Trying to justify spending 1 to 3 per cent of your company’s annual revenue on ERP software is always going to be more art than science. This is mainly because the reasons for moving ahead with an ERP project have included the essential but difficult-to-quantify replacement of legacy systems along with the equally slippery goal of improving productivity and system reliability.
But when the CFO tells you to gauge the effect of ERP, you’ve got to come up with coherent metrics that are less artful and more concrete.
A new study by Meta Group might help. Meta says each company must include in its metrics its unique business, geographic and environmental context. As such, corporate location and revenue, the size of the user population and the actual ERP process must become part of your cost analysis. The report concluded that “TCO metrics can be misleading when they are based on industry-wide averages”.
After surveying the work of six leading ERP vendors — JD Edwards & Co, Lawson Software, Oracle, PeopleSoft, QAD and SAP AG — for 200 user companies in 12 industries, the results showed that ERP investments were made over three to five years. On average, 25 per cent of the cost was spent on software, 40 per cent on professional services and 25 per cent on internal staff. Implementation time for these projects was approximately 20 months. Another seven months were needed before the benefits showed up. Calculating your TCO shouldn’t stop when the project goes live. Also, include the first two years of operation.
Of course, part of your analysis needs to incorporate the structural changes you made to accommodate the ERP project. Indeed, the Meta report found that although smaller companies spend more as a percentage of revenue on ERP, the projects were more comprehensive.
Evaluating the benefits of ERP projects produced a top 10 list of intended accomplishments, according to Meta: replace outdated software, improve financials, improve analytics and decision-making, standardise cross-platform processes, improve IT performance, improve customer service, get a single-system view, improve purchasing, improve order management and reduce personnel costs.
Finally, the report revealed that ERP vendor marketing efforts appear to all be for naught. Companies aren’t particularly enamoured of e-commerce or supply chain wizardry. Rather, IT managers said they regard long-term partner relationships as the true selection criterion, not features and functions.
And relationships are definitely an art, not a science.