This post defines ERP from a new perspective, considering advancements in technology, business models, and business intelligence.
You will also find a detailed study of cost factors and ROI factors here.
Definition: Enterprise resource planning (ERP) is the software that integrates every business process of an organization into a single centralized system to provide visibility, efficiency, and intelligence.
Enterprise planning solutions are not a new thing. The history of ERP started back in the 1960s.
The global enterprise resource planning market is expected to be $74.2 billion by 2026. The current size is estimated to be $40 billion. Organizations that are using this system are finding greater growth in their business.
Why do we need ERP?
- This software allows you to access enterprise data from multiple jobs using the familiar setup and user experience.
- It collects all data and centralizes them for wide distribution. It avoids having various standalone databases with disconnected excel sheets so that all the users of an organization from lower to higher can enter, store, and use data through the regular processes.
- All users of the company can get centralized, secured, and accurate data from this system.
- This system provides all types of reports for all the activities of the organization like the financial statements, receiving reports, etc.
- This system avoids copying of data and gives data solidarity with a single source
- The system helps the organization to make better decisions by bringing visibility in all the aspects of the organization.
What is new with enterprise systems?
With exponential progress in data storage and computing capacity of systems per Moore’s law, we are witnessing advancements in enterprise software systems.
The following are the few high impact innovations.
- Artificial intelligence and big-data-analytics.
- Integration with the Internet of Things (IoT).
- Applications over smartphones.
- Blockchain integration.
- Cloud enterprise resource planning.
- SAAS model.
Artificial intelligence and big data analytics
Artificial intelligence (AI) with machine learning can help in making better choices for the business. AI will help businesses to optimize their all operations including,
- Business operational processes.
- Software systems.
- Management structures.
- Hardware and technology infrastructure.
Enterprise software systems gather many enterprise data from day-to-day business processes and generate big data. Big data analysis can predict demand and help to make future business decisions better and efficient.
Integration with Internet of Things (IoT)
Internet of Things (IoT) is a system of interconnected physical objects that are accessible through the internet. Automated, machine to machine, meaningful communication is established with it.
Following are the advantages of integrating IoT with enterprise software systems,
- Enhanced data availability and accuracy.
- Accurate and efficient communication.
- Greater business intelligence.
Applications over smartphones
Mobile applications help in accessing the information on the go. They also help in collecting job site information accurately.
The most popular mobile operating systems on which client applications built are,
Enterprise systems are adopting blockchain technology. It helps businesses in achieving,
- Enhanced transparency.
- Greater security.
- Increased traceability.
- Improved efficiency.
It helps in achieving greater control over supply chain management.
Vendors host their software on the cloud computing system instead of customers’ data centers. It helps in faster upgrading and reduced maintenance efforts.
Software-as-a-service models allow small and medium-scale businesses to use software systems without huge initial investments. This model does not demand higher installation costs or IT people. It is pay-as-you-go based on how much you use.
The following are the set of features commonly found in these systems. Different ERP modules manage each of these functionalities.
- Accounting and Finance.
- Customer relationship management (CRM).
- Supply chain inventory management.
- Human resources.
- Business intelligence.
- Purchase management
- Sales management
ERP benefits and disadvantages
Using a centralized enterprise system across all departments of the organization provides the following benefits,
- Data accuracy.
- Strategies based on previous data analysis.
- Business process standardization.
- Better transparency and collaboration.
- The efficiency with inventory management and supply chain.
There are some inconveniences in implementing enterprise resource planning solution
- Implementation is challenging.
- Handling change in the business process is difficult.
- Upgrading or migration challenges.
- Data security issues.
Popular deployment models
Three main types of application deployment models are,
- Deploying on company premises.
- Deploying on the cloud.
- Deploying both on-premises and on-cloud.
ERP buyer types
ERP vendor selection and deployment type depend on the needs of a buyer. Here are the common types of buyers.
- Big Enterprises
- Small and medium scale businesses
- Industry-specific buyers
ERP cost factors
The total ERP cost includes the costs of packaged software, hardware, professional services, and internal costs. The average cost depends on ERP software and the country in which you are staying. The following costs are mainly if your deployment is on-premises.
The cost of software depends on the scope of implementation (the number of modules and the number of end-users), the complexity of software and ERP vendors. Software that involves integration with external business entities costs more.
Vendors offer a discount for organizations who invest in a suite of software systems.
Implementation of ERP systems routinely requires the purchase of new computer hardware, systems software, network equipment, and security software. The costs of hardware vary in a wide range, dependent on the scope of implementation and platforms.
Costs of Professional Services
Although different companies find different hurdles and traps in the budgeting process, those who have implemented ERP packages agree that some costs are more commonly overlooked or underestimated than others. Application implementation veterans agree that either one or all of the following eight areas are most likely to result in budget overruns.
- Integration and testing
- Data conversion
- Data analysis
- Continuing maintenance
ERP training cost
Training is the unanimous choice of experienced system implementers as the most elusive budget item. It is not so much that this cost is completely overlooked, as it is consistently underestimated. Training expenses are high because workers almost invariably have to learn a new set of processes, not just a new software interface. For instance, a receiving clerk who accepts shipments of raw materials.
With a package like SAP, that clerk now becomes an accountant because he is keying new inventory directly into a live system. Mistakes have an immediate impact on the books. ERP is not so much about technology implementation; it is much work to set up the software.
Customization of the ERP system happens when it cannot support one or more of your business processes, and you decide to make it do what you want. You will have to do it all over again in the new version.
The big chunk of costs for professional services is customization. The cost of customization can easily out-run the packaged ERP software, but it is the customization of the software that makes it a success or a failure.
Integration and testing
ERP systems will not demonstrate their full potential unless they are properly integrated with other enterprise software applications. Three main areas need integration,
- The integration of the various functional modules
- The integration of the system with other business software applications
- The integration of the system with legacy systems
Most enterprise planning software packages are very complex systems. Interfacing with those systems is not an easy task. Testing the links between ERP packages and other corporate software links that have to be built on a case-by-case basis is another essential cost that is easily missed.
Most companies will have some system that will not fit into the ERP packages functionality and which will have to be interfaced with the core package. In most cases, such integration can be costly.
It costs money to move corporate information, including customer and supplier records, product design data, and the like, from old systems to a new system. Most data in most legacy systems are rubbish. But most companies seem to deny their data is dirty until they actually have to move it to the new client/server setups that popular packages require. As a result, those companies are more likely to underestimate the cost of the move.
There is a misconception that the ERP vendors perpetuate that you can do all the analysis you will want within their product. But often, the data from the system must be combined with data from external systems for analysis purposes.
Users with heavy analysis needs should include most of a data warehouse in the budget and should do quite a bit of work to make it run smoothly.
The extravagant cost of ERP consultants is a well-known fact. Like training expenses, this cost is hard to circumvent. Choosing a lesser-known package to avoid premium-priced consultants won’t necessarily help either.
When users fail to plan for disengagement from the existing system, consulting fees will overshoot the budget. To avoid this, companies should identify objectives for which their consulting partners must aim when training internal staff.
It is a good practice to include performance metrics and time schedules for the consultants. For example, a specific number of the company’s staff should be trained to a certain specified level.
Most companies intend to treat their ERP implementations as they would any other software project. Once the software is installed, they figure that the team will be scuttled, and everyone will go back to his or her day job. But after ERP, you cannot go home again. You are too valuable. Because they have worked intimately with the system, they know more about the sales process than the salespeople do and more about the manufacturing process than the manufacturing people do.
Companies cannot afford to send their project people back into the business because there is so much to do after the software is installed.
ERP Return On Investment (ROI) Facts
Measuring how well the application is performing and contributing to the return on investment is important.
It is not just about choosing the right product; establishing performance metrics is also needed for measuring and improving.
The reason why post auditing is not done includes, negligence to lack of knowledge.
Auditing should happen while implementing the system and follow up post-implementation at 3, 6, and 12 – month intervals.
Define ERP Implementation success expectations
Make documents on where the company and its process are standing now. What are the issues and problems?
Define what the future road map with the new implementation is. Include everything. All existing applications and data repositories are going to centralize.
Defining industry-specific benchmarks
To acceptably measure how well your implementation is performing, you’ll need to identify an industry benchmark for comparison. Without a benchmark, measurement is not meaningful.
First, you will have to collect data for benchmarking. You may get it from government data or an industry association. You can also buy them from agencies that sell them.
While collecting the data be as specific as possible. Benchmark is needed because the improvement in comparison with competition matters more than improvement in isolation.
Perform ERP post-implementation audits regularly
The only systematic approach gives a clear idea of how the application is performing against expectations.
Strict auditing should happen at all levels, including upper management.
A user survey of employees about ease of use of the application should be part of auditing.
Analyzing the auditing data
Analyzing should be done objectively. The areas where it met the expectation and areas where improvements are needed need to be derived.
Implement a company-wide process
The main idea of implementing enterprise resource planning software in any organization is to bring uniformity and centralizing processes and data. Hence all the departments and employees must use the same process as much as possible. The new system needs to be strictly imposed.
Training the employees should be an ongoing process
Unless people using the application are aware of all the features of it, and how to efficiently use them, finding the ROI of the implementation is difficult. Traning also gives back feedback from end-users about the usability of the system. Feedback will help in optimizing the system for the better.
Managing ERP security issues
You need a specific plan to handle any security issues. Risks may include forgetting the password to failing to take data backup of the system. Specific issues need to be defined, and a backup plan should be available in case of disaster. Ongoing secure data backup is one essential thing every company should do.
Modern enterprise solutions are equipped with smartphones, data analytics, and the latest emerging technologies like blockchain and IoT. These new functionalities are essential for staying ahead of today’s competition. Cloud solutions proved to be cost-effective and efficient.