Enterprise resource planning (ERP) describes software that integrates departments and functions across your business onto a single computer system. The intended outcome is a system that improves operational visibility, streamlines decision-making, reduces costs, and generally allows you to manage your business to better profitability.
While there has been considerable hype (and some horror stories) about ERP systems, up until recently only large corporations have implemented comprehensive ERP solutions, mainly because they have been perceived as cost prohibitive for smaller companies.
In recent years however, many small and medium sized enterprises (SMEs) have begun to see the value of ERP solutions as a way to respond to both legislative compliance and industry mandates for electronic trading. The reality now is, companies with a turnover of more than $10 million should be considering implementing an ERP solution, if not actively planning for one.
When an SME Should Consider ERP
There are several things that you should consider before investing in an ERP solution:
· What business problem are you trying to solve?
· Can the company do more for less?
· Will the business be more effective with an ERP solution?
· Are your competitors doing this?
· Can you grow your business using your current tools and methods?
As you answer these questions you will be better placed to talk to ERP vendors. Understanding the business problem is critical, as ERP vendors cannot easily implement an effective solution if the objective is unclear. Fortunately, vendors can be the best resource to determine your business problems, as their staff should be intimate with the challenges of your industry. Presentations by their pre-sales staff will typically declare broad industry issues, then drill down into details of specific issues relevant to you. The best part is vendors usually do this for free as part of their opportunity qualification, potentially saving you from hiring consultants to discover and document basic business issues and limitations.
Choosing an ERP Solution
Traditionally, ERP implementations occur over a long period of time. In large corporations, this could take several years and require teams comprising hundreds of experts. This is not an option for SMEs, so many ERP vendors promote a 'one-size-fits-all' solution with the capability to customise the solution to better suit your organisation. This pre-configured solution is supposed to reduce implementation times and manage the 'scope creep' that adds costs to many projects.
Depending on the needs of your organisation, and budget, you may want to consider only implementing the core modules to start with and then add on other modules over time. Typically, the core will be an accounting framework, plus industry-specific modules such as inventory management for distributors, point-of-sale for retailers, MRP for manufacturers and project costing for professional services.
While there is no magic bullet solution that is applicable to all companies, there are a number of common aspects of an ERP system that you should consider:
1. Ask the application provider to tell you about your industry ‘pain points’ before you start to tell them your issues. This will demonstrate that they know your industry in sufficient detail to be able to advise you on appropriate ways to implement a technology solution.
2. Ask whether, when your business grows, you will be forced to 'upgrade' to another product from a particular vendor the provider may recommend. This is a common situation, as many vendors have acquired products from various companies that fit different market segments.
3. Ask to visit three reference customers who are in the same line of business as you. If the provider is working in your industry, they should be able to easily provide three customers who are geographically close (ideally in the same city, certainly in the same state). Ask the reference customers about how the application is supported—how quickly are support calls answered; have the support staff demonstrated that they know your industry; how long does it take to fix a bug; is there a clear escalation process etc.
4. An SME should expect to upgrade their main business application about every 12-18 months, so check the solution upgrade cycle. If there are frequent upgrades, it suggests the product may be immature. Ask the reference customers how easy/often it is to upgrade.
5. If the provider has to customise more than about 20 percent of the project, find another provider. While your business model is unique, the basics of accounting, importing, distribution, retailing, professional services etc are not. The customisation should round off your business needs, not be the provider's recommended solution.
6. Ask about ongoing administration costs. For example, if you buy a new software system do you also need a database administrator?Can it run on a single server or does it need a separate database server, a separate application server and a separate remote office server?
7. In terms of budgeting for business application software, an SME should expect to spend at least 1 percent of their revenue on a completely new system. For software, the cost is usually 'one thirds'—one-third for licenses, one-third for annual maintenance and one-third for implementation.
8. Ask whether there are other models other than just an outright purchase. Some applications are amiable to renting (CRM is a good example) but irrespective; check whether the provider can accommodate your cash flow needs. Keep in mind however, the more complex your business—and typically the larger your business—the less likely it is that a hosted or application service provider (ASP) model will readily fit the bill.
9. Finally, if the application provider is pushing technology that you don't understand— service oriented architecture, for example—and they cannot distil the benefits down to specific advantage for your business, find another provider. Very few SMEs have the luxury of technology for its own sake, yet this is often what larger, international vendors are pushing into the market because their business model requires it.
The decision for an SME to implement an ERP solution can be a major investment that impacts on the whole company. A well-planned and implemented solution can change the way an SME does business and improve profitability, but there can be pitfalls if not prepared properly.
SME's should ensure they do their homework, have a clear objective agreed at the outset, prioritise expected outcomes, and ask the right questions for your business. Lack of ownership by an SME is usually the biggest pitfall. A successful implementation is almost guaranteed when the business takes responsibility for the outcomes.
* Paul Goepfert is the marketing manager for Pronto Software.
* The opinions expressed in this article are those of the author, and don’t necessarily reflect the opinions of DYNAMICBUSINESS.com or the publishers.