A trusted advisor will often save you many times the cost of their fees. I recently helped a medium-sized company select a major ERP system and negotiated with the vendor, saving the company almost $8 million in the process, and later we achieved similar savings in negotiating with the system integrator we help selected.
Although the business case is the first step, a concurrent step is to define with some precision your actual requirements. This requirements definition study (RDS) is crucial to the proper selection of the ERP system.
Selecting and purchasing an ERP system is just the beginning, because most of the cost in ERP is in the implementation, typically three-to-five times the cost of the software, sometimes quite a bit more.
Over the next couple of months, I will detail the steps necessary to help you select the proper software package, and outline a methodology to reduce your chances of failure.
What to Expect
Unlike prior generations of ERP implementations, the current methodologies focus on quantifying the benefits expected from the new systems and implementing a measurement system to insure that those benefits were actually achieved.
Driven by these best-practices, and by the major research done on software acquisition as embodied in the Carnegie Mellon Capability Maturity ModelSoftware Acquisition (CMM-SA) companies now are willing to make significant investments based on projected return on investment (ROI), no longer relying on gut feel to justify major ERP systems.
Complex financial and operational models describing the benefits of the new systems are in place to help the CIO, and many consulting organizations are focused on insuring that the business case is well documented prior to beginning a new project.
According to Hamilton, companies implementing ERP should expect significant inventory reductions. "Improved planning and scheduling practices typically lead to inventory reductions of 20% or better" and improved procurement practices lead to better vendor negotiations for prices, typically resulting in cost reductions of 5 percent.
In addition Hamiltons work shows labor savings of 10%, improved sales, and significantly improved accounting controls including reduction of receivables by 18%.
Clearly with these and other quantifiable measures, you can build a pretty sophisticated model to show the ROI of what typically is a multi-million dollar investment.
Understanding the cultural and organizational impacts of a major system like ERP is also essential. A major ERP system cannot be implemented as an IT-only project. Its really a business project and, as such, it needs to be driven and lead by a business sponsor.
The IT organization should try to avoid providing the leadership in this scenario because it generally is one of the causes of failure. In fact, the leading cause of ERP implementation failure according to many research studies is the lack of business sponsorship. This is usually manifested in the organization refusing to change their business processes to accommodate the system, and forcing modifications on the system.
I like to tell both my graduate students and my clients that most major ERP systems embody the institutional knowledge of thousands of companies in businesses similar to theirs. If their business process differ from those embodied in the software, theres a good chance that their processes are wrong, and they should really examine them closely.
Most companies will tell you theyre very different from everyone else, but most ERP consultants will tell you there are very similar themes that run across most organizations, and 95% of most companies can adapt their processes to the software just fine.
So, should you be thinking about a major ERP redux? The time may be right, particularly if you do not have a single view of your enterprise, or if your systems are struggling to keep up with the changing business climate. It may even be time for you to re-examine your current ERP implementation, with an eye on fixing those problems that drive the business users a bit crazy.
Daniel Gingras has been CIO of five major companies and is a partner at Tatum, LLC. , a nationwide professional services organization of senior-level technology and financial executives who take on leadership roles for client companies. He has more than 30 years of IT experience and teaches computer science at Boston University. He can be reached at firstname.lastname@example.org.