The Secret to Successful ERP Implementations is Not Putting the Cart Before the Horse
In today’s challenging economy, there is more pressure than ever on small to mid-size firms from their banks, their CPAs, investors and the SEC (if they are public) to produce accurate and timely financial reports. In many firms this task, painful and slow if not automated, falls on the shoulders of the firm’s Accounting Team, usually the Controller.
Thus, it is no surprise when, at some point, the Controller’s voice becomes the loudest in the room, appealing for a new or improved ERP system to ease the pain. Moreover, such an urgent need might also be precipitated by the discovery of an audit or control issue – in which case the Auditor’s voice adds even more volume to the urgency of the need.
If the CEO/Owner of the firm agrees to an ERP initiative, the Controller may be assigned to take the lead. Thus, the squeaky wheel gets both the grease AND the tough assignment.
While the decision to install or upgrade an ERP system in these circumstances may be wise, the decision regarding who should lead the project may not be.
Enterprise Resource Planning (ERP)
An ERP system is an integrated suite of software programs (modules) that both facilitate and automate a firm’s business processes and transactions. While performing these functions, the system collects, processes and stores all the data associated with those processes and transactions.
There are three primary processes integral to all businesses:
1. Order to Cash: This process typically comprises the accepting and recording of a customer order, shipping to a customer, invoicing a customer and collecting cash payment.
2. Procure to Pay: This process comprises the ordering of goods and materials, receiving goods and materials, inventory transactions (raw material to work-in-process to finished goods), inventory valuation, matching receipts and invoices for goods received, payment for goods received and control over cash disbursements.
3. Financial Reporting: This process comprises the compilation and reporting of the financial results of the other two processes.
The typical ERP system architecture centralizes all business data into master data files and integrates and synchronizes co-dependent functions. (You can read more about master data files here in a great post by Rick Koski, President of Lighthouse.)
An ERP system typically has many different “modules” or “software functions” that correspond to the many primary and secondary business processes of the firm. These modules are usually focused around Order Management, Manufacturing and Accounting activities.
Some ERP system architectures and designs are better suited to manufacturing, others to distribution and yet others to services firms.
Accounting-Managed ERP Installations:
If the Controller consults his external Accounting firm for ERP advice, the feedback may over-emphasize and prioritize Accounting’s pain-relief needs, while missing critical requirements of the rest of the business.
The problem created with this approach is that Accounting and Financial Reporting are backward-looking functions. They record what has happened. They do not facilitate, automate or improve performance of core business processes quickly – in real time.
Here are some common “tells” that your current ERP system implementation may have been an Accounting-driven project:
1. The production or operations people hate the ERP system because it just doesn’t do what they need. Finance is blamed.
2. Driven by continued frustration with the current ERP implementation, the rest of the business has bought or built parallel tools. Finance is blamed.
3. There are expense overruns. Finance is blamed.
4. Executives are not able to get meaningful reports to help them manage the business. Finance is blamed.
These symptoms can also hide manufacturing problems.
Manufacturing people are typically resourceful and quickly find work-arounds to dysfunctional systems to accomplish their goals. The trap is that what may appear to be good customer delivery performance, for example, may be hiding horrendous inventory and cost variances beneath.
If you are still unsure about the consequences associated with an Accounting-driven ERP installation, ask yourself this question:
Which is more likely to create meaningful business outcomes in terms of revenue, profit, cash and corporate value: a) automating the score keeping or b) improving and automating the Order-to-Cash and Procure-to-Pay processes?
An ERP deployment cannot, in any way, be considered complete by only deploying Accounting and Financial Reporting modules.
“Successful ERP deployments are about improving the playing of the game first, before improving the score-keeping – not the other way around.”
To further make this point, a McKinsey Global Institute and London School of Economics study of 100 companies in the United States, France, the UK and Germany came to these conclusions: ⁽¹⁾
1. Improving management practices (process improvements) increases company productivity by 8%
2. Increasing the intensity of IT deployment (tools) increases company productivity 2%
3. Doing both increases productivity 20%
That is synergy at its best.
A company can buy all the enterprise software they want, but unless the company’s core business processes are optimized before they are automated, that software isn’t going to help a whole lot.
Assuring your ERP system delivers an ROI
Sadly, too many ERP Investments never actually yield a measurable ROI. More than 50% of companies in the U.S. upgrade their ERP software every three years. With investment cycles this short, an ERP cannot generate any meaningful ROI.
You must fix your organization and processes before you automate. If you have inefficient business processes, all computer systems will report the same automated mess.
The first thing to recognize is most contemporary ERP systems typically come with all the functionality necessary to run your business. In our experience, 90% of the challenges with ERP deployment revolve around poor process optimization and ineffective module implementation, while only 10% of the time will the problem be related to an ERP system’s available core functionality.
Here are ways to optimize ROI from an ERP, either a new installation or one that isn’t delivering what it should.
1. Create a clear understanding of what it is you need to accomplish with your ERP. What processes need to be optimized, then automated to make the business generate cash? What information will be required to sustain the business at high performance?
2. Consider, strongly, bringing in an independent third party expert to diagnose and fix the processes – then use them to implement the appropriate system modules.Everyone in your firm is most likely already busy, so the addition of a knowledgeable and objective resource should be valued. In addition, bringing in an experienced, objective resource assures that current flawed processes are identified and corrected, not immortalized by automating them.The external resource should be a business person that understands Finance, yet has a strong operations perspective. It must be someone that looks at the business as a whole – managing the cross-functional team and understanding the requirements of the entire business, not just Finance.Listen to the person you hire. You’re spending a lot of money for an expert guide. It doesn’t help if you don’t listen.
3. Attack and optimize the core processes first. Don’t reinvent the wheel. Force yourself to evaluate why your core processes are different before immortalizing them in custom systems implementations.
4. Implement and optimize the core business process ERP modules you already have before tackling additions.
5. Subsume spreadsheet financial processes into the system – eliminating the use of excel files.
Sarbanes Oxley compliance is very demanding on proving, testing and auditing excel based financial reporting process steps. Public companies, no matter their size, borrow more trouble than they save by using spreadsheets in their financial reporting processes. Even if you don’t have to be SOX compliant, there are other audit standards that need to be satisfied.
A Final Word
What we have been attempting to tell you throughout this post is simply that two most common traps associated with ineffective ERP systems implementation initiatives are: a) moving to implement an ERP without understanding and considering the needs of the entire business, not just Accounting, and b) automating (bad) processes before they have been fixed and optimized.
If you are patient, thorough and implement in the proper order – process optimization first, systems implementation second, scorekeeping third – success is within your grasp.
⁽¹⁾“ERP Lessons from Rich People Who Stink at Golf,” Tony Friscia, CEO Eduventures.
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