ERP consultants love to recommend switching platforms. It’s the product they’re paid to sell, after all.
So it might surprise you to hear an ERP consultant suggesting that might not always be the best plan.
As companies grow, an inevitable side effect is increasing complexity in management software technology. Whether multiple ERP platforms have been deployed as a solution to meet varying departmental needs or as a product of merger and acquisition activity, the results are the same. Managing a variety of ERP products creates a challenge for ensuring consistency and efficiency in corporate financial reporting.
Standardization has long been the conventional solution offered by the consulting community. But Dan Aldridge, CEO of Performa Apps and Managing Director of Priority Software USA, contends that an overly aggressive pursuit of standardization involves its own risks to consider.
Dan joined me in this interview to discuss the various choices open to businesses running multiple ERP deployments, new technological options available on the market, and the strengths and weaknesses of the most common approaches to ensuring consistent, consolidated financial reporting.
What risks do executives need to be on guard against when multiple ERP platforms are in use?
Executives need to guard against letting salespeople or consulting firms push the idea of standardization across multiple divisions that may or may not have similar business models. Because of long implementation cycles, ERP system versions can become obsolete or no longer supported. During these long cycles, executives like the CIO tend to turn over. Replacements may have a different philosophy or a new system that they’re familiar with. You could be starting from scratch each time the management team changes. Executives aren’t the only employees who can move on either, of course. “Tribal knowledge” within internal project teams can be lost when people leave the organization during an implementation. The possibility of losing a project champion or key project leaders isn’t always a risk that’s considered, but it is a real one that can have real repercussions.
Another issue to consider with multiple platform deployments is the compounding of issues related to over-customization. Particularly with large on-premises ERP solutions, consulting teams often end up customizing solutions to the degree where it is virtually impossible to upgrade without a large, expensive consulting team. I call this “consulting for life” unless an internal team can be hired and trained to keep the system running. The cost of continuing to customize an older version of the ERP system is almost always more than putting in the latest version that has standard functionality which alleviates the need for customization. A less expensive and less problematic approach is to keep the different platforms at the plant or division level, as long as they are working relatively well, and upgrade to the latest versions. Then you can see which customizations are no longer necessary. One of our clients called Flex, which is a $30 billion in revenue company, was able to eliminate over 70% of their customizations in the Finance area. This saved them thousands of dollars by eliminating what was primarily reports. The CIO and CFO were extremely pleased!
There’s also a tendency in multi-platform scenarios to gravitate toward a “rip and replace” standardization strategy without fully considering the hidden costs of doing so. Scope creep is the primary danger. If the strategy is to “rip and replace” with a new standard ERP, then executives need to be on guard against exploding requirements for customizing the new system to replicate the bells and whistles that existed in the old system. I once had a client called Blue Bird (the bus company) that attempted building their bus configurator in the ERP, which turned out to be a flop. Eventually they just went back to their old system and fed the items and bills of material directly into the ERP with XML.
The standard recommendation from the consulting community for the multiple ERP platform enterprise seems to be, “Standardize at all costs.” The advantages of a unified management platform are well-understood by most executives, but does the advice to standardize at all costs still hold true?
My opinion is that “standardize at all costs” is an extremely risky proposition that really is no longer necessary. And this is coming from an ERP consultant who’s been in the business for 20 years!
A better strategy is to choose an “ERP for Corporate” and develop a standard business model to implement for each division. The benefit of this approach is that for new acquisitions or mergers, a standard ERP and an internal project team will already exist. This strategy also allows existing plants with systems other than the standard to do an individual cost/benefit analysis that compares the cost of upgrading and maintaining the existing system versus putting in the standardized platform. The results of the cost/benefit analysis can be used to prioritize which systems are the oldest and most risky in order to sequence their transition to the standard platform. My consulting friends may disagree, but I think this is the least risky, least costly approach.
The rise of corporate performance management (CPM) software seems to offer a solution to unifying the reporting for enterprises with multiple ERP platforms. Is this a viable solution for the multiple ERP platform enterprise?
Yes. In fact, the integration of effective CPM software is a perfect short term solution to the problem of having multiple ERP systems. Think of ERP systems as storehouses of data that can be standardized to a single data model and consolidated with either a data warehouse or direct access. Having CPM allows access to report across the entire enterprise. An example of this is Flex which I mentioned previously. They use a variety of ERP systems such as SAP, Infor LN and Baan to run operations. Each month they reconcile the books at the plant level and then feed financial data to SAP Outlooksoft at Corporate so that Flex can have consolidated financial and management accounting.
Because Flex is growing quickly by acquisition, the first step is always to make sure the data for the “data mart” can be exported from the ERP system. This allows the CIO time to develop a standard business model by division and an implementation plan to either standardize on a single ERP or keep each solution and upgrade to the latest version. At the very least, CPM software can keep the pressure off. As discussed, “rip and replace” is often a risky path. But so as long as the CPM system is collecting the data and giving each division the reporting they need, at least the CFO and Operations managers can relax.
What are the major factors you consider when advising your clients on whether they should standardize on an ERP system versus provision an integrated CPM reporting platform?
My opinion is that every organization of any size needs to have an integrated CPM reporting platform for at the very least corporate financial reporting. Further, each plant should also have a report writer such as QlikView or Cyberscience eCQ for financial and management reporting at the local level. This allows easy access to “drill down” on the data to check against the summarized corporate numbers.
One of my clients uses Hyperion with a standard chart of accounts at a summarized level. At the plant level they have a more detailed chart of accounts that is mapped to the Hyperion accounts at a “parent” level. They can run financial statements real time using the ERP anytime during the month to see how they’re doing and to tie out against the corporate statements so that they have “one version of the truth”. The previous solution relied on Excel templates and manually entering the numbers to produce financial statements. That’s a process I call “Excel Hell”. In addition this company has a standard ERP system that’s customized to each division so that when there’s a new acquisition then they get that system. If the existing system is not the standard and it’s working well enough, then they postpone implementation of the new system.
I’m all for standardization on an ERP system as much as possible, but I would have a CPM in place regardless.
One of the most significant business development impacts of switching ERP systems is the opportunity to optimize stagnant processes. Does implementing a CPM solution still provide similar impact in stimulating process re-engineering?
Business process re-engineering is one of the major benefits of implementing a new ERP system. But it’s important that the ERP system should be flexible enough to adapt to the business’s needs and at the same time spur business process improvements.
CPM doesn’t really stimulate business process re-engineering improvements in my experience. What it may do, however, is highlight the need for the ERP system to deliver certain types of data that corporate requires. If this data is not available “out of the box,” then it could stimulate a business process change or functionality to create the data required by the CPM software.
To what degree should a business consider the ERP platform in place at a potential M&A target and the difficulty of integrating it into the full corporate information systems, when gauging the risk factors related to a new business purchase or merger?
The fact that a company runs a different ERP system doesn’t necessarily need to be a primary consideration when assessing the viability of a business as an M&A target. But there still needs to be a plan with regards to integrating their management technology.
My recommendation is to start with a standardized reporting tool or CPM solution that can access all of the ERP systems via API’s or flat files. Standard financial statements, ratios, product line profitability and other reports can be run to consolidate the information, which relieves the need to be running on a standard ERP solution right away.
A standard business process model should also be developed using either the software itself or a flow-charting tool like Visio. Process modeling can be very helpful as an exercise to make sure all ERP systems can be adapted to the business rather than the other way around. If an ERP system is inflexible to the point it forces you to adapt your business to fit it, then it might be time to get a new system.
When acquiring another company and considering using their existing ERP system versus the corporate standard, do the same cost/benefit analysis I mentioned before to determine whether to upgrade or rip and replace in the acquired company.
For more in-depth discussions of ERP and management technology strategy, make sure to follow Performa Apps on LinkedIn.