For a business to take advantage of market opportunities, its information must be consistent, accurate, updated in real time and actionable. As businesses grow and operations become more complex, executives often discover they're operating with information they can't trust, can't effectively use or both. Understanding what's actually happening in their businesses is time-consuming, and decision-making is cumbersome. Processes that ought to be simple aren't. These realizations drive many companies to consider an enterprise resource planning (ERP) system. But how do you evaluate and buy ERP?
ERP touches processes throughout the organization, so it's important to consider the business case for an ERP system, to assess ERP features and benefits and to choose the best ERP provider for your organization before making a purchasing decision.
What is ERP?
Enterprise Resource Planning (ERP) systems start with a shared database that contains the information your business needs to handle core processes—from accounting and finance to inventory and manufacturing to order processing and human resources. Drawing on this shared data, ERP systems add diverse modules for automating and integrating workflows, tracking and analyzing operations and promoting faster, smarter decision-making.
Why would you want to buy an ERP system?
Most potential benefits fit into three categories: direct and indirect cost savings, opportunities to increase revenue and greater business effectiveness.
Top Reasons to Buy ERP
Companies often choose ERP because:
- Their existing systems don't allow them to work out processes in a simple way, or at all. Consider an accounting software, for example, that can't handle multi-entity accounting or connect to the business's inventory tool.
- Company growth makes it necessary to get a system that requires less manual labor, so team members can spend less time, say, responding to simple customer queries one-by-one and more time responding to only the most complex complaints.
3 Top Benefits of ERP Systems
Direct and indirect cost savings. ERP systems drive cost savings in multiple ways. For example, they can help simplify and automate complex business processes, saving hours spent on manual work. They can also eliminate processes that don't add value and integrate functions across the business, making employees better informed and more able to adapt.
By supporting standardized, repeatable processes, they can help improve quality and reduce waste. By replacing many software systems with one, they reduce the number of technology vendor relationships you need to manage, which typically saves on licensing costs as well as integration requirements, application administration and reduces the needs to train staff on the various processes.
Selecting a cloud-based software-as-a-service (SaaS) ERP system, where the service provider manages infrastructure, performance, uptime and upgrades, further reduces IT responsibilities.
Opportunities to increase revenue. ERP systems can drive sales by helping to ensure the right level of inventory to meet customer demand and building repeat business through consistently better customer service. ERP allows your team to give faster answers to customer queries, accomplish higher rates of order accuracy and on-time delivery, and incorporate more self-service options so customers can buy from you whenever they're ready.
Additionally, with a central database for all financial information, an ERP system can help a business identify its most profitable products, improve cash flow and forecast demand.
Greater business effectiveness. Today's ERP systems improve business effectiveness by promoting easier and faster collaboration, introducing best practices and automation into processes and providing real-time data about company performance across teams. They help managers identify emerging trends and opportunities and support strategic and tactical decision-making. With ERP in place, teams share the same data, rather than manually integrating data from multiple sources of varying ages and levels of accuracy. Once implemented, ERP systems should also offer a platform for growth and change, helping you introduce new offerings or enter new markets more quickly and easily.
Many ERP systems are modular. That allows you to start with core functions and expand as you're ready or to choose specific modules associated with your industry or the characteristics of your business.
In addition to their underlying database, most ERP systems offer tools and features for accounting, financial planning, procurement and supply chain control, production management, customer relationship management, ordering and fulfillment. More robust offerings include ecommerce, professional services automation and human resources management. ERP systems can also include analytics and business intelligence capabilities, workflow integration and automation, and dashboards to give managers easier access and control.
How to Choose an ERP System
As with any important business decision, start by clarifying your goals and expectations, and involve key stakeholders who have the most to gain from a successful implementation (and the most to lose if there are problems). Once you have an ERP implementation team, identify the offerings that might be appropriate for your business.
If you're just getting started, you might start with a request for information (RFI) telling ERP providers roughly what you're aiming to accomplish and asking which solutions they might provide. You may wish to seek a consultant's guidance to help you evaluate options, and perhaps to help you build a more detailed request for proposal (RFP) or request for quote (RFQ) later. (Note that some consultants may specialize in working with only one or a few preferred ERP providers.)
As you narrow down your potential ERP providers, you'll want to create an ERP implementation checklist and ask detailed, specific questions about technical support, problem-solving and costs. For example:
- Time frame. How long will implementation take? What does a detailed schedule look like? What resources will I need to provide, and when? How are operational disruptions limited, and when might they occur?
- Customization. How much can the system be customized to my needs? Where are customizations actually necessary, and where can I use modules, reports or other resources the provider has already created for my industry? Does my provider understand where my processes and requirements truly are unique? Do I understand where they might not be quite as different as I thought?
- Project management. How will the provider manage my project? Will I have an experienced single point of contact? Which of my team members will be involved in implementation? How will the provider help me keep track of progress? Who do I call if there's a problem? How quickly will they respond?
- Usability. User adoption is a fundamental piece of a successful ERP deployment. Determine how intuitive and easy to use the application is across a variety of roles.
- Subscription costs. In a subscription arrangement, how are costs structured? Which costs are upfront, which costs are monthly, and how does the contract handle changes (for example, increases in usage)?
- Project costs. What about my implementation might trigger additional costs? Where have other customers encountered additional costs? What should I be especially careful to understand about project scope?
- Data migration. What should I know about migrating my existing data? Am I aligned with my ERP provider in assessing the complexities of migrating from legacy systems, cleaning data, eliminating redundant or obsolete data, and so forth?
- Updates and maintenance. How will I make changes to the ERP system after implementation? What is the process for adding new features, changing the number of users, customizing new reports or other changes? What changes can I make—for example, building new reports and queries? Which activities will require help from the provider or a specialist consultant or programmer?
- Platform flexibility. Does the vendor offer programming tools to customize the system? Is there a robust partner community that offers add-on applications by department or industry and pre-built integrations with other applications?
- Training. What sort of on-site, distance training or training resources are provided? How much do they cost, or are they free? How often are they updated and expanded?
Demand a thorough technical demonstration, with opportunities for your team to explore the user experience and envision what working with this software might be like.
Make sure to request references of companies similar to yours who've implemented the same software—and take time to check those references thoroughly. Ask what happens if there are problems, if there was a single point of contact with the authority to solve issues, how well the software worked and how the user experience helps or hinders productivity. Also inquire whether their people quickly came to trust the new environment (or whether they looked for workarounds outside of it), what it was like to work with this ERP provider, how long it took to start seeing value, where they stand now and their next steps.
How to Build a Business Case to Purchase an ERP
Before investing in a product, you need to be sure it will deliver business value. A business case helps the organization estimate the value that an ERP system will deliver, so it can weigh that value against the costs and risks of implementation and make a decision.
To build a business case for ERP, start with the problems you need to solve and the benefits you intend to derive. You can expect to capture some of those benefits rapidly—for example, a faster month-end close or decommissioning servers and avoiding software upgrades you no longer need. Others might be longer-term, such as 10-20% productivity growth after everyone's fully trained and you've tested and implemented all the automated workflows you envision.
Carefully quantify the costs as well, including planning, implementation, training and cutover costs, based on a realistic assessment of what it typically takes companies like yours to deploy the system you're considering.
Decades ago, ERP systems were primarily for the largest companies, and implementation was dauntingly complex. The industry has come a long way since then: ERP systems are well-proven and simpler to manage, making it easier to derive value. If you do your homework upfront, buying ERP is one of the most powerful actions you can take to boost your competitiveness.