The issue of whether or not to adopt an organization-wide ERP system remains a tricky question for growing businesses—and for good reason. According to Manufacturing Business Technology Magazine, 75 percent of ERP implementation projects end in failure, while 74 percent run over budget.
With outcomes like these, business owners and decision-makers likely find themselves wondering, “Why is ERP so important?” and “Is it worth the risk and cost?”
In this article, our aim is to help your business approach enterprise resource planning assessment from a position of knowledge. To that end, we cover the following sections:
- The advantages of ERP
- The disadvantages of ERP
- ERP cost considerations
- Who uses ERP
- How to decide if your business needs and ERP
First, let’s see what benefits can be gained from ERP adoption.
What are the primary business benefits of ERP software?
Enterprise resource planning has been touted as the framework for superior business management. By connecting core business operations like financial management, supply chain management, customer relationship management, human resources, and more, companies hope to bring greater efficiency to processes and improve business outcomes.
The major benefits of ERP systems fall into three categories: the unification of disparate systems, the automation of manual processes, and enhanced reporting capabilities. Learn more about how ERPs work here.
1. Single source of truth
By centralizing disparate systems onto a single platform, businesses can break down data silos and improve cross-department collaboration. Without a single source of truth, employees can end up working from different datasets, which can increase errors rates and reduce organizational efficiency.
Connected systems that share data have numerous benefits. For example, when a salesperson closes an order via customer relationship management (CRM) program, like Salesforce, they can create an invoice or estimate and fulfill an order in just a few clicks, all working from the same integrated database.
A single source of truth can also help improve data security. By implementing organization-wide access permission rules and multi-factor authentication to access business applications, organizations can better protect sensitive data. They can also monitor suspicious log-ons and system activity through the security features built-in to most ERP systems. With one system to manage, there are fewer entry points for security breaches.
A single source of business data can also help organizations stay on top of regulatory compliance. For example, most ERP systems adhere to Generally Accepted Accounting Principles (GAAP) and consolidate finance records in one place, making IRS tax compliance much easier.
2. Automation of manual processes
Another major benefit of ERP is the automation of manual processes. With connected business applications sharing real-time data in the background, the need for duplicate data entry is eliminated. Plus, with software solutions taking over the heavy lifting of mundane tasks, the propensity for human error is drastically reduced. ERP systems can streamline formerly time-consuming tasks such as inventory cycle counts, sales order processing, invoicing, customer service notifications, and more.
With repetitive tasks turned over to ERP automation, staff will be free to work on value-generating assignments instead of laborious manual processes.
Enhanced analytics and reporting capabilities are an extension of the first two benefits. By leveraging a unified platform to share data across business applications, most ERP vendors offer functionality to automatically generate business intelligence reports that offer a more complete view of the business.
This may include general reports with relevance across industries such as real-time inventory snapshots, profit and loss analyses, and accurate forecasting. In addition, purpose-built ERP software may include industry-specific reporting capabilities like job costing for construction businesses, gross margin by item by retailers, or markup-based pricing for wholesalers and distributors.
Access to this real-time business information and insights helps power better decision-making and enables staff to act more quickly when time is of the essence.
What are the disadvantages of ERP systems?
The advantages are certainly compelling, but as is evident from the percentage ERP implementations that fail, such an undertaking is not without risk. Most enterprise resource planning systems are complex and expensive, and some are designed for global organizations with deep resources.
Depending on the system you choose, successful ERP implementation can be a long and arduous road that requires careful project management. For very large organizations, it may be a months or years-long endeavor that will require disparate systems and stakeholders to harmonize. Part of the roadmap will include building internal consensus among stakeholders around implementation, executing a data cleanse, building a data conversion strategy, a migration plan, and employee training.
Because enterprise resource planning software is generally built to cover a broad range of business processes across industries, it may take a great deal of customization to tailor the solution to specific business needs. This can be a time-consuming task that requires highly skilled personnel. To reduce customizations, seek out an ERP vendor that specializes in your industry.
The complexity and the customizations associated with ERP implementation often means business disruption is difficult to avoid. During the migration period, orders can fall through the cracks and employee errors can result in production oversights or missed sales. Getting existing business processes to work on a new ERP often requires additional IT costs and resources.
How much does an ERP cost?
Whether you’re representing a global enterprise or a mid-sized business that runs three locations—ERP implementation can be costly. Global companies can spend millions of dollars on an ERP, but those figures don’t diminish the many thousands of dollars that growing businesses will need to shell out to buy a tailored system. When it comes to ERP costs, you’ll need to account for the following expenses:
- Software licenses
- Customization and implementation
- Employee training
- IT consultants or new IT staff
- Hardware purchase
Typically implementation costs 1.5 to 2.5 times the cost of ERP software itself, with figures upwards of $150,000 for growing or maturing companies.
Who uses ERP?
ERP solutions are generally sought out by businesses experiencing sustained growth. These businesses are ready to embrace a long-term plan to digitize processes, and they have the resources to see this plan to fruition while absorbing potential setbacks along the way. Companies of all sizes and industries use ERP—purpose-built solutions exist for:
- Construction contractors
- Wholesalers and distributors
- Professional services
- And more
Because ERP systems have business process modules that correspond to almost every job function, employees of every department may find themselves using the solution including finance and accounting, customer service, sales, procurement planning, etc.
How to decide if your business is ready for ERP implementation
ERP implementation comes with equal potential for business risk and reward. It’s a costly and time-intensive undertaking that should not be taken lightly. Before deciding if your business is ready to use ERP, ask yourself these questions:
- Are our current systems no longer delivering the expected business results or customer outcomes?
- Are key business functions siloed off from each other, causing reduced productivity?
- Can we upgrade or build on our current system to achieve desired business results without undertaking a complete system overhaul?
- What resources would be required for a successful ERP implementation? Do we have them?
- What are the potential downsides to ERP implementation? Could the business rebound from them?
Keep in mind that changing the way you do business isn’t worth it if it ends up damaging your reputation, company culture, or increasing employee turnover.
Finding a best-fit solution
In today’s business environment, pursuing more efficient operations and cost savings is a common goal. Multinationals with complex operations are well-positioned to pursue these goals through an equally complex ERP system—they also have the resources to recover if the project doesn’t go as planned.
Companies without the resources of multinationals can look to ERP alternatives that offer end-to-end functionality without the upfront cost and complexity of ERP implementation. With an intuitive accounting and business management solution, your company can scale with add-on functionality that grows with your business.
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