For large organisations, Enterprise Resource Planning (ERP) systems are the backbone that support core processes and transactions. Whether they are on the premises, hosted or cloud-based, “their purpose is to improve efficiencies and to get better information out of the business to run it”, explains Richard Anning, head of ICAEW’s IT Faculty.
But ERP is not exclusive to large organisations. “To a certain extent, ERP is just your operational system,” says Anning. “It could range from an implementation of a global ERP system in an FMCG company through to putting in a finance system with practice management and other operational processes into an accountancy practice.”
Because they are generally expensive to implement, ERP systems tend to have long life cycles. Yet businesses, and the technology that supports them, change over time, and what once worked smoothly may not fit a company’s present and future business needs. “Also, Electronic Data Interchange and other new ways of doing business may not be supported within a stale ERP platform,” adds Vadim Chobanu, managing partner at ERP solutions provider Enapps.
ERP is the engine that drives finances in most organisations. “Just like a car’s engine, it may start showing signs of age after three or five years of running well,” says Andy Bailey, senior product manager at business software provider Exact Online Accounting. “I like my old car, but it doesn’t have sat-nav, an iPhone dock or cruise control and uses a lot of fuel as it’s running on old technology. I can get around these, but it takes time and costs more to run.”
It is a sure sign that a company’s ERP system is stalling when people start plugging functionality gaps with add-ons or manual adjustments. “Older ERP software is typically less user-friendly too, as it’s likely not to include technology such as responsive design principles that allow people to use any device,” says David Atherton, solutions consultant at ERP software provider NoBlue Limited. “This means the IT department has to issue fixes and workarounds, rather than focus on more important tasks to help grow the business.”
John Parker, project manager at financial services consultancy Projective, notes that managers and departments creating their own offline fixes is a big worry for financial services industry regulators. “Reports that do not match from two departments using the same data are a red flag as well,” he says. “In financial services especially, data must be aligned between departments, or regulators could impose penalties. And most dangerous of all, poor financial systems and processes can lead to high-profile accounting errors, resulting in a dramatic hit to a company’s share price.” According to Parker, when a department’s costs are rising year-on-year it is a telling sign that the ERP is not working.
Inaccurate or old data coming out of ERP means the management do not get the reporting information they need to make critical business decisions, and so run the risk of losing control. “When data is held in silos too, a robust, centralised view of the business isn’t possible,” adds Atherton.
Adcock Refrigeration and Air Conditioning upgraded its ERP at the end of 2014 to facilitate a planned turnover growth from £32m to £50m. “One of the downsides to an outdated ERP system was having to wait until quarter-end to analyse job profitability, which limited our ability to cost up jobs accurately,” says Kevin Newman, Adcock’s finance and administration director.
Poor or non-existent systems interaction could be another telltale sign of the current ERP not being fit for purpose. Before the upgrade, Adcock had had two separate systems for job allocation and ERP, which did not integrate. “Having to align the two systems constantly was time-consuming. We weren’t able to automate key processes such as invoicing, which had a knock-on impact on cash flow, unnecessary postage costs, and staff’s time as they had to manually invoice and chase payments,” says Newman. “We quickly realised that solving this issue would be essential for improving the operational efficiency to help us achieve our business goals.”
It also becomes apparent that the existing ERP is out-of-date when the business perpetuates inefficient processes. Anning says: “Say your company makes breakfast cereal. All of a sudden, your competitors come up with new cereal that’s similar to yours but cheaper. And you’re thinking: How can they do that? One reason could be by improving their systems and processes and taking cost out. Meantime, your business is losing competitive advantage and suffering lower profits.”
There are also “external” telltale signs that companies do not have the best finance processes and systems in place, says Parker. “It’s usually those that are the last to report quarterly or annual results,” he says.
Such warning lights mean it is time to review ERP requirements with a view to upgrading the system. “For rapidly growing or changing companies, I’d recommend reviewing ERP at least every three years,” says Bailey.
Failure to have the current business workflow mapped out will prevent you getting where you need to be
Here, Chobanu warns against making the mistake of not first documenting current processes and only defining desired processes and business requirements. “Failure to have the current business workflow mapped out will prevent you from getting where you need to be from a systems perspective two or three years down the line,” he says.
Another mistake is not treating an upgrade like a new implementation. “ERP upgrades shouldn’t be taken lightly due to the potential of specific functionality being completely left out,” says Chobanu. “Don’t assume that everything that was there before will also be in the new system and test that everything is as expected, just like you would with a brand-new implementation.”
According to Gartner research, there are other reasons why 75% of all ERP implementation projects fail. Generally, they are part of a larger business transformation. “It’s a business project, not an IT one – if the organisation says it’s an IT project so the IT department can lead it, that’s a dangerous mistake,” says Anning. “IT can facilitate it, but it’s the business that has to put in the business systems.”
The project must be properly managed or it can lead to huge losses. Bad ERP project management cost Nike and HP $100m and $160m respectively in lost revenue in the early 2000s.
“Many companies attempt the equivalent of a Big Bang, with everything being changed at once, resulting in a programme of change too big for the business to handle,” says Parker. “How do you eat an elephant? The answer, of course, is ‘one small piece at a time’.
“Implementing an ERP system may seem like a Herculean task, so there must be a detailed project plan in place and a project team with the right mix of skills.” A dedicated internal project manager is also a must. “They’ll also act as a funnel which feeds in and out of the ERP vendor’s project implementation team,” says Chobanu.
The project plan must have a realistic timescale. “The issues of an ERP implementation at a global consumer goods company are going to be quite different from those of a small professional services firm, but whatever the size of the business, you have to set realistic expectations of what you can achieve, especially when you think the project may take a year but people are pushing for six months,” says Anning.
Although asking how long the implementation usually takes is like asking how long a piece of string is. “If you’re putting in a system in a global consumer goods company, that could take a number of years; a smaller company could do it in a matter of months,” Anning says. “You can also do it in stages, maybe putting the financials in first, and then adding in the distribution and manufacturing later.”
As for budgets, research from Panorama Consulting estimates the average company spends around 4% of its annual revenue on ERP implementation. “The vendor should deliver the system for the agreed ‘firm’ price, but we recommend setting aside a contingency budget of 20% in case there’s some extra functionality you want added on but which you didn’t anticipate at the outset,” says Chobanu.
The business must also anticipate and tackle resistance to change from staff. Any change management plan needs to include end-user training, as well as input from and communications with everyone affected. “Dictatorial ERP planning can cause massive pains when it doesn’t consider departmental plans,” says Atherton.