Time for an ERP upgrade? A guide to replacing your legacy ERP system
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 reps), but you might have asked yourself that question, if not explicitly. Is there a small measure of doubt that your system is better in some way? Possibly you’ve heard some modern ERP success stories. Or maybe it’s more obvious than that – perhaps there are new things you need to do for your customers or to keep up with the competition that your legacy system can’t 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 keep 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It is fashionable to refer to installed systems as “legacy ERP,” implying old technology and outdated systems.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, albeit strongly encouraged by software vendors. It is important to stay up-to-date with fixes and enhancements provided by your solution provider. If you spot issues or unfavorable trends, the first thing you should do is make sure your system has all updates and releases, then find out if your vendor has additional add-ons or enhancements available that could address any shortcomings you’ve found. Determine what it would take to implement those fixes in terms of money and effort, and use that information to assess the cost of continuing with your current solution (see “How much do you spend on ERP?” below).
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In sum, 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 places limits on new initiatives.
- It does not support new technologies or requirements, or does so only with difficulty, high cost, and delays. The vendor is slow to incorporate new features and functions.
- The functions are difficult to learn and use, and inhibit rather than support efficiency.
- Response time is aggravatingly slow. Storage and retrieval of information is inadequate, cumbersome, or just not up to today’s ever expanding needs.
- The system is costly and difficult to maintain and support, and is not adequately supported by your vendor.
- If your system is truly a legacy ERP with dwindling support from the vendor, 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 evolve slowly and go unrecognized 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 do the analysis and find out what it truly costs to keep their existing ERP system in place and operational. That may sound strange when midsize companies typically watch expenditures very closely as part of their regular management responsibilities. But it’s not always easy to separate out 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 service, consulting, 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, space, utilities, and supplies. Try to separate out those that directly support your ERP. Keep 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-premise system with another on-premise 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.
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What would a new system cost?
Do you have anxiety over the potential cost of changing to a new ERP system? That’s understandable. A new ERP system is likely one of the larger 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, like five to seven years.
When looking at the cost to acquire and implement a replacement system, be aware that the hardware and software license costs are only a part of the equation. You should also include the following in your assessment:
- Networking and peripheral devices like barcode scanners, remote entry stations, mobile devices, and client software plus 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 skimp here.)
- New workflow development and documentation.
- Implementation assistance. Likely a certain level of assistance will be included in the package from the primary system supplier, but you may want to engage additional assistance from the supplier(s), outside consultants, your accounting 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 temps to assist with regular duties so they have time to work on the implementation, or bonuses and other incentives to keep workers motivated.
Be aware that cost structure for cloud-based SaaS systems is quite different from the traditional buy-and-implement, on-premise approach. With SaaS, there is little or no up-front cost for hardware as it’s essentially a subscription situation. But a SaaS contract usually includes a great deal of the maintenance and support costs as well, so your on-going, in-house IT costs will be greatly reduced. Most companies find that total cost over five to seven years with SaaS will likely be less than the total cost to buy and support in-house.
As you weigh the decision to keep your existing system or look at a replacement, consider the tradeoffs. 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’re not primarily looking for 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 benefits requires the company to envision 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 labor 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 by its mere existence in your company. The system organizes, analyzes, and presents data in such a way that managers can better utilize people and make better decisions, which is what will generate the big benefits. Keep that in mind when you budget for user training and 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 good 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 give each user the most efficient and comfortable work screens and processes. Think 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 new hiring. It is inadvisable to justify the system based on reduced headcount – it probably won’t 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, keep in mind that legacy system replacement is a 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 organization, 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 an achievable timeline when you lay out your project plan in the early stages of implementation planning.
We don’t have to tell you that replacing your company’s strategic information management backbone is bound to be disruptive. That can’t be entirely avoided, but disruption can be minimized with a well-planned and -managed implementation effort.
Tips for evaluating ERP software
Zero in on the best choice for your business with 5 steps on evaluating an ERP.
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