An ERP system is the heartbeat of key company processes and the pathway for the flow of information to the people who need it. It can be a daunting task for any company to rip out and replace this vital tool or to install one for the first time. Although you may be forced to take this step for a variety of reasons, it is a significant undertaking for a team that is already fully engaged in running your business. The solution that you select and implement will likely be a 10 -year commitment with little room to correct mistakes down the road. It is a marriage of sorts with the ERP vendor that you choose which means you want to get it right the first time.
Despite its criticality, it is surprising to see how organizations make simple mistakes in addressing fundamental questions before embarking on this commitment. There is no doubt that due to its complexity, every ERP implementation will face glitches and some unpredicted delays. There are just too many variables to expect an ERP implementation to go flawlessly. Having said that, most risks that materially impact your project success can be mitigated through upfront planning, excellent negotiations and contracting, clear focus on key business objectives, and solid project management and executive oversight.
Our experience tells us that there are five key factors that you need to keep in mind when tasked with selecting and implementing an ERP system:
- What do you need and why do you need it?
Perhaps one of the most common mistakes that we see in our practice is that companies engage in discussions prematurely with software vendors. This leads them down all sorts of unnecessary paths without understanding what they really want or need. Once there is a perception of a need, phone calls to software vendors begin and before they know it, demos and proposals are flying without a clear understanding of the end game. Before you talk to people outside your company, talk to those inside your company. Find out what problem you are trying to solve or what capability you are trying to enhance. Gauge your readiness and make sure that you have first mapped out the business processes before you begin evaluating ERP packages. You may even find that you do not need a new system after you reengineer your business processes and take advantage of the capabilities your current system provides. Once you have confirmed internally that there is compelling need to move forward, that is when you begin exploring options externally.
- Are you choosing the right software?
Go back to the business needs that you outlined in the first step and decide where you need critical functionality from your ERP solution to support your business. Most packages will do a good job on covering the basic needs in finance, operations, purchasing, resource management, etc. but what might differentiate solutions is the ability to meet your more unique needs. Ideally, the functionality will be built into the solution you choose out of the box or through simple configurations. Unless there is compelling business case, try to avoid customization because that will saddle your organization with costs and complexity throughout the life of the solution.
As you narrow the field to a few software vendors that have the capabilities you are looking for, be sure you begin negotiating pricing and terms early in the process and before you are past the point of no return. Do not be enticed by aggressive discount levels and quarter-end pressures. Exercising patience and introducing competition will get you much more value than succumbing to high pressure sales tactics. Also, be cautious of the contract terms and conditions as there are many critical points that you can negotiate to increase value and obtain flexibility as business conditions change. There is no doubt that your plans will change in a significant way during your ERP’s lifecycle and well negotiated contractual terms can go a long way to preserving value.
- Is the System Integrator (SI) the right fit for your ERP?
For complex, customized ERP engagements, money spent on an SI for implementation can be substantially higher than the purchase price of the software itself. Of course, with less customization and through the use of cloud ERPs, your implementation cost will be reduced. In almost every implementation, schedule delays and scope changes are a fact of life. The key is how you identify, quantify, rationalize, and approve or disapprove these changes. It is important for you to have knowledgeable personnel who also have the bandwidth to manage the activities of the SI. The SI is an important resource, but you should not assume that you can rely on them to do everything. You must keep the SI and your organization focused on why you decided to purchase or upgrade your ERP package and what problem you are trying to solve. Work with an SI that not only knows the ERP software that you have chosen but one that also has a successful track record in dealing with the specific business issues that you have identified as critical.
The Statement of Work (SOW) that you sign with an SI also has a significant impact on cost and on the behaviors that you are trying to encourage or discourage. A robust SOW should clearly outline scope, deliverables, key milestones with payment tied to those milestones, acceptance/rejection criteria, well-defined roles and responsibilities, selection and retention of key personnel, a transparent cost structure, and a change order framework that is mutually understood and agreed to by you and your SI.
- Are you getting a good deal?
Depending on how well you run the sourcing and evaluation process for your ERP selection, you can either pay a premium, pay market pricing, or get what we call an “extreme deal” at Symphony. Research shows that a hasty sourcing process can cause you to pay more than 2X market price. But even market price is what we consider to be a premium. Properly negotiated and structured, a professional who has familiarity with pricing structures can help secure deeper discounts based on benchmarks that are relevant to your business and your industry. Also, a good deal – or in this case an extreme deal – is not limited to just getting a higher percentage discount. It is based on your total cost of ownership over the lifecycle of the ERP platform, including maintenance and support, not to mention contract terms and definitions that represent a significant portion of the non-price value you will receive.
- Have you identified and mitigated risks?
As stated previously, no ERP implementation goes flawlessly. It is simply a question of how much risk is reasonable, what mitigation steps you take, and what contingency plans you put in place. For example, we are aware of one company that made a cold-turkey transition from their old ERP system to the new one, with insufficient testing and weak contingency plans. During a weekend, the company turned off one system and turned on the other, assuming that all data had been properly migrated and that the company could now run on its new ERP system. On Monday morning, the system crashed and with no access to data, the company had to delay its financial reporting by over two weeks. The stock was impacted and people were fired. Simply stated, when you do not have a Plan B, you are gambling with your company.
Assessing risk and taking mitigation steps are not activities that you do once at the beginning of the project and call it a day. It is an on-going process and a critical part of project management. Risks evolve during the various phases of your ERP selection and implementation process and as such the plan needs to be constantly refreshed as new information emerges. This should be one of the main deliverables of the ERP project manager whom, by the way, should be laser focused on the project success and not distracted by day to day operational activity.
Summary
An ERP system is the backbone of your company. Before you jump into a new solution, it is important to know what problems you are trying to solve and/or what capabilities you are looking to enhance. There is a lot of analysis and due diligence that goes into selecting the right ERP software and SI, getting the best deal, and mitigating risk through robust project management. Given the impact, it is prudent to invest the time and resources necessary to get good results and to avoid common mistakes.
Helping small and mid-size companies address the issues above is part of our firm’s service offerings. If you think we can be of assistance, please feel free to contact us at info@symphonyconsult.com.