Not long ago, only large, Fortune 1000 organizations had the time, money and resources to implement ERP effectively. In recent years, however, ERP software vendors have begun to target small and medium-sized businesses (SMBs), viewing that market segment as an opportunity for growth.
As a result, ERP is becoming an increasingly viable option for SMBs in many manufacturing industries. But how do the actual results that SMBs realize from their ERP investments differ from those gained by their larger counterparts? Let's examine some of the variables that will help shed light on the difference in the benefits of ERP for the SMB versus larger organizations:
Options include Tier 1 and Tier 2 ERP
While not all ERP solutions are scalable to larger organizations, SMBs have a number of options to choose from. In addition to Tier 1 ERP solutions such as those from SAP and Oracle, SMBs have Tier 2 ERP and niche, industry-focused software options. According to research from Panorama Consulting, 24% of SMBs implement Tier 2 options, compared with 17% of larger organizations. In addition, SMBs are much more likely than larger organizations to implement Microsoft Dynamics (22% vs. 6%).
ERP implementation costs low, but higher than expected
The total cost of ERP implementations at companies of all sizes averages nearly $8.5 million and 9% of annual revenue. Large organizations, characterized by those with more than 500 employees and $500 million in annual revenue, spend significantly more money on their implementations, or an average of $24.1 million.
SMBs, on the other hand, spend materially less ($3.1 million) but a higher amount relative to revenue (10.5%). The smaller size and lower complexity of SMBs contributes to the lower raw dollars, but fixed costs incurred regardless of implementation size result in an escalated cost as a percentage of annual revenue. More bad news for SMBs: They are twice as likely to exceed their expected budgets by 50% or more, probably because of lack of resources to commit to their projects.
Shorter implementation timelines
While ERP implementation costs vary greatly depending on company size, there is less variability in implementation duration. SMBs take an average of 18.8 months to implement their ERP solutions, compared with 19.8 months for companies of all sizes and 25.2 months for large organizations.
Less ERP customization
One of the main drivers of implementation duration and cost is the level of software customization required. According to our research, small companies are twice as likely to implement software with vanilla or out-of-the-box functionality without customizations to the source code. While 24.5% of SMBs implement ERP with very little customization, only 15.2% of large organizations are able to do so.
These results suggest that SMBs -- compared with larger organizations -- may have more options for ERP solutions, can implement those solutions relatively quickly and inexpensively, and can better leverage the software's vanilla functionality.
There are tradeoffs and risks for SMBs, however. Implementation investments tend to be larger as a percentage of annual revenue, and implementations typically take longer than expected. There are three keys to avoiding ERP deployment pitfalls: entering the ERP evaluation and implementation stage with realistic expectations, understanding the costs and benefits of ERP, and selecting the right software.
About the author: Eric Kimberling has more than 15 years of international ERP business experience. He is the president and founder of Panorama Consulting Group, a Denver-based consulting firm that provides ERP consulting to international companies. Panorama helps clients with ERP software selection, ERP implementation, organizational change management and benefits realization.