How ERP Distracts From and Undermines Planning Functionality

Executive Summary

  • Because ERP offers mediocre functionality, it distracts from better functionality outside of ERP.
  • Learn why this leads to so much waste on ERP projects.

Introduction

ERP sets up mediocre functionality at companies, and interferes with buying better software that could provide a great deal of value to the business. I will use several examples in this chapter to explain this prevalent feature of ERP software. ERP implementations result in generic functionality being installed. Then, after the ERP system is installed, other applications that provide better functionality are frequently and selectively used to replace ERP. These superior applications must often coexist with portions of the ERP functionality that are still active.

The Problem with ERP and Supply Chain Planning

ERP systems were developed with a strong delineation between supply chain partners and customers. Since then, that delineation has blurred signifi cantly. While ERP systems have been updated since they were fi rst introduced, updating an old design in an attempt to meet requirements it was never designed to meet is quite a bit different than if the software was designed from the beginning to work a particular way. Subcontracting, contract manufacturing, direct sales through the Internet, modeling supplier capacity, supplier collaboration—all of these features blur the line as to what is inside or outside of the company. Let me provide an example. In ERP systems, suppliers are external locations and resources cannot, at least with most ERP systems, be created or exist in supplier locations. Under the ERP design, suppliers are simply for accepting purchase orders. But what if a company wants to model supplier capacity? That is, what if the company wants to perform capacity constraining so as to treat the external location partially as an internal location? Some planning systems can do this but the ERP system cannot, meaning that there is an inconsistency between the ERP system and the planning system that requires work to overcome. Let us look at another example.

Some time ago I received two packages from my favorite running store, RoadRunnerSports.com. I noticed that both packages were not from Road Runner Sports’ distribution center, but separate, one from each manufacturer. I needed to send both packages back, but did not know where to send them: to Road Runner Sports or to the manufacturer’s distribution center addresses, which were listed on the boxes. When I called they told me that all returns come to them. I asked if this was a change in policy—did they no longer fulfi ll their orders? They told me that they used drop shipping for some items but not others, which allows them to provide a larger selection on their website. They stock high volume items at their DC. This is consistent with Amazon’s approach, which is to fulfi ll some, but not all of the orders from their website (Amazon has grown into a marketplace where other online retailers also offer products).

What Changed and Who Must Know What

The old model for order fulfi llment is from a time when most orders were fulfi lled at a physical store. However, with ordering taking place on the Internet, it is not particularly relevant who fulfills the order, as long as it gets done. Amazon was one of the first web retailers to pick up on this fact and now it is a major part of their business. Other online retailers are clearly copying Amazon’s approach. A variety of system adjustments are required to pull this off. The less your systems are designed to do this model of order fulfi llment, the more custom work is required.

This product is sold on Amazon’s website, but the options below are actually fulfilled by someone else. Under this model, the sales order goes from Amazon to the fulfi llment company, and the product goes from the fulfillment company to the customer. Payment goes to Amazon, which then pays some of this money to the fulfi llment company. This is one example of how the traditional roles are changing.

Road Runner Sports must know the inventory position at their fulfi llment company so that they know what they can commit to the customer and what is available to ship. Also, notice that the return does not go back to the fulfi llment company, but goes to Road Runner Sports, which sends bulk returns to the fulfi llment company. Increasingly, what is inside and outside the company is blurred, yet in the ERP model, inventory is shown for internal locations only. The problem is that ERP’s model won’t work for this business requirement. Examples of the blurring distinction between what is inside and outside of a company are covered in detail in the book, Superplant: Creating a Nimble Manufacturing Enterprise with Adaptive Planning Software, which covers multi-plant planning, multi-sourcing and subcontracting. Superplant is the more accurate modeling of location interdependencies for production and supply planning that is provided by standard advanced planning functionality. Superplant alters the assumptions along which a planning system makes decisions. It can see relationships that software lacking these functionalities cannot access. Superplant allows for manufacturing processes to be planned and integrated across plants. Sources of supply are automatically and dynamically selected based upon changing circumstances, and the integrated planning of external partner plants are treated as if they were internal plants.

These functionalities are logically grouped under Superplant as they all relate to improving the scope of planning with respect to how locations are treated when solving a combined supply and production problem. Superplant is characterized by an expansive and integrated view of planned locations, the ability to nimbly react to changes in things such as capacities, and to redirect to other sources of supply. Superplant is not a management technique. It is a specifi c set of software capabilities that must be confi gured, tested and accounted for in a range of areas from user training to integration to ERP systems. For example, with some special multi-plant planning software, companies can leverage more of their manufacturing resources as part of the natural output of the planning system (that is without any manual intervention).

ERP Repeatedly Getting in the Way

In case after case, ERP systems, because of their introverted nature and dated designs, put up substantial barriers to flexibility when locations in a supply network are pseudo internal. Most vendors that sell add-on software don’t spend much time or energy criticizing how ERP systems slow the implementation of their applications, but their implementations are, in fact, slowed. This is because all systems must be made to integrate back to a system that sees strong delineations between “inside” the company and “outside” the company. The very integration between the supply chain modules and the fi nancial modules of ERP systems have made companies that much less adaptable.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    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 support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

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

How to Understand The Way ERP Creates Redundant Systems

Executive Summary

  • Because ERP begins with duplicate functionality, they create redundant systems.
  • Learn why this leads to so much waste on ERP projects.

Introduction

ERP systems include very basic functionality for supply chain planning and management, sales, reporting, etc. Because this functionality is basic, many companies purchase and connect external systems to the ERP system. Let’s look at the supply chain planning system as an example. In almost all cases, during an implementation the planning system is not integrated to the ERP system’s financial module. Instead it is connected to the ERP system’s supply chain modules. In SAP ERP, the supply chain modules include all three of the nonfinancial modules: materials management, production planning, and sales and distribution.

These modules then communicate with the financial/ accounting module through the normal ERP workflow. This sets up situations where multiple systems are now used: both the ERP system supply chain modules and the supply chain planning system, leading to complex decisions as to what to perform where. These are some of the questions that I help companies with on implementation projects.

 

Ordinarily the external planning system could convert the purchase requisitions that it creates to purchase orders, and then send them to a financial system for reconciliation. In fact, by making the inventory management, planners, and procurement individuals use the ERP system, they are less efficient than if they used the external planning system, which is specifi cally designed for supply chain management. This same problem exists regardless of which type of external application is added—CRM, reporting, etc. The issue becomes, use the ERP system or use the external application.

When an ERP system is implemented, purchase requisitions must now be sent to the inventory management module in the ERP system. At this point, duplicate supply chain documents are created, and these documents must be kept in synch between the two supply chain systems. If there were no ERP system and the company had another supply chain application that it had purchased previously, the existing supply chain application would be decommissioned and the new supply chain application would be connected directly to the financial and accounting system. Therefore, the ERP system has just made the implementation more expensive and more complicated.

The Background on Supply Planning Database Segmentation

In supply planning, segmentation on the basis of the product-location combination is a way of dividing a database so that different rules can be applied to different database components. The standard approach is the following:

  1. Place critical materials (those that are either capacity-constrained or that have long lead times—or both—or have a high profit margin) into the planning system.
  2. Plan noncritical materials with the MRP, DRP and consumption-based logic in the ERP system.

The problem with this approach is that planners must use two systems (the ERP’s supply chain modules and the supply chain planning system) to get the job done. A justification for this design is that the advanced methods available within the planning system would take too much time to run on the entire product-location database. This is a weak argument; simple methods can be run on product-location combinations within the planning system. In fact, any product-location can have a specific method assigned to it by simply assigning only the desired combinations of product-locations. All planning systems I have worked with (and I have worked with quite a few) have this capability.

The Justification for Using ERP Functionality

Some of the justifications for continuing to perform planning in the ERP system have really been about maintaining the relevancy of the ERP system rather than any real benefi t to the company. In this way, ERP has arrested the implementation of more sophisticated and better systems. It’s almost as if companies are continually attempting to justify the investments they have made in their ERP implementations. And of course, when the same vendor that sold them the ERP system is now selling them the bolt on the system, the vendor has the same predisposition: to help convince their customer that their ERP investment was a good one.

Finally, while the traditional approach is to convert planning recommendations (planned production orders, planning purchase orders, planned stock transfers) in the ERP system, it’s actually very easy for planning systems, convert planning recommendations into execution objects (production orders, purchase orders, stock transfer). These execution objects could be integrated more easily to a financial application, cutting out the redundancy of the ERP system. Unlike ERP systems (at least, on-premises systems), the integration of these execution objects would be a simple matter if the financial application published to an integration standard.

Conclusion

ERP has large amounts of functionality that is not useful and reproduces functionality that is far superior in other applications. This causes the mediocre functionality to be overused when far better functionality exists outside of ERP.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    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 support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

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

How to Understand The Failure of ERP Decision Making

Executive Summary

  • The broad purchase of ERP systems without looking for evidence says many things about IT decision making within companies.
  • Learn what areas lead to so many companies to fail on ERP.

Introduction

Decision-making in companies is often presented as highly rational. The assumption is that attentive and thorough research is performed before purchasing decisions are made. A perfect example of this line of thinking is presented in the following quotation:

“If IT were not delivering value, rational decision makers would not keep investing in it.”Andrew McAfee

The above quotation provides an example of the logical fallacy of an appeal to authority combined with the logical fallacy of an appeal to accomplishment. The same argument could be made for exotic financial instruments. How could mortgage-backed securities and credit default swaps—which fell in value so precipitously that without government intervention every US investment bank involved in these instruments would have had to shut their doors—possibly be lacking in value?

Many entities, ranging from consulting firms to the business press that cover these companies, as well as the software buying companies themselves, have an interest in having this line of reasoning accepted. However, the results of my research and experience in software selection, some of which is encapsulated in the book, Enterprise Software Selection: How to Pinpoint the Perfect Software Solution using Multiple Information Sources, actually show considerable evidence to the contrary. A few of the issues that are problematic for IT decision-making are listed below:

  1. Selecting Biased Information Sources: Companies often lack the knowledge to make appropriate software selection decisions for themselves. Often this issue is not mitigated by hiring external parties because the buying companies are frequently misled by advisory firms. These firms are more interested in selling IT consulting services than in providing objective advice. These advisory firms are not “fiduciaries,” in that they have no legal responsibility to put their client’s fi nancial interests above their own. This issue is similar to the problem of a lack of fiduciary responsibility that the majority of financial advisors have, which is why financial advisors have a very strong tendency to place their clients into investment vehicles that benefit them more than they benefi t their client’s. This is discussed in detail in the following article. Enterprise software buyers rely upon research from entities that are themselves paid by software vendors, along with a host of other limiting factors.
  2. Accepting Simplistic Explanations: As will be shown repeatedly in this chapter, companies deciding which course of action to follow tend to be influenced by oversimplified rationales or logics. If the executive decision-makers knew technology better, and if they had studied the history of enterprise software sales methods, there is no way that the oversimplifi ed logics that were so effective in selling ERP to them would have worked. Another way of looking at this is that it was simply all too easy.
  3. Companies Do Not Delve into Detail on Functionality: There is a strong tendency for buying companies to accept that functionality between the software of multiple vendors is the same, as long as the description of the functionality is the same and the functionality is proven to be similar when demonstrated by a skilled pre-sales consultant. In fact, rarely is the competing functionality “the same.” Often there are very signifi cant differences in the usability, implement-ability and maintainability of functionality that is at first blush seen as identical across multiple applications. A purpose of the software selection process is to determine the best fit between the various desired functionalities versus its documented business requirements and the functionalities that are available from competing applications.
  4. Overestimation of Implement-ability: Companies have a strong tendency to overestimate what they can implement. Software vendors that market a broad or deep set of software functionality are of no help to these companies. However, some functionality is tricky to implement properly. In addition, companies will often have a certain level of funding in mind for software implementations, but will then implement more advanced functionality that requires a greater commitment of funds than they are interested in making. This lack of funding, which increases the general failure rate on projects, is addressed with the concept of Maximum Tolerable Functionality, as explained in the following article:
  5. Susceptibility to Salesmanship: Good salespeople are paid very well by software vendors for a reason. Salesmanship works. However, sales, regardless of how well done, does not have anything to do with how well the application can be implemented. Software salespeople will become “best friends” with their prospects, but after the sale is made, the relationship will not count for much. In fact, salespeople frequently make implementations worse by insisting that overpromised capabilities can be met with “creativity.” Some of the sales presentations that I have seen seem highly conceptual and have little to do with how an application is used in reality; one of the old jokes in this area is that the difference between a car salesperson and a software salesperson is that the software salesperson does not know he is lying. Unfortunately this joke has quite a bit of truth to it.

The Reality of Getting Around Rationality

There is no way of getting around the fact that companies appear far less rational when one works within them and sees “how the sausage is made,” than when one reads about them from afar. Business journalists, afraid of losing their access to information, have a strong incentive to place a positive spin on their coverage of a company, and most of the journalists are suitably compliant. Secondly, journalists don’t actually work in the companies they cover; thus it is quite easy for them to get bamboozled. Typically the executives who are interviewed and provide information to the journalists are good at selling or at least good at making good impressions, and are motivated to improve their prominence in the field as well as to positively impact the company’s stock price. A nice write-up on them and their company gives them even more negotiating leverage for salary increases, bonuses, stock options, etc. The most extreme example of this is the Wall Street Journal, which produces puff pieces on executives, building them into either geniuses or exemplars of highly capable and responsible corporate officers. The Wall Street Journal completely misrepresented how the industry worked when I was young and had not yet worked in these large companies. Now I understand the Wall Street Journal’s focus on making companies look good for stock market ends.

ERP Success and Failure

ERP success and failure rates are difficult to estimate, as was explained several pages ago. Much of this is definitional: what does one consider a success?

The failure rate of ERP systems is far higher than generally understood. While some high-profile failures get released to the business press, in most cases the news simply never gets out. I know of several implementations that have featured very prominently in the marketing literature of several software vendors, and have been featured both by this vendor, and even at the implementing company for over ten years. This customer is the main reference account for the software, has numerous press releases and marketing documents created for the project, and the truth is that the client is barely using the application. This is a case where the client has so much of their reputation wrapped up in the success of this application, that they cannot admit the failure—it is simply too embarrassing. However, another reason that so many implementation failures go unrecognized is that companies often do not even know the applications well enough to know that their implementations have failed. I have written a number of articles that explain how some of the most advanced software available is poorly configured to such a degree that there was no point implementing the sophisticated software that had been selected such as What is Your Supply Planning Optimizer Optimizing?

When I have brought up this matter to several of my clients, I have been told that there is no time allocated to fix the system; we must hit the deadlines to roll out the flawed configuration to new regions. At one company I was told that part of my role was to be enthusiastic about the system and to use my credibility with the business to get them to believe that the system was working well. The information I provide regarding a detailed analysis of system output and its fit with what the business needs is often suppressed and never reaches the ultimate decision-makers. The top decision-makers are in effect insulated from accurate information about how systems perform and instead are told only the good news. It’s a complicated political stew of competing agendas that results in decisions being made without any logical foundation for the positives or negatives of the actual impact of the decisions. However, I suspect that to those readers with significant work experience, this is not exactly news.

Conclusion

The first assumption to dispense with is that because companies are big they must have rational decision-making processes or have effective channels for transmitting information to decision makers. This should help to explain why companies have universally accepted the following examples of logic for implementing ERP systems.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    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 support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

References

https://www.forbes.com/sites/oracle/2015/12/24/5-signs-that-cloud-erp-has-serious-momentum/#4a8073d2e8cc

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 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 an 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 fi nancial 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 fi nd a correlation between ERP implementations and the fi nancial performance of companies) contains several fl aws. Some of these fl aws 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 benefi ts, 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 defi ne 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 effi ciently, 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 fi nancial 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 benefi ts 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 have 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

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    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 support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

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

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    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 support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

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

How to Understand The High TCO and Low ROI of ERP

Executive Summary

  • ERP is sold on the its financial benefits.
  • Learn why ERP systems have a high TCO and negative ROI.

Introduction

The Wikipedia definition of total cost of ownership (TCO) is as follows:

“Total cost of ownership (TCO) is a financial estimate whose purpose is to help consumers and enterprise managers determine direct and indirect costs of a product or system. It is a management accounting concept that can be used in full cost accounting or even ecological economics where it includes social costs.”

Background on TCO

We find TCO research incredibly illuminating. TCO is one of the most misunderstood, abused and underutilized tools for enterprise software decision-making. Our work on TCO has provided us with insight across multiple software categories. In fact, it is a mistake to limit the use of TCO to such a narrow range of decisions. Because we perform TCO for so many software categories, we know the following:

  • How the TCO varies based upon the size of the implementation.
  • How the TCO varies based upon the delivery method (SaaS or on-premises).
  • How TCO varies based upon the complexity of the implementation.
  • The average percentage that one can expect the implementation to cost for any one specific cost item, or for cost categories such as implementation, license, hardware, or maintenance and support.
  • Using ERP combined with 100 percent ERP vendor applications.
  • Using ERP combined with 100 percent best-of-breed solutions.
  • Open source ERP, 100 percent best-of-breed solutions.
  • No ERP, 100 percent best-of-breed solutions.
  • The risks of various software categories.

False Assumptions of ERP

The analyses include assumptions that are often not considered, such as realistic average implementation times. These implementation times, which are habitually underestimated by vendors and consulting companies, have been taken from actual projects. I can say unequivocally that from this database of knowledge we have been able to disprove many deeply entrenched concepts that drive IT decisions to poor outcomes. In our view, combining unbiased and highly detailed TCO calculations, along with an evaluation of comparative software functionality based on strong domain expertise, are two of the most important inputs to producing quality IT decisions.

Unfortunately, this knowledge is not resident within companies, and ERP software vendors (as well as consulting companies and IT analysts) have not informed companies as to the true TCO of ERP systems; it takes work to do this analysis, and probably more importantly, the ERP vendors do not want buying companies to know.

Various ERP TCO Studies Versus Our Estimates

The study What Managers Should Know About ERP/ERP II estimates the costs of ERP software licenses to be between 10 and 20 percent of the overall TCO, which is higher than we estimate. While the software license cost of most application categories averages 20 percent of the TCO, we estimate 8 percent of the TCO of Tier 1 ERP software is due to software license costs. ERP implementations take so long, and have so much customization, and therefore, maintenance expense. So it’s not that the software license cost is lower; the TCO is made so much larger by the customization and implementation expenses that the software license cost becomes a smaller percentage of the cost in comparison. The book, Control Your ERP Destiny: Reduce Project Costs, Mitigate Risks, and Design Better Business Solutions considers a reasonable estimate of the costs of ERP software to be 20 percent of the total project budget. According to this book, software vendors provide their potential customers with estimates (as do consulting companies) that consulting costs will be roughly twice the cost of the software. One independent source, called 180systems, actually estimates that consulting costs average 65 percent of the license costs (71 percent for larger customers and 59 percent for mid-sized customers). Below is a meta-analysis and comparison of my individual TCO analyses in this regard.

While the software vendor estimate of consulting costs holds true for my sample (although you can see that there is considerable variability), this does not correlate with our estimations because other TCO estimations that we have reviewed consistently underestimate the TCO of applications. Because license costs are explicit costs, they are the easiest to estimate, and thus the easiest to overestimate in relation to other costs.

Estimations from other sources are all over the map. Some entities recommend a rule of thumb of 1:1 between license and consulting costs. The software vendor e2benterprise recommends a ratio of between 1:3 to 1:4. We worked backward from these numbers and found that the estimations on the software license costs are solid, but the ratio of 1:4 only estimates consulting; it does not bring the total ERP cost even close to the estimations of the total costs of ERP. Additional costs such as the vendor support costs, hardware costs, and ongoing maintenance costs are well known. It is difficult to see why so much emphasis is placed on the software and implementation costs while maintenance costs are left out. Hardware costs are barely worth mentioning as they represent a small percentage of the overall TCO, but estimated maintenance costs must be included in decision-making.

The Brightwork Research & Analysis Estimates

On our website, we estimate software, hardware, implementation, and maintenance costs—both external costs and internal costs. The maintenance costs are incurred to keep the applications running, but also include maintenance of customizations. As 96 percent of ERP implementations require moderate or heavy customization, work is required to keep customizations up-todate with new releases and to augment the customizations, and this makes ERP software maintenance a high cost. An important aspect to consider when evaluating ERP TCO studies is that the consulting expenditures on most ERP projects are signifi cantly over-budget, something that ERP software vendors would not have included in their TCO estimates.

Generally speaking, a 100 percent success rate is assumed for implementations (strange, as the real success rate is far lower than this) when vendors estimate TCO for ERP and enterprise software. However, if the project goes over-budget or fails, the estimates provided by the software vendor do not apply, and neither do our estimates. We have observed this as a problem in terms of how projections are performed and I explain this in the book Enterprise Software Risk: Controlling the Main Risk Factors on IT Projects. We are currently developing risk estimators for all analyzed applications; these risk estimates auto-adjust based on the application, the consulting partner used, and the stated capabilities of the company. The company can perform their own interactive analysis right on our website.

Is the TCO of Failed Implementations Included?

What is the TCO for software that is never implemented? I have interviewed for several projects (and worked on a few projects) that were re-implementations, where the software failed to go live.

That failure may have taken a year and a half; the company focused on other things and then decided to re-implement the software two and a half years after it began the first implementation. If the software is taken live the second time, most likely the project will have a negative ROI. The standard ERP TCO calculators we provide would not apply. Therefore, a question that anyone with an interest in ERP estimation should ask is: If 60 percent of ERP implementations fail, and if the vast majority of ERP implementations miss their deadlines by signifi cant durations, why are TCO estimations still based upon assumptions that do not include these very critical factors?

There is little disagreement on the fact that companies repeatedly underestimate the costs of ERP systems.

“In ERP systems, having clear criteria for success is particularly important since the cost and risk of these valuable technological investments must be reviewed in light of possible payoffs. Mabert, et al. (2001) put the total ERP implementation cost at tens of millions of dollars for a medium-sized company and $300 to $500 million for large international corporations.”Measures of Success in Project Implementing Enterprise Resource Planning

According to Aberdeen, the average number of users per ERP software vendor is as follows (we used Aberdeen’s numbers for this purpose, although Aberdeen’s TCO studies were not used in this book):

There are significant price differences if just the aggregate license revenues are compared among a sample of ERP vendors. However, this difference in license revenue is primarily driven by the differences in the average number of users. On average, the Tier 1 ERP vendors such as Oracle and SAP have a much larger customer base, as measured here by the number of users. This relationship is so strong that a regression performed between just the number of users and the software cost results in a 96.75 R Squared, as the following graphic shows.

The average number of users for Microsoft is more comparable to Lawson, QAD and Infor than they are to Oracle and SAP.

Even though it is well known that ERP does not lower costs, the actual cost of ERP goes well beyond the direct cost of the software, but extends to the indirect costs such as the costs of maintenance, the costs of adjusting the functionality in other systems in order to make it compliant with how ERP works, to increased needs for customization, to losses in ineffi ciency as mediocre ERP functionality is used in place of better functionality that could be obtained by buying specialized software. In the vast majority of cases, companies did not perform TCO analyses prior to purchasing ERP systems. It is now long forgotten that ERP systems were sold based on the concept that they would lower costs (the idea that an ERP system could have a low TCO is laughable even in the present day). Since then, ERP systems have proven to be very expensive, not only to implement but also to maintain, as the following quotation explains.

“ERP systems were expensive, too, costing companies more than they had ever paid for software when costs had been based on per workstation usage. But that price tag was dwarfed by the installation charges, because companies had to hire brigades of outside consultants, often for a number of years, to actually get the software up and running. While the average installation cost $15 million, large organizations ended up spending hundreds of millions of dollars.”The Trouble with Enterprise Software

How Mistakes With Respect to ERP

The long-lived mistakes with respect to ERP have affected every part of IT today. ERP systems have proved to be much more expensive than even the highest “generalized” cost estimates (even though 80 percent of the time companies did no real estimation), and ERP systems now consume a very substantial portion of the overall IT budget, particularly for companies that purchased from the most expensive Tier 1 ERP software vendors. The high investment in ERP negates investment in other possible applications, even though most of these other applications would have a higher ROI than ERP. All ERP ever offered was basic functionality, and any company that has basic functionality consuming the majority of its IT budget has a serious problem of resource allocation. By that measure, an enormous number of companies have this problem. The direct cost of ERP systems has continued to increase. When companies give so many modules over to one vendor, they also give up a lot of negotiating leverage. The ERP vendors use this leverage to:

  • Sell uncompetitive software in other areas of the same account.
  • Increase the cost of the yearly support contract. The TCO of on-premises ERP systems is generally considered to be high compared to other application categories. It is quite amazing that writers who cover ERP implementations do not bring up these issues with any frequency. Various articles will discuss how expensive ERP systems seem, but the enormous elephant in the room—the leverage of ERP vendors—is unaddressed.

Conclusion

TCO on ERP is not analyzed outside of academics. Vendors, consulting companies and paid off IT analysts and IT media have conveniently circumvented the question of the TCO and ROI of ERP, because it leads to all the wrong answers.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    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 support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

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

What Are the True Benefits of Two Tiered ERP?

Executive Summary

  • Two tiered ERP is sold as a highly beneficial strategy.
  • Learn how beneficial two tiered ERP is to customers that follow this advice.

Introduction

Two-tiered ERP systems are a trend in ERP, but there is little research on the impacts of two-tiered ERP strategies and how they differ from what companies are doing anyway with multiple ERP systems. Once again, the marketing is far ahead of the evidence. Remember that a previous concept—service-oriented architecture (SOA), which has now fl amed out with respect to ERP systems—was also supposed to be a “savior” for ERP. I work on projects where ERP is omnipresent, yet after so many SOA books published and so many ERP vendor marketing documents written, SOA has yet to show its face on any of my projects. Major ERP vendors made a lot of noise about supporting SOA, but SOA never fi t their business model because it reduces their account control; there was no reason for them to support it. On the other hand, there was a large incentive to say that they supported the concept, as is explained in the following article.

Accept the Marketing Message

So before we go forth and accept a new marketing message (i.e., two-tiered ERP), let’s analyze whether it makes any logical sense. It is not clear how two-tiered ERP is much different from the current practice, where most companies have several instances of ERP. Let’s look at a few quotations that define two-tiered ERP.

“Two-tier ERP software and hardware lets companies run the equivalent of two ERP systems at once: one at the corporate level and one at the division or subsidiary level. With two-tier ERP, the regional distribution, production, or sales centers and service providers continue operating under their own business model—separate from the main company, using their own ERP systems. Since these smaller companies’ processes and workfl ows are not tied to the main company’s processes and workfl ows, they can respond to local business requirements in multiple locations.”Wikipedia

Obviously companies are already doing this. The real difference is in the acknowledgement that a foundational characteristic—single instance ERP—is giving way to a standard approach of multiple ERP systems, not merely as part of a shortterm approach, but as part of a long-term strategy. I would not have guessed that ERP systems had diverged so far from their original intent in this regard, as I tend to work for just one subset of enterprise software that is connected perpetually to ERP systems.

Multi ERP Strategy

The multi-ERP strategy has been around for as long as there have been ERP systems. Yet IT analysts, consulting firms and IT trade periodicals that discuss the new trend of two-tiered ERP strategies, fail to bring up the rather important fact that a big part of the ERP value proposition was supposed to be a single instance of ERP, as explained in the following quote from an article in the Sloan Management Review:

“The concept of a single monolithic system failed for many companies. Different divisions or facilities often made independent purchases, and other systems were inherited through mergers and acquisitions. Thus many companies ended up having several instances of the same ERP system or a variety of different ERP systems altogether, further complicating their IT landscape. In the end, ERP systems became just another subset of the legacy systems they were supposed to replace.”

How can so many entities actively promote the concept of two-tiered ERP without even mentioning that it is in complete opposition to one of the original value propositions of buying ERP systems in the first place? Simply put, it is ignorance, amnesia, or a desire not to disrupt various forms of funding that they receive from ERP vendors.

The Logic of Cost Reduction for ERP

All of the above factors undermine a primary argument used to sell ERP systems: they reduce costs. After the ERP market had become saturated, the cost reduction logic “declined as a point of emphasis,” because the vendors were now motivated to sell different types of software. I have noticed other previous changes in SAP’s story line as well. Back in the late 1990s, before they had a supply chain planning system, SAP essentially told companies that supply chain-planning systems were unnecessary. Advanced supply chain planning systems were designed to replace some of the supply chain functionality in SAP R/3. They offered supply chain functionality not available in ERP systems, in addition to more advanced functionality. The argument used by SAP at the time was that this software was only of interest to a very small number of companies. However, after SAP developed their own external supply chain planning system, they changed their message, proposing that it was now quite necessary.

Business Cost Reduction

ERP systems were supposed to save companies money through the standardization of business processes. ERP customers generally accepted this without question. The quotation below provides an example of the pitch.

“It is also one of the most worthwhile initiatives for securing your place in a competitive market. A successful, enterprise-wide implementation will move your company from one with piecemeal business procedures and no overall plan, to a re-engineered organization that is poised to take growth and profi tability to a whole new level.”Why ERP is Vital to Productivity and Profitability

This is an example of a generic argument that proposes that businesses were somehow lost in the wilderness, lacking direction until—POOF! ERP came to save them from themselves. The next quotation is a more sophisticated explanation for what is still a fl awed appraisal of the situation.

“Many organizations have several different legacy systems that have developed over the years to meet their information needs for planning and decision making. Often there is little or no integration among departments and applications used by separate departments do not communicate with each other. This means that data has to be entered into each separate department of the organization resulting in data redundancy and at times inaccuracy. ERP systems can virtually eliminate the redundancies that occur from these outdated and separate systems. ERP systems integrate various systems into one and data is entered into the system only once.”What Managers Should Know About ERP and ERP II

It’s hard to fathom why these companies had not already created interfaces between their applications. ERP has not “virtually eliminated the redundancies that occur from separate systems.” We have the same redundancies and the same issues, except we have newer systems. The previous quote seems to have been written by someone who does not spend any time on actual projects, because those who have work experience in this area have come to the opposite conclusion.

Legacy Systems?

As far as systems being outdated, one of the major complaints of ERP clients is that their ERP vendors have stabilized the functionality within their ERP systems and are no longer innovating. This was the same complaint regarding legacy systems and the reasons they were called outdated! Here is another quotation that contains more unexamined assumptions.

“ERP systems are based on a value chain view of the business where functional departments coordinate their work, focus on value-adding activities and eliminate redundancy. ERP can be a valuable tool for managers to improve operational as well as financial performance of the firm.”What Managers Should Know About ERP and ERP II

This sounds great; however, how would the author know this?

A lot of things “could be” but I have searched through all of the research on this topic and there is no evidence of this. In fact, the ROI is so low, that companies have had to change their stories as to why they implemented ERP, often turning to the equally fallacious argument that ERP improved integration in their companies (as highlighted in the quote below).

“ERP systems replace complex and sometimes manual interfaces between different systems with standardized, cross-functional transaction automation.”The Impact of Enterprise Systems on Corporate Performance

I have to ask how current this observation is and whether it still applies, or whether it was ever true. This paper was written in 2005, but interfaces between systems do the same thing that ERP does, and have for many years.

Conclusion

This chapter covered the other logics—in addition to best practices and integration benefi ts that were used to sell ERP systems. All of these logics are similar in that they were over simplifi cations of reality, and none of them were ever actually proven true. They were never hypotheses that were formulated to be tested. They were proposals that were designed to help pave the way for software and consulting purchases. The evidence is clear that none of the logics were proven to be correct, and yet there is almost a total blackout of this fact. Academic research shows this, but exceedingly few have addressed the discrepancy between the offi cial storyline on ERP and the research. Instead the logics presented in this chapter continue to be used in order to sell more software and consulting. This displays a concerning inability of corporate buyers to differentiate between evidence based statements and marketing propaganda. In the next chapter we will explain the total cost of ownership of ERP systems—which is directly related to the logic of whether ERP systems reduce costs.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    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 support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

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

How Accurate Are the Single Instance Benefits of ERP?

Executive Summary

  • ERP is sold on the ability to be used as a single instance.
  • Learn why the proposal that ERP works as a single instance is incorrect and what this means for projects.

Introduction

A primary selling point of ERP was that a company would be able to move to a single instance of their ERP system. This idea continues to be a selling point of vendors such as SAP, even though in most cases only smaller companies actually have single instances of ERP.

“An ‘instance’ refers to the number of discreet versions of ERP software you have in your company. The original vision of ERP was that companies should have a single instance—that is, a single implementation of the software running on a single database— that serves the entire company. It would mean no duplication of information in different departments or in different geographic divisions and thus better integration and information quality across the company. Upgrading the software would also be easier than with multiple customized instances of ERP across the company.”The ABCs of ERP

Historically companies have been unable to move to a single instance of ERP, yet no one questions why, especially since this is presented as such a desirable end state. As the complexity of a company increases with the addition of regions or subsidiaries, the value of having a single instance of an ERP system, with only one database, becomes questionable. Vendors certainly know this, but present a single instance as a desirable option with benefi ts to the customer anyhow. The reasons why companies are unable to move to a single ERP instance are well documented and are not going away; some of the major causes are listed below:

  1. Database Management and Query Efficiency: ERP systems are supposed to be single database systems, which belies their integration. There are issues with reduced efficiencies at higher data volumes, but what is the value of having sales fi gures from different subsidiaries that may have no relationship to each other in the same sales order table? For instance, if a user performs a query for all sales in a quarter, do they mean the sales of subsidiary one or subsidiary two? How do proponents of the single instance ERP system consider the increased complexity of the data in their presentation of this solution?
  2. Which Region/Division/Subsidiary Gets Its Way?: If different regions do business differently, and they must move to a single instance, which region gets the system configured or customized to its requirements? What happens to the productivity of the company that gets its confi guration adjusted for no other reason than the desire to normalize the functionality across the subsidiaries so that the move to a single ERP system can be facilitated? Most often it is the region with the political power (i.e., the region where the headquarters are located), and has absolutely nothing to do with logic or what is best for the business. I have been on several global implementations and I would recommend to any independent contractor who could choose between a global implementation and a regional implementation to choose the latter. Global implementations are exercises in one region enforcing its will upon the other regions. At one client site, the region with the headquarters simply left out functionality that was available in the application when the new application was explained to the other regions. The functionality they left out would have allowed the application to be confi gured differently. They did this to prevent the other region from choosing a confi guration that was different from what they had already decided upon. The region that selected the confi guration assumed that the confi guration was right for everyone seeing as they had selected it. They called this the “Global Template,” which was a convenient way of getting the other regions to do things their way.
  3. Negotiation Leverage: A single ERP system is viewed as a cost savings because more business is aggregated to one vendor. Surely this is a one-sided view on the matter: single sourcing also increases the negotiating leverage of the vendor (why they like it so much). What happens when the ERP vendor knows they have 100 percent of a customer’s ERP business? Well, this is just the starting point for Tier 1 ERP vendors; their eventual goal is to replace all enterprise software used by the company with their other applications, to turn the client’s IT infrastructure into a monoculture, and to staff the IT departments with 100 percent compliant executive decisionmakers. If this sounds vaguely familiar, it is because it is the same desire of every major IT consulting company. When I first got into consulting, my partner at KPMG explained to me that our role was to “penetrate” the client and then “radiate” through them.
  4. What About Functionality?: Looking from 30,000 feet up, it’s easy to state, “If we use one system we can save money.” However, there is another side of the equation: the value that the system provides. When a company moves to a monoculture, having regions/divisions/subsidiaries—the people who actually know the business, reduces the functionality benefi ts—choose their own solutions. This leads to the next point.
  5. How Much Does Customization Increase With a Single Solution?: Proponents of a single instance ERP leave this point out of the analysis, and for good reason. Using a single instance ERP system will mean more customization or, as so many IT proponents prefer, taking a wrecking ball to the business requirements. However, customization translates to real money, both up front and in long-term maintenance, and the costs must be estimated as part of a strategy of moving to a single instance ERP.
  6. What About Flexibility?: Moving toward a single ERP system has negative implications for the flexibility of the company. If the acquisition is eventually sold, what is the cost of breaking the acquisition out from the combined ERP system? Hold on to your hats! Tier 1 ERP vendors are not doing this analysis—or have done the analysis but don’t want their customers to know the truth. Instead they continue to bang the gong of single instance ERP. In truth, that a single ERP system was never a realistic proposition should have been apparent to buyers from the very beginning. It is now well documented that the vast majority of companies do not have a single ERP system, and the reasons are quite well explained.

The following quote is just one of many examples.

“Well, it sounded great on paper, but unfortunately reality bites. The stories started to leak out—multi-million dollar never-ending ERP projects, high profi le ERP project failures, inability to tailor the deployment to local subsidiary needs, and over-tapped local IT resources overwhelmed by a monolithic on-premise ERP deployment. And if a division is run as a profi t-center, these kinds of deployments can quickly paint red all over the P&L.”The Decline of Single Instance ERP

The Use of Multiple ERP Systems

Multiple ERP systems in companies are now the norm, and not just two or three ERP systems as the quotations below explain.

“On average, big companies worldwide are running fi ve SAP instances, while almost four in ten have more than six, according to a study from IT services firm HCL Technologies.”When SAP Sprawl is Cool, ZDNet

“The concept of a single monolithic system failed for many companies. Different divisions or facilities often made independent purchases, and other systems were inherited through mergers and acquisitions. Thus, many companies ended up having several instances of the same ERP systems or a variety of different ERP systems altogether, further complicating their IT landscape. In the end, ERP systems became just another subset of the legacy systems they were supposed to replace.”The Trouble with Enterprise Software

According to one IDC survey, 72 percent of respondents were running more than one ERP system. People will say that multiple ERP instances can be consolidated into one, but in most cases that is simply not practical. There are a number of very good reasons as to why a company cannot reasonably be expected to move to a single ERP instance.

“‘A lot of people run multiple instances because of geographic reasons, regulations, or business-sector reasons,’ Illsley said. “If you’ve got part of your business that is outsourced, for example, you’d probably want to run an instance that your outsourcing provider could use and that would be different to the one you would want to keep inside, so that it’s easier to do things like that.”When SAP Sprawl is Cool, ZDNet

Conclusion

So, while some companies have moved to a single instance of ERP, most have not and will not in the future. It is easier for smaller companies to move to a single instance, and more difficult for larger companies, particularly companies with subsidiaries. We are now three decades into the ERP phenomena and only a small portion of single instance ERP systems are in use. So why is it still considered a realistic goal to move to a single instance of ERP? Apparently many Tier 1 ERP software vendors think it is quite reasonable. However many companies are turning a deaf ear to this message and are, in fact, now far more frequently exploring the concept of a two-tiered ERP system.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    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 support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

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

How Accurate are the All Industries Benefits of ERP?

Executive Summary

  • ERP is sold on the ability to be used in any industry.
  • Learn why the proposal that ERP works for any industry is incorrect and what this means for projects.

Introduction

ERP vendors have been adamant that their software can be used for any industry. SAP has many different industry solutions. However, when one examines these advertised capabilities, the actual functionality is often lacking. These SAP industry solutions are really more marketing constructs than usable functionality, and because the marketing is so good, it took me years of working on SAP projects to figure this out. While I have not worked with every industry solution, I have worked with many of them, and none of them have been as advertised. Most of the time the ERP system is implemented without using the functionality of the “industry solution.” SAP industry solutions are designed to get executives in purchasing companies to think that SAP can meet the unique requirements within their industry, but in truth, SAP tends to offer generic functionality as a base, which they sell to most of their customers. Then they add some functionality for the specific industry, which is of dubious implementation value, but serves as the “hook” to make the executive decision-makers think the software has been customized for their needs. I have worked on several SAP implementations for repetitive manufacturing.

The Example of Repetitive Manufacturing

Repetitive manufacturing is a manufacturing environment where the production is continuous and the equipment investments are high, as is the rate of production. Late in one project, it finally came out that the repetitive manufacturing functionality was not worth turning on. As a result the implementing company decided to forgo the functionality and stick with the standard discrete functionality with a few adjustments. SAP got the sale by pitching repetitive functionality down to the eleventh hour. But the company wasted an enormous amount of time discussing whether or not repetitive manufacturing functionality would be used. As a very experienced SAP consultant (from SAP itself) once stated to me, “There is really more sizzle than steak to SAP repetitive manufacturing.” This issue of “there not being much there” is repeated throughout SAP industry solutions. Among prospects there seems to be some confusion on this topic. Just because a software vendor has a number of customers in a particular industry does not mean that their software serves that market or provides the necessary functionality. But with applications from name-brand vendors, so much of the purchasing decision is based upon the brand yet so much of the ERP system is customized by many clients. Across all industries, one of the greatest unheralded “helpers” is probably Excel. It might be more accurate to say in airport advertisements “XYZ ERP vendor + Excel is used by four out of five top chemical companies.” An honest statement—but obviously not as catchy.

Simply put, many executives buy software to advance their careers, because other companies buy it, or because the marketing and the salesmanship dazzled them. As discussed in the next section, another common division between manufacturing companies, who are the most common implementers of ERP systems, is the division between discrete and process industry manufacturers.

The Example of Discrete Versus Process Manufacturing Requirements

In discrete manufacturing (e.g., automobiles, toys and tools), usually there are multiple input items and a single output item. However, in process manufacturing, where the fi nal item cannot be broken down and converted back to the original input products (i.e., cheese cannot be disassembled into its original components, but an automobile can), one input item can convert to multiple output items, or multiple input items can convert to multiple output items. All of these relationships can be easily modeled in a spreadsheet. The finished product of process manufacturing is not simply the assembly of the input products, but is in fact an altogether transformed item. For example:

  1. One cannot unthread fabric to get to the original spools and restock the thread as inventory.
  2. Once crude oil is cracked into jet fuel, kerosene, tar, etc., it cannot be reconstituted back into crude oil.
  3. In some types of process industry manufacturing, the input product is literally “gone.” For instance, when coal is converted into electrical energy, it cannot be converted back into coal.

So what common and important capabilities are typical of process industry manufacturing? The software vendor TGI, which states the following capabilities within its Enterprise 21 software application, can demonstrate the requirements for process manufacturing planning.

“1. Supports infinite-level formulas with yielding at the top level or ingredient level and rank-ordered ingredient substitutes

2. Products can have global formulas or unique facility-specific formulas

3. Supports scalable batches

4. Supports recipes through the integration of formulas and associated processing instructions and notes for use during batch process production

5. System maintained version and revision control with a fully integrated engineering change order process

6. Formulas support nested formulas and intermediates and can have infi nite notes and instructions

7. Supports online review of formulas via single-level and multi-level explosion

8. Multi-level where-used functionality enables rapid access and mass change to all finished goods using specific ingredients, intermediates, and nested formulas

9. Formulas and recipes are easily duplicated and updated for the same product or a new product

10. Formulas are pulled into work orders or batches for tracking and recording of actual ingredients consumed or backflushed at defined standards”

Batch Functionality in SAP ERP

Batch functionality in SAP can be enabled, which is used for batch process manufacturing. Batch functionality is a very popular requirement for all types of batch manufacturing (including manufacturing such items as bakery items, paint, glass, specialty chemical, and pharmaceuticals, as is explained in the book Process Industry Manufacturing Software: ERP, Planning, Recipe, MES & Process Control). Batch functionality allows specific batches (e.g., a batch of pharmaceuticals from a single production run) to be tracked. Batch manufacturing can be enabled in SAP ERP.

However, batch functionality is well known as a major headache to enable. Batch management was added as an afterthought, even though it is foundational to a batch management ERP system and also a process industry ERP system. SAP ERP was designed to work with discrete manufacturing, which simply has quite different requirements. This is not just an issue with SAP ERP, but of ERP generally, and not just with ERP as a software category, but with all manufacturing enterprise software sold to process industry customers. This is a topic in the book, Process Industry Manufacturing Software: ERP, Planning, Recipe, MES & Process Control. The following quotations talk about how enterprise software designed for discrete manufacturing customers is sold to process manufacturing companies.

“For IT chiefs like Pam Haney, IT director at Irvine Scientific, a $28 million life sciences company, issues of competitive advantage are overshadowed by ever-present customization needs with her ERP system. ‘What we’re faced with is having to deal with ERP packages that are not designed for process manufacturers.’” — Why ERP Systems are More Important Than Ever, CIO

“Originally business information systems for manufacturing companies were designed for discrete manufacturers, not process industries. These systems targeted industries such as automotive, consumer electronics, machine tools, etc. The discrete manufacturing sector produces piece parts to form subassemblies, which are then combined to form the fi nal product. Nearly all ERP suppliers have built their information systems to support the business functions of discrete manufacturers.”Process Industry ERP Requirements

Very specific requirements exist in process industry manufacturing companies that must be met one way or another.

“Today, process manufacturers have a proliferation of products. These products are produced using the same equipment or using existing processes downstream but at the same site. Because of the number of products now fl owing through the same cost center, using financially based cost systems to develop accurate, individual product costs is difficult, sometimes impossible. Furthermore, as multiple methods evolve for producing the same end item (whether in a sister plant or with newer technologies in an existing plant), the setting of standard costs must reflect a weighted average cost. This type of costing can only be done using an ERP system designed for the process environment.”Process Industry ERP Requirements

Unplanned Customizations

Businesses require solutions that have been designed from the ground up to meet their requirements, not software that attempts to meet their requirements. ERP vendors claim they can address the specific requirements of manufacturers by appealing (successfully) to all industries with slick marketing literature, yet with the barest level of functionality. Right now, thousands of companies have made unplanned customizations to their ERP systems because ERP vendors told them that the software would cover their industry-specific requirements when, in fact, they could not. So much money has flowed into Tier 1 ERP vendors who have provided generic solutions and left promises regarding industry-specific functionality unfulfilled, that money has been prevented from flowing to solutions that could have been developed to offer companies software that meets their requirements. This is another example of a prediction make by many ERP vendors that helped them get sales, but has been bad for their “customers” and bad for the enterprise software market overall.

Conclusion

The concept of using ERP for any industry with little customization is a sales construct that after decades has proven not to be true. The more customers have bought into this sales pitch, the more unplanned expenses and corrections and customizations were required of the ERP systems that they purchased and implemented.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    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 support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

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

How to Understand The Overly Integrated Nature of ERP

Executive Summary

  • ERP systems are internally integrated, but it leads to too much internal integration.
  • Learn how this over internal integration damaged ERP customers.

Introduction

The much-promoted internal ERP integration is described universally as a virtue and as a system with no corresponding downside. I do not exaggerate when I say that I could not find anything published about the disadvantages of ERP being self-integrated. However, systems that are so integrated limit a company’s flexibility to meet its requirements, although at fi rst it can be difficult to see how this is the case. When a system external to the ERP system makes a decision, that decision/output must be converted so that the receiving system can understand and use the transaction. A transaction can have multiple dimensions (a payment processed between two locations/entities, a shipment sent between two entities, etc.). The problem is that ERP systems offer a limited number of options per dimension (as with most systems; however with ERP systems there is a catch), and when the company has a requirement that cannot be met by a transaction that exists in the ERP system, customization must be performed.

Customization rarely works smoothly and becomes something that the company must maintain in the long term. Customization of ERP systems is one of the most expensive customizations a company will ever pay for, as it means hiring programmers at the top of the market and developing from within the ERP software vendor’s environment. This is explained in the following quotation.

“’We could have written ABAP code, but the cost of ABAP programming and maintenance is enormous,’ says Bill Waters, MMS’s director of information services. With Oberon, MMS saved the initial programming effort and will save even more whenever it upgrades its packaged apps. Oberon provides prebuilt connectors between the two systems and is committed to maintaining and enhancing these links so MMS doesn’t have to.”

The Efficiency of Customizing ERP Applications

ERP applications are not known as efficient applications to customize.

“The problem is the lack of a full set of application development tools in ERP packages. Major ERP vendors may publish APIs, include a low-level programming language, reveal their underlying data schema, and even provide some customization tools. But they don’t usually provide testing and debugging—or much of the other functionality developers expect.”ERP: More than an Application

Customization is a near universal requirement for ERP systems. According to IDC, 87 percent of respondents to their survey performed moderate to extensive customizations in their ERP system, and estimates from other sources move that figure up to 96 percent.

“During the past two years, Data Exchange has invested several million dollars in its systems overhaul. A good portion of that money went toward custom coding. ‘Each business is unique,’ Malchicoff says. ‘We did a gap analysis of what Oracle could do and what we needed to do for our business.’ The company wrote nineteen modules comprising fifty thousand lines of code for such things as logistics, process control, and data mining. That effort was just as significant as deploying the ERP software—and it cost just as much, an amount Malchicoff had to calculate as part of his ROI analysis.”Making ERP Add Up

How Many Releases Behind the Latests Version

More than a third of small to mid-sized manufacturers that use on-premises ERP operate between two and three releases behind the most up-to-date version of their ERP system. Furthermore, because the modules within the ERP system are so tightly integrated, there is no easy way around the module in order to connect directly into the ERP’s financial system. The reason for this is clear: if we use ERP’s inventory system as an example, the inventory system must have the full information on all inventory movements, even if there is no standard way for the ERP’s inventory module to process the movement.

While many articles describe ERP systems as inflexible, they miss out on the distinction that I just explained: part of this infl exibility is due to the overintegration of ERP systems. In one article that followed the “ERP is inflexible theme,” the IT analyst firm IDC did an excellent job of elaborating on one aspect of ERP inflexibility:

“ERP systems in general are not designed to be flexible; in fact, most are designed to provide and automate repeatable business processes. While there is substantial benefit to this automation and predictability, there are also risks and costs.”

Inflexibility of Umbrella Term for ERP Shortcomings

“Inflexibility” is used as an umbrella term for many ERP shortcomings, but “over integration” is the term I use to explain the specific problem that results in infl exibility. ERP systems cannot represent all the different business processes that exist in a system, and its introverted design limits a company’s ability to implement these business processes without considerable and expensive customization. In fact, one of the reasons that ERP vendors and consulting companies make so much mention of best practices is because ERP’s coverage of business processes is restricted, making it necessary for ERP vendors to have a readymade argument to use to convince the company not to implement its preferred—and in many cases valuable—business process, and to accept a substitute that requires the company to make all the adjustments. How ERP Sets the Integration Agenda for All Other Applications If you check out the websites of non-ERP vendors, you will fi nd them littered with various certifi ed (by the ERP vendor) integration adapters. (Most of these certified adapters are more marketing sizzle than reality as described in What Are SAP’s Vendor Integration Certifications.)

Integrate Applications of ERP Vendors

It is crucial for non-ERP vendors to show their ability to integrate with the applications of ERP vendors. During the presale presentation to the customer, they often pay homage to the customer’s existing ERP system (particularly to SAP and Oracle because of their popularity in the market) by talking about the great relationship they have with that ERP vendor, and if possible, by discussing the details of as many joint implementations as possible. I have been critical of software vendors in the inventory optimization space who dilute their own message by stating in their marketing literature that they “work with” ERP vendor functionality, rather than replace ERP functionality. These vendors have sophisticated solutions with functionality that is head and shoulders above what can be found in ERP systems. Yet, because they are concerned about offending the ERP vendor, they are as non-confrontational as possible, even to the point of misrepresenting what their applications actually do. For instance, when they refer to SAP on their websites, they could not be more deferential, as I explain in the following article How to Understand Why Software Vendors are Fear SAP.

Conclusion

This is the power that many ERP systems have. Other vendors are fearful of contesting the ERP system directly or showing how their systems are superior. That is, the other vendors self-censor. These are not the workings of a transparent market; the power and veto authority of the ERP software vendors influence the information provided by other vendors that do not even sell ERP software.

Financial Disclosure

Financial Bias Disclosure

This article and no other article on the Brightwork website is paid for by a software vendor, including Oracle and SAP. Brightwork does offer competitive intelligence work to vendors as part of its business, but no published research or articles are written with any financial consideration. As part of Brightwork’s commitment to publishing independent, unbiased research, the company’s business model is driven by consulting services; no paid media placements are accepted.

ERP Contact Form

  • Want Honest Information about ERP?

    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 support.

    • We have a better track record of being correct than any of the well-known brands.
    • If this type of accuracy interests you, tell us your question below.

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