Analysis & Commentary:

ERP FUNDAMENTALS
by Adrian Mello

When most people imagine the IT systems of a large enterprise they probably conjure a vision of air-conditioned rooms stuffed with computers busily humming away. But by and large, it's enterprise resource planning (ERP) software that lies at the heart of a large enterprise's computing activity. Although it's tempting to do so, don't pronounce the term as a word that rhymes with "burp;" say each letter: "E-R-P." No matter how you pronounce it, the term doesn't shed much light on what the software actually does. ERP software integrates the information used by an organization's many different functions and departments into a unified computing system. That means that instead of using isolated departmental databases to manage information, such as employee records, customer data, purchase orders, and inventory, everyone in the enterprise relies on the same database. This allows employees in different departments to look at the same information.

Benefits and applications

The unified nature of an ERP system can lead to significant benefits, including fewer errors, improved speed and efficiency, and more complete access to information. With better access to information, employees and managers alike can gain a better understanding of what's going on in the enterprise so they make better business decisions. For example, an ERP system could let buyers in the purchasing department quickly adjust material orders when they see an increase or decrease in customer orders. The result? They'll either ensure that orders are met on a timely basis or save on inventory expenses. Prior to ERP systems, companies stored important business records within many different departments. Each department often used different systems and techniques to manage that information. Information might also be duplicated many times within an organization without necessarily being identical or similarly up-to-date. Some of this information might only have been on paper, making it difficult to access it across the organization. For example, a customer might call sales to inquire about the progress of an important order. Instead of answering the question by quickly referring to a shared database, the sales rep would be forced to track down the order by making multiple calls to the company's manufacturing or shipping departments.

ERP systems originated to serve the information needs of manufacturing companies. Over time, though, they have grown to serve other industries, including health care, financial services, the aerospace industry, and the consumer goods sector. With this growth, ERP systems, which first ran on mainframes before migrating to client/server systems, are now migrating to the Web and include numerous applications. IDC defines an ERP product as one that helps automate a company's business process by employing an integrated user interface, an integrated data set, and an integrated code set. IDC tracks about 100 vendors offering products that meet this definition. Dennis Byron, IDC's vice president of ERP and industry applications research, estimates that there are probably 1,000 companies globally that meet this definition.

When most people refer to the "core" ERP applications or "modules," they mean the back-office capabilities to manage human resources, accounting and finance, manufacturing, and project-management functions. However, major ERP suites from the likes of Oracle, PeopleSoft, and SAP now provide much more -- including modules for sales force automation, business intelligence, customer relationship management, and supply chain management.

ERP's hidden costs

In practice, ERP systems can be difficult to deploy and maintain. ERP packages are complex by nature and IT departments must invariably tailor the software to fit the company's specific requirements and business processes. Installing an ERP system is usually a massive undertaking measured not in months, but in years. Even after the initial deployment, an ERP system must be continually adapted to reflect changes in the business and software upgrades and extensions. Due to their complexity, ERP projects are expensive. Before embarking on an ERP project, it's important to understand the project's total cost of ownership (TCO), which extends far beyond the price of the ERP software. In a survey of 63 companies, Meta Group found that the average TCO was $15 million for ERP when real project costs such as software, staff time, consulting, and hardware were included.

If you want to avoid out-of-control costs and incomplete results, it's essential to understand an ERP system's hidden costs and the major issues involved with implementing a project. Here are several key areas where problems can arise:

Planning and project management

It takes time and effort to properly prepare for an ERP deployment. The company's IT staff and the appropriate business managers must be given the time and clear responsibility to conceive and evaluate the project's scope, costs, and timeline. It's important to assign the planning responsibilities to staff members who not only have a good grasp of the technology, but who also understand the company's business requirements and processes. Also make sure that whoever leads the planning sees the project through -- from the initial deployment to some extended period after deployment to work out the inevitable kinks.

Integration

Companies almost always underestimate the time and cost necessary for enterprise software integration. ERP systems rarely exist in a vacuum and they usually need to be tied into software and complex business processes that predate the ERP system. In addition to software from a primary ERP vendor, the enterprise may also want to use applications provided by other software vendors. For example, a company may want to tie its core ERP suite from SAP into a CRM application from Siebel and global trading management software from Vastera. Mergers and acquisitions also create difficult integration challenges because the merged companies may use different ERP packages and other different applications with which they've already integrated. Dick Kuiper, a vice president with Meta Group, says that a large enterprise typically operates five or more ERP systems and some companies are known to have more than 20 ERP systems.

Dirty data

A number of problems and hidden costs crop up when handling real-world data. When an enterprise converts its legacy systems to ERP, it must convert large amounts of data for use in the new system. Much of the old data is difficult -- if not impossible -- to convert, which means a lot of time and money will be spent re-entering it into the system or putting it through complex conversion processes. Even after a system is fully deployed, you can't take the data for granted because it ages. For instance, every month some of the company's customers, employees, and business partners change their address or other parts of their profile. Gartner Group analyst Beth Eisenfeld estimates that 2 percent of a company's customer data goes bad every month. She recommends an ongoing effort to clean up obsolete data. Finally, when data is combined from multiple systems for analysis or as a result of integration projects, more work can be involved to clean it up and convert it.

Testing

Given the mission-critical nature of a company's ERP system, it should be thoroughly tested before it's fully deployed. Don't just test the system with dummy data. Use actual data from different real-world scenarios. For example, a manufacturing company should pull up historic orders from customers and route the orders through the entire process of creating the product, shipping it, and billing for it. Ideally, employees who actually operate the specific business processes on a day-to-day basis should perform these tests. Of course, all of this costs money, but the investment will significantly reduce other costs that result from the downtime and poor implementations that occur when systems aren't properly tested.

Documentation

ERP systems take a long time to deploy and are used for many years within a company. That means they usually outlast the IT employees and business-process managers who conceptualize, deploy, and modify the systems. Documenting the system is crucial so that future employees can make sense of the software and business-process logic the system encompasses. Documentation is also needed to help future workers deal with the inevitable updates, extensions, and integration projects that occur as a company evolves. In addition, documentation can save consultants time and help them map out the scope of projects properly to improve cost accountability.

Training

One of the biggest mistakes enterprises make is forgetting that employees must adapt to a new ERP system. Employees must be trained on how to operate the system and how to apply it to familiar business tasks such as looking up and entering data, Furthermore, a new ERP system almost always means changes to business processes. That requires change management to teach employees about new business practices and manage staff reorganization. Employees often resent change and resist it when it means they have to let go of established work habits and take up new reporting relationships. Despite all the money a company spends, an ERP deployment can fall flat on its face or simply operate at vastly reduced efficiency if the company fails to adequately train the staff and manage the change effectively. Consulting fees Since few IT departments are staffed to handle the extra work required to implement each phase of a big ERP project, many of the items mentioned earlier require consultants. Without proper management, though, consulting fees can eat through your budget faster than a pack of mice through a chunk of cheese. It's important to make sure that in-house staff is capable of managing consultants. Consulting contracts should carefully define key deliverables, schedules, skill levels of available staff, and objectives for training internal staff. The contract should also be accompanied by a detailed specification that clearly points out the desired business objective and technical requirements. Proper planning and project management (as mentioned earlier) are important for managing consultants and holding them accountable.

The bottom line on ERP Although ERP projects are complex and expensive, properly implemented, they are nonetheless worthwhile. Meta Group found that once fully deployed, the median annual savings from a new ERP system was $1.6 million per year.

But every ERP system must be continually maintained and upgraded to take advantage of new applications, technologies, and features. ERP software is hardly static, and there are major new developments as the software grows to embrace the Internet and as companies open up their data and business processes to partners.

When you realize how much is involved with ERP, you quickly realize that it is this software and the business process it describes -- not the computing hardware -- that lies at the real center corporate information technology.