- ERP systems have very long implementation times.
- Learn how these implementation times are justified and what it means for ROI.
The implementation time for ERP systems is the longest of any enterprise software category. The term “implementation time” is laden with assumptions. At our site we perform risk and duration estimation for all of the major enterprise software categories. ERP has by far the longest implementation of any software category—and by a wide margin.
Furthermore, ERP software comes with high risks for implementation. According to IDC, 15 percent of survey respondents implemented their ERP software again. What was the implementation time on those projects? It is not easy to find detailed TCO studies on ERP systems, which is one of the reasons we began estimating it at a separate website. ERP ROI The ROI of ERP is an interesting topic; as one would expect, a company implementing an application with a very high TCO is put at a disadvantage when it comes to obtaining a high ROI.
“A Meta Group study of sixty-three companies a few years ago found that it took eight months after the new system was in (thirty-one months in total) to see any benefits. The median annual savings from the new ERP system were $1.6 million—pretty modest, considering that ERP projects at big companies can cost $50 million or more. ERP systems may be integrated, but on-premises ERP has proven to be poor at integrating to other applications and to business partners.” — The ABCs of ERP
“Markus, et al. (2000) argued that the companies that adopted ERP systems need to be concerned with success, not just at the point of adoption, but also further down the road. After ERP implementation is complete, the expected return may not come as soon as desired. In fact, most ERP systems show negative return on investment (ROI) for the first fi ve years that they are in service.” — Measures of Success in Project Implementing Enterprise Resource Planning
This is quite a statement.
And the implications of this statement cannot be understood without performing a little math.
The math presented above is problematic when one compares the known estimated durations with ERP. Generally ERP systems are thought to have a useful life of between eight and twelve years. If it is true that no return can be expected for the first five years of use, it is seven-and-a-half years into the ERP project when the company has begun paying for the ERP system (including two-and-a-half years of implementation time).
If the ERP system is decommissioned after eight years, the company has three years to receive a return (which would clearly mean a negative ROI). If the ERP system is decommissioned at the high side (after twelve years), there are seven years or 58 percent of the total time the ERP system is in the company to receive a return. While the information up to this point is problematic, the news gets worse with the following statement.
“After the first five years of use, a company can expect steady returns, but not in the traditional form of revenue. As Markus and Tanis (2000) indicated, different measures are needed at different stages in the system lifecycle and a minimum set of ERP success metrics should include projects metrics, early operational metrics and long-term business results.” — Measures of Success in Project Implementing Enterprise Resource Planning
According to this quote, there are close to no fi nancial returns, which is what studies generally say. Researchers think that no return can be expected until seven-and-a-half years after the ERP project kick-off. While no financial return can be demonstrated, it is implied continually that ERP pays off in other ways, ways that are imperceptible to the company’s fi nancial health. In fact, the company may not be able to expect a return until other applications are connected to the ERP system.
Selling the Dream…..of ROI in on Related Items
“‘There’s a general understanding today that ERP is the investment you have to make just to get into the game,’ says Josh Greenbaum, a principal analyst with Enterprise Applications Consulting. ‘First you have to get ERP installed, and then you can take a look around and see where major ROI can be achieved. It’s the so-called secondwave applications, such as business intelligence, supply-chain management, and online procurement, that can leverage the ERP backbone and offer the highest return,’ says Greenbaum.” — Making ERP Add Up
That is one incredible statement. Talk about “future selling.” There is no evidence that ERP improves the benefits/return on investment from other applications; this is utter conjecture on the part of this analyst. Then comes the other issue with estimating operational benefits, as the following quotation explains.
“According to Parr and Shanks (2000) ‘ERP project success simply means bringing the project in on time and on budget.’ So, most ERP projects start with a basic management drive to target faster implementation and a more cost-effective project… Summarizing, the project may seem successful if the time/budget constraints have been met, but the system may still be an overall failure or vice versa. So these conventional measures of project success are only partial and possibly misleading measures when taken in isolation (Shenhar and Levy, 1997).” — Measures of Success in Project Implementing Enterprise Resource Planning
With such high costs, ERP ends up consuming a very large portion of the overall IT budget. The maintenance of ERP systems consumes anywhere from 50 to 90 percent of the IT budget according to Forrester and Gartner. ERP software, as with any other type of software, consumes resources across all of the IT operating budget categories. ERP has proven to be an expensive proposition for companies, and did not reduce costs as was promised by its proponents. The problem is that both the direct AND indirect costs of ERP systems have been high.
The Low (and Misleading) ROI of ERP Software
It is difficult for ERP to have a good ROI if it also has a high TCO. Obviously, the TCO is the denominator in the ROI equation, with the business benefits being the numerator. Another problem with ERP ROI is that ERP systems take a long time to implement. Other estimations are shorter, but I have not been able to fi nd any research that provides a solid method for this analysis. I quote this book’s estimate not because it explains or divulges its data points, but because I fi nd the book credible in other aspects. However, even this book’s estimates are lower than the study by Meta Group, which proposed that it takes eight months until the ERP system begins showing any benefit. This figure is contradicted by the study The Impact of Enterprise Systems on Corporate Performance, and that after the ERP implementation the company loses productivity every year the ERP system is live. (This study is discussed on the next page.) If we take the lowest estimate and average the high and the low values, we get the following:
((12 + 36 months)/2 + (4 + 6 months)/2) = 29 months 29 months / 12 = 2.4 years
According to the above calculation, a company must pay for an ERP implementation for two years and then wait another fi ve months before the software is functional to the degree that it can be relied upon. That is taking the average of the most optimistic of the three estimates; other scenarios are not even this rosy. For instance, one scenario is that the company never sees any productivity benefit even though it implements the ERP system. Another scenario is that there is a 40 percent likelihood of major disruption to business operations during the golive. What is the cost of this “major disruption”? Well, that is not estimated. What about smaller disruptions? It would seem quite likely that smaller disruptions occur with even greater frequency; however, I have never seen a TCO analysis for ERP that includes the costs of these disruptions. At Software Decisions, we are currently working on adjusting the risk in TCO calculations, but do not yet have all of the data. Another interesting timeline was provided in the paper Which Came First: IT or Productivity? where a full timeline of an ERP implementation, as well as the software that followed it, was laid out.
This shows the timeline for a relatively fast ERP implementation of nineteen months from the ERP system kickoff until the full go-live. However, this company would not have seen the full benefit of ERP until the ERP system was fully integrated, which is not mentioned in this study.
In fact, most estimates are unreliable because they are put out there by consulting companies or ERP vendors themselves. Generally, what is not debated is that ERP software takes the longest of any software category to implement. Furthermore, most of the estimates of ERP implementation timelines leave out the time taken to integrate other applications to the ERP system. Gartner estimates that it can take up to five years to integrate the other applications within the company to the ERP system. Because the full benefi ts of an ERP system are not realized until ERP is integrated to all the company’s various applications, the value realized is incremental up until that time.
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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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