For small and midsize businesses, ERP implementations can be dicey endeavors. ERP rollouts involve not only huge capital outlays, but also long implementation times, significant IT resources and intense cultural change. These factors can be especially daunting to a small but growing business attempting to move off of familiar QuickBooks or Excel spreadsheets.
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The average SMB ERP implementation takes 10 months, though the installation work continues long after the go-live date hits, according to recent Aberdeen Group survey data of 920 SMBs. The financial costs can be just as significant: SMBs with less than $50 million in annual revenue will typically pay nearly $300,000 for ERP software and services, while larger businesses (revenues between $100 million to $250 million) will spend $1.4 million, the survey data states.
“Given this level of investment, one would think ROI would be top of mind for most companies,” writes Cindy Jutras, VP and research fellow at Aberdeen in a March 2009 report, “Measuring the ROI of ERP in SMB” (registration required).
But it’s not. The data shows that 52 percent of respondents “sometimes” or “never” estimate ROI in order to cost-justify an ERP project (48 percent “always” do it). And post-rollout, 75 percent “sometimes” or “never” measure ROI after the completion of ERP projects (just 25 percent do this “always”).
In other words, many SMBs feel “compelled to make this investment,” Jutras writes, “simply because they view ERP as a necessary infrastructure to support the business.”
Of course, Jutras’s point is that determining ROI pre- and post-rollout is key to achieving success with ERP projects, especially with resource-challenged SMBs in these tough times.
“A well-managed ERP implementation can be a continuing source of cost savings and operational improvements which help companies survive and thrive in these troubled economic times,” she states. “The strategic goals of standardizing and accelerating business processes and providing improved visibility are essential to improving business execution, which in turn supports the organizational goals of revenue and profit growth.”
During the last decade or so, enterprise software vendors and their customers have paid particular attention to cutting the total cost of ownership (TCO) of ERP applications. However, “focusing exclusively on TCO is no longer enough,” Jutras contends. “The focal point must now expand to include ROI of ERP projects in order to justify continued investment and maximize business benefits.” (For more on enterprise software, see the Enterprise Software Unplugged blog.)
The horrendous economic conditions that SMBs now face have pushed “reducing costs” to the top of the ERP strategies to-do list, according to the Aberdeen survey data. The mantra “must reduce costs” has displaced “growth expectations” and “customer service” as the leading ERP business drivers.
Jutras contends, however, that cutting ERP investment simply isn’t the right strategy right now.
“With the downturn in the economy, a knee-jerk reaction may be to stop any discretionary spending on ERP projects just when their cost-saving, operation-improving potential is needed the most,” she writes. “Given the current economic uncertainty, it is now more critical than ever to keep these projects alive.”