How to avoid underestimating ERP costs

Industry expert Steve Phillips offers his advice for accurately predicating ERP costs and savings before an implementation.

Organizations implement ERP for many different reasons, and the ultimate goal of any project is to deliver on the benefits. While managing the ERP costs and schedule are very important, if a company does not achieve the expected ERP savings, the project will likely be deemed a failure.

Though estimating ERP implementation project costs is not easy, developing realistic project savings can be even more difficult. Often, the first problem is many companies estimate the ERP savings based solely on "industry observed" benefits, or use estimates developed by those who know little about the business or have their own interest in mind -- such as the ERP software vendor or consulting firm involved.

No doubt, many companies have achieved major cost savings and many strategic benefits with ERP. However, this does not mean any company can achieve the same results. Manufacturers should take the time to dig into the improvement opportunities that exist within their companies, as well as to recognize some of the possible pitfalls when estimating the project savings.

ERP implementations: Integration and automation

ERP systems are designed to integrate business processes and information across the enterprise. In addition, software functionality that automates tasks and activities within the business can be a major benefit. 

More on ERP implementations

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If an organization already uses ERP in most areas of the business and has systems in place to interface with customers and suppliers, it should not expect breakthrough productivity improvements based on data integration alone.

ERP packages with very good functionality have been around for a while. Moreover, many companies have made software modifications for the better. ERP cost savings resulting from automation of manual tasks is not as powerful as it once was.

On the other hand, for companies where many tasks are performed manually in spreadsheets, or where there are many islands of automation, expect major savings in automation.

Better tools worth ERP costs

When the ERP software provides the organization with many more capabilities, it is a common mistake to assume that the mere existence of better tools automatically results in a change in employee behaviors.

In order to embrace the new tools, the first step is educating management, the project team and end users on industry accepted business practices. Without this type of education -- which has little to do with software and nothing to do with a particular package -- the organization may not fully understand the proper application of the tools found in most ERP systems.

The result is the improvements envisioned, such as a reduction in inventory, less unplanned overtime and improved shipping performance, may not materialize.

The question of head-count reduction for ERP savings

Due to improvements in productivity, many companies include employee reductions as anticipated ERP savings. In some cases, IT department staff reductions are planned. While many organizations realize head-count reductions with ERP implementation, often the number is overstated simply due to a failure to recognize some of the subtleties.

First, there will be at least some unforeseen software limitations that dampen benefits. Second, in order to take advantage of the new software capabilities or address business-process-related issues, new value-added tasks are usually required. This means some ERP savings are partially offset by additional work.

Third, productivity improvements often times cannot be easily isolated to specific jobs. Rather, much of the total time savings are cumulative across many departments, processes and people. In some cases, given the need for separation of duties -- internal controls -- and other tasks and skill sets required, the reallocation of work in order to realize a head-count reduction may not be feasible.

Often after an ERP implementation, the same number of IT employees are using different technologies, or doing different things. Of course, every situation is unique, and there might be head-count reductions in IT if:

  1. The current systems are decentralized, supported by multiple IT groups, and the plan is to centralize support within one system.
  2. The company currently has older systems with many people in IT writing software modifications and enhancements.
  3. ERP Software as a Service is the deployment strategy, or the IT function is to be outsourced with the new system.

However, these are topics with their own set of advantages and disadvantages.

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This was first published in November 2012

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