Overview

How is your ERP system working for you? Is it time for an ERP upgrade? You probably haven’t been asked those questions directly (unless you’ve been talking to sales representatives), but you might have asked yourself that question, if not explicitly. Is there a slight measure of doubt that your system is better in some way? Perhaps you’ve heard some modern ERP success stories. Or perhaps it’s more obvious than that—maybe there are new things you need to do for your customers or to keep up with the competition that your legacy system cannot handle without a lot of time and money for upgrades or modifications. Either way, it is good management practice to continually assess system performance and identify areas for improvement or emerging issues that may become problems in the foreseeable future.

Is there a perfect ERP system?

The short answer is “no.” And even if the perfect system existed for your specific needs at a given moment in time, those needs are continually changing. So it is good to stay on top of things, know how well your ERP is supporting your current needs, and identify trends that may lead to problems.

It is fashionable to refer to installed systems as “legacy ERP,” implying old technology and outdated systems. That is unfair because many installed systems are regularly maintained, continually upgraded, and fully capable of growing and adapting to changing needs and requirements. That said, ERP upgrades are optional, although strongly encouraged by software vendors. It is important to stay up to date with fixes and enhancements provided by your solution provider. If you notice issues or unfavourable trends, the first thing you should do is ensure your system has all updates and releases, then find out if your supplier has additional add-ons or enhancements available that could address any shortcomings you have identified.

Is your current ERP software letting you down?

In summary, keep your legacy ERP system up to date. But also keep a close eye on system performance. Needs and requirements will change and you need to be sure that your system is truly supporting your company and customer needs.

The self-assessment mentioned above may help identify shortcomings and areas of concern, including the following:

• Your system is unable to meet new requirements or imposes limits on new initiatives.
• It does not support new technologies or requirements, or does so only with difficulty, high cost, and delays. The supplier is slow to incorporate new features and functions.
• The functions are difficult to learn and use, and hinder rather than support efficiency.
• Response time is infuriatingly slow. Storage and retrieval of information is inadequate, cumbersome, or simply not up to today’s ever-expanding needs.
• The system is expensive and difficult to maintain and support, and is not adequately supported by your supplier.
• If your system is truly a legacy ERP with dwindling support from the supplier, or a shrinking pool of technical support, knowledgeable programmers and analysts will undoubtedly become more expensive and harder to find as the system becomes more outdated and unreliable.

These are the kinds of problems that can develop gradually and go unnoticed for a long time. Then, suddenly, it becomes clear that the system’s shortcomings are causing serious business problems—and something needs to be done.

How much do you spend on ERP?

Many companies are surprised when they carry out the analysis and discover what it truly costs to keep their existing ERP system in place and operational. That may sound strange when medium-sized companies typically monitor expenditures very closely as part of their regular management responsibilities. But it’s not always easy to distinguish between the direct and indirect costs associated with ERP.

In addition to monthly and annual fees to the software supplier(s) and hardware supplier(s), there will be ongoing costs for service and support from your various service providers (for example, hardware servicing, consultancy, or networking). Be sure to include the costs of bringing things up to date if you have detected (or suspect) that updates or enhancements may be needed to resolve existing or anticipated issues as mentioned above.

Also consider the direct internal IT department costs, including salaries and benefits, premises, utilities, and supplies. Try to separate out those that directly support your ERP. Bear in mind that at least some of these costs will remain after you upgrade and implement a new system, especially if you are replacing a traditional on-premises system with another on-premises system. Cost structure for cloud-based software-as-a-service (SaaS) is different, but you will still need a point of comparison to make a defensible decision whether to stay with your existing system, start an ERP upgrade, or pursue a legacy system replacement.

How much would a new system cost?

Are you concerned about the potential cost of switching to a new ERP system? That’s understandable. A new ERP system is likely to be one of the largest expenditures on non-production equipment that a company will make in a given year. Nevertheless, when viewed in the context of the benefits available and in comparison to the amount currently being spent to maintain the current system, most companies find that the cost is entirely reasonable and justifiable. Remember to think in terms of life cycle costs—the total cost over a period of time, such as five to seven years.

When considering the cost to acquire and implement a replacement system, please note that the hardware and software licence costs are only part of the equation. You should also include the following in your assessment:

• Networking and peripheral devices such as barcode scanners, remote entry stations, mobile devices, and client software, as well as support.
• Data conversion and data entry to the new system as well as provision for archiving and accessing historical records.
• Disaster preparedness, including backup or failover systems, data recovery resources, redundant connectivity, and communications.
• Education and training for the ERP implementation team and all future users. (This is critically important. Don’t cut corners here.)
• New workflow development and documentation.
• Implementation assistance. A certain level of assistance is likely to be included in the package from the primary system supplier, but you may wish to engage additional assistance from the supplier(s), external consultants, your accountancy firm, or others for some or all of the items listed above.
• Additional burden on your employees during the implementation in the form of overtime, hiring temporary staff to assist with regular duties so they have time to work on the implementation, or bonuses and other incentives to keep workers motivated.

Please be aware that the cost structure for cloud-based SaaS systems is quite different from the traditional purchase-and-implement, on-premises approach. With SaaS, there is little or no upfront cost for hardware as it’s essentially a subscription situation. However, a SaaS contract usually includes a large proportion of the maintenance and support costs as well, so your ongoing, in-house IT costs will be significantly reduced. Most companies find that the total cost over five to seven years with SaaS is likely to be less than the total cost of purchasing and supporting in-house.

As you weigh up the decision to keep your existing system or consider a replacement, take the trade-offs into account. With a new ERP solution, you will gain a modern user interface, additional features and functions, and enhance your competitive advantage, whereas if you keep your legacy system, you limit your ability to remain agile, productive, and competitive. While you are not primarily seeking cost savings, modern ERP success stories demonstrate that the benefits of moving to a new system often cost less and outweigh the expense of implementing an upgrade.

How do you financially justify a new ERP system?

When making a decision of this size, most companies require a cost-benefit analysis in the form of a return on investment (ROI) statement. The cost side is easy—add up the expected costs as outlined above. On the benefit side there may well be direct savings in IT costs, but enumerating the major ERP benefits requires the company to envisage how the system will change the workplace and enable higher performance, improved productivity, and better customer service.

Improved performance

Many ERP system projects are justified to a great extent on expected improvements in efficiency (direct labour reductions) and cost savings (including, but not limited to, inventory reductions), and rightly so as these are huge payback benefits in many successful ERP implementations. Be aware, however, that the system does not create these benefits simply by its existence in your company. The system organises, analyses, and presents data in such a way that managers can better utilise people and make better decisions, which is what will generate the major benefits. Bear that in mind when you budget for user training and the implementation of improved procedures.

Better customer service

These benefits are less direct but even more valuable. By better serving customers, you can theoretically increase sales and profits, increase market share, and perhaps even increase margins because good customer service adds value for the customer without adding cost to the product itself. In some cases, customer service improvements become survival requirements because when a new or valued customer expects capabilities such as electronic ordering or enhanced electronic reporting, your ERP system needs to deliver.

Workplace changes

Today’s systems are designed for usability (UX or user experience is the current buzzword) for quick and easy access to information. Because each user’s job and workflow is unique, today’s systems are highly tailored to provide each user with the most efficient and comfortable work screens and processes. Consider cost avoidance rather than cost reduction for this benefit. This increased efficiency will help current employees do more and handle a higher volume of business without additional recruitment. It is inadvisable to justify the system based on reduced headcount—it is unlikely to happen, and the prospect of job losses will not motivate workers to embrace the system and help it succeed.

ERP selection is just the beginning

While following tips for evaluating ERP systems, bear in mind that replacing legacy systems is not a simple or quick process—but it is well worth the investment as it can deliver considerable benefits when properly selected and implemented.

One question that most companies have at the top of their list at this point in the process is “How long will it take to select and implement a legacy system replacement?” There is no single answer to that question—it depends on the size and complexity of the organisation, whether either or both systems (old and new) are cloud-based, the dynamics of the company and the implementation team, the level of management commitment to the project, and the amount of cooperation or resistance among the user community … to name just a few of the variables. Some implementations can be completed in a few months; others take a year or more. An experienced implementation partner can help you develop a realistic timeline when you set out your project plan in the early stages of implementation planning.

We don’t need to tell you that replacing your company’s strategic information management backbone is bound to be disruptive. That cannot be entirely avoided, but disruption can be minimised with a well-planned and well-managed implementation effort.

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