It’s Not Always Sunny in ERP Land
March 31, 2021 Alex Woodie
Enterprise resource planning (ERP) systems remain central to company operations. The expansive application suites are heavily relied upon to automate the core business processes that businesses rely on. However, they’re notoriously difficult to implement, and they do not always do what they’re supposed to. And according to a recent survey, they’re often lousy when it comes to providing a return on investment.
For its Technology Trends 2021 study, Computer Economics polled nearly 200 IT professionals to gauge what types of technologies they’re using, and whether they’re getting a good ROI out of them. When the results were tallied, ERP came in dead last out of 15 technologies.
AI, mobile applications, e-commerce, and software-defined wide area networks (SD-WAN) were among the top achievers when it came to low-risk and high-reward, while technologies like RFID, virtual/augmented reality, data analytics, and human capital management (HCM) occupied the middle of the chart.
But ERP was all alone at the bottom of the heap, with the highest risk and the lowest reward, just as it was back in 2019. In fact, ERP delivered the highest risk possible, with the lowest reward possible. Nothing else was even close.
“Relatively speaking, ERP is worst in terms of both risk and reward,” the company says. “This is not to say that no companies see a positive return on investment or find a way to come in under budget with ERP. It is just that, among all the technologies, this happens the least often with ERP.”
This was the second straight year that ERP came in dead last in the analysis by Computer Economics, which is conducted by a Los Angeles-based management consulting firm called Avasant. The rub, of course, is that nearly every company of any size needs an ERP system, running either on premise or, increasingly, in the cloud.
“ERP systems touch nearly every part of the business, so implementation is complex and requires buy-in throughout the organization,” Tom Dunlap, the director of research for Computer Economics, said in a press release. “ERP implementations often lead to cost overruns and dissatisfaction. But the alternative (no ERP or an aging legacy product) can be even more costly to a company.”
This may not be the case forever. While no technologies have emerged that can replace ERP systems at the heart of businesses, the nature of ERP deployments is slowly changing, as more ERP deployments occur in the cloud.
According to Gartner, cloud ERP is growing in excess of 25 percent per year on a revenue basis, and will continue to grow at least at that rate for the foreseeable future. That compares to the overall ERP market, which grew nearly 9 percent globally in 2019 to nearly $39 billion, Gartner says.
Today, there’s a mix of ERP systems in the cloud that cover a spectrum of capabilities, according to Gartner. This includes “born in the cloud solutions” that were designed from the get-go to support multi-tenant deployments; “new-generation solutions” that provide some separation at the operating system or database layer; “rearchitected” ERP systems that were adapted to run in the cloud; and existing ERP systems that were originally designed to run on-prem, and which are deployed in the cloud via some type of provisioning layer.
Over time, it seems clear that “born in the cloud” systems will gain share while older on-prem systems that were adapted to run in the cloud will lose share, relative to the whole. As this happens, it will have a couple of downstream impacts.
First, as vendors gain more experience in running ERP software on behalf of customers, the costs associated with deploying ERP cloud deployments should go down. Standardization of both the infrastructure hardware and the software will benefit customers and providers, and thereby start pushing that ROI figure in the right direction.
However, the apparent cost-savings of more efficient cloud-based ERP may come with a downside in the form of hidden expenses, specifically around the lack of customization. While customers are accustomed to tweaking their on-prem ERP deployments to fit their exact business processes, customization options are limited in the cloud.
In the IBM i world, there historically has been an expectation that companies will modify their ERP systems to fit their specific needs. This is a double-edge sword, of course, as it enables companies to maintain unique processes that are the source of competitive differentiation on the one hand, but also adds cost and complexity to implementation, not to mention ongoing maintenance on the other.
Many companies have so heavily customized their ERP systems that they are no longer able to upgrade to new versions of the ERP system, thus marooning those technology investments and allowing technical debt to accrue at a high rate. This inevitably spills over into the operating systems and the hardware itself, which explains why so many IBM i shops are running outdated ERP systems on unsupported operating systems running on ancient hardware.
In a perfect world, standardized cloud ERP deployments should benefit both vendors and customers. But the world is a messy place and customers prefer not to abandon their customized business processes. Until the software-as-a-service or cloud ERP industry can figure out how to enable companies to differentiate their core business systems, the ROI figures will not improve.
But Gartner offers a ray of hope in the form of “postmodern ERP.” According to Gartner, postmodern ERP systems will be radically different than what customers are used to with on-prem ERP systems.
For starters, instead of getting all of one’s ERP functionality (including human capital management, supply chain planning, customer relationship management, enterprise asset management, etc.) from a single vendor, as many ERP customers are accustomed to doing today, in the “postmodern ERP” future, customers will assemble a variety of services from different vendors in a collection of “federated and loosely coupled cloud services.”
In the “postmodern ERP” world, customers will move away from modifying their ERP systems and instead rely upon SaaS offerings that are frequently updated. Customers will also surround their ERP system with a variety of on-premise “feeder systems.”
Getting all of these services to work together in a cohesive manner will require better project management skills on the part of company’s internal IT staffs, and skills such as change management, configuration management, integration, and testing will be more important than the ability to code new business logic or modify existing code in RPG or Java.
For some folks, this may not sound like moving up, but more like going from the frying pan into the fire. There are no free lunches when it comes to ERP today, and apparently there won’t be any in the future, either. When the costs are all accounted for, don’t expect ERP’s ROI figure to improve much for the foreseeable future.