So you've mastered EDI and the IDW - even set up an e-commerce site. Feeling a little cocky and techno-savvy? An ERP installation can change all that and make you eat humble pie.
Once again the computer industry has made an addition to the alphabet soup of IT acronyms: ERP, short for enterprise resource planning. An ERP system is a packaged soft-ware system that attempts to integrate all departments and functions across a company onto a single computer system to serve the needs of all those separate and distinct departments. It lets a company automate and integrate the majority of its business processes, share common data and procedures throughout the company, and produce and access information in a real-time environment.
Before ERP systems arrived, each department within a company had its own computer system, one set up for the particular processes and/or work flow of that department. But ERP combines all those systems, or processes, into a single, integrated software program that uses a single database. The idea is to enable the various departments to easily share information and communicate with each other - quickly and accurately. Still have lots of unanswered questions about ERP? You should. This article aims to supply you with answers as it tackles the queries one-by-one.
Why do companies install ERPs? Using different and discreet computer systems within each department of a company makes for sluggish and error-prone intra-company communications. For example, when a customer places an order, that order begins a mostly paper-based journey through the company, often being keyed and rekeyed into the computer systems of different departments along the way. All that keying and rekeying within different departments invites errors and causes delays. Plus, it's hard to tell what the status of the order really is at any given point because there is no way for one department to access the computer system of another. "I'll have to find out and call you back," is a familiar refrain to customers calling in to check on the status of an order.
Ideally, an ERP system reduces inventory, slashes lead times by improving coordination efforts and avoiding delays, and generally increases efficiency. It typically links together accounting processes, production planning, materials management, plant maintenance, quality management, project management, sales and distribution, human resources management, investment management and the data warehouse. ERP automates the tasks involved in performing the business processes.
Take, for example, order fulfillment, which involves taking an order from a customer, shipping it and billing for it. With an ERP system, when a customer service representative takes an order from a customer, he or she has at hand all the information necessary to complete the order, such as the customer's credit rating and order history, the company's inventory levels and the shipping department's trucking schedule. Everyone in the company has access to the single database that holds all the information on the customer's new order. After one department finishes with the order, it's automatically routed via the ERP system to the next department. To find out where the order is at any given point, an employee simply logs into the ERP system and tracks it down.
ERP can work that same kind of magic throughout the other major business processes, such as human resources or accounting. An integrated-systems approach can yield a tremendous payback if an ERP system is installed correctly. If it is, the order moves smoothly through the organization, and customers get their orders faster and with fewer errors. That, of course, is the ERP ideal. The reality is often less than perfect.
Building a single software program that can serve the needs of the warehouse as well as those of the front office is no simple endeavor. Installing one is no piece of cake, either. Some of the most frequent problems faced by the project implementation team, and by extension, the company management, are staffing and turnover, risk management, funding, unexpected expenses, missed deadlines, organizational politics and resistance to change.
What are some things I should consider before diving into ERP? Before you consider anything else, understand that if you do an ERP installation right, you won't, as they say, "get off cheap." If you do it wrong, you can bring your company to its knees.
Also realize that running your company on an ERP system will change the way you do business in a fundamental way. Your old-fashioned processes may not have been efficient, but they were simple. Each department did its own job. Problems that cropped up outside of the department were someone else's concern. So much for the good old days. ERP will change all that.
With ERP, customer service representatives are no longer just typists entering a customer ID number into a computer. An ERP system forces them to become businesspeople. The ERP screen glows with the customer's credit rating from the finance department and product inventory levels from the warehouse. Does this customer pay on time? What payment terms does this customer rate? Will the warehouse be able to ship the order on time? Will it be able to ship the order complete? These are decisions that customer service reps never had to make before and which affect the customer and every other department in the company. But customer service representatives aren't the only ones who wake up in a brand new world once an ERP system is installed. People in the warehouse who used to keep inventory levels on scraps of paper or in their heads now need to enter precise inventory information into an online database. If they don't, customer service reps will see low inventory levels on their screens and tell customers requested items are not in stock. Accountability, responsibility and communication suddenly permeate every employee's job.
How should I approach an ERP project? There seem to be three general methods of installing an ERP system:
Tossing out the baby with the bath water. This is probably the most ambitious and difficult way to accomplish ERP implementation. A company dumps its entire legacy system in favor of a completely new ERP system, installed at once across the entire company. Yikes! This one screams culture shock and headaches for everyone from the CEO to the person who replenishes the pencil stash.
Although this is the way many early ERP implementations were handled, the ERP implementation horror stories from the late '90s have mostly turned companies away from this strategy. Few organizations attempt this method anymore because it means the entire company has to radically change all its business processes, and change them all at once. Getting everyone to cooperate and accept a new software system at the same time is a Herculean effort. No one within the company has any experience with it, so no one feels confident it will work. It will have few advocates because, at first glance, it just seems like it will complicate the work process.
Also, ERP involves compromises. Many departments have computer systems that have been fine-tuned to match their particular work processes. In most cases, ERP offers neither the range of functionality nor the comfort of familiarity that a custom legacysystem offers. In many cases, the speed of the new system may suffer because it's serving the entire company rather than a single department. For this type of ERP implementation to be successful, there must be a mandate directly from the company president or CEO. Without that kind of force behind it, a change of this magnitude has little chance of success.
The bandwagon approach. Companies that want to get on the ERP bandwagon but don't have the resources or the know-how to design an ERP system let the ERP system itself dictate the system design. The emphasis is on just a few key processes, such as those contained in an ERP system's financials module. This method is generally for smaller companies that expect to grow into a full-fledged ERP system. The goal here is to get an ERP system up and running quickly and to ditch fancy custom design and re-engineering in favor of the ERP system's "canned" processes. However, research shows that most companies that have approached ERP this way can claim little payback from the new system alone. Most often this type of ERP installation is used as an infrastructure to support more comprehensive ERP implementation efforts in the future.
Many companies discover that this toe-in-the-water effort toward ERP system installation is little better than a legacy system because it doesn't force the company to change any of its old ways. With the exception of procedural changes within a few areas, it's business as usual. Plus, doing the hard work of process design and re-engineering after the system is installed can be much more difficult. You have implementation problems again, and you also have a morale problem because at this juncture people will feel even more resistant, having felt little benefit from the system headaches the initial installation brought.
The United Nations approach. This method suits large companies that do not share many common processes across business units or departments. Separate ERP systems are installed in each unit, then common processes within each system, such as human resources or accounting, are linked across the whole enterprise.
This has emerged as the most popular way of implementing ERP. In most cases, the business units each have their own separate system and database, or mini-ERP. The systems link together only to share information necessary for the corporation to get a "big picture" of performance across all the business units (business unit revenues, for example), or to perform processes that don't vary much from business unit to business unit, such as payroll or employee benefits processing.
Usually, these implementations begin with pilot installations in a smaller business unit where the core business of the corporation will not be disrupted if something goes wrong. Once the project team gets the system up and running and works out all the bugs, the team begins moving other units onto the ERP system, using the first implementation as a kind of in-house reference. This strategy takes a long time but is the least disruptive overall and carries the least risk.
How can I avoid ERP implementation problems? ERP packages are built from database tables, thousands of them, and they must be set to match a company's business processes; each table has a decision "switch" that leads the software down one decision path or another. But figuring out precisely how to set all the switches in the tables requires a complete understanding of the company's existing processes being used to operate the business. It requires knowing what to do and when to do it and what the appropriate "functional layers" are within the business. As the table settings are decided, these business processes must be re-engineered, or redesigned, in an ERP way.
Most ERP systems are not shipped in as a shell system in which customers must make the thousands of minutia-level decisions on how all the functional procedures should be set. Most systems are preconfigured, allowing just hundreds, rather than thousands, of procedural settings to be made by the customer-settings that affect howthe system behaves in line with the company's own business activities. But even with many of the decisions made in advance, and a thorough understanding of the business and its processes well in hand, unavoidable difficulties exist in implementing something as complex as an ERP system.
The sheer magnitude of an ERP implementation means that it's impossible to anticipate every challenge that develops, and there are bound to be some nasty surprises. So, first and foremost, the project manager must be flexible enough to roll with the punches as the project progresses, and be able to keep his or her cool when surprises pop up. Tensions may run high as everyone adjusts to working with the new system. The manager must possess top-notch communication skills and be a diplomat of the first order because, before this job is finished, he or she will have to work with every individual in the company, from the most technically-oriented computer staffer to the building and maintenance crew. Because of the huge number of variables, people and risks involved in such a big project, this person must be willing and able to handle chaos. Find a person with experience in herding cats-large numbers of nervous cats.
Timing is also a critical factor to consider, especially where minimizing tensions are concerned. When installing one of these famously complex systems, the busiest time of the year is not an optimum period to take the system live. Snags will arise, and it's much less nerve-wracking to be working them out when the work load is the lightest. Also, if any other software systems are to be added to the ERP system or implemented as part of the IT system in general, wait until the ERP system has been launched and all the bugs have been worked out. Launching more than one system at a time only compounds trying to pinpoint problems and will inevitably invite finger-pointing.
How long does it take to get an ERP system up and running? Plainly speaking, companies that install ERP systems have a rough time of it. Surveys show the average time for an ERP system implementation is 23 months. This implementation period has great significance because a company doesn't get any payback or benefit until the system is up and running. In fact, the implementation period generally means added operating costs for a company until the system is up and running smoothly. A study by the Meta Group, Stamford, Conn., found that it took 2.5 years from the start of the ERP project before any kind of quantifiable benefit from such a system was realized. However, the study also noted that there were more immediate, nonquantifiable benefits such as improved customer satisfaction and increased access to accurate and timely information.
Don't be fooled by ERP vendors who will tell you an average implementation period is from three to six months. Those short implementations all have a catch of one kind or another: the company was small, or the implementation was confined to a small area of the company, or the company only used a piece of the ERP system. To do ERP right, the way you do business will need to change, and the ways people do their jobs will need to change. That kind of change doesn't come easily or without pain-unless, of course, your business processes are working perfectly: all orders shipped on time, productivity higher than all your competitors, customers completely satisfied. In such a case, there is no reason to consider an ERP system. You can't improve on perfection.
But if things aren't running just perfectly in your company, and you do wish to make improvements by installing an ERP system, the important thing is not to focus on how long it will take-real transformational ERP efforts take time, lots of time. Instead, focus on why you need it and how it will improve your business.
What does ERP really cost a company? According to International Data Corp, a market research group in Framingham, Mass., businesses spent about $18 billion just on the consulting and integration services needed to implement ERP systems in 1998 and will spend more than $34 billion in 2002.
With ERP package deals routinely running more than $1 million, concepts such as standard pricing and terms become meaningless. Meta Group did a study to determine the Total Cost of Ownership (TCO) of ERP systems. The TCO numbers included hardware, software, getting the software installed and also included the two years afterward, which is when the true costs of maintaining and optimizing the system for the business are felt. According to Meta Group, among the 63 companies surveyed-including small, medium and large companies in a range of industries-the average TCO was $15 million (the highest was $300 million, the lowest $400,000). The TCO for an average operator/user, across companies and industries, for that period was a staggering $53,320. Although, it's impossible to come up with an accurate average from that small number of companies and ERP efforts, one thing it does show is that, without a doubt, ERP implementation is expensive no matter what size company is installing it.
Will hidden costs surface? Although different companies will find different land mines in the budgeting process, those who have implemented ERP packages agree that certain costs are more commonly overlooked or underestimated than others. Most ERP installation veterans agree that the following areas are most likely to result in budget overruns: training, training, training, integration and testing, data conversion, data analysis, consultant costs, staffing-and did we mention training?
Many analysts think that a good portion of the high costs associated with ERP installations could be related to employee performance problems. After an ERP system implementation, everything looks and works differently from the way it did before. When people can't do their jobs in the familiar way and haven't yet mastered the new way, they become frustrated or panic, and the business begins to experience some spasms as a result. One way of controlling costs while still implementing and maintaining a strategic ERP system is to hand off all or part of the responsibility for implementation and maintenance-commonly called ERP outsourcing. ERP outsourcing provides a combination of services designed for customers who are unable or unwilling to shoulder the full responsibility of an ERP system. The services provided range from database maintenance, system-performance tuning and application support to design, implementation, maintenance and business-process engineering. Although services provided will vary from company to company, ERP outsourcing includes guarantees for system availability, throughput, response time and cost.
Another alternative to the implementation and staffing nightmare of ERP implementation is to "rent an ERP app." Companies known as application service providers (ASPs) are offering companies the option of renting applications run off-site at the hosting provider's data center, accessible via dedicated leased lines or over the Internet through a browser. This often is an ideal way for a small to mid-sized company to gain access ERP software and service that would otherwise be financially out of reach.
When will I see a return on my ERP investment? One of the most enduring legacies of traditional software project installations is that a company expects to see a return on the project investment as soon as the software program is booted up, the project team then expects a break, and everyone gets a pat on the back. None of these expectations applies to an ERP implementation. Most ERP systems don't reveal their value until after companies have had them running for at least a year and, through the ERP system, have begun making improvements in the business processes that are affected by the system. Post script: the project team is not going to get that pat on the back until their efforts pay off-months or years down the road.
Oh, and by the way. . .don't expect to reinvent your business overnight with an ERP system. ERP, with considerable soul searching and navel gazing, is at best a powerful tool to help uncover ways to improve the way things are done internally rather than with customers, suppliers or partners. But the navel gazing will give you a pretty good return if you're willing to wait for it. That same Meta group study mentioned earlier found that it took at least eight months after a new system was installed to see any return at all, but after the system had been up and running awhile, the median annual savings was $1.6 million per year.
Does ERP include e-commerce? ERP vendors have always had the advantage of a huge installed base of customers and have had a virtual stranglehold on "back office" functions. But after all that work designing and perfecting ERP, the major ERP vendors are having a hard time re-engineering themselves to accommodate current business trends, namely e-commerce. Instead of making applications that streamline business practices inside a company, they suddenly have had to accommodate business processes that face outward to the rest of the world.
Most ERP vendors have been slow to develop offerings for electronic commerce and customer relationship management. In these areas they face stiff competition from niche vendors. Recently, however, ERP vendors have begun to shrink their ambitions and focus on being the back-office engine that powers electronic commerce, rather than trying to own all the software niches that are necessary for a good e-commerce Web site. By allowing someone else to do the Web site, the standardization of the electronic data and attracting and marketing to the community, the ERP vendors can concentrate on what they do best-providing a reliable infrastructure.
For a good listing of ERP system providers and links to their Web sites, visit the I.T. Works' Reference Site on Enterprise Resource Planning and Supply Chain Management at www.softinfo.com/europe/supply/vendors/typicalvendors.html.