The true cost of ERP: Expense or business opportunity?

When considering the cost of ERP systems, companies should look at potential ROI to see if an ERP integration or ERP upgrade is worth the expense.

Whether it's replacing an outdated ERP system or focusing on utilizing more of what's already in place, companies are realizing that a well-integrated ERP system can deliver an incredible return on investment. If carried out correctly, ERP serves as a business opportunity for an organization, not merely an expense.

In order to achieve a business edge, companies are increasingly spending more money on their Enterprise Resource Planning (ERP) investments. Research firms such as AMR Research and Gartner are predicting that companies will continue to invest in ERP over the next five years, resulting in an average market growth of 10%. From 2005 to 2006 alone, the ERP market grew from $25.4 billion to nearly $29 billion, according to AMR.

But organizations should not go into an ERP project blindly. Some of the key questions that should be addressed before undertaking any improvement project include:

  • Does the ERP solution support the current business objectives?
  • What tasks will need to be integrated into the ERP system to ensure that management has all of the correct business activities incorporated so the solution runs seamlessly after implementation?
  • Is the ERP system a means to deliver higher revenues and profit, or is it just another expense to the business?

Once these questions are addressed, an organization can look at the solution that best fits its business objectives. What can get confusing is that there are lots of solutions to choose from.

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In fact, ERP vendors usually have a new product release they are pushing that offers new and improved versions of their applications. The updated versions offer companies many new technology and functional improvements. However, one fundamental question customers are wrestling with today is: Should we upgrade our ERP system with this technology? It is imperative that companies pick the solution that best fits their business and is feasible financially, rather than just implementing the latest release.

Many executives see an ERP upgrade as an unnecessary expense that has been forced on them by the software vendor. In turn, management's goal for the upgrade becomes one of getting the implementation done quickly and inexpensively, which can lead to an ineffective ERP system.

Smart customers look at an ERP upgrade as an opportunity to realign their technology solutions to their business needs. They focus on such issues as improving cash flow, evaluating customer loyalty and satisfaction, and the incremental impact of organic growth on a business's processes. The dollars are being spent anyway, so why not invest them in a way to better the business rather than as a "throw away" expense?

Recently, we experienced several situations where customers completely re-implemented the new versions of their ERP software because the current applications had too many customizations. In most cases, these customizations provided little to no business value and existed only to mimic a feature from the previous system, deemed necessary for doing business. These features may have been required to support the business years ago, but as a business changes, so must its ERP processes.

Companies across industries struggle with these challenges. For example, a growing military equipment manufacturing company needed to upgrade its ERP solution to maintain growth and secure a new round of financing. Initially, the company did not spend the necessary time to choose a solution that worked for its organization, and it installed a solution too quickly and with too many customizations. This impeded the organization's ability to effectively roll out the solution to a growing employee base.

The company quickly realized the ERP implementation was solely an expense and was impeding its ability to successfully grow the business and work effectively across the organization. To turn this investment into an opportunity, the organization selected a new consultant that could execute this upgrade in a way that would better use its internal resources and enable it to map its technology solution to its business goals. As a result of the new ERP solution, the company secured its refinancing, increased communication among internal departments, improved documentation of business processes, and was able to reconcile the costs of product manufacturing with outsourced manufacturing suppliers.

By implementing solutions with as few customizations as possible, the solution is easier to support and upgrade. This will allow a company's ERP technology to grow with the business.

It is essential that businesses evaluating an upgrade of their ERP technology look at the value this investment can deliver to the business. If viewed as a pure expense on the books, an organization is underestimating the opportunity to improve the business. A new ERP solution can be a terrific tool to help support a company's success today and in the future. When selecting an ERP tool for your business, the most important element to remember is to select a tool that best supports your unique value proposition. Be open and prepared for change, adapting the ERP system to the changing needs of the business as it grows.

Ben Holtz is the CEO of Watertown, Mass.-based Green Beacon Solutions, an ERP and CRM services provider.

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