ERP – the coveted and yet daunting abbreviation for top managers. Why is this? Because everyone has heard of the incredible benefits that an effectively implemented ERP system can provide, along with the simultaneous negative background of scandals resulting from losses and unsuccessful attempts to implement different ERP systems in various enterprises. So, what exactly is an ERP system, and what are the advantages and risks of implementing an ERP system in a business? And most importantly, what are the prerequisites for successful ERP system implementation?
An ERP system – Enterprise Resource Planning system – is a system that provides tools for quality management of a business based on reliable and timely data through proactive actions on the part of the ERP system. It is about proactive actions from the ERP system, not a retrospective generalization of entered information, as is the case with accounting. That is, reliable information directly from where it originates is promptly entered into an automated environment, forming a complete picture of the enterprise, its customers and suppliers, and finally, based on this picture, ERP creates detailed tasks for each participant in the working process. In this way, the ERP system manages processes, rather than merely registering their results in an accounting system.
Listing the benefits of implementing an ERP system can take quite some time due to the vast ocean of advantages. Undoubtedly, the most important aspect is having accurate and timely information regarding the state of the entire enterprise for making effective management decisions. This can be felt through a simple example – when there are reliable data present in the ERP system regarding customer orders, material and semi-finished goods inventory in warehouses and production, the availability and loading of work centers, labour and financial resources, comprehensive design and technological documentation, and reliable information from suppliers and logistics, critical path for production can be planned with precision up to one day or even one hour. This allows setting realistic delivery deadlines and achieving maximum efficiency in all processes. Real process efficiency growth leads to increased competitive advantages of the enterprise and, as a result, an increase in profits. We know of credible facts when the implementation of the ERP system resulted with 400% increase in product output with a simultaneous 25% reduction in the number of employees and an available possibility to reduce the number of employees by another 30%!
Given the above conditions, it can be clear that for achieving real results, almost all the enterprise’s business processes need to be integrated into the ERP system. And here, unique features of the ERP system, the enterprise, its departments, leaders, and products/services will become an obstacle. Experts claim, and our Team shares this view, that over 50% of ERP system implementations end in failure or do not achieve their goals. Combining this feature with the considerable cost of full-fledged projects for implementing an ERP system, one can understand the reasons for the negative background that accompanies ERP implementation projects.
Another negative aspect accompanying ERP implementation projects is corruption. Unfortunately, due to the high cost of implementing ERP and the complexity of conducting unbiased audits of such projects, many shady individuals initiate projects with a single goal in mind, which is not to improve enterprise efficiency. And it is not only prevalent in developing economies; it is also a common story in developed countries.
Therefore, it can be said that successful ERP projects are all different, but unsuccessful ones are almost identical.
So, what are the prerequisites for a successful ERP implementation project?
- The most important thing is the need for an ERP system to have an empowered manager in the company. If the company has a manager interested in obtaining a powerful tool such as ERP, has the resources and authority, then consider that more than 50% of the conditions for a successful project are already in place. It is good if this is the first person, but it is not essential. The main thing is the real need, resources and authority. It is not worth making the system administrator or unauthorized head of the IT department responsible for the implementation of the ERP system. The person responsible (or you can call them the project sponsor) must have effective powers to influence the company as a whole, by changing business processes, accessing budgets, bonuses, sanctions, layoffs, or hiring new employees.
- The second most important factor for successful implementation is the Team that will be directly implementing the ERP system. Neither the company nor the ERP system developer/vendor, but rather the Team itself. The Team must have experience in a number of successful projects with similar functionality and industry, similar scale and in your country. Be sure to check the Team’s composition and the references they provide. Make sure you are not being sold the experience of implementing a document flow or CRM system as experience in implementing a full-fledged ERP. An experienced Team provides an additional 20% for successful implementation. It is important to remember that even an unrealistically fantastic Team will not ensure successful implementation without meeting the conditions of the previous point.
- The presence of transparent, measurable, formalized project goals will ensure at least the absence of misunderstandings during the project and in its assessment of success or failure. Before the start of the project, it is necessary to make a list of goals, measure current indicators and coordinate this with the implementation Team. For example, the current production throughput is 10 units per day, the main workstation downtime averages 3 hours in an 8-hour working day, demand is 15 units per day, the goal is to reduce downtime by at least 20% and increase production to 12 units.
- Centre of Competence. Never embark on a major project without your Centre of Competence. Having your own Centre of Competence allows you to relieve the external Implementation Team, speed up implementation, training, error correction and significantly reduce costs and dependence on the external Team. After the implementation of the ERP system, qualified support and maintenance will definitely be required, and the internal Centre of Competence will provide it thanks to its previous participation in the implementation itself.
- Realistic cost estimation of the project and availability of appropriate budgets. The cost of implementing an ERP system greatly exceeds the cost of the ERP system licenses. Unfortunately, many deceptive “unicorn vendors” try to deceive the Customer at the very initial stage, offering to purchase the first 50 licenses if necessary for 2500, in order to reduce the initial budget. They understand very well that once the system is purchased and a considerable amount is spent on implementation, the Customer will hardly have a chance to refuse it, as re-implementation is just as expensive and stressful for the Enterprise. Therefore, immediately calculate the actual number of workstations and licenses. If you are offered a smaller number of licenses at the expense of documents being filled in on-site somehow, and then centralized entry into the ERP system by other operators, which significantly affects the number of licenses/workstations – say goodbye to these vendors. Information must be entered into the system in online mode immediately from the place of its creation, otherwise, it is not an ERP system, but rather an Accounting system, and it certainly was not created to achieve the goals of effective Enterprise management! To fully understand the cost of implementing and owning an ERP system, you need to compile:
- The cost of licenses for all workstations involved in the business process.
- From four, and often even ten denominations of the cost of licenses for the project itself.
- Costs for 5 years of technical support from the vendor (10-25% per year of the total license cost).
- Realistic costs for 5 years of external developers, for example, to maintain the relevance of tax and accounting functionality.
- Realistic costs for 5 years of an internal Center of Competence.
- Costs for 5 years of server power, other equipment, and specialists to support them.
- Preparedness for shocks. Implementing an ERP system is implementing changes in the enterprise, and like all significant changes, implementing ERP goes through all the stages of acceptance according to Elizabeth Kubler-Ross – denial, anger, bargaining, depression, acceptance. Therefore, the enterprise will experience the same, and it is essential to remember that there are no radical changes without shocks. Management must stand up for the changes and see the transformation through to the end. It is desirable to do this through various systems of positive employee motivation, but sometimes resorting to enforcement tools is necessary.
There is also a long list of factors that influence the success of the ERP implementation project, but adhering to the above conditions will already guarantee the enterprise a high chance of successful ERP implementation.
The Infosol Team has successful experience in over a hundred automation projects, including ERP systems from various vendors, and can tell even more about the world of ERP systems and help achieve a successful and productive implementation.