Need to move up from a small business accounting system? We help you choose the right enterprise resource planning solution.
ERP isn't just another TLA (three letter acronym) – it’s the software at the heart of most large enterprises and many smaller, but fast-growing companies.
We’ve previously explained what enterprise resource planning is and how to know when it’s time to consider migrating from your small business accounting application to an ERP system. But essentially, ERP can take care of a broader range of business processes than accounting software, potentially including financials, manufacturing, inventory, service delivery, marketing and sales (including CRM – customer relationship management), logistics, and human resources (HR).
While the “enterprise” label may once have referred to the way only large companies could afford to run ERP, falling costs and particularly the arrival of cloud-based systems have put it in reach of smaller businesses.
Still, moving to ERP is a big step, not to be taken lightly. ERP systems vary significantly and there are traps for the unwary. We spoke to executives at leading ERP providers and analysed the market to help you navigate a complex market and choose the right system for your business.
What every ERP system should do
One of the objectives of ERP is to centralise all business processes, according to Sage Australia vice president Alan Osrin.
So an ERP system should be able to handle all the steps from an initial sales lead through to receipt of payment – and perhaps even further if some sort of after-sales service is required.
As Pronto managing director Chad Gates puts it, ERP “becomes the technological heart and lungs of the business.”
To that end, ERP systems are generally built on a single database. So when the system tells you that one of your products costs $342 to make, you know that is based on the actual price you paid for the components and materials, and the actual amount of labour that went into it. A single database means a single source of truth, and you know that number wasn't derived from a spreadsheet that hasn't been updated with the price of widgets for six months.
Even when job costing gets complicated, it's easy to do properly in an ERP system, says MYOB general manager of industry solutions Andrew Birch.
The modular approach
ERP often comes as a core system with a number of optional modules. An import and wholesale does not require support for manufacturing activities, and a pure services organisation such as a law firm does not require inventory – though when the service provided is something like repairing appliances keeping track of spare parts can be important.
All other things being equal, you don't want to pay for functionality you're not going to use, but it would be foolish to reject a system simply because something you don't need is part of the core product.
Some ERP vendors aim to deliver the features needed by a broad range of industries, with special-purpose functionality provided in the form of optional modules or by including a mechanism allowing other software companies to offer add-ons.
IFS managing director Rob Stummer points out that with modular products you don't need to buy the whole suite at the outset, but instead add modules as needed and as your budget permits. Don't let a supplier pressure you into a 'big bang' implementation if a progressive rollout is cheaper and less disruptive.
Vendors sometimes add particular functionality (such as HR or CRM) by acquiring a specialist in that area. Sometimes these acquired programs are reworked into the core product, but there are also cases where the integration is not as thorough or deep as you might expect, resulting in inefficient operation and ongoing maintenance issues for the vendor.
The industry-specific approach
In some cases vendors target their ERP systems at particular markets, and may even offer separate industry-specific systems (such as for clothing manufacturers or hospitality operators).
“Purpose-built software allows manufacturers of any size or industry to streamline processes, gain greater insight to make more informed decisions, achieve unparalleled end-to-end efficiency and greatly reduce costs,” says Infor vice president and managing director for South Asia, ANZ and ASEAN Helen Masters.
“Industry specific solutions are advantageous in that they leave no stone unturned and very explicitly address the challenges an industry is likely to face – challenges which may typically be overlooked by ‘one-size-fits-all’ solutions. For example, solutions for the food and beverage industry allow for total visibility, from the delivery of raw materials coming into the factory to the pallets of products going out the door.”
In some cases, these industry-specific offerings are basically the same product that has been pre-customised by the vendor, or they may be independent products that were designed for different markets and have possibly come under one roof as a result of mergers or acquisitions.
According to InfoMotion managing director Robert Frandsen, an ERP system suited to a particular industry or sector should be able to meet 95 percent of a customer's requirements with no customisation.
An ERP system may incorporate so-called “best practices” for various business processes. Customers are likely to be encouraged to adopt the processes built into the software, as that makes the initial implementation and any future upgrades quicker and less risky. Cloud-based ERP may be less customisable than traditional on-premises software, but that is not always the case.
The real issue here is that if an organisation's processes really are an important part of its 'secret sauce' then adopting the same processes as everyone else may be a step backward. Conversely, if it has stuck with old and outmoded practices simply because “that's the way we do things here,” switching to new software may provide the impetus for change.
Identifying and implementing the appropriate practices and workflows is an important part of adopting ERP, and is likely to call for expert outside help. Not managing the transition properly is “one of the biggest downfalls” according to Stummer, so “change management has to be thought through very carefully.”
Appropriate training for staff is essential, as is the full support of the senior management team, as any negativity will flow down the hierarchy, he warns.
Cloud, hosted or on-premises?
ERP can run in the cloud or on premises. There are three main options:
- Software as a service (SaaS), where each customer runs practically the same software, often with limited opportunity for customisation
- Hosted, where the customer has its own copy of the software but runs it on someone else's computers
- On-premises, the traditional model where the customer looks after all of the hardware and software.
SaaS and hosted minimise upfront costs, while on-premises gives the maximum flexibility at the cost of having to provide and maintain the infrastructure. Each of these options can be suitable for small and mid-sized enterprises, Frandsen said. Microsoft's SQL Server database system was “a game changer” in terms of making on-premises ERP affordable for SMEs.
One potential advantage of on-premises software is that it keeps working even if the vendor goes broke. But if that happens to a SaaS provider it is likely to be difficult and expensive to transfer to an alternative platform, so look carefully at the financial stability of a potential provider.
One common mistake is focussing too much on cost at the start of the selection process, according to Frandsen. If a particular ERP system is way beyond your budget there's no point considering it, but don't be too quick to rule out a product simply because it seems a bit expensive – it could provide the best value.
Another trap is failing to adopt a systematic process from the beginning, he says. Keep a scorecard weighted to your requirements, along with notes about what you think is good and bad about each.
Picking an ERP system is the start of a long-term relationship – you don't want to go through the process every few years. So Frandsen suggests you evaluate the vendor carefully to determine how it can help your business as opposed to simply supplying the software.
He also recommends checking that the ERP is built on a widely used database and programmed in a mainstream language, as obscure choices by the vendor lead to more costly customisation, support and maintenance.
Companies often switch to ERP when they are growing fast, so make sure you won't hit any limits on transaction volumes. Frandsen also suggests making sure the vendor makes provision for connecting to third-party applications in case you subsequently need a function that is only available as an add-on. “Futureproof your system as much as possible,” he says.
Growing companies that have an eye to overseas expansion should look for ERP systems that are designed for international markets with multicurrency and multilingual support, says Stummer.
“I feel sorry for customers... when you look at the marketing material they all look the same,” says Frandsen. So be prepared to ask detailed questions, and “be open with the provider,” he says. Otherwise there can be a significant difference between reality and what you think the product does or what the vendor thinks you need.
Finally, realise that you will need to keep upgrading your new ERP system. Some businesses “think they're right for ten years,” says Stummer, but that's not the case so build upgrade costs into your budget from the start. Keeping modifications and customisations to a minimum will generally make these upgrades as easy and as cheap as possible.