Businesses are looking to make technology investments to prepare for growth. But with the economic recovery uneven and uncertain, they remain cautious about these investments. One thing is clear: Any technology investments must deliver value to the business. To define this value and corresponding costs, businesses need to define a business case for their technology investments and build a framework for measuring ROI. This white paper describes steps that will help organizations build their own business case for an ERP investment.
While the economy continues to improve, high unemployment and consumer thriftiness mean that the recovery remains anemic and uncertain. Thus, while businesses are now preparing for growth by increasing technology investments from the low rates of the Great Recession, they remain careful with their investment dollars.
Building the Business Case for ERP
To create a business case for an ERP investment and select the right ERP option, organizations should follow this step by step process:
- Describe the business challenge
- Assess the potential benefits of the ERP investment
- Assess the potential costs of each ERP option
- Assess risks that might arise during the implementation
- Recommend the preferred solution
- Describe the implementation approach
1. Describe the Business Challenge
The first step in building a business case is to precisely determine the business challenge to be addressed with the ERP investment. Describe the aspects of the business environment driving the need for the ERP project, including why the problem exists, human, process, or technology issues that are creating the problem, the impact of the problem on the business and the timeframe within which the problem must be resolved.
Common challenges that cause companies to consider ERP solutions include:
A desire to grow the business
Many businesses want to grow either through acquisition or organically. However, existing processes or business applications may be unable to adequately manage a larger enterprise. For example, existing accounting software may be unable to support new subsidiaries or offices in multiple countries. Acquired companies might have their own business applications; the company may need a common software application to standardize business processes across the organization. The company might need a new business system to handle growing numbers of users and transactions. Or it might need more advanced functionality, such as sophisticated reporting and business analytics, CRM, or payroll capabilities.
Inefficient Business Processes
Many organizations perform business processes in a time-consuming, inefficient, error-prone manual fashion. For example, employees may manually extract information from spreadsheets to create reports, re-enter customer information into multiple siloed applications, as well as consolidate data from multiple companies by hand or enter data from paper timecards.
A Need to Reduce Costs
During difficult or uncertain economic conditions, many organizations look to reduce their operating costs to shore up profit margins. They might wish to implement an ERP to automate manual business processes and allow staff to focus on exceptions. Many organizations also seek to reduce distribution and transportation costs by bringing their operations closer to the customer. These organizations need standardized processes for managing geographically distributed operations while allowing the company to consolidate financial information.
Many organizations considering a new ERP have obsolete systems that are no longer supported.
They need to move to a new system to obtain modern functionality, ongoing upgrades, and support.
2. Assess Benefits of ERP Options
Replacing an obsolete system with a modern ERP can give companies the tools they need to address their business challenges while reducing costs and achieving a wide range of benefits. The following are the types of benefits organizations can expect to achieve by implementing an ERP. When evaluating different ERP options, organizations should consider how well each solution delivers these benefits.
Grow the Business
Moving to a comprehensive, integrated ERP can give businesses the functionality they need to manage larger, more sophisticated operations. The right system will enable companies to increase their use of the system as their needs evolve by deploying all or part of the ERP functions, one step at a time, without having to start a new project from scratch. Or they can implement the ERP in a single location and for a limited number of users first and then progressively connect new users, either locally or remotely. With such a solution, organizations can manage their growth while minimizing additional costs.
The right ERP can improve efficiency by enabling integration, automation, improved decision making and better collaboration:
Integration Provides Coherent Business Information
The right ERP can integrate all management processes into a single, coherent information system and distribute information in real-time throughout the company wherever it is needed. By sharing data throughout the system, the ERP eliminates the need for manual data re-entry, which improves productivity, eliminates lost time, reduces errors, and provides reliable, coherent data.
Automation Eliminates Manual Processes
ERP solutions can automate business processes while providing alerts for exceptions to allow staff to focus on unusual events. Greater automation means companies can either reduce staffing levels (costs) or redeploy staff to other activities (e.g., do more with less).
Business Intelligence Improves Decisions and Efficiency
An ERP system that includes Business Intelligence (BI) tools and integrated information eliminates manual processes needed to produce reports. Better reporting capabilities allow employees to make better, faster, data-driven decisions. Companies can also use BI tools to analyze business processes to further improve process efficiency.
The ability to collaborate electronically with partners, suppliers and/or customers enables organizations to manage end-to-end processes with customers and partners in a more efficient and cost-effective manner. Organizations can provide better and faster response to partners and customers. Partners and customers have the opportunity to participate in the businesses’ processes and do part of the job, which reduces a company’s labor requirements and costs. For example, an organization can authorize a supplier under contract or blank order to connect to its business process management system remotely and be automatically informed of a reorder requirement triggered by a low stock alert.
3. Assess Costs of ERP Options
Next, determine the total cost of ownership for the various ERP options under consideration.
Typical costs for an ERP implementation include:
Many ERP solutions come at a high acquisition cost. Small to mid-sized businesses are often looking for Tier 1 performance and functionality but are unable to afford Tier 1 costs and implementation. An ERP designed specifically for the SMB market is likely to cost less while offering the appropriate functionality.
Cost of Expanding the Solution
Is the solution comprehensive, or does it require an organization to upgrade to obtain more than entry-level functionality? Look for a solution that includes best-of-class features and a complete range of modules that can be used throughout the organization: accounting and financial management, sales, purchasing, inventory management, and manufacturing. The solutions should also be easily scalable to accommodate increasing numbers of users as necessary.
Intuitive navigation will help reduce training costs and get users onto the system faster. Look for a graphical process-oriented user interface; a common look-and-feel throughout the system, and sound ergonomics that streamline and simplify work processes by providing a clear view of the tasks to accomplish and steps required.
ERP implementations are notorious for high costs. To minimize implementation costs and time and deliver Return on Investment (ROI) faster, look for configurable software that adapts to the enterprise without requiring custom development and months of professional services.
The ERP system should be fully customizable to address any unique business requirements an organization may have.
To reduce administrative/maintenance costs, the system should include simple and comprehensive administration tools to make it easier to update and maintain without a huge IT staff or with minimal third-party support. The ERP system should also easily evolve with the growth and new requirements of the enterprise. Integrated design can make it easy to activate new functions when needed, connect new users to the system or quickly provide a new branch with a fully operational management system without the need for custom interfaces.
4. Assess the Risks and Issues that Might Arise with theImplementation
Next, assess the risks or issues that might arise during the implementation. Potential risks and issues to consider include:
Some operational risks to consider include low user adoption due to software that is complicated to use and low reliability/continuity of operations. These risks can be mitigated with a reliable solution that is intuitive and easy to navigate.
Common IT risks include short shelf life because the system is not adaptable to new business requirements (e.g., doesn’t offer comprehensive operational functionality or multi-site/international functionality) or technology requirements. Organizations can mitigate this risk with a system that offers comprehensive functionality and is easy to configure or adapt to new requirements. A second risk is that the system will be IT resource intensive and require too many cycles from limited IT resources to manage. Strong management tools mitigate this risk. To avoid the long implementation times that often plague ERP solutions, look for a comprehensive, flexible and configurable system.
ERP systems can be costly to implement and require expensive additional modules or customizations. Address this risk with a comprehensive solution with a price point geared toward the size of the organization.
5. Recommend the Preferred Solution
Once an organization determines the benefits and costs of each alternative, it can recommend a preferred solution.
6. Describe the implementation approach
Now describe the implementation approach to give sponsors confidence that the implementation has been well thought through. When looking for a vendor’s professional services arm or systems integration partner to help with the implementation, consider factors that include:
- Skills and knowledge delivering solutions for your line of business and industry
- The longevity of the business providing the service
- Use of an implementation methodology that tracks a critical path for all the steps that must occur
- How well they document the implementation process, milestones, and deliverables
By following this process, organizations have the tools they need to precisely measure the value of any ERP investment to their operation and to compare ERP solution alternatives. They can also use this analysis as the basis for estimating potential ROI prior to the investment — and actual ROI results after implementation.