Manufacturers to ERP Vendors: Give Us More Functionality
June 8, 2009 Dan Burger
When it comes to making ERP software decisions, the choices are: increase the functionality, lower the cost, and improve the integration with applications and data that reside outside the ERP system. You can hope for all three, but your luck probably won’t be that good. Given one choice, the winner is functionality. That’s part of what I learned from the Aberdeen ERP in Manufacturing 2009 report that I peeked at in advance of its release on June 30.
In light of the current emphasis on cost cutting and downsizing, it might seem that the most popular choice would be cutting prices. Not exactly, says Cindy Jutras, an Aberdeen vice president and author of the report that was based on the survey results. The single most important factor in ERP decisions comes down to functionality. Cost and ease of integration combined do not trump functionality.
That’s not to say that cost is not a factor when it comes to ERP software. Overall, Jutras says, the pressure to reduce costs have escalated during the past year and has become the top business driver impacting ERP. Aberdeen’s survey of more than 890 small to mid-sized businesses found that 44 percent feel the pressure to reduce costs, yet 54 percent of respondents are planning to grow revenues at an average aggregate rate of 11 percent. The report also shows that 13 percent anticipate revenues to be flat from 2008 to 2009, while 34 percent predict revenues will decline by an average of 11 percent.
So how do the quarreling goals of increased functionality and lower costs co-exist? That’s where the return on investment comes into play. Without it, Jutras says, ERP projects lose their justification for continued investment. Ideas about increased functionality sputter and stall.
When the price of increased functionality increases, buyers are going to shop around with a bit more determination. They’re also going to look for savings in areas other than the cost of the software, the licensing fees, and the maintenance or the ROI just won’t pencil out. The answer to the ROI question is often found in improved profit margins and the prevention of lost revenue.
“A well-managed ERP implementation can significantly reduce cost while improving other aspects of the business,” Jutras says. “As companies brace themselves in this down economy, ERP projects run the risk of being delayed just when they are needed the most.”
The Aberdeen survey–a year-over-year benchmark of ERP use–gets a read on upgrades, extensions, and new implementations. A valuable portion of the statistical deciphering comes from an examination of ERP modules and ERP extensions. These are similar but different in important ways such as functionality, price, and where the purchase is made.
Modules use a single database model, full integration is built in, and there is little or no redundancy of data elements except where there is a specific need. Modules are built with the same development tools and the same architecture as the ERP software. A module can be implemented incrementally; its release cycle is in lock step with the core ERP.
Not all ERP systems have the same core functionality, but in the Aberdeen survey, which relies heavily on manufacturers, the core functionality includes general ledger, accounts payable, accounts receivable, inventory control, materials requirement planning, supply chain planning, and scheduling, as well as others. These are all considered as modules.
Extensions are products that go beyond core ERP functionality. Examples include items such as customer relationship management, enterprise asset management, buyer relationship management, and transportation management. They include enhancements to modules such as warehouse management that goes beyond inventory control or human capital management that adds functionality to a standard human resources module.
According to Jutras, the recently completed survey was the first to record a dip in the use of ERP modules.
“It looked like functionality and ERP usage was down,” she says, “but if you combine the use of modules with the use of extensions, the usage and functionality went up.”
Examples include a year-over-year 20 percent growth in customer relationship management, a 29 percent growth in product lifecycle management, a 29 percent growth in buyer relationship management, and a 44 percent growth in supply chain planning.
“I barely see any change in module adoption from year to year,” Jutras says.
Some ERP vendors offer CRM, PLM, BRM, and SCP as part of their core package or as integrated modules, and others don’t. But the Aberdeen report indicates extensions are being used instead of the available ERP modules. The determining factor is increased functionality, with price having a say in the decision if ROI is not favorable or is undetermined.
Dividing the survey responses according to best-in-class companies and all others, Jutras says best-in-class companies are more likely to use more extensions and implement them as if they were fully integrated modules of the ERP suite. Certainly, not all extensions are fully integrated with the ERP that they are teamed with, even though most purchasers prefer a high level of integration.
Best of class companies are also more likely to purchase extensions from their ERP vendors rather than purchasing them from a vendor’s partner or a source not connected to the vendor. The ERP vendor blessing is a powerful advantage, but this is closely tied to the importance of integration.
A couple of comparison statistics that Jutras offered were in the areas of business intelligence, where 46 percent of best-in-class companies purchased extensions compared to 30 percent of other companies, and in document management where 35 percent of best-in-class companies made the investment compared to 22 percent of all others.
“Best in class has a higher adoption rate in all 17 extensions categories noted in the survey, but I couldn’t say that with the modules,” Jutras says.
So even though there continues to be heavy pressure to reduce costs, the realization that value for money spent is an important factor in ERP purchasing decisions, especially as it pertains to increasing the functionality that the core ERP software provides. This is not to say that all ERP software lacks the functionality that all its users desire or that all users make functionality a higher priority than price. Because it’s not IBM i specific, it’s possible that AS/400 shops may view their ERP circumstances differently, and because the responders of this survey are primarily manufacturers, the results could be somewhat different in other vertical industries.
This is a benchmark. Variances from one organization to the next are assured. However, the dramatic rise in ERP extensions use substantiates the emphasis on functionality and demonstrates the expanding ERP footprint that is likely to be occurring regardless of industries, platforms, or the size of the enterprise.
The complete Aberdeen ERP in Manufacturing 2009 report goes well beyond this snapshot. It will be available at the end of the month.
Measure Twice, Cut Once Applied to ERP Implementations
Need to Cut Costs? Midrange Shops Should Do ERP Well
Manufacturers Don’t User Most of Their ERP Software’s Features, Says Aberdeen