- Most of the sources of information in IT are filled with ERP based financial bias.
- Find out how this makes the coverage of ERP inaccurate.
ERP is based upon the oversimplified concept that companies should buy an integrated financial/manufacturing/supply chain/sales management system. This concept could be implemented well or poorly, but it is important to differentiate the implementation of the concept (that is the resulting software application) from the concept itself. Proponents of ERP state that the ERP concept is not only beneficial but that ERP systems are a requirement for all companies. Companies that don’t buy and implement ERP systems are “not with the times” and “don’t have good executives making decisions for them.” In fact, the logical fallacy used in promoting this concept is “appeal to fear,” and it is effective against executive decision-makers who must keep marketable acronyms such as ERP on their resumes.
For some time, being involved in or overseeing ERP implementations was an important addition to an executive’s resume. In the course of doing research for this book, I found a number of articles that implied that companies, where ERP has not yet been implemented, should absolutely be thinking of using an ERP system. These articles present no evidence that companies benefit from ERP, but instead rely upon the logical fallacy of “argumentum ad numerum”—that many companies have implemented ERP. They then combined this fallacy with hypothetical statements about how ERP software may benefit a company. Furthermore, this viewpoint is not contradicted by the opposing viewpoint that ERP may not always be the best approach. There is little variability and very little independent thinking on the topic.
How Accurate is the Unanimous View?
After a review of the research on ERP benefits has been presented, the reader should question whether this unanimity of opinion is justified. Companies have invested an enormous number of resources into ERP systems, and contrary to the opinion presented in most of the literature in the area, the failings of ERP to meet the expectations of implementing companies is not something that can be rectified simply with a change in management practice or by hiring a new implementation consultant. This is because the aspects of ERP that have been most disappointing are related to the fact that the concept of ERP—regardless of the specific implementation of the concept (the software)—was never as advantageous as was presented. Once companies can interpret these limitations as permanent in nature, they can begin to deal with ERP in a realistic manner rather than by relying upon a new release, wishful thinking, or some new marketing construct provided by their ERP vendor to improve the condition of their ERP systems.
Everpresent Financial Bias
Clearly, information generally available on ERP systems is subject to financial bias, for the obvious reason that the ERP industry is so large and so lucrative. Just a few ERP implementations can make a partner at a large consulting company well off, as they make a lot of money off of their consultants and it takes many consultants to implement an ERP system. For salespeople who sell ERP systems, the same rules apply. Because of the financial bias that exists, information published about ERP is quite positive, bordering on the Pollyannaish. Meanwhile, negative information about ERP tends to be suppressed. When negative information about ERP (mostly in the form of information about failed implementations) does get out, normally the information is spun so that the software and the concept of ERP is not blamed. Instead, the repetitive narrative is that the implementing company must have made some mistakes, and these mistakes are simply managerial in nature and therefore correctable. Clearly, with all this money to be made in ERP systems, the question of who can be trusted to provide accurate information on ERP is clearly not a question that I have come up with exclusively, as the following quotation demonstrates.
“ERP is a multi-billion dollar industry dominated by consultants and software vendors. This is not going to change anytime soon since software and software expertise are the necessities of an automated system. But for a practitioner within an industry responsible for a project and a company that must live with the outcomes, the question is: Who solely has your best interest in mind? I can say only one thing: The deck is clearly stacked against you.” — Control Your ERP Destiny: Reduce Project Costs, Mitigate Risks, and Design Better Business Solutions
Financial bias has caused some highly inaccurate information to be released by most of those who have written about ERP. The fact that so many entities were spectacularly wrong with respect to their predictions for ERP has been one of the great missed stories of enterprise software. And who will cover this story? The IT press themselves are the main culprits; after all, will those who take in advertising revenue from ERP vendors break the story that the emperor has no clothes? It fits into the overall storyline of ERP systems; in fact, the ERP phenomenon cannot really be understood without understanding how wrong the projections about ERP have been, and therefore, this is the main theme of this book. It is only through understanding why these projections were so wrong and by taking a full account of ERP as it is today (not blindly accepting the fabricated sales pitch of entities that make their money from implementing ERP), that companies that already have ERP can determine the best way to manage ERP in the future. Secondly, for companies that have not yet implemented ERP, this book will address how to avoid the mistakes of companies that jumped on the ERP bandwagon to their great detriment, and are now stuck in a situation where the system is negatively impacting their ability to meet business requirements and ERP’s resource consumption crowds out best-of-breed solutions.
Unintended Consequences and the Definition of Success
The promises to ERP buyers have not come true, but many things that ERP buyers were never promised and never expected—such as the power that enterprise software buyers handed over to ERP vendors after implementing ERP (and particularly Big ERP vendors and big consulting companies) or the large percentage of the IT budget that the ERP system would consume into perpetuity—did become realities. Therefore, it’s quite important to differentiate between the commercial success of ERP and the benefits analysis of what ERP does for companies. No one could dispute that ERP has been tremendously successful for ERP software vendors and for the major consulting companies. On the basis of software sales, ERP systems comprise the highest grossing category of application software ever developed. The sales, implementation, and maintenance of ERP systems have created an enormous number of well-paying jobs and quite well off ERP salesmen and consulting firm partners.
Currently, all of the major consulting companies are dependent upon their ERP consulting practice to make their numbers. However, what this book will focus on is the value that ERP provides to the companies that implement it. This book will address two major assumptions. The fi rst is the unquestioned assumption that ERP is necessary.
Big ERP Benefits Companies?
The second assumption is that Big ERP actually benefits companies. As this book will demonstrate, there is no evidence to support these views, and there is quite a bit of evidence that ERP has been an unfortunate misallocation of resources within enterprise software. (In fact, the evidence is that ERP is the largest misallocation of resources to have ever occurred in the history of enterprise software—possibly not as momentous a statement as it appears to be as the history of enterprise software only goes back to the early 1970s, but the total resources expended on ERP since its inception have been gigantic.) This book explains the background of ERP, the expectations that were set for it, and why it is a myth that ERP systems improve the state of companies better than other software that could be implemented. ERP proponents say it is “ERP versus nothing”—a logical fallacy called a “false dichotomy/false dilemma” that is used to stack the deck in favor or ERP—however, the question is really “ERP versus true alternative applications” and therefore alternative expenditures of resources.
The Consensus on ERP
In the previous section, I discussed the commonly held belief that ERP is essential infrastructure for a company, something that is particularly true if the company in question is in manufacturing. It is interesting that Aberdeen Research wrote a paper that stated the following about this type of assumption right in the title of the paper: “To ERP or Not to ERP: In Manufacturing, It Isn’t Even a Question.” The words in this title can be described reasonably as the general consensus on ERP, but it is a curious consensus considering ERP’s history. Interestingly, one cannot find consulting advice that questions whether ERP is even a good idea.
The only real topic of conversation is when to implement ERP software or how to improve ERP implementations. If one does not have ERP installed, the question is not whether ERP is a good fit, a good value, and can meet the company’s business requirements, but why ERP hasn’t been implemented already and when the company plans to implement it. Therefore, for the most part, Aberdeen’s research conclusion is correct: this is what the majority of manufacturers believe. But what Aberdeen does not know is that this assumption is not true. With this consensus about ERP among those who provide advice, it is little wonder that most enterprise software buyers believe they need ERP as explained in the quotations below:
“More than 85 percent of respondents agreed or strongly agreed that their ERP systems were essential to the core of their businesses, and that they ‘could not live without them.’ Interestingly, just 4 percent of IT leaders said their ERP system offered their companies competitive differentiation or advantage.” — Thomas Wailgun, CIO
“The business sees the slick demos and possibilities, and then keeps forking over the money for this, and they don’t understand why they are still paying all this money,’ Wang says. ‘Why is it so hard to get a simple report? Why is it so hard to add a new product or build a new product line? Why is it so hard to get consolidated financial information? [underline added] Isn’t that the whole point of ERP?’ ” — Thomas Wailgun, CIO
Companies see the low functionality and the poor reporting functionality of their ERP systems, along with the problems integrating with non-ERP systems, but they don’t seem to be able to put the separate data points together into a complete story. As “everybody” has implemented and used ERP, how could ERP itself be bad?
Books and Other Publications on Software Selection
I perform a comprehensive literature review before I begin writing any book. One of my favorite quotations about research is from the highly respected RAND Corporation, a think tank based in Santa Monica, California—a location not far from where I grew up and where I used to walk with my friend when I was in high school—at that time having no idea of the historically significant institution that I would stroll by on my lost surfing weekends. RAND’s Standards for High-Quality Research and Analysis publication makes the following statement regarding how its research references other work.
“A high-quality study cannot be done in intellectual isolation: it necessarily builds on and contributes to a body of research and analysis. The relationships between a given study and its predecessors should be rich and explicit. The study team’s understanding of past research should be evident in many aspects of its work, from the way in which the problem is formulated and approached to the discussion of the findings and their implications. The team should take particular care to explain the ways in which its study agrees, disagrees, or otherwise differs importantly from previous studies. Failure to demonstrate an understanding of previous research lowers the perceived quality of a study, despite any other good characteristics it may possess.”
There are so many books that promote ERP, rather than analyze ERP, that there was little to reference when doing research for this book—this is a “why” book rather than a “how” book. Books on ERP have a strong tendency to deal in platitudes and unexamined assumptions and offer very little new or different information on the topic. The closest I could find to a book that applied some critical thinking to ERP was, Control Your ERP Destiny: Reduce Project Costs, Mitigate Risks, and Design Better Business Solutions, which is sort of a “tell all” book about the errors of ERP implementations. However, as with almost all ERP books, it concentrates on providing information to companies to help improve their ERP implementations rather than questioning the logical and evidentiary foundation for ERP. Most of the references in this book you are reading are not from other books but from a combination of my personal experience and some articles (including academic articles) that study the impacts and benefits of ERP.
Unreliable Information from ERP Vendors
The only quality ERP statistics came from either academic research or, to far a lesser degree, IT analysts. And very little of the material from ERP vendors were found to be reliable; even when they point out flaws in the arguments of other ERP vendors, they proceed to promote their own arguments, which are not based on evidence and often contain logical fallacies. Smaller ERP vendors have gone on the aggressive against Big ERP abuses, but often their arguments are also self-serving. And after reviewing a number of ERP applications, some of the best smaller ERP systems are certainly not the loudest nor do they have the biggest marketing budgets. Some might say that this should be obvious, as these are software vendors and thus entirely biased. However, this has not been true of all vendors in all software categories that I have analyzed. For example, some vendors in the other software categories we cover have added significant content to their space. One vendor that has provided very good and very accurate content in the area of ERP is e2b enterprise, and they are referenced throughout this book. Many of the authors who work for both IT analyst firms as well as IT periodicals frequently quote statistics from other sources, with the same statistics referenced repeatedly. Some of the conclusions that were drawn from the research of others display clear logical errors.
A Lack of Analysis on ERP
Many authors in this area are simply not qualified or have not spent the time to try to make sense of the numbers and to triangulate them with other sources. They may be effective beat reporters, but they lack a background in research. Because of this, one finds that many of the same numbers are repeated in various articles; however, when you study the underlying research, you will find that the conclusions do not follow from the statistic that is quoted in the secondarily sourced article. Executive decision-makers certainly do not have time to perform this type of analysis themselves, and as a result, there is little doubt that many of them have been misled by authors who lacked the background to perform the analysis for the articles that they wrote on ERP.
Aberdeen’s Fake ERP Cost Estimation
The most prolific IT analyst firm with respect to ERP cost estimation is Aberdeen. However, Aberdeen’s cost estimates are not realistic. They greatly underestimate the implementation costs for ERP projects, as well as underestimate the variance in license costs between the Tier 1 and Tier 2 vendors (projecting them with an average cost per user no greater than 15 percent in a study that included SAP, Oracle, Lawson, and QAD). Aberdeen did, however, have an interesting estimate of the average number of users per ERP vendor, and that helped reinforce how various ERP vendors tend to sell into different sized companies. This is well known in the industry, but the exact figures helped drive the point home. One of the more comprehensive studies of the benefits of ERP also evaluated the research on ERP and explained their findings in the following quotation.
“Previous evidence on ERP systems has come from qualitative case studies (e.g., Markus et al. 2000) or surveys of self-reported perceptual performance (e.g., Swanson and Wang 2003), but relatively few studies collect data from a large number of fi rms or use objective measures of productivity and performance.” — Which Came First, IT or Productivity?
This lack of information also demonstrates that the demand for such information was never very high. ERP was one of the most powerful trends in enterprise software; however, it was one that was driven largely without the support of academic or other forms of research. This may have been attributed to the compelling logic of ERP. Some philosophies have their own appeal and lower the need for proof in order to make people believe them to be true. ERP was clearly one of these philosophies. I cannot explain why so much writing on the topic of ERP is so generic and duplicated, I only know that this is what I found, but it has a basis in financial bias. In performing research for this book, I would frequently jump between different books and articles; often the similarities were so striking that it seemed as if I were reading from the same book or article.
Financial Bias Disclosure
Neither this article nor any other article on the Brightwork website is paid for by a software vendor, including Oracle, SAP or their competitors. As part of our commitment to publishing independent, unbiased research; no paid media placements, commissions or incentives of any nature are allowed.
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Thanks to Ahmed Azmi for his contribution to this article.
The Real Story on ERP
How This Book is Structured
This book combines a meta-analysis of all of the academic research on the benefits of ERP, coupled with on project experience.
ERP has had a remarkable impact on most companies that implemented it. Unplanned expenses for customization, failed implementations, integration, and applications to meet the business requirements that ERP could not–have added up to a higher Total Cost of Ownership for ERP were all unexpected, and account control, on the part of ERP vendors — is now a significant issue affecting IT performance.
Break the Bank for ERP?
Many companies that have broken the bank to implement ERP projects have seen their KPIs go down— but the question is why this is the case. Major consulting companies are some of the largest promoters of ERP systems, but given the massive profits they make on ERP implementations — can they be trusted to provide the real story on ERP? Probably not, however, written by the Managing Editor of SCM Focus, Shaun Snapp — an author with many years of experience with ERP system. A supply chain software expert and well known for providing authentic information on the topics he covers, you can trust this book to provide all the detail that no consulting firm will.
By reading this book you will:
- Examine the high failure rates of ERP implementations.
- Demystify the convincing arguments ERP vendors use to sell ERP.
- See how ERP vendors take control of client accounts with ERP.
- Understand why single-instance ERP is not typically feasible.
- Calculate the total cost of ownership and return on investment for your ERP implementation.
- Understand the alternatives to ERP.
- Chapter 1: Introduction to ERP Software
- Chapter 2: The History of ERP
- Chapter 3: Logical Fallacies and the Logics Used to Sell ERP
- Chapter 4: The Best Practice Logic for ERP
- Chapter 5: The Integration Benefits Logic for ERP
- Chapter 6: Analyzing The Logic Used to Sell ERP
- Chapter 7: The High TCO and Low ROI of ERP
- Chapter 8: ERP and the Problem with Institutional Decision Making
- Chapter 9: How ERP Creates Redundant Systems
- Chapter 10: How ERP Distracts Companies from Implementing Better Functionality
- Chapter 11: Alternatives to ERP or Adjusting the Current ERP System
- Chapter 12: Conclusion