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A company’s enterprise resource planning (ERP) system is one of the pillars of its record-keeping and process management architecture and is central to many of its critical functions. It is the heart of its accounting and financial record-keeping processes. In manufacturing and distribution, ERP manages inventory and some elements of logistics. Companies also may use it to handle core human resources record-keeping and to store product and customer master data. Often, companies bolt other functionality onto the core ERP system or extensively modify it to address limitations in the system. Because of the breadth of its functionality, those unfamiliar with the details of information technology may perceive ERP as a black box that controls just about everything. So it’s not surprising that when a company’s information technology becomes more of an issue than a solution, many assume that the ERP system needs replacing. This may or may not be true, so it’s important for a company to assess its existing ERP system in the context of its business requirements (as they are now and will be in the immediate future) and evaluate options for it.

A common scenario for a company to replace its ERP system is because the business has outgrown (or will soon outgrow) its capacity to handle transaction volumes. Replacement also becomes necessary when the system no long meets business requirements, as, for example, when it is too difficult to configure to specific requirements. This issue might have developed because the company’s business model has changed significantly since purchasing the system or because it had to adjust its go-to-market strategy, added a new product line, expanded geographically or made an acquisition. Another reason to change may be that for a company with an adequate on-premises ERP system migrating to the cloud can eliminate a substantial portion of work done by its IT staff, enabling the department to focus on more strategic efforts, reduce headcount or both. A shift to the cloud also may improve the performance of an ERP system, especially if it’s an on-premises system running on aging hardware and the organization does not have the resources to maintain the system well.

Then, too, there are less obvious reasons that necessitate replacement. ERP systems are inherently complex, as I have noted, because they cross multiple business functions in many types of business, each of which has its own requirements. Seemingly trivial elements, such as the particular sequencing of tasks in a process by an ERP system, may be irrelevant for many businesses but have a negative impact on some. For example, when customer orders are almost always infrequent, it doesn’t matter when in the sequencing of the sales order process the system records the use of credit to confirm that the order can go through. An order must be rejected if adding it to the customer’s outstanding balance will bring the account over its limit. However, if orders occur frequently, the ERP system must execute the credit check at the first step or customers routinely will exceed their credit limits. It’s easy to overlook a detail such as this in the software selection process and even in the initial implementation. If that happens, dealing with the credit limit may require software customization or a process workaround if the root cause is the application itself. However, replacing the existing ERP system often is necessary if there are multiple issues such as these and the overall impact of them is severe enough to be measured by a combination of monetary losses, wasted time, lax controls, an inability to measure performance or limited visibility of information and processes.

At the same time, replacing the ERP system may not be the most cost-effective solution to business issues. To gauge that aspect, an important first step is determining whether the process or data issues identified by users are the result of a poorly executed implementation. Midsize companies in particular don’t always get the most competent consultants to set up their software, especially if the consultant (or the individual running the project) is not familiar with the peculiarities of the company’s industry or its specific operating requirements. Checking in with user group members in a similar business is an easy way to confirm if the issue is systemic or simply a poor job of setting up the software. If, based on feedback from other users, the situation appears dire enough, it may be worthwhile to engage a new consultant to fix the mistakes of the first one.

vr_nextgenworkforce_are_new_applications_neededIn some instances a “bolt-on” application (that is, software designed for easy integration with another, specific application) may be the most cost-effective way of addressing existing shortcomings. This is especially true for companies using a cloud-based system. Most ERP systems have rich functionality for handling core tasks such as accounting, human resources and inventory management. Yet the package a company is using may not have sufficient functionality for a specific process needed to run the business. For example, companies (particularly growing midsize ones) may find that their human resources department needs software to automate recruiting and onboarding of employees and that these capabilities are absent or insufficient in their ERP package. In our benchmark research on workforce management almost half (45%) of companies said they need new applications to address the full range of their human resources management requirements. In other cases, functionality necessary to manage the business may be missing. Companies that have a recurring revenue or subscription business usually find that the ERP system falls short of their requirements for invoicing. Bolt-on applications usually replace spreadsheets, ensuring that data is captured and available in a single controlled system where it can be accessed in an extended process (such as order-to-cash). Replacing desktop spreadsheets can save considerable time by automating tasks and eliminating the need to re-enter data into one or more systems. Having accurate and controlled data makes reports and metrics more reliable. It saves the finance and accounting departments time by eliminating the need to perform periodic reconciliations to ensure the accuracy of the data. Of course, the challenge with any bolt-on is that it is one more piece of software that requires attention, and integration with the core ERP system can pose challenges, especially over the long run.

vr_Office_of_Finance_01_ERP_replacementA company also may believe that it needs a new ERP system in order to consolidate data in a single system to facilitate analysis and reporting. In this instance, however, it may find that an operational data store, which integrates data from multiple sources for additional processing,  will address all or most of its issues, especially if the company uses custom software or some niche application that supports its operations but is unavailable in an ERP system that otherwise meet its needs. A data store may prove to be a more practical choice because it’s much less costly and disruptive than replacing an otherwise well-functioning system. It also can provide flexibility in the longer term. As the company adds new applications, data from this new source can be fed into the operational data store. But be aware of challenges in setting up an operational data store or adding new system data feeds to it, using one usually requires an IT organization with the skills to maintain it over time.

Many companies are loath to replace an otherwise well-functioning ERP system because doing so is expensive and usually disruptive to operations. Also, implementing a new system almost always requires retraining and some adjustments in operating procedures. Our research on the Office of Finance finds that on average companies are keeping their ERP systems one year longer today than they did a decade ago. Deciding whether to replace an ERP system is not always straightforward. The process is made more difficult because today organizations have many more software and data options than they used to. Few companies have the expertise in-house that will enable them to decide the best course of action. There may even be vested interests within the organization that will prevent them from making the best choice. Finding a truly independent advisor that understands both information technology and the specific business requirements can be the best way to sort out the options and help make the difficult technology decisions.

Regards,

Robert Kugel – SVP Research

Midsize businesses “pay” for their use of entry-level accounting systems by not having the essential information they need readily available and by using up valuable time that could be better spent generating business, finding issues or responding to opportunities sooner or simply enhancing the efficiency of the organization. Nevertheless, the transition from an entry-level accounting package such as QuickBooks to an on-premises system can be daunting for companies whose entry-level software no longer addresses their needs. Usually, the shortcomings start off as minor annoyances for companies that have between 100 and 500 employees and grow over time, and usually the pain grows with the number of employees and the volume and complexity of the underlying business. As business volumes expand and complexity grows, entry-level accounting systems are increasingly less able to support the underlying business. Yet finance executives usually don’t want to migrate to a new system until their old software threatens the orderly management of the business or becomes an overwhelming burden on finance operations. I know this firsthand, since not all that long ago I worked at a company where the CFO thought his biggest IT challenge was finding spare parts for the ancient Burroughs mainframe on which our financial system ran.

Whether they choose cloud-based or on-premises software, almost all companies can implement a new ERP system in less than three months. However, moving to cloud-based ERP (or simply accounting) software addresses two key barriers to making the transition away from an entry-level system. First, the up-front investment in taking the cloud approach is considerably smaller than with on-premises software, though there is almost always an up-front outlay for consulting and initial provisioning costs even if cloud-based services don’t require purchasing a software license or new hardware. Second, midsize companies with employee counts at the lower end of the range may not have an IT department per se. (Even those at the higher end usually have limited capabilities provided by IT generalists.) A third-party value-added reseller or consultant may handle the initial implementation of an on-premises system, but not having (and not being able to afford) the in-house expertise to maintain such software can keep a company from purchasing one.

By eliminating these barriers, cloud-based systems make the value of migrating from entry-level systems all the more compelling, especially when you consider that these offerings have a much richer and deeper set of capabilities to manage core business processes and collect data than entry-level software. They can, for example, handle multiple currencies, manage the order-to-cash cycle (as well as other end-to-end processes) and manage purchasing more effectively. Some web-based systems aimed at midsize companies offer professional services organizations (such as consulting, engineering and architecture) the ability to manage project schedules, attach costs to projects and schedule employee time to these projects.

Cloud-based systems also offer more robust business intelligence capabilities, such as individualized dashboards that promote more management by exception. All of them can be quickly configured to produce industry-specific reports, and all come with some built-in templates configurable to varying degrees by end users. All make it possible to spot future cash flow issues by automating the netting of cash inflows from receivables and cash requirements for payables, debt repayment, recurring expenses (such as lease, rent and salaries) and other predictable costs.

Finance executives in midsize companies have been wary of cloud-based systems because of potential security and reliability problems. These are legitimate concerns, of course, but they ought to be considered in context. Senior executives should understand that their on-premises systems have vulnerabilities too and are not inherently safer. At a time when a 64GB thumb drive costs about $35, a company’s on-premises financial and customer data can be taken out the door and put into an outsider’s hands without detection in a matter of minutes. Also, on-premises systems are vulnerable to fire, flood and other catastrophes. If the backup tapes are sitting in the same room as the server, there is no plan B for disaster recovery available. Cloud providers often have multiple locations and can save clients the cost of having their own remote disaster recovery site. To be sure, cloud providers have vulnerabilities too, so it’s important to assess how effectively each vendor addresses them.

One area where an on-premises, perpetual license can be more attractive than a software-as-a-service cloud option is total lifetime cost of ownership. This is similar to other lease-versus-own business decisions. If a company were to keep a perpetually licensed ERP system for more than X years, it would be less expensive than buying it as a service. The value of X depends on several factors, such as the cost of the license, implementation, hardware and IT personnel, among other factors. Typically, the breakeven point will be between four and six years.

Increasingly, midsize companies are figuring out the value of cloud-based services. This market has been growing at a good pace. Netsuite, a vendor that offers accounting as well as a broad and integrated set of business management software, recently reported that deferred revenue (an indicator of future revenue potential) had increased 38 percent in the most recent fiscal quarter ending June 30, and that revenues grew by 29 percent to $75 million.

Companies have a large and growing list of options to choose from if they are interested in moving their accounting systems to the cloud, including Acumatica, Aplicor, Expandable, FinancialForce, Intacct, Intuit, Microsoft Dynamics (available through a reseller network), NetSuite, Noguska, Plex and SAP ByDesign. I believe every company that is using entry-level accounting software and beginning to run up against its limitations should look into a cloud-based alternative, especially if buying, deploying and maintaining an on-premises system is a daunting prospect.

Regards,

Robert Kugel – SVP Research

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