ERP implementations are high-risk affairs. Much of the ERP functionality difficult to implement, many of the vendors are offering dated technology – that if it were not for how the word “legacy” is controlled by software vendors and consulting companies would be called legacy. (Hint, legacy is a term of propaganda, and can only every be used to label a system one wishes to replace – never to a vendor’s software.) One of the major complaints of ERP clients is that their ERP vendors have stagnated while buyers keep paying high yearly service charges.
The unfortunate, if under-reported fact is that many years after most ERP systems go live, it is difficult to demonstrate the return on investments from them. This story is of course worse if buyers buy expensive ERP systems. Of all ERP categories, tier 1 ERP are the worst values – and the common logic presented that only tier ERP systems have the functionality for the complexities of large companies is not true. The actual costs of ERP systems are covered in our TCO Estimation for ERP, as well as in our Solution Architecture Packages. Several up and coming ERP vendors are far more competitive along all the decision making criteria in which we measure and score ERP software, and the fact that it is now easy to find stand alone financial applications that are superior to the financial modules in any ERP system is taking the wind out of the shopworn “ERP is necessary” argument. Furthermore, some of the best applications are – while not the least expensive, are towards the less expensive end of the spectrum.
What the Research Says About Risk Implications of ERP
ERP implementations are generally known as risky, but this does not seem to influence the software selection process. This is unfortunate as the risks vary depending upon the application selected. Only rarely is the actual success rate of ERP implementations quoted. According to the publication The Critical Success Factors for ERP Implementation: An Organizational Fit Perspective, the success rate is roughly 25 percent. So, according to this source, 75 percent of ERP implementations are considered failures. But quoting just one study is misleading because the estimates are truly all over the map, as the following quotation attests.
“A study by the Standish Group estimates that 31 percent of projects are not successful (Kamhawi, 2007). Barker and Frolick (2003) suggest that 50 percent of ERP implementations are failures. Hong and Kim (2002) estimate a 75 percent failure rate, while Scott and Vessey (2002) estimates failure rates as high as 90 percent. Different statistics for the success or failure of ERP projects have been offered by researchers. In addition Bradford and Sandy (2002) reported that 57 percent of the companies they interviewed had not attempted to assess the performance of their ERP systems owing to a lack of empirically effective evaluation models.” – Measures of Success in Project Implementing Enterprise Resource Planning
One of the most ridiculous arguments we have heard is that (particularly from the tier 1 ERP vendors) ERP implementations are so difficult that companies that manage to pull them off gain a competitive advantage over other companies. In this incarnation, the ERP system is presented as something akin to the Ironman Triathlon where the implementing company proves its toughness by running the gauntlet. It is an interesting analogy, which as far as we aware is unique in the field of enterprise software where ease of implementation—rather than difficulty of implementation—is traditionally considered a virtue. And in fact, the argument is edging extremely close to circular reasoning: ERP is virtuous because it is difficult to do, and it is difficult to do because it is virtuous. It is also the only time we can recall that a high failure rate is presented as a positive attribute of a software category.
ERP as “Just Another Application”
This transition of ERP from the center of the IT solution architecture is almost never written about or discussed (one of the few exceptions is in an article from Tech Target, who’s reference is show below) however, ERP is not nearly as influential or critical to the IT solution architecture as it once was. After bringing about a period of relative centralization (we say relative, because many of the “legacy” systems that ERP was supposed to eliminate never went away because ERP systems lacked the functionality to replace them), solution architecture has decentralized. And every year the scope of ERP shrinks and companies bring up less ERP functionality, and look for better functionality outside of ERP systems. In fact, CRM has been forecasted by Forbes to surpass ERP in revenues by the year 2017. This is the first time that any other category of enterprise software has even come close to ERP sales since ERP was introduced back in the 1980s.
Interestingly even when this issue has been brought to the surface, such as with the Tech Target article, the coverage is notable for what is left out. Curiously, they quote Gartner about the future, the firm that coined the term “ERP” — and has historically been one of the big cheerleaders on big ERP. Gartner was one of the pied pipers that lead companies to these bad big ERP purchases on the basis of what has turned out to lack a strategic and technological foundation. This leads to the next section. The question being which of the ERP vendors can effectively support the new reality of ERP not longer being the center of the solution architecture.
Finding Flexible ERP Software Vendors
Buyers should look at ERP systems as an a la carte menu. In our Solution Architecture Packages we compare the TCO of multiple alternatives.
Buyers have all types of options; each should be evaluated on the basis of its TCO as well as the functionality match to the buyer’s requirements. These estimators will be quite a surprise to the vast majority of buyers, because our analysis shows that the only losing strategy is to choosing the recommendation of all the major consulting companies and center their solution architecture on a tier 1 ERP system. Not doing this means the buyer comes out with a far lower overall TCO and with far better functionality – resulting in a much higher ROI.
Some ERP software vendors are comfortable not being the center of the IT solution architecture and other are not. This indisputable final outcome of ERP is the opposite conclusion to a the ERP trend as predicted by every authority on ERP (primarily SAP and Oracle, consulting companies, IT analysts). They were supposed to be the experts on this topic, but they all had a major flaw – they all had a financial bias, making their forecasts invalid. See our Software Selection Packages to learn all about the effects of financial bias on forecasting. This makes dealing with SAP and Oracle in fact dangerous for buyers because they are proposing the continuation of a strategy that calls for a large and expensive ERP system, which is the center of the IT solution architecture continually consuming a large percent of the IT budget.
This strategy has never worked as the evidence from research that has been performed shows a negative return on investment from larger ERP solutions. (Tip: any entity that proposes that ERP has a positive ROI, simply ask them to produce the independent research study) The evaluation of the research on ERP systems is explained in fine detail in the SCM Focus Press book The Real Story Behind ERP: Separating Fact from Fiction.
On the other hand, other vendors, examples being ProcessPro, Rootstock and ERPNext never operated from this point of view, and are happy to have their system implemented as part of any solution architecture strategy desired by their customers – they are not practicing account control by selling an ERP system. Instead they have always considered themselves providing low cost ERP, and just one system as part of an overall ecology than can be the center or any fit with their customer’s solution architecture that the customer desires. These are the types of ERP vendors that buyers should seek out, as they provide not only the best software in ERP, but also the best ability to partner with, rather than seeking to control their customers. Another major advantage of purchasing from a software vendor that only makes ERP software is that buyers will not relentlessly pitched other products by these software vendors sales reps.
Tier 1 ERP is in the Price Gouging Phase
Oracle and SAP have put very little back into their tier 1 ERP products for roughly 15 years, and as a result the applications are seriously dated. However, their support costs continually increase. This is the negative consequence of software “lock in.” In fact it is estimated that Oracle receives up to a 90% margin on its ERP service contracts. Many buyers have felt the pinch as the following quotation suggests.
“When you put in a $40 million or $50 million ERP package, it’s difficult to have an exit strategy without causing a lot of pain. They know that, and so they increase our costs every year,” he says. Therefore, Steinour says he would like to lay the groundwork for a more strategic approach.” – ComputerWorld
If buyers could wipe the slate clean, we have concluded it is unlikely SAP or Oracle could rebook a high fraction of the customers it currently is receiving ERP support revenues from. Interestingly, the fact that one makes oneself extremely susceptible to the power of their supplier when they concentrate their purchases with a single software vendor was not brought up by any of the supposed experts that were promoters for big ERP. Hold you breath, because one of the major logics presented by ERP vendors, consulting companies and IT analysts was that ERP systems would reduce IT costs.
The Growth of SaaS ERP
Something, which we see as a strong future growth trend, is SaaS ERP. Consulting companies and non-SaaS software vendors have been proposing that SaaS should not happen for “core” applications, however their arguments are simply conveniently connected back to their financial models. SaaS for ERP is bad for them, but it is a good idea for their clients. It’s just that they don’t have SaaS applications to sell. Because they have no SaaS applications, to sell, their advice to customers is to only use SaaS for “non core” software like CRM.
SaaS ERP should begin at the smaller end of the company size spectrum and move its way up. SaaS solutions are particularly attractive for smaller companies and even for midsized companies that have under performing tier 2 ERP applications. There are several very good alternatives. One of our favorites being ERPNext. These systems are easy for both experienced and novices to use because the business process is clearly explained right in the application.
Software Category Summary
The complete story on ERP is quite clear, it is simply not communicated to buyers because it’s more profitable to promote big ERP, rather than communicating accurate information on the topic. ERP systems never provided much of an ROI to buyers, and our research provides a logic for why when accounted for correctly, the ROI for most ERP systems has actually been negative. This research cannot be presented in a few paragraphs, but is presented in its complete form in the SCM Focus Press book, The Real Story Behind ERP: Separating Fact from Fiction. However, buyers don’t have to accept negative ROI ERP implementations, and the best way to control for this is to select better and less expensive ERP systems, which have better functionality, can be implemented more quickly, and are not so difficult to integrate to other systems that they create negative externalities on the overall solution architecture. There are several good applications to choose from that meet all of these criteria.
MUFI Rating & Risk
See the MUFI Ratings & Risk below for all of the applications we cover.