The Logic of ERP Driven Improved Financial Performance

Executive Summary

  • ERP systems are justified on the basis of improved financial performance.
  • Learn the accuracy of this proposal regarding ROI.

Introduction

Our research into the studies of ERP ROI shows the following:

  1. ERP implementations show no positive business benefit, and often impose significant costs (e.g., missed orders due to lack of inventory, inability to ship orders that are received due to execution problems).
  2. The potential for ERP implementations to show a positive business benefit for up to a year after implementation is low, as the company is still adjusting to the radical changes that an ERP system imposes on a company. Once these problem projects are thrown into the mix, the average return for an ERP planning project is negative.

While there is no research into the ROI of ERP software, one would assume that ERP would generally have a poor ROI for the reasons listed above. Others, such as the Sloan Management Review, have noted this lack of ROI research:

“Given the high costs of the systems—around $15 million on average for a big company—it’s surprising…that despite such study, researchers have yet to demonstrate that ‘the benefits of ERP implementations outweigh the costs and risks.’ It seems that ERPs, which had looked like the true path to revolutionary business process reengineering, introduced so many complex, difficult technical and business issues that just making it to the finish line with one’s shirt on was considered a win.”

This begs the question as to why, as stated in the above quote, “ERPs…had looked like the true path to revolutionary business process reengineering.” The answer to this question is simple: a number of entities with a strong financial bias declared it to be so.

Negative ROI: The Missing Link of the ERP ROI Research

Every research study into the ROI of ERP systems that I reviewed (except for the research that attempts to find a correlation between ERP implementations and the financial performance of companies) contains several flaws. Some of this flaws have been stated previously in this book and relate to an underestimation of the TCO as described in the previous section. Obviously, if the TCO is not conclusive, then the ROI is inaccurate; the TCO is the base or the “I” in the ROI. Let’s review the issues with estimations of the TCO (issues that are usually overlooked) before moving on to examining the error from the return side.

  1. The TCO for ERP projects are not adjusted for risk.
  2. The total length of ERP projects is not included in the TCO calculation. The longer the project, the longer it takes for the project to pay back the investment. Furthermore, ERP projects are so problematic from the integration perspective that it can take up to five years for them to be fully integrated with other systems, and therefore fully operational.
  3. There is a 40 percent likelihood of a major operational disruption after an ERP project goes live. The costs of these major disruptions nor the costs of smaller disruptions are included in the ERP TCO calculations.
  4. ERP TCO estimations consistently underestimate the actual TCOs of projects. These estimations completely neglect or underestimate the costs of internal resources to adjust to and learn the ERP system. Actually, this issue is not specific to ERP software but is a feature of enterprise software generally. However, the large-scale nature of ERP software makes this issue worse.

The error on the return side of ROI is that ERP ROI studies look at the ERP system in isolation from the other software that the company implements. However, as will be explained in more detail in “Case Study #4 of ERP Misuse: Intercompany Transfer”, the transactional inflexibility of ERP systems—the fact that they have their modules so tightly integrated—restricts a company’s ability to fully leverage the functionalities in applications that are connected to ERP systems. As a result, a company with an ERP system will receive less value from other applications that they implement (unless the application is extremely simple) than a company that does not have an ERP system. Companies with ERP systems do not leverage the other applications that they purchase and implement, and this means the companies must use more of the mediocre functionality within the ERP system. I found this statement by Aberdeen very interesting:

“As ERP has become more pervasive, there is always a risk in perceiving it as necessary infrastructure. If viewed as a requirement for doing business, companies also run the risk of neglecting to measure the business benefi ts resulting from its implementation.”

I would say this statement is a bit late. The decision to purchase ERP was not based upon measurement of its business benefits, but was primarily based upon an idea that ERP systems were “necessary infrastructure.”

Support Costs of ERP

The maintenance costs of Tier 1 ERP (and possibly other tiers as well) are likely headed upward. ERP software is stabilizing; it is falling further and further behind the other applications connected to it and that can replace much of ERP’s functionality. Instead, SAP moves almost all of their newer functionality to their non-ERP modules, as they can charge new license fees for the modules. Analysts are not picking up on this, but investment in ERP has wilted, and ERP systems are unable to meet requirements without further customization. Your ERP vendor already has your ERP business; now they want to nudge up the ERP support costs and they have some other software they would like to sell you. The High

Opportunity Cost of ERP

The opportunity costs of ERP are underemphasized (or ignored altogether). The term “opportunity cost” is used infrequently, so let’s define it before we explain how it should be used in making decisions:

“In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the ‘cost’ incurred by not enjoying the benefit that would be had by taking the second best choice available.” — Wikipedia

In general parlance, costs are often described as the amount that we pay for things. Economists look at costs quite a bit differently. Opportunity cost is one cost category, and sunk cost.

Promoters of ERP tend to present any benefits of ERP without acknowledging that the time and effort spent on ERP could have gone into other initiatives. However, the gain from those systems should be compared against the gain from ERP systems.

Let’s take a simple example. Imagine that I have no car. I have a hard time getting around town because I lack transportation. To improve my condition, I buy a Hummer. After a week, I report that I am able to get around town much more efficiently, and compared to walking, I am now much more mobile. Have I established that the Hummer was the best possible alternative? Obviously, I have not proved this. I could have purchased any car—almost any of them with lower operating costs than a Hummer. Therefore, the question is not whether the purchase of the Hummer improved my condition compared to the other alternatives (these alternatives could have included any other car of equivalent or lower cost, public transit, bicycle, etc.). Does my analogy that a Hummer is the best automobile one can buy sound silly? Well, it should, but it is no sillier, no less evidence-based, than the evidence presented for why ERP has helped companies. The comparison can never be between “something” and “nothing,” but between two “somethings.” People that compare something to nothing are stacking the deck in favor of the “something” and are not promoting research or a logical and serious framework.

The Logic of ERP Driven Improved Financial Performance

Enterprise software implementations should have a positive ROI. This is why they are purchased. In this section I will provide a synopsis of the research findings.

“The results are based on a sample of one hundred eighty-six announcements of ERP implementations; one hundred forty SCM implementations; and eighty CRM implementations. Our analysis of the fi nancial benefits of these implementations yields mixed results. In the case of ERP systems, we observed some evidence of improvements in profitability but not in stock returns. “The results for improvements in profi tability are stronger in the case of early adopters of ERP systems. On average, adopters of SCM system experience positive stock returns as well as improvements in profi tability.” — The Impact of Enterprise Systems on Corporate Performance

This makes sense because ERP functionality was more advanced in the past. Now the technology of almost any on-premises ERP system will be quite dated. Secondly, at one time an announcement that a company was going to implement an ERP system would have had an effect on stock prices because the system was considered leading edge. However, ERP systems are so common now that a bump in stock price can no longer be expected. Interestingly, the improvement in financial performance for ERP lagged SCM implementations. When ERP is compared to other types of implementations, it consistently lags other enterprise software categories.

The Stock Price of Firms that Invest in ERP

“The evidence suggests that over the five-year period, the stock price performance of firms that invest in ERP systems is no different from that of their benchmark portfolios.”The Impact of Enterprise Systems on Corporate Performance

This means that investing in an ERP system did not impact the stock price of the companies in the study.

“The positive changes in ROA (Return on Assets) during the implementation period are statistically signifi cant at the 5 percent level. Although the changes in ROA during the post implementation period are positive, none of the changes are statistically signifi cant. Overall the evidence suggests that although fi rms that invest in ERP systems do not experience a statistically significant increase in stock returns, there is some evidence to suggest that profi tability improves over the combined implementation and post-implementation periods.” — The Impact of Enterprise Systems on Corporate Performance

ERP Versus SCM ROI?

While the financial benefits of ERP investments are either nonexistent or barely perceptible, the results of SCM software investments were positive; while investments in CRM software were the same as ERP, they did not show gains. Furthermore, clients that were early adopters of ERP achieved better returns, which means that returns of companies that have recently implemented ERP are even worse.

“The results for the accounting metrics provide strong support that fi rms that invest in SCM systems show improvements in ROA and ROS (Return on Sales). Improvements are observed in both the implementation and post-implementation periods, with mean and median changes in ROA and ROS generally positive and most are statistically signifi cant at the 2.5 percent level or better.”The Impact of Enterprise Systems on Corporate Performance

ERP Versus CRM ROI?

CRM on the other hand scores very similarly to ERP implementations: no relationship to financial performance improvement can be found.

“Over the full four-year period, the mean (median) abnormal return is –15.22 percent (–12.41 percent), and nearly 53 percent of the sample firms do better than the median return of the firms that belong to their assigned portfolio. However, none of these performance changes are statistically significant. Basically, investments in CRM systems have had little effect on the stock returns of investing firms. These results are consistent with that of Nucleus Research (2002), who report that 61 percent of the twenty-three Siebel customers that they surveyed did not believe they had achieved a positive ROI.” The Impact of Enterprise Systems on Corporate Performance

Overall ROI of ERP

“Despite the generally positive acceptance of ERP systems in practice and the academic literature, other studies have not found overwhelming evidence of strong positive performance effects from investments in ERP systems. Our results are generally consistent with these findings.”The Impact of Enterprise Systems on Corporate Performance

“For example, although Peerstone Research (Zaino [2004]) found that 63 percent of two hundred fifteen fi rms gained ‘real benefi ts’ from adopting ERP, they also report that only 40 percent could claim a hard return on investment (ROI). Other ROI results are reported by Cooke and Peterson (1998) in a survey of sixty-three companies that found an average ROI for ERP adoption of negative $1.5 million.”The Impact of Enterprise Systems on Corporate Performance

“Overall we find that, controlling for industry, ERP adopters show greater performance in terms of sales per employee, profit margins, return on assets, inventory turnover (lower inventory/sales), asset utilization (sales/assets), and accounts receivable turnover.”ERP Investment: Business Impact and Productivity Measures

This last quote sounds convincing, although no numbers are listed and there is no comparison of the financial benefit versus the implementation of another type of system. Furthermore, it is no longer possible to be an earlier adopter of ERP software; at this point one can only be a late adopter, meaning that the benefits to adopting ERP are lower. The data for this report was taken from companies before or during the implementation (prior to the system being live) and prior to when the system is operational and providing benefits to the company. This same report stated that the benefits of the ERP implementations began to reverse after the system was live. Here are the productivity gains from the same study.

“There is a productivity gain during the implementation period, followed by a partial loss thereafter. When value added is used as the dependent variable, the gains are 3.6 percent during implementation with a loss of 4.7 percent for a net gain of –1.1 percent (t=.8, not significant).”ERP Investment: Business Impact and Productivity Measures

Conclusion

Did the information in this article shock you?

When I first began researching these topics, I was also unaware that every one of the proposed rationales for the purchase and implementation of ERP systems would prove to not only be wrong but spectacularly wrong. I found myself quite surprised that these false predictions had not been reported in some published form. A multitude of entities has misled readers as to the benefi ts of ERP systems. I don’t necessarily assign a nefarious motive to all the people who have written about ERP vendors over the years. Certainly, vendors and software companies write marketing literature and have no interest in the truth. However, many journalists lack research skills and simply repeat what they have heard about ERP. Perhaps readers do not demand more, and if the journalists were to do the research, they might find things that would be unappealing and could cause blowback from their editors and advertisers.

Financial Disclosure

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.

ERP Contact Form

  • Interested in Our ERP Research?

    It is difficult for most companies to make improvements in ERP without outside advice. And it is close to impossible to get honest ERP advice from large consulting companies. We offer remote unbiased multi-dimension ERP decision support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, contact us and we will be in touch

Search Our Other ERP Content

References

The Real Story on ERP

ERPThe Real Story Behind ERP: Separating Fiction From Reality

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.

Chapters

  • 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

The Length of Implementation Times and ERP ROI

Executive Summary

  • ERP systems have very long implementation times.
  • Learn how these implementation times are justified and what it means for ROI.

Introduction

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 Disclosure

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.

ERP Contact Form

  • Interested in Our ERP Research?

    It is difficult for most companies to make improvements in ERP without outside advice. And it is close to impossible to get honest ERP advice from large consulting companies. We offer remote unbiased multi-dimension ERP decision support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, contact us and we will be in touch

Search Our Other ERP Content

References

The Real Story on ERP

ERPThe Real Story Behind ERP: Separating Fiction From Reality

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.

Chapters

  • 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

The Disastrous ROI of Big ERP When Comprehensively Calculated

Executive Summary

  • The evidence is clear that ERP’s ROI is negative.
  • What is even less discussed is that investing in ERP leads to even more negative ROI with further purchases.

Introduction to ERP’s ROI Face Plant

The academic literature on ERP is that its ROI is negative. This was explained in our book The Real Story Behind ERP. In this article, we will expand upon this to consider the implications for ROI in the rest of the enterprise after the initial ERP purchase.

Including the Larger Picture Analysis — Post ERP Implementation

The studies on ERP ROI are focused only on the ROI of the ERP system. However, none of the studies that we reviewed looked at the overall picture. We analyzed this in the Brightwork Solution Architecture Analysis.

The problem with the ROI of just ERP is that it limits the impact that ERP systems have on the other applications that are purchased. This is because the strategy of ERP vendors to push what are most often marginal applications into the customer by the ERP vendor. A perfect example of this is SAP. SAP has an extremely poor stable of applications outside of their ERP system, the sordid history for which we covered in the article How SAP is Now Strip Mining its Customers.  None of the research includes this very important implication. (Oracle, SAP, Infor, Epicor, Sage), etc…. the larger ERP vendors follow this approach.

How Much Do Companies that Implement ERP Know About their Lack of ROI?

This quotation for Sam Graham, a highly experienced independent ERP consultant applies.

“ROI rarely comes into the equation. At best, ERP is seen as an inevitable necessary evil, or a ‘rite of passage’ to becoming a big company (SAP had a very effective campaign in the UK (and presumably other markets) a few years back, along the lines of, “Now SAP isn’t just for large companies” which glossed over the fact that they were actually talking about Business One. Clever marketing; and a lot of companies fell for it, believing that they were running the same software as the ‘big boys’.) Rarely do they talk to independent ERP consultants and, when they talk to general management consultants, these people are usually keen to sell their services (and gain experience in ERP) so the last thing that they will do is put obstacles in the way of their clients buying a system.

In my last job in industry, I was taken on as Materials Manager for a $100m t/o Swiss company that had just had a disastrous BPCS implementation. They approached what was then called Coopers & Lybrand (now part of PWC) for assistance. C&L sent in a consultant, who identified more work than one consultant could handle, so they pulled in a second, and then a third. Now; when you had 3 C&L consultants, you had to have a senior consultant to supervise them. And when you had 3 senior consultants, you had to have a partner to manage the 3 senior consultants. So they ended up with a partner, 3 senior consultants and 9 consultants on-site. 5 days a week. I’m not making this up; but it gets worse.

This was in the days of MRPII and, in those days, Ollie Wight & Associates were thought to do the best courses on the subject. So the Partner persuaded our CEO to send all of the company’s management team on a 5-day course. Then, when they came back, he said to the CEO, “You know, now that your people have been on that course, there is a danger that they will use terminology that our people don’t”. So he persuaded the CEO to pay for the same 5-day course for all 13 C&L staff on the project. And that meant not only paying for the courses, hotels, expenses etc; but paying for their time to be on the course!”

This is our observation as well.

Companies that purchase ERP listen to biased entities, ERP vendors and ERP consulting companies that are presenting them with sales information.

Conclusion

Companies that implement ERP systems have not and are not doing the most elementary research to evaluate the potential benefits of the software they are purchasing. They not only do not research the ROI of the ERP system itself but do not have the knowledge of the ROI of the follow-on applications that the ERP vendors plan to sell to them after they have captured the account.

Decision makers don’t measure benefits, (measurement is tricky), don’t read academic literature, and benefit by doing things that are considered “right” at the time to do. What is considered right to is controlled by the marketing departments of vendors and consulting companies that also control the media landscape? So IoT is being pushed right now. Are there really many use cases for IoT? They exist for package delivery and a few other areas, but IoT use cases are quite overstated. Big Data is similarly overstated. But assertion without evidence is the norm in the IT industry. Loosely translated, the only justifying logic for ERP is that firms that promote ERP propose that ERP is something that should be purchased. That is it. And the firms that recommend ERP, most frequently recommend the most expensive ERP systems to implement.

Financial Disclosure

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.

ERP Contact Form

  • Interested in Our ERP Research?

    It is difficult for most companies to make improvements in ERP without outside advice. And it is close to impossible to get honest ERP advice from large consulting companies. We offer remote unbiased multi-dimension ERP decision support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, contact us and we will be in touch

Search Our Other ERP Content

References

The Real Story on ERP

ERPThe Real Story Behind ERP: Separating Fiction From Reality

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.

Chapters

  • 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