5 Keys For Maximising Your ROI Through Optimal ERP Performance: Key 1 - A Software ERP Directive

Key No 1 - Charting the course of success for your technology investment

Is your current ERP system is lacking in functionality? Does it limit your ability to respond quickly to customers' requests? Where are you placed in comparison with your competitors, and does your existing system help you or hinder you in meeting industry best practice or benchmarks? Are you simply unhappy with your current supplier and their ability to respond to your requirements, let alone those of your customers?

Whatever the case, you are unlikely to stand alone in these areas - many companies have faced similar issues with their ERP systems, so no user is likely to be unique. There are common drivers you can consider in your deliberations over a replacement ERP system, and these include the measures you use to chart the success of your technology investment, the major issues you need to address and the consideration of how much pain you are willing to put up with to achieve your ultimate goal.

According to Aberdeen Group's 2007 ERP in Manufacturing Benchmark Report, 328 companies out of 1245 companies surveyed were planning to replace their current ERP systems at one or more locations within the next three years. In other words, at any one time, a quarter of companies are looking to replace their existing ERP systems.

In the past, enterprise resource planning has garnered a mixed reputation. While there are fundamental reasons and obvious benefits for going down the ERP path, many have feared - rightly or wrongly - that ERP entailed major organisational disruption if not re-engineering, at high cost and high risk.

Aberdeen Group reports ("When Replacing ERP - Size Matters", June 2007) the primary driver for large companies is consolidation and rationalisation strategies. An underlying issue, considering the proliferation of ERP and other enterprise applications, is the need for integration. For mid-sized and small companies, on the other hand, the concerns are more with gaining functionality and integration. These sized firms are also more heavily concerned with updating their outdated user interfaces, an important factor in raising employee productivity and efficiencies.

Other issues include requirements of expansion, pressure from trading partners, compliance with regulation and even disastrous events, but overall companies looking at ERP implementations are primarily seeking "low cost options that minimise risk".

Risk and cost in combination imply a concern for return on investment, but Aberdeen's surveys show that fewer than 25 per cent of respondents consistently estimate ROI to cost estimate ERP projects, and 20 per cent or less measure the actual post-implementation costs and gains to calculate ROI.

In contrast, "best in class companies are on average 88 per cent more likely to estimate ROI before initiating projects and are 130 per cent more likely to measure ROI after project completion. As a result, these best performing companies produce, on average, 93 per cent more improvement across a variety of metrics such as cost reductions, schedule performance, headcount reduction or redeployment and quality improvements."

The reality is that minimising risk with an ERP implementation is an achievable result and, by minimising risk, costs should also be kept under control. By following a formal process of charting the reasons for your implementation, assessing the various offerings from your current supplier and, importantly, from suppliers who might be new to you, and checking off against the various criteria for selection, an ERP implementation need not be a nightmare; in fact, it could prove to be the instigator of quantifiable benefits for all concerned.

Specific success markers

Getting down to brass tacks, there are a number of key aspects of an ERP system that need to be addressed, both prior to any decision to move to such a system and certainly as part of selection criteria. Near the top of the list is total cost of ownership, which incorporates:

Software and implementation costs;

Costs associated with any interfaces or system modifications;

All costs associated with system communications;

Costs associated with employing additional or specialised staff; and

Annual costs for system upgrades and helpline support.

Other specific areas of consideration that will impact on the success or otherwise of your ERP program include:

Functionality;

Ease of use;

Integration capabilities;

Ease and speed of implementation;

Ability to tailor functionality without programming; and

Software licence price.

Added to this, or overarching these considerations, is return on investment. Whether and how quickly you achieve this is dependent on many factors, not least the rigour and realism applied to the assessment of current circumstances and the contribution made by the ERP system as outlined in initial business cases. An article as far back as the European Journal of Information Systems in 1996 reported on a survey of the 200 largest UK companies that found that 47 per cent openly admitted to overstating the benefits to get approval for IT investments.

But wishful thinking and creative accounting aside, these are all relevant considerations. (And in future articles, covering total cost of ownership, selection criteria, best and worst practices, and maximising ROI, we will look at them in more detail.) But it should be noted that the level and mix of these factors and how successfully they are achieved is specific to individual sets of circumstances, including size and type of organisation, intended purpose, individual business priorities and, of course, budget.

The big picture

The overriding consideration that affects all organisations, large or small, regardless of industry sector or even of budget, is alignment with the business objectives of your organisation.

Jerry Luftman and Rajkumar Kempaiah of the Stevens Institute of Technology suggest ("An update on business-IT alignment", September 2007) that the issue of achieving IT-business alignment was first documented in the late 1970s and was in the top 10 IT management issues from 1980 through 1994, as reported by the Society for Information Management. Since 1994 it has consistently been issue #1 or #2.

Nonetheless, it has proved to be an elusive target. Luftman and Kempaiah suggest a number of reasons for this, including that, while IT might be aligned with the business, business is rarely aligned with IT. They also add that organisations have often looked for a 'silver bullet', whether technological solution or improved communications, as well as improved governance to identify and prioritise projects, resources and risks. Another reason they suggest for missing the alignment target has been the lack of an effective tool to gauge the maturity of IT-business alignment.

On this last point, they suggest a set of six components that indicate (if not mandate) alignment maturity: Communications - exchange of ideas, knowledge and information between IT and business; Value - balanced measurements to demonstrate the contributions of information technology and the IT organisation in terms that both business and IT understand;

Governance - who has authority to make IT decisions and set IT priorities;

Partnership - including IT's role in defining business strategies, the degree of trust and how each perceives the other's contribution;

Scope and architecture - IT's provision of flexible infrastructure, evaluation of emerging technologies, driving business process change, and delivery of customised solutions internally and externally; and

Skills - HR practices of hiring and retention, encouragement of innovation, developing individuals' skills, and the organisation's readiness for change, capability to learn and ability to leverage new ideas.

Interestingly, they say that "business executives score alignment maturity higher than IT executives". In other words, it is the IT side of the business that feels most that alignment is not being achieved. Whether your organisation complies with these suggestions - and it should be added that sometimes these factors can be seen as reflections of alignment maturity as opposed to stepping-stones for achieving that heightened state - any IT implementation, especially one as significant as ERP, should keep all of these factors top of mind.

Supply chain criteria

Many ERP systems are implemented as part of the supply chain process of an organisation. Here, again, the above success markers are relevant, but Tim Payne of Gartner ("Supply chain and IT strategies must align around five key themes", August 2007) suggests that "enterprises should focus on five technology areas - business process agility, data management, analytics and performance management, collaboration, and sensory networks - as the sources of technology-enabled supply chain innovation".

Payne says "focusing on these technology areas will give the IT organisation more credibility as an ongoing participant in the dialogue [with the supply Key No 1 - Charting the course of success for your technology investment

Is your current ERP system is lacking in functionality? Does it limit your ability to respond quickly to customers' requests? Where are you placed in comparison with your competitors, and does your existing system help you or hinder you in meeting industry best practice or benchmarks? Are you simply unhappy with your current supplier and their ability to respond to your requirements, let alone those of your customers?

Whatever the case, you are unlikely to stand alone in these areas - many companies have faced similar issues with their ERP systems, so no user is likely to be unique. There are common drivers you can consider in your deliberations over a replacement ERP system, and these include the measures you use to chart the success of your technology investment, the major issues you need to address and the consideration of how much pain you are willing to put up with to achieve your ultimate goal.

According to Aberdeen Group's 2007 ERP in Manufacturing Benchmark Report, 328 companies out of 1245 companies surveyed were planning to replace their current ERP systems at one or more locations within the next three years. In other words, at any one time, a quarter of companies are looking to replace their existing ERP systems.

In the past, enterprise resource planning has garnered a mixed reputation. While there are fundamental reasons and obvious benefits for going down the ERP path, many have feared - rightly or wrongly - that ERP entailed major organisational disruption if not re-engineering, at high cost and high risk.

Aberdeen Group reports ("When Replacing ERP - Size Matters", June 2007) the primary driver for large companies is consolidation and rationalisation strategies. An underlying issue, considering the proliferation of ERP and other enterprise applications, is the need for integration. For mid-sized and small companies, on the other hand, the concerns are more with gaining functionality and integration. These sized firms are also more heavily concerned with updating their outdated user interfaces, an important factor in raising employee productivity and efficiencies.

Other issues include requirements of expansion, pressure from trading partners, compliance with regulation and even disastrous events, but overall companies looking at ERP implementations are primarily seeking "low cost options that minimise risk".

Risk and cost in combination imply a concern for return on investment, but Aberdeen's surveys show that fewer than 25 per cent of respondents consistently estimate ROI to cost estimate ERP projects, and 20 per cent or less measure the actual post-implementation costs and gains to calculate ROI.

In contrast, "best in class companies are on average 88 per cent more likely to estimate ROI before initiating projects and are 130 per cent more likely to measure ROI after project completion. As a result, these best performing companies produce, on average, 93 per cent more improvement across a variety of metrics such as cost reductions, schedule performance, headcount reduction or redeployment and quality improvements."

The reality is that minimising risk with an ERP implementation is an achievable result and, by minimising risk, costs should also be kept under control. By following a formal process of charting the reasons for your implementation, assessing the various offerings from your current supplier and, importantly, from suppliers who might be new to you, and checking off against the various criteria for selection, an ERP implementation need not be a nightmare; in fact, it could prove to be the instigator of quantifiable benefits for all concerned.

Specific success markers

Getting down to brass tacks, there are a number of key aspects of an ERP system that need to be addressed, both prior to any decision to move to such a system and certainly as part of selection criteria. Near the top of the list is total cost of ownership, which incorporates:

Software and implementation costs;

Costs associated with any interfaces or system modifications;

All costs associated with system communications;

Costs associated with employing additional or specialised staff; and

Annual costs for system upgrades and helpline support.

Other specific areas of consideration that will impact on the success or otherwise of your ERP program include:

Functionality;

Ease of use;

Integration capabilities;

Ease and speed of implementation;

Ability to tailor functionality without programming; and

Software licence price.

Added to this, or overarching these considerations, is return on investment. Whether and how quickly you achieve this is dependent on many factors, not least the rigour and realism applied to the assessment of current circumstances and the contribution made by the ERP system as outlined in initial business cases. An article as far back as the European Journal of Information Systems in 1996 reported on a survey of the 200 largest UK companies that found that 47 per cent openly admitted to overstating the benefits to get approval for IT investments.

But wishful thinking and creative accounting aside, these are all relevant considerations. (And in future articles, covering total cost of ownership, selection criteria, best and worst practices, and maximising ROI, we will look at them in more detail.) But it should be noted that the level and mix of these factors and how successfully they are achieved is specific to individual sets of circumstances, including size and type of organisation, intended purpose, individual business priorities and, of course, budget.

The big picture

The overriding consideration that affects all organisations, large or small, regardless of industry sector or even of budget, is alignment with the business objectives of your organisation.

Jerry Luftman and Rajkumar Kempaiah of the Stevens Institute of Technology suggest ("An update on business-IT alignment", September 2007) that the issue of achieving IT-business alignment was first documented in the late 1970s and was in the top 10 IT management issues from 1980 through 1994, as reported by the Society for Information Management. Since 1994 it has consistently been issue #1 or #2.

Nonetheless, it has proved to be an elusive target. Luftman and Kempaiah suggest a number of reasons for this, including that, while IT might be aligned with the business, business is rarely aligned with IT. They also add that organisations have often looked for a 'silver bullet', whether technological solution or improved communications, as well as improved governance to identify and prioritise projects, resources and risks. Another reason they suggest for missing the alignment target has been the lack of an effective tool to gauge the maturity of IT-business alignment.

On this last point, they suggest a set of six components that indicate (if not mandate) alignment maturity: Communications - exchange of ideas, knowledge and information between IT and business; Value - balanced measurements to demonstrate the contributions of information technology and the IT organisation in terms that both business and IT understand;

Governance - who has authority to make IT decisions and set IT priorities;

Partnership - including IT's role in defining business strategies, the degree of trust and how each perceives the other's contribution;

Scope and architecture - IT's provision of flexible infrastructure, evaluation of emerging technologies, driving business process change, and delivery of customised solutions internally and externally; and

Skills - HR practices of hiring and retention, encouragement of innovation, developing individuals' skills, and the organisation's readiness for change, capability to learn and ability to leverage new ideas.

Interestingly, they say that "business executives score alignment maturity higher than IT executives". In other words, it is the IT side of the business that feels most that alignment is not being achieved. Whether your organisation complies with these suggestions - and it should be added that sometimes these factors can be seen as reflections of alignment maturity as opposed to stepping-stones for achieving that heightened state - any IT implementation, especially one as significant as ERP, should keep all of these factors top of mind.

Supply chain criteria

Many ERP systems are implemented as part of the supply chain process of an organisation. Here, again, the above success markers are relevant, but Tim Payne of Gartner ("Supply chain and IT strategies must align around five key themes", August 2007) suggests that "enterprises should focus on five technology areas - business process agility, data management, analytics and performance management, collaboration, and sensory networks - as the sources of technology-enabled supply chain innovation".

Payne says "focusing on these technology areas will give the IT organisation more credibility as an ongoing participant in the dialogue [with the supply chain organisation]". He goes on to recommend:

Periodic demonstrations of new technology capabilities, coupled with the co-development of supply chain initiatives, as new capabilities arise in these areas;

Developing a plan for incorporating new infrastructure components that are needed to support innovation areas; and
Evaluating the supply chain IT strategies and SCM vendor-sourcing criteria with the supply chain organisation for conformance and alignment based on the five key themes and related discussions, adjusting IT and sourcing strategies to address perceived gaps.

All well and good. But, despite the best planning and setting of firm criteria, there is always the issue of compromise - that such an important and far-reaching a system as an ERP will not perfectly match your organisational set-up. The Aberdeen report suggests that "if your business processes were developed over time - in an unstructured way - the possibility exists that no ERP system will match exactly. Search out ERP solution providers with customers in your industry, evaluate the fit, and balance the need to adapt your business processes to conform with the software against aligning the software to your processes. While some customisation of software may be necessary, (only 11 per cent of respondents have zero customisation) it adds expense and effort to the initial implementation, and the complexity of future upgrades."

In other words, if you bend a little to accommodate the ERP, while still maintaining your markers of success, you will find that the ultimate payback is a system that works well with an organisation in sync with itself.

It is important overall, therefore, to look at all options, and that includes a range of suppliers, to assess the issues, drivers and pain points that you may have been facing in the past, and that you might be looking to deal with or, hopefully, avoid in the future to ensure the best fit for your organisation.

The next article in this series will look at "Managing the total cost of ownership - What you need to know".

IBS Australia develops ERP solutions, ERP Systems and business management supply chain software for inventory management systems, manufacturing ERP software, business intelligence systems and integration ERP software.

Peter Clarke will present on ERP Systems at the Gartner 2008 ITxpo, 11-14 November to be held in Sydney, Australia

References:

•Jutras, C., and Barnett, R., "The total cost of ERP ownership in large companies", Aberdeen Group, July 2008
•Jutras, C., and Dalle Tezze, H., "When replacing ERP - size matters", Aberdeen Group, June 2007
•Jutras, C., Trost, J., and Dalle Tezze, H., "Taking the ERP plunge for the first time", July 2007
•IBS, "5 things you should know about total cost of ownership (TCO) for ERP systems", IBS Australia, March 2008
•IBS, "6 essential considerations when selecting an ERP system", IBS Australia, February 2008
•Luftman, J., and Kempaiah, R., "An update on business-IT alignment: 'A line' has been drawn", MIS Quarterly Executive, Vol 6 No 3, September 2007
•Payne, T., "Supply chain and IT strategies must align around five key themes", Gartner Research, August 2007
•Ward, J., Daniel, E., and Peppard, J., "Building better business cases for IT investments", MIS Quarterly Executive, Vol 7 No 1, March 2008
•Ward, J., Taylor, P., and Bond, P., "Evaluation and realization of IS/IT benefits: an empirical study of current practice", European Journal of Information Systems (4), 1996, pp 214-225 (as cited in Ward et al, 2008).