Why buy an ERP system? Vendors tout many key benefits, including increased productivity, better data capture and analysis, a faster order-to-cash cycle and lower labor costs. On a September earnings call, Charles Salameh, CEO of Sangoma Technologies, offered that ERPs even boost employee morale: “You’re dealing with just one system rather than multiple systems,” he said.
Sounds great? Savvy CFOs know it’s a long, arduous journey to this land of information and productivity riches. Of the 131 ERP implementations Panorama Consulting studied recently, 34 percent exceeded budget (the most popular reason being unforeseen technology and staffing needs), and 31 percent went over deadline.
More proof: quarterly earnings calls are littered with tales of ERP installations and upgrades costing public companies’ sales and profits and denting earnings guidance. And the bugs don’t always show up immediately.
Zimmer Biomet migrated to a new ERP in July and expected some glitches, said CEO Ivan Tornos at a Morgan Stanley conference (according to S&P Capital IQ transcripts). “We said it was manageable, as we got later into August, clearly, [the system] did not work as expected,” Tornos said. The company could take up to a 1% annualized hit in sales in the second half.
Footwear company Caleres, whose brands include Allen Edmonds, Sam Edelman and Franco Sarto, migrated to SAP’s cloud version in the second quarter. After the system went live, Caleres saw delays in key operational reports and “a lack of visibility into the tools we rely on to drive our business day in and day out,” said President and CEO Jay Schmidt. The price tag for Caleres: an estimated $10 million to $15 million of lost sales or as much as five percentage points of growth.
Like A Transplant
With all the war stories over the years, why would a CFO take such risks? The fact that many companies do speaks to the value of such systems, as well as their criticality: all software cutovers have glitches, and because changing ERPs is like getting an “organ transplant,” as one Intuit executive put it, even hiccups can be calamitous.
But do you need an ERP system? “There is so much amazing new technology. The assumption you need to invest in an expensive, inflexible ERP is being challenged,” Matt Gardner, CEO of accounting outsourcer Hiline, told our reporter Katie Kuehner-Hebert.
“Best-of-breed tools that talk to each other—be it project management tools, collaboration tools or project management platforms that focus on workflows—have siphoned away many of the functions of traditional ERP systems,” says Mark Sue, CFO of Breathe Media Network and co-chair of The FENG technology group.
However, heavily regulated industries with traceability and accountability requirements, including manufacturing and pharmaceutical companies and other sectors with supply chains and inventory, “find quite a bit of value in an ERP,” he said. “One size does not fit all, and a company’s focus, processes and end markets often dictate the tools.”
Newer offerings for the midmarket like Odoo, ERPNext and Gravity Software may help bridge the gap for companies that outgrow QuickBooks but don’t need the scale of SAP.
Kadidia Cooper, CFO of 10,000 Degrees, a nonprofit college scholarship provider, is in the middle of replacing a “relic” ERP. The company chose Gravity for its versatility and flexibility, and because functionality is constantly being updated. Cooper said that the price tag is more palatable and implementation more manageable compared with the big-name ERP systems.
However, even in this case, the selection process took months (elongated by the hire of a new controller after selection). The first phase, which included setup and transferring historical data, was completed on September 30. “Phase one probably took as long as it would have with a much larger system, but that was our fault,” said Cooper. “We extended the process by changing specs during it, having to go through a second evaluation process with the controller and having a resistant team.”
Plan and Plan Again
Management shouldn’t underestimate the process of adopting even user-friendly, lower-cost ERPs. As research firm ERP Focus warned in a recent report, CFOs and the rest of management must be meticulous about exactly which features and modules the company needs and what it expects the ERP to deliver in financial value. “One of the biggest pitfalls in any tech investment is the potential to be oversold.”
According to ERPFocus, “Sometimes, despite the best planning, you may find that you need to re-engineer some of your internal processes; this can take time and resources that you had not planned for,” according to ERP Focus. “If this won’t work, you may need to return to your vendor for customization you didn’t originally budget.” That, in turn, can mean retraining, too, resulting in unplanned time and more resources.
Some other recommendations:
- Leave some headroom. An ERP system is a strategic decision involving many stakeholders because an ERP is more than just software. “Your ERP must grow with your business,” says Mark Sue. “It should support increasing users and data complexity.”
- Go modular. A big bang implementation—all modules and offices at once—is too risky for most organizations, especially midsize to large companies, says Panorama Consulting. Add modules to the core product as you see fit. When adding modules, beware: sometimes problems arise with modules’ capabilities to communicate with each other in real-time.
- Calculate the all-in cost. Avoid budget overruns and unexpected costs by scenario planning for additional technology needs and increased staff. Don’t leave out training costs (and necessary training resources), and don’t skimp on the implementation partner: they can make or break the project. In Panorama’s report, the median cost of an ERP project was $450,000.
- Scrutinize AI features. “Vendors are quick to boast about their AI features and use cases,” writes Forrester principal analyst Liz Herbert in a June report. Be sure to inquire about case studies and references, she says. Does the vendor’s general AI vision align with your own? Is the vendor working on finance-centric large-language models, or is it partnering with specialists?
Additional reporting by Katie Kuehner-Hebert
