- The history of ERP systems is normally misrepresented by those with software to services to sell.
- Find out the real story around ERP history.
I find it amazing that there is so little information about the history of ERP, other than a few short articles on the Internet and the paper ERP: A Short History, by F. Robert Jacobs and F.C. Weston Jr. in 2007 in the Journal of Operations Management. It is curious, but I can come to no other conclusion than this: very rarely have ERP systems been put under the microscope.
See our references for this article and related articles at this link.
The articles on ERP tend to accept all of the initially proposed benefits of ERP as if they were true, and almost all of the materials written about ERP systems since ERP systems were first introduced (outside of academic materials) have been promotional in nature. The articles have not demonstrated historical knowledge and certainly are not scientific in their orientation (that is, based on evidence and/or testing). Book after book, and article after article, promote ERP and provide advice about improving ERP implementations—yet never do the authors question the benefits of ERP. The influence of ERP has been so great and has so strongly impacted the structure of the enterprise software market (in addition to impacting the decisions that are made by companies outside decisions about ERP itself), that ERP as a topic really deserves a comprehensive written history. What follows is not that comprehensive history by any means, but enough of a background to support the analysis presented in the following chapters.
What is ERP?
Conceptually, ERP is a combined set of modules that share a database and user interface, and that supports multiple functions used by different business units.10 Because the ERP modules use a single database, employees in different divisions (e.g., accounting and sales) can rely on the same information for their specific needs and without any time lag. ERP covers what is sometimes considered a company’s “core” business processes. These processes are mirrored in the four basic modules of SAP’s ERP system:
- Sales and Distribution
- Materials Management
- Production Planning
- Financial and Controlling
ERP Gets its Start A bill of materials (BOM) is the listing of components and subcomponents that make up a finished good. The first enterprise system in which the BOM was encapsulated was the material requirements planning system or MRP system for short. Major MRP functionality is shown in the following graphic.
MRP Versus ERP
I will use the term “MRP” a number of times in this book, and you may notice that MRP sounds very similar to the term “ERP.” This is not a coincidence; ERP is actually based upon the term MRP, although, as we will see, it is not a particularly descriptive term for what ERP actually does. MRP software predated ERP software by more than a decade, with MRP systems beginning to be implemented in the mid-1970s and ERP systems beginning to be implemented in the mid-1980s. At one time, MRP systems were sold as standalone systems, and there were around thirty competitors in the market. Many ERP vendors acquired MRP vendors and began to include this software as part of a broader integrated offering.
In its earliest incarnation, ERP software was known as “business systems” software. Prior to the change in terminology, vendors of business systems were simply growing the footprint of their applications; it was actually the IT analyst firm Gartner that began referring to these systems like Enterprise Resource Planning, or ERP. However, as previously stated, in time, the MRP software vendors became subsumed within ERP suites primarily through mergers and acquisitions.
“In the early 1980s, MRP expanded from a material planning and control system to a company-wide system capable of planning and controlling virtually all of the fi rm’s resources. This expanded approach was so fundamentally different from the original concept of MRP that Wight (1984) coined the term MRP II, which refers to manufacturing resource planning. A major purpose of MRP II is to integrate primary functions (i.e., production, marketing and fi nance) and other functions such as personnel, engineering, and purchasing into the planning process. “A key difference between MRP II and ERP is that while MRP II has traditionally focused on the planning and scheduling of internal resources, ERP strives to plan and schedule supplier resources as well, based on the dynamic customer demands and schedules.” — Planning for ERP Systems: Analysis and Future Trend
The dates in the above chart are estimates of when these technologies became broadly used, not when they were first developed. MRP is a method of performing supply and production planning.
The Simplicity of MRP
MRP is quite simple and requires nothing more than elementary arithmetic to perform its functions.12 The software processing requirements are quite low. For instance, while a supply and production planning problem will take hours to run using more advanced methods, MRP can be run for the entire supply network in just a few minutes. Even two decades after the rise of advanced supply chain planning software, MRP is still the dominant procedure/method used in companies around the world for supply and demand planning. MRP is also run in external supply chain planning applications; however, the vast majority of MRP planning runs that are performed today are performed in ERP systems. Let us look at two graphics that succinctly explain how MRP works.
For procured items, MRP converts forecasts and sales orders into purchase orders and production orders with the right dates so material can be brought in on time to support demand. Additionally, the purchase orders and production orders are batched (that is, they are not necessarily in the same quantities as the sales orders) in order to meet order minimums and to create economic order quantities.
Both MRP for procured items and MRP for manufactured items are inbound methods. There is also a method for outbound planning, which is called DRP (distribution requirements planning. I won’t get into DRP here, but I do explain the history of it in the article The History of MRP and DRP.
The Focus of ERP Systems
The relationship between MRP and ERP systems that I have described up to this point could easily lead one to believe that ERP systems were first designed to meet the needs of supply chain management. However, the opposite is true. In fact, ERP systems were actually designed first to meet the needs of finance and sales, and to a lesser degree, manufacturing and supply chain management. When one compares the functionality depth in the SAP ERP modules of Sales and Distribution (SD), Material Management (MM), Production Planning (PP), and Finance and Controlling (FI/CO), FI/CO has by far the greatest depth in functionality.
The major selling point of ERP systems was not that these systems provided particularly good functionality in any operational area. In actuality, they provided very basic functionality in all areas (I will address the notion of best practices in Chapter 4: “The Best Practice Logic for ERP”), but anything that occurred in operations was immediately reflected on the accounting side because all of the applications shared the same database. It was an argument tailor-made for executives: they would never have to deal with the functional limitations of ERP systems personally. That is the common issue when the individuals who buy items are different from the individuals who use the item. Anyone who has had to use a centrally purchased corporate laptop should have no problem understanding this.
However, as we will see further on, companies eventually paid for accepting the assumption that functionality did not really matter all that much, as long as all the applications were integrated.
Why Are ERP Systems Called ERP?
The first system that is recognized to be ERP was an enlargement of an MRP system. This was the IBM MMAS system. However, in an interesting historical turn of events, IBM never became a major player in the ERP space even though they had the first ERP system.
“In 1975 IBM offered its Manufacturing Management and Account System (MMAS) which Bill Robinson from IBM considers a true precursor to ERP. It created general ledger postings and job costing plus forecasting updates emanating from both inventory and production transactions and could generate manufacturing orders from customer orders using either a standard bill of material or a bill of material attached to the customer order.” — ERP: A Short History Gartner is credited with naming ERP systems.
The term “ERP”—Enterprise Resource Planning—was adopted from the term “material requirements planning” (MRP) or “manufacturing requirements planning” by simply replacing the “M” with an “E.” 14 This was done because, in addition to containing the MRP supply and production planning method, ERP systems also contained sales, financial accounting, and materials management functionality. Gartner found itself analyzing what appeared to be a new software category, and they needed a way to broaden out the terminology in a way that was more descriptive than “business systems.” Additions to the MRP functionality made the application include more than just material or manufacturing, and expanded it to the entire “enterprise.”
ERP Begins Its Life with an Illogical Name
I was unable to find whom at Gartner actually named ERP. The term, although wildly successful, unfortunately, is also inaccurate. Naming ERP systems after MRP made little sense because MRP is just one small component of what ERP does. Furthermore, ERP systems have little in the way of actual planning functionality, and instead, are transaction processing systems. They are designed to do things like accept sales orders, create purchase requisitions and convert them to purchase orders, and then connect every transaction to the financial module. If anything, ERP systems were and continue to be the exact opposite of planning. ERP systems are generally known as “execution” systems. This is one reason why companies, after completing their ERP implementations, connected external supply chain planning applications to ERP to replace ERP’s limited planning functionality. On the finance side, “planning” is not performed in the ERP system. Instead, the data is exported to a flat file and opened in a spreadsheet or exported to a reporting application. Regardless of the area in which the analysis is performed, the best way to actually perform planning is to export the data from the ERP system. In reality, ERP systems just tell companies what already happened, for use in planning for the future.
Companies found that planning was only the beginning of ERP’s limitations. ERP is now well known for many limitations in its ability to present analytical data to customers. The shortcomings of ERP in this regard are a strong precursor to the growth of the separate business intelligence market, a market that was not supposed to have developed if the original projections by proponents of ERP had come true—that all reporting would be done within the ERP system. What was once known as “reporting” was renamed “business intelligence” to make it sound more appealing and leading edge. After all, “reporting” is boring…but “business intelligence” is leading edge. Business intelligence requires data to be extracted from ERP systems and placed into business intelligence repositories and performs the reporting from these off-line repositories.16 This point is reinforced by the following quotation from Craig Sullivan of NetSuite, a vendor of SaaS ERP and other things.
“Stone-Age ERP was designed when businesses were top-heavy in general administration—when it was standard practice to have someone assigned to rekeying purchase orders or time and expense entries. Today, any unnecessary bureaucracy just wastes time that could be better spent elsewhere.”
Most ERP systems have not evolved past their humble roots, and to the disappointment of many companies that own ERP systems, many ERP systems have essentially stabilized. Stabilization is a development term that means only minimal improvements are being made to the system, as explained in the following quotation.
“Our point is that current ERP technology provides an informationrich environment that is ripe for very intelligent planning and execution logic, yet little has changed since the late 1970s in the logic associated with such applications as forecasting, reorder point logic, MRP, production scheduling, etc. The current systems are now just executing the old logic much faster and in real-time. The area is ripe for innovative new approaches to these old problems. This may include partnering with our business counterparts who live in this dynamic environment on a day-to-day basis.” — ERP: A Short History
The Reality of ERP
“The preponderance of corporate pain lurking throughout the lifespan of a traditional on-premise ERP suite is unequivocal. To wit: ERP projects have only a 7 percent chance of coming in on time, most certainly will cost more than estimated, and very likely will deliver very unsatisfying results. In addition, today’s enterprise has little better than a 50 percent chance that users will want to and actually use the application. Poor application design just adds to the turmoil. In sum, ‘ERP success’ has become a very subjective metric.” — Why ERP Is Still So Hard
What is ERP Implementation History?
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 quotation below 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
Stupidity Disguised as Consulting Advice
One of the ridiculous arguments I’ve heard is that 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 a ludicrous analogy, which, as far as I am aware, is unique in the field of enterprise software where ease of implementation—rather than the difficulty of implementation—is 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 one of the few times that a high failure rate is presented as a positive attribute of a software category.
One can imagine airport advertisements like this, which focus on ERP’s character-building qualities rather than on its negligible benefits. What is interesting about the problematic implementation record of ERP is that it never seemed to quell the insatiable desire of companies to continue to implement ERP systems. Nothing should ever be accepted as a course of action because “it is hard.” If difficulty irrespective of a beneficial outcome is being promoted, then some type of scam is at play.
This is the main takeaway: ERP was so quickly established as a mandatory application suite that not even gruesome stories of ERP failures and cost overruns could mitigate the desire for ERP implementations.
What is the Satisfaction Level with ERP Systems?
Discussed much less frequently is how effective ERP systems are in helping companies achieve their objectives after the systems are live. It turns out that the satisfaction level with ERP systems is low.
“Pretty much no one is really satisfied with the state of their ERP. Only 23 percent of users would recommend their ERP system to another enterprise. The truth is that ERP has been placed on the backburner because of the recession and manufacturers have suffered because of it.” — Old and Bad All Over Manufacturing
My research into ERP continually reinforced a central concept: very rarely does ERP impress the companies where it is installed. Who really promotes ERP systems as good? This is exclusively the province of ERP vendors and consulting firms. With customers, ERP tends to be discussed in terms of being a rite of passage.
- ERP is also commonly referred to as a “standard.”
- But the adjective “good” does not seem to surface much in discussions about ERP systems.
Of the ERP systems that I have worked with—and these systems are the more popular systems—I would say that none of them have impressed me. Furthermore, multiple aspects of the ERP system displease companies; common complaints include the following:
- Stagnant Applications: There is a perceived lack of innovation on the part of ERP vendors. It is increasingly apparent that many ERP vendors are funneling their support revenues into other applications, leaving their existing ERP customers with dated applications.
- Costs: ERP buyers frequently mention the high costs of upgrades and support.
- ERP Inflexibility: The inability of ERP systems to be adjusted is a constant constraint that companies must work within.
- Missing Required Functionality: The inability of ERP to meet a company’s business requirements, which leads to the following point.
- Customization: There is a constant need to customize the ERP system, leading to another complaint: the expense to upgrade ERP systems. In a properly functioning media system, these types of issues would be the topic of more articles and better explained.
The Obvious Question
Software buyers should ask the following obvious question:
If ERP software vendors and consulting companies made all of these projections for how ERP would help companies, at some point shouldn’t an investigation into the actual benefits of the software category be performed, particularly when it is the largest enterprise software category? Whose interests do the IT media support: the software vendors or the buyers? The IT media was instrumental in building up demand for ERP software and in serving as an echo chamber for software vendors and IT consultancies.
ERP and Account Control
The history papers that I reviewed for this book left out the fact that ERP was yet another attempt (and one of the most successful attempts by software vendors in the enterprise software space) to take control of clients. Each vendor replaced many of their client’s applications with ERP and then used their leverage as the ERP provider to sell more applications to these semi-captive companies. Mediocre systems were justified on the basis that they were at least integrated and that having poor functionality in an integrated system was better than a nonintegrated system that provided the business with the functionality they needed to get their job done. ERP had a second impact in that several vendors became extremely well-positioned to sell other types of software.
The Outcome of the ERP Boom
Two of the most powerful vendors were created through the ERP boom. One was SAP, which is the most successful ERP company and which parlayed this success into other enterprise software areas. Currently, SAP stands as the largest enterprise software vendor in the world, and the second is Oracle, which extended its reach from the database into the application software realm with ERP software. From their dominant position in ERP, these vendors acquired a number of software companies that were effective at growing the company (although usually bad for the acquired software itself, as well as for the customers).
SAP and Oracle have ridden the “ERP wave” and owe much of their current central position with customers to their role as the provider of the customers’ ERP system. Both companies are “Peter Principled” control enormous faceless conglomerates that neither company has the competence to manage intelligently, and serve as liabilities for all of their customers. SAP and Oracle are followed by companies like Infor and Epicor, and other ERP vendors whose primary organizational goals are to match the account control enjoyed by the ERP market leaders.
How to Understand ERP as The F-22 of Enterprise Software
The F-22/F-35 fighter program is a massive waste of taxpayer dollars that can’t be stopped because of Lockheed Martin’s lobbying.
ERP systems have a great deal in common with the F-22/F-35 program.
In the book The Real Story Behind ERP: Separating Fiction from Reality, I explained something that no major IT consulting company or ERP vendor would want to get out. That is that the consensus of all the academic studies into ERP shows that ERP systems do not show a positive ROI.
However, particularly for ERP systems from the largest vendors, ERP systems have shown an even more nefarious outcome than simply having no ROI themselves. This is that the ERP system is used by the software vendors and the consulting companies to direct IT purchases into other inefficient areas as well.
Understanding the F-22
The F-22 fighter is a long-running exorbitantly expensive initiative to develop the next-generation fighter for three branches of the US military, which began all the way back in 1991.
- Twenty-seven years later, the F22 costs roughly $68,000 per flight hour.
- The F-22, while having been featured in movies, has barely taken part in any military action. The F-22 is a stealth aircraft, but for a publicity stunt, it has been used occasionally to bomb Afghanistan — a country without radar.
- The F-22 has a massive logistics tail and unending reliability problems.
However, the proposal was that all of this would work out because it would go into the F-35. As explained in the video below, this was always a deception developed by those trying to keep the program alive.
As the video above explains, the fact that the F-35 is of little use, but its continued purchase cannot be stopped.
Lockheed Martin, as with ERP vendors, issues simplistic platitudes to support the F-22 and now F-35. One is that the planes provide jobs, but of course, any plane produced would also provide jobs. Therefore it need not be a bad plane. Second, Lockheed Martin has conflated support for the F-22 and F-35 with patriotism. Good patriots who love America want to get ripped off by Lockheed Martin and field the most wasteful fighter jet ever produced in the history of humankind. Americans who want a better value are unpatriotic and may not love America sufficiently.
ERP vendors, and their partners in crime, large consulting companies follow similar approaches in establishing ERP systems as the only option. “Everyone agrees” that ERP systems are necessary and are the “digital core” (as proposed by SAP). And something that all the people who agree with this have in common is that a) they sell or otherwise financially benefit from ERP systems, or b) they have never analyzed the issue in a sufficient level of detail to develop an informed viewpoint on the topic.
Quotes from Scientific America on the F35
Like ERP, the F22/F35 has been relentlessly pitched by those that either make ERP or make money off ERP using exaggerated claims. With respect to the F22/F35, this is explained in the following quotes.
“The company building the F-35 has made grand claims. Lockheed Martin said the plane would be far better than current aircraft – “four times more effective” in air-to-air combat, “eight times more effective” in air-to-ground combat and “three times more effective” in recognizing and suppressing an enemy’s air defenses. It would, in fact, be “second only to the F-22 in air superiority.” In addition, the F-35 was to have better range and require less logistics support than current military aircraft. The Pentagon is still calling the F-35 “the most affordable, lethal, supportable, and survivable aircraft ever to be used.”
But that’s not how the plane has turned out. In January 2015, mock combat testing pitted the F-35 against an F-16, one of the fighters it is slated to replace. The F-35A was flown “clean” with empty weapon bays and without any drag-inducing and heavy externally mounted weapons or fuel tanks. The F-16D, a heavier and somewhat less capable training version of the mainstay F-16C, was further encumbered with two 370-gallon external wing-mounted fuel tanks.
In spite of its significant advantages, the F-35A’s test pilot noted that the F-35A was less maneuverable and markedly inferior to the F-16D in a visual-range dogfight.
Lockheed Martin and the Pentagon say the F-35’s superiority over its rivals lies in its ability to remain undetected, giving it “first look, first shot, first kill.” Hugh Harkins, a highly respected author on military combat aircraft, called that claim “a marketing and publicity gimmick” in his book on Russia’s Sukhoi Su-35S, a potential opponent of the F-35. He also wrote, “In real terms an aircraft in the class of the F-35 cannot compete with the Su-35S for out and out performance such as speed, climb, altitude, and maneuverability.”
Other critics have been even harsher. Pierre Sprey, a cofounding member of the so-called “fighter mafia” at the Pentagon and a co-designer of the F-16, calls the F-35 an “inherently a terrible airplane” that is the product of “an exceptionally dumb piece of Air Force PR spin.” He has said the F-35 would likely lose a close-in combat encounter to a well-flown MiG-21, a 1950s Soviet fighter design. Robert Dorr, an Air Force veteran, career diplomat and military air combat historian, wrote in his book “Air Power Abandoned,” “The F-35 demonstrates repeatedly that it can’t live up to promises made for it. … It’s that bad.” – Scientific America
Continuing the Undending Fiasco that is the F-22 and F-35
ERP is eerily similar to the F-22 and F-35 not only in the inability to meet exaggerated claims but in how it has created a great number of financially biased entities that support it. For the F-35, the proponents of the fighter are the politicians in the various states. The customer is the normal US citizen (ostensibly who is purchasing defense), i.e., the taxpayer. However, the decision-maker is different than the taxpayer. The politician is far more focused on their political career than defense overall. Many years after the JSF was conceived, and with the development of drones (which often run around $5,000 per flight hour), there are many who question whether the F-35 has any reason for existing. But this does not matter to the US politicians that seek to direct revenues to their states.
Lockheed Martin need only make payments to the right politicians and then set up the F-35 so that most US states receive income from the F-35 (right now 46 out of 50 states do).
This is enough to have the F-35 continue to be purchased, regardless of whether it is a good fighter or a good value for US taxpayers.
The video uses the term “political engineering” to describe how Lockheed Martin continues to receive funding for the F-35.
The Political Engineering of ERP
ERP has its own proponents. While ERP is a poor value for most companies that have implemented ERP (as explained in the book The Real Story Behind ERP: Separating Fiction from Reality), ERP is very good for the largest consulting companies. These consulting companies are very high in recommending ERP systems. Normally ERP systems from the largest vendors like Oracle and SAP, but especially SAP.
The lesson from the history of enterprise software history is that consulting companies don’t much care what the right software for their clients to purchase and implement is. They are in it to maximize their own billing hours. Therefore, they will recommend the software categories and the vendors within each category that maximizes their revenues. The longer your software takes to implement, and the worse value the software is for the end customer, the more the large consulting companies will sing your praises!
The clients of consulting companies don’t seem to recognize that nearly all of the consulting company’s “recommendations” are determined by working backward from self-interest.
In the Vox video, it states.
“Despite deep design flaws and constant problems, there have been no serious efforts to cancel or scale back the project.”
This quotation was referring to the F-35, but it applies equally to ERP systems. Once in place, ERP systems take on a life of their own.
Lack of Oversight
ERP systems are typically implemented by large corrupt consulting firms. They do not allow any independent entity into the company to evaluate the process. If a client asks for this, the consulting firm will state that
“They already do that.”
ERP implementations are normally so filled with waste that they have similarities with a US defense contract, which also has very little oversight and enormous cost overruns as a normal course of business. This reduction in oversight in the US defense contracting is described in the following quotation from a comment on an article in the blog BIG by Matt Stoller.
Lockheed did let me have as much time in the F35 plant as I wanted. And, I had free reign to talk to anyone. I was totally appalled by what I saw. It was clear that the rate of production promised would not be accomplished with the plant as designed.
Even more disturbing was that there was complete lack of DoD oversight – none. There were no DoD engineers in the plant. Back in the Pentagon I asked to meet with the procurement people who were in charge of DoD industrial policy.
There had been such a thing during the time when DoD did not take 35 years to produce an AC that still does not meet it design objectives and did not cause pilots to pass out – the F35. I was told that the lack of an industrial policy is an industrial policy. Around that time the administration changed from Bush to Obama and the situation only got worse. I let it go and continued my job while continuing to see the inside. – BIG
Pushing Customers to Reinvest in Low or Negative ROI ERP Systems
ERP vendors continually reinforce investing more back into the ERP system. This can take the form of unnecessary upgrades. Increasing support costs, customization, remediation, etc..
The Example of S/4HANA
For the past three years, SAP has been telling a wide variety of lies about S/4HANA in order to…you guessed it, get companies to redirect even more money into ERP, even though companies that do this will have little hope of getting this investment back. S/4HANA is an amazingly brazen example of how many ERP vendors harvest their accounts in that SAP’s demand that customers pay for what is merely an upgrade to ECC and should be covered by SAP’s 22%+ yearly software support fee. (we covered this topic in the article Why S/4HANA Should be Free). SAP does not worry about their claims about R/2, R/3 and ECC not coming true, they have simply pushed the claims forward to S/4HANA.
For example, SAP has stated that running MRP and end of period close is really horribly problematic in ECC, and therefore companies should move to S/4HANA. However, curiously, when SAP was selling companies on moving to ECC, they did not, at the time, point out how horribly ECC was in these two processes.
Statements made by both SAP and other ERP vendors win our Golden Pinocchio award. The intent is to make it seem as if everything the ERP vendors offers is “naturally integrated,” and that other vendor that connects to their ERP do not also use adapters.
How ERP Vendors Overstate the Integration Argument
ERP vendors use their relationships with customers to push their customers to purchase other non-ERP software that they offer, arguing that while it may not be competitive in its own right, at least it is “integrated” back to the ERP system. This argument dilutes the most important aspects of the software that should drive any software purchase, which is the quality of the software, combined with how well that software matches the business requirements of the customer. It is also misleading because ERP vendors use an adapter to connect their non-ERP to ERP systems, in the same way that non-ERP vendors do.
This results in large amounts of mediocre or worse software that has been acquired by ERP vendors, only being selected because it happens to be owned by the ERP vendors. Not because it is good software, and not because it meets the business requirements. Therefore the ERP system cannot be looked at in isolation from its impact on the rest of the company’s IT landscape. While, as was pointed out already, the studies point very clearly to ERP systems not having an ROI, ERP systems also reduce the ROI of the other systems that a company purchases. This is accomplished through the way that ERP redirects purchases away from competitive applications to the applications that the ERP vendor happens to have in their stable.
When taken as a whole, this means that it is the case the ERP has a substantially negative ROI when this larger effect is taken into account. These types of analyses are not done in the industry. The assumption is that ERP has a positive ROI. A positive ROI that has never been proven. Therefore the analysis of the impact of ERP on the ROI of related applications is beyond the industry’s ability to process or even analyze properly.
The IT organizations within companies that are often more interested in keeping the number of software vendors to a minimum push for what is most cases the worst software for the business inside of their companies to use, so they can both deal with fewer vendors. Another prime motivator is so the IT decision-maker can show their allegiance to specific vendors to which they frequently have more loyalty than to the company they receive their paychecks.
Maintaining a Portfolio of Applications that are Not the Expertise of the ERP Vendor
This has caused ERP vendors to maintain broad portfolios of applications that normally are not adept at maintaining. That means acquiring applications that they have no business acquiring. SAP is an excellent example of this. SAP has really only ever demonstrated competency in ERP, yet they maintain a broad portfolio of bad applications that have nothing to do with ERP. Applications that get acquired by ERP vendors to “broaden the portfolio” become less prominent over time.
Driving Industry Consolidation
ERP vendors have, in many cases, acquired other non-ERP applications, specifically, so they could force these non-ERP applications into their accounts. And thus, ERP has been a force of consolidation in the enterprise software market, making the overall market less competitive.
Along with the consulting companies, many directors and VPs of IT have an incentive to keep up the high investments into ERP for career reasons, which means that ERP continues to soak up resources, further decreasing its ROI from neutral to negative, to steeply negative.
Conceptually, ERP is a combined set of modules that share a database and user interface, and which supports multiple functions used by different business units. Because the ERP modules share a single database, employees in different divisions—for example, accounting and sales—can rely on the same information for their specific needs without any time lag. A major selling point of ERP systems was not that they provided particularly good functionality in any operational area. In actuality, they provided very basic functionality in all areas, but, because the applications shared the same database, anything that occurred in operations was immediately reflected on the accounting side. It was an argument tailor-made for executives who would never have to deal with the functionality limitations of ERP systems personally.
Gartner is credited with naming ERP systems. The term ERP (Enterprise Resource Planning) was adopted from the term “material requirements planning” (MRP) or “manufacturing requirements planning” by simply removing the “M” and replacing it with an “E.” This was done because, while ERP systems contained the MRP supply and production planning method, they also contained sales, financial accounting, and materials management functionality. Companies found that planning was only the beginning of ERP’s limitations. ERP is now well known for many limitations in its ability to present analytical data to customers. The shortcomings of ERP in this regard are a strong precursor to the growth of the separate business intelligence market, a market that was not supposed to have developed if all reporting was done within the ERP system as had been originally projected by proponents of ERP. My research into ERP continually reinforced a central concept that ERP rarely impresses the companies where it is installed. Instead, ERP tends to be discussed as a rite of passage.
Although there is an enormous influence of ERP systems on information technology, remarkably little has been written on the history of ERP. This is for good reason. If history were known, many ERP systems would be reduced in investment, and the reputation of ERP vendors would be irreparably damaged. ERP vendors, the compliant ERP consulting firms, and the paid off IT media and IT analysts make sure that the history stays hidden.
Options for ERP
ERP proponents like to present the idea that there are not options for ERP. In fact, they go a step further. They state that there aren’t real alternatives to whatever ERP they happen to have resources they can bill for. Then after they buy ERP, they tell their customers they don’t have options outside of buying applications from the same vendor that made the ERP system. Consulting companies are very good at leading companies down a restricted number of options, all of which end up benefiting the consulting company itself.
Here is the truth, there are a large number of options to ERP systems, and furthermore, to how any ERP system is used. Here are just a few alternatives — without getting into any specific vendor offerings.
- A commercial ERP system can be purchased, but large areas of it unused, and combined with better external functionality.
- A commercial ERP system can be purchased, but large areas of it unused and connected to custom functionality/custom applications rather than porting the code to the ERP system (that is not recoding everything in say SAP’s ABAP and porting to the SAP system)
- An open-source ERP can be used, and with the large extra pool of money, any number web-based (hosted on AWS or Google Cloud for example) applications can be developed and connected to the ERP system.
- ERP can be dispensed with entirely, and a financial solution can be connected to both specialized applications and custom coded applications.
- ERP can be dispensed with entirely, and a custom-coded solution can be created which covers financials and other and combined with specialized applications.
These are just five options. Any number of permutations are possible from these options. The evidence of decades of ERP projects heading back to the 1980s is clear; no company of any size or complexity will use an ERP system by itself without support from other applications.