Enterprise resource planning (ERP) is a system of integrated software applications that standardizes, streamlines and integrates business processes across finance, human resources, procurement, distribution, and other departments. Typically, ERP systems operate on an integrated software platform using common data definitions operating on a single database.
ERPs were originally designed for manufacturing companies but have since expanded to service industries, higher education, hospitality, health care, financial services, and government. Each industry has its own ERP peculiarities. For example, government ERP uses contract lifecycle management (CLM) rather than traditional purchasing and follows government accounting rules rather than GAAP. Banks have back-office settlement processes to reconcile checks, credit cards, debit cards, and other instruments.
The benefits of an ERP system
ERP systems improve enterprise efficiency and effectiveness in a number of ways. By integrating financial information in a single system, ERP systems unify an organization’s financial reporting. They also integrate order management, making order taking, manufacturing, inventory, accounting, and distribution a much simpler and less error-prone process. Most ERPs also include customer relationship management (CRM) tools to track customer interactions, thereby providing deeper insights about customer behavior and needs. They can also standardize and automate manufacturing and supporting processes, and unifying procurement across an organization’s disparate business units. An ERP system can also provide a standardized HR platform for time reporting, expense tracking, training, skills matching, and the like, and greatly enhance an organization’s ability to file the necessary reporting for government regulations, across finance, HR and the supply chain.
Properly operating ERP systems enable enterprises to reduce the time required to complete virtually every business process. They also promote collaboration through shared data organized around common data definitions, resulting in better decision-making. The standardization and simplification that ERP systems offer result in fewer rigid structures, thereby creating a more agile enterprise that can adapt quickly while increasing the potential for collaboration. An ERP systems centralized database, while being a bigger target, is easier to secure than data scattered across hundreds of systems.
4 key features of ERP systems
The scale, scope, and functionality of ERP systems vary widely. However, most ERP software features the following characteristics:
- Enterprise-wide integration. Business processes are integrated end to end across departments and business units. For example, a new order automatically initiates a credit check, queries product availability, and updates the distribution schedule. Once the order is shipped, the invoice is sent.
- Real-time (or near real-time) operations. Since the processes in the example above occur within a few seconds of order receipt, problems are identified quickly, giving the seller more time to correct the situation.
- A common database. A common database enables data to be defined once for the enterprise with every department using the same definition. Some ERP systems split the physical database to improve performance.
- Consistent look and feel. Early ERP vendors realized that software with a consistent user interface reduces training costs and appears more professional. When other software is acquired by an ERP vendor, common look and feel is sometimes abandoned in favor of speed to market. As new releases enter the market, most ERP vendors restore the consistent user interface.
Types of ERP solutions
ERP systems are categorized in tiers based on the size and complexity of enterprises served. Typical tiers include:
- Tier I ERPs support large, global enterprises and handle all internationalization issues, including currency, language, alphabet, postal code, accounting rules, etc. For decades, Oracle and SAP have been considered Tier I. Microsoft and Infor are more recent competitors but are frequently categorized as Tier I as well.
- Tier I Government ERPs support large, mostly federal, government agencies. These vendors support the nuances of government accounting, HR, and procurement. Oracle, SAP and CompuServe’s PRISM are considered Tier I with Infor and CGI’s Momentum close behind.
- Tier II ERPs support large enterprises that may operate in multiple countries but lack global reach. Tier II customers can be standalone entities or business units of large global enterprises. Most of these ERPs have some internationalization but lack Tier I breadth. Depending on how vendors are categorized there are 25 to 45 vendors in this tier.
- Tier II Government ERPs focus mostly on state and local governments with some federal installations. Tyler Technologies and UNIT4 fall in this category.
- Tier III ERPs support mid-tier enterprises. Most handle a handful of languages and currencies but only a single alphabet. Depending on how ERPs are categorized, there are 75 to 100 Tier III ERP solutions.
- Tier IV ERPs are designed for small enterprises and often focus on accounting.
Over the past few years, ERP vendors have created new systems designed specifically for the cloud, while longtime ERP vendors have created cloud versions of their software. Cloud ERP is becoming increasingly popular, and fall into two major types:
- ERP as a service. With these ERPs, all customers operate on the same code base and have no access to the source code. Users can configure but not customize the code.
- ERP in an IaaS cloud. Enterprises that rely on custom code in their ERP cannot use ERP as a service. If they wish to operate in the cloud, the only option is to move to an IaaS provider, which shifts their servers to a different location.
For most enterprises, ERP as a service offers three advantages: The initial cost is lower, upgrades to new releases are easier, and reluctant executives cannot pressure the organization to write custom code for their organization.
For more on cloud ERP, see:
Top ERP software
Choosing an ERP system is among the most challenging decisions IT leaders face. In addition to the above tier criteria, there is a wide range of features and capabilities to consider. With any industry, it is important to pick an ERP vendor with industry experience. Educating a vendor about the nuances of a new industry is very time consuming.
To help you get a sense of the kinds of decisions that go into choosing an ERP system, check out “The best ERP systems: 10 enterprise resource planning tools compared,” with evaluations and user reviews of Acumatica Cloud ERP, Deltek ERP, Epicor ERP, Infor ERP, Microsoft Dynamics ERP, NetSuite ERP, Oracle E-Business Suite, Oracle JD Edwards EnterpriseOne ERP, Oracle Peoplesoft Financial Management and SAP ERP Solutions.
Most successful ERP implementations are led by an executive sponsor who sponsors the business case, gets approval to proceed, monitors progress, chairs the steering committee, removes road blocks, and captures the benefits. The CIO works closely with the executive sponsor to ensure adequate attention is paid to integration with existing systems, data migration, and infrastructure upgrades. The CIO also advises the executive sponsor on challenges and helps the executive sponsor select a firm specializing in ERP implementations.
The executive sponsor should also be advised by an organizational change management executive, as ERP implementations result in new business processes, roles, user interfaces, and job responsibilities. Organizational change management can help everyone in the enterprise understand the impact ERP will have on their work. In many cases, an organizational change management firm, rather than an internal executive, provides this support.
Reporting to the program’s executive team should be a business project manager and an IT project manager. If the enterprise has engaged an ERP integration firm or an organizational change management specialist, their project managers should be part of the core program management team.
See also: How to assemble a winning ERP team
ERP implementation: The 5 major steps
Most ERP practitioners structure their ERP implementation as follows:
1. Gain approval
The executive sponsor oversees the creation of any documentation required for approval. This document, usually called a business case, typically includes the following:
- Problem definition
- Description of the program’s objectives and scope
- Implementation costs
- Implementation schedule
- Development and operational risks
- Projected benefits
Once the business case is complete, the executive sponsor presents the business case to the appropriate group of senior executives for formal approval to spend money and direct staff to implement the ERP.
2. Plan the program
The high-level timeline created for the business case is then refined into a work plan, which should include the following steps:
- Finalize team members. Key internal individuals should be identified by name. Other required staff should be identified by role. External partners need to be selected. Typical partners include: ERP implementation specialists, organizational change management specialists and technical specialists.
- Complete contracts. Contracts for new software, technology, and services should be finalized.
- Plan infrastructure upgrades. On-premises ERP systems frequently require faster processors, additional storage, and improved communications. Some organizations can minimize infrastructure upgrades by using a cloud ERP. But even cloud ERPs can require infrastructure upgrades.
- Create a work plan and timeline. Tasks, dependencies, resources, and timing need to be made as specific as possible.
3. Configure software
This is the largest, most difficult phase. Major steps include:
- Analyze gaps. Understanding the gaps in current business processes and supporting applications helps the project team determine how to change business processes to conform to the software.
- Configure parameters. Parameters in the ERP software are set to reflect the new business processes.
- Complete required programming. Ideally, no changes are needed for the ERP software. However, some programming may be required for interfaces to other systems or for data migration.
- Migrate data. The team standardizes data definitions and examines existing files for data completeness, quality, and redundancy. Finally, existing data is cleansed and migrated to the new ERP.
- Test system. The system is tested to ensure it delivers the needed functionality and required responsiveness.
- Document system. Required functional and technical documentation is created. Typically, the vendor has documentation that can be tailored to enterprise standards.
- Upgrade infrastructure. Complete any required upgrades.
4. Deploy the system
Prior to the final cutover when the new system is in production, multiple activities have to be completed. These include:
- Train staff. All staff need to be trained to operate the system and be given access rights.
- Plan support. A support team will be needed to answer questions and resolve problems after the ERP is operational.
- Test the system. The new system must be thoroughly tested to ensure it is secure, responsive, and delivers the functionality described in the business case.
- Make the “Go live” decision. Once the executive sponsor is confident the new ERP is ready, the enterprise needs to switch from the old system to the new system.
5. Stabilize the system
Following ERP deployment, most organizations experience a dip in business performance as staff learn new roles, tools, business processes, and metrics. In addition, poorly cleansed data and infrastructure bottlenecks will cause disruption. All impose a workload bubble on the ERP deployment and support team.
For more on ERP implementation, see:
The four factors that are commonly underestimated during project planning include:
- Business process change. Most people are content to work within the current environment unless they are a systems analyst or worked for a different enterprise with better systems. Once teams see the results of their improvements, most feel empowered and seek additional improvements. Success breeds success often consuming more time than originally budgeted.
- Organizational change management. Although process improvements make enterprises more efficient and effective, change creates uncertainty at all organization levels. A formal organizational change management program reassures staff and helps them accept the changes. With many executives unfamiliar with the nuances of organization change management, the effort is easily underestimated.
- Data migration. Prior to an ERP implementation, enterprises frequently have overlapping databases and weak editing rules. The tighter editing required with an ERP system increases data migration time. The time required is easy to underestimate, particularly if all data sources cannot be identified.
- Custom code. Although enterprises have customized ERPs for years, it remains a bad practice. Customization increases implementation cost significantly as users demand additional features. It voids the warranty; problems reported to the vendor must be reproduced on unmodified software. It makes upgrades difficult; the custom code usually requires changes every time the vendor issues a new release. Finally, most enterprises underestimate the cost; even enterprises that estimate the initial cost rarely include the cost of migrating to new releases.
For more on ERP costs, see:
Why ERP projects fail
ERP projects fail for many of the same reasons that other projects fail. The most common cause is an ineffective executive sponsor who cannot command respect throughout the organization, is not interested in the project, or is distracted by other responsibilities. Other ways to fail include poorly defined program goals, weak project management, inadequate resources, and poor data cleanup.
There are several causes of failure that are closely tied to ERPs. Specifically:
- Inappropriate package selection. ERPs, particularly Tier I ERPs, are very complex with many options. Many enterprises believe a Tier I ERP is by definition “best” for every enterprise. In reality, only very large, global enterprises will ever use more than a small percentage of the functionality available in a Tier I ERP. Enterprises that are not complex enough to justify Tier I, may find implementation delayed by feature overload. Conversely, large, global enterprises may find that Tier II or Tier III ERPs lack sufficient features for complex, global operations.
- Internal resistance. While any new program can generate resistance, this is more common with ERPs. Remote business units frequently view the financial or other standardization imposed by an ERP as an effort by headquarters to increase control over the field. Even with an active campaign to explain the benefits of the new system, it is not uncommon to find people in the field slowing implementation as much as possible.
Even groups who support the ERP can become disenchanted if the implementation team provides poor support or is perceived to be rude or unresponsive. Disenchanted supporters can become vicious critics when they feel they have been taken for granted and not offered appropriate support.