ERP Investments Rising, Complexity Waits In The Shadows
June 16, 2014 Dan Burger
Enterprise resource planning systems are the good, the bad, and the ugly of business computing. The benefits of a smooth-running system with integration throughout the organization are significant when compared to faulty or non-existent ERP. The marginally successful and complete failures are legendary. It’s the classic risk-reward scenario. A recent report by Computer Economics shows companies investing in ERP at a rate that tops all other enterprise software. What does that tell you? The risk is worth the reward?
There are huge challenges involved whether companies are choosing to enhance existing systems, rip and replace those systems, or even implement their first enterprise-quality systems. More often than not, the focus is on the software and the promise of what it can accomplish, but factors involved in the cost and the implementation also are dependent on organizational dynamics and resource allocations, which are typically underestimated.
The Computer Economic report, titled ERP Adoption Trends and Customer Experience, is based on a survey of more than 200 organizations. From that, analyst Frank Scavo reports on worldwide adoption and investment rates by sector, organization size, and geography. The report also measures customer experience, success rates, return on investment, and total cost of ownership.
“Companies have to invest in ERP because it is the transactional backbone for so many things they want to do,” Scavo told me on the phone last week. “If, for instance, a company wants to deploy mobile applications, generally they want to provide that for base transaction processing whether it is expense reporting, inventory, sales orders, or whatever it might be. They need a solid ERP system underneath.”
According to the survey, the number of organizations with ERP systems is increasing and more organizations are investing in ERP systems than in any other technology. The percentage of companies making ERP investments varies by size, with 40 percent of midsize companies making ERP investment and 43 percent of large companies investing. Only 13 percent of small organizations are spending on ERP enhancements. By sector, manufacturers are most often investing, followed by health care, retail and wholesale, and energy, utilities, and transportation.
Measuring customer experience yields few positive responses. The success rates based on return on investment and total cost of ownership are dismal, single-digit percentages.
“The fact that the success rate is low is because ERP is a cross-functional system that involves business processes,” Scavo explains. “Whenever you touch business processes, you have the risk of cost overruns and not being successful. If you compare this with other technologies such as virtualization, infrastructure as a service, or the kinds of things that can be delivered by the IT organization itself without involving users, those projects are more successful because IT has control of the project. ERP involves a variety of user departments and the changing of business processes. There are a lot of opportunities to not do things the right way.”
Cost overruns and delayed schedules are usually a shared responsibility between the vendor and the company, Scavo says. On one side, there are vendors that knowingly low-ball the implementation costs to win the deal and establish expectations that the project will be easier than it is. On the other side are organizations that often do not commit sufficient human resources to make the project successful and are ill prepared to do the type of business process re-engineering needed to make projects successful.
“The bulk of the expense is people cost,” Scavo says. “Implementation, consulting services, and the time requirements on internal staff greatly add to the cost. Software costs and ongoing maintenance costs are not trivial though. And most companies are not in a position where they can implement ERP changes by themselves.”
The unexplained and unaccounted for project costs attributed to the involvement of too few people particularly the end users is a legit concern as is the escalating costs of the consulting services. Both are connected to the spiraling complexity of the new technology, which affects the ERP software and organizations’ IT infrastructure. This causes people to look at product architecture and the downstream consequences it creates.
ERP by nature is a complicated undertaking. There’s nothing about it that brings to mind the word easy. Hard, harder, and hardest would be more fitting descriptions.
“The more complicated the ERP, the more likely you are to fail,” says Ross Freeman, strategy leader for System i ERP solutions at Infor. “The most successful ERP systems on the market are designed to drive consulting revenue. This has been on open secret, at least in the consulting community, for a long time. The software needs to drive consulting revenue if the vendor wants consultants to recommend it.”
This perspective leads to the normalization of ERP projects that require large teams of consultants and system integrators to navigate the implementation process. It’s also steers the discussion beyond ERP and to bigger and more complex projects aimed at re-engineer companies. IT complexity and cost management are both more difficult to contain.
“Let’s take the re-engineering part out of the equation and talk about implementing straight ERP,” Freeman says. “There are two options at the highest level: take care of specific industry functionality (narrow segments without a lot of volume in software sales) or try to do a one size fits all with all the functionality built in.”
Freeman readily admits his bias toward the first alternative, considering it to be the way Infor operates with its variety of ERP flavors. There’s a sharing of the generic aspects of ERP software development, but on the operational side ERP should accommodate customization, personalization, and integration with other software that the user chooses, while keeping complexity in check.
“The SAP approach,” says Infor’s IBM i guy, “is that they put it all in one box and take care of it for you. The Infor approach is that we know you will buy other vendors’ software and we know you will do your own custom stuff to the software. That’s how the world works. And you need a way to connect all this without painting yourself into a corner.”
There’s also the complexity involved with upgrades and the obstacles that highly customized software presents. Part of the ERP economic value paying maintenance and getting upgrades that most likely would not be affordable or available on home-grown ERP or ERP that was highly customized.
Being able to separate applications from with regard to upgrade paths is a complexity issue that companies have been wrestling with for a long time.
Many would argue the modifications, extensions, enhancements that make the ERP unique and create unique value. This often depends on integration with other systems and not having conflicting release dependencies, which cause a domino effect with the integrated pieces when the core ERP is upgraded.
Although the Computer Economics report does not indicate how companies are making investments in ERP, being able to make investments through modifications without bringing in the consultants or re-engineering the business is a worthy goal.
The ERP report is available on the Computer Economic website by following this link.