Reviving ERP

Everybody knows it. The major ERP suites are old and not as flexible as some newer stuff, and they can’t build flexibility in, and what’s more modifying it takes enterprise time, money and training. So when it comes to ERP, what exactly is missing?

ERP is essential, but unlike when it was new, it now offers scant opportunity for a business to set itself apart from its competition. It certainly doesn’t help bring in new revenue. And running it eats up an increasing share of the IT budget. Yet long-time ERP users aren’t pitching the technology. Companies still need it for managing supply chain, financial and employee data. 

As CIOs are finding, however, behemoth ERP systems are inflexible. Meanwhile, high-priced maintenance plans and vendors’ slowness to support new technologies such as mobile and cloud computing mean that without careful management, the ERP technology woven through your company can become a liability. 

Your ERP system probably won’t collapse if you do nothing; it’s not like legacy mainframe applications were a decade ago. But just as you had to adapt your approach to managing mainframes in order to maintain their value in an age of faster, cheaper Web-based apps, you now need to do the same with ERP. And so it’s time to rethink business processes, drive a harder bargain on maintenance fees and find ways to marry ERP to emerging technologies. To achieve an ERP system that delivers future value means managing it differently here and now. 

The new legacy system 

New ERP licence revenue dropped last year by about 24%, according to Forrester Research—one effect of the general decline in software spending during 2009. This means vendors enter 2010 hungry for new business. They’ll offer software deals to tempt CIOs who had put off upgrades or who want to install completely new systems to get the latest capabilities. 

Yet CIOs need to tread carefully: What used to be a good deal may not be anymore. In fact, many global CIOs are beginning to say that their peers must depart from the traditional ERP script, where, after lengthy negotiations, vendors hand over software and charge hefty ongoing fees. CIOs must avoid falling into the same ERP traps they once did. 

Buying and installing ERP was never a cakewalk. In the 1990s, in courthouses across the US, lawyers told tales of intractable disputes between vendors and customers, of how ERP actually ruined some companies. No doubt ERP projects forced the CIOs of many others onto blood-pressure meds. 

But as the years rolled by, ERP vendors and CIOs worked out their problems and companies began to install these multimillion-dollar systems to make sense of their complicated operations. In doing so, they were able to run better and faster than the competition—at least until the competition caught up. 

Today, though, ERP is the Jack Nicholson of software: Its repertoire hackneyed, the old and expensive dog finds it hard to learn new tricks. It’s become a legacy technology, and CIOs are now finding new ways to manage ERP projects and the ongoing upkeep. Their best advice: Draw a clear project map and modify the software only as a last resort. 

Haworth, a $1.7 billion office furniture manufacturer, will use tools from iRise to visually plan its rollouts of SAP systems in its major offices on four continents. The iRise tools simulate how the finished SAP system will look to employees, to get them accustomed to changes before rollout.

The company also uses a sales compensation application from Vertex because SAP doesn’t support the complicated, multitiered compensation model Haworth uses to pay its salespeople, says CIO Ann Harten. These choices stem from Harten’s decision to make no custom changes to the core SAP code. The idea is to streamline the implementation project, which started in 2006, and to make future upgrades easier. 

Modifying the core is expensive both when you do it and as you live with it, she says. “Next time the vendor does a version upgrade or a patch, your testing requirements are increased several fold,” she says. “You want to avoid this at all costs.” 

ERP of the future is as plain-Jane as possible, agrees most global CIOs. The fact that it can take an army of developers to build new features into ERP suites slows the vendors down. But it’s also an obstacle for customers. The 6,446 customisations that Kennametal, a $2 billion maker of construction tools, made to its ERP software over the years prevented the company from taking advantage of new technology its vendor did build in. “We couldn’t implement one single enhancement pack ever,” says CIO Steve Hanna. 

No more maintenance 

Because Kennametal’s ERP system has been unable to keep up with changing technologies, Hanna says the company never benefitted from the millions in maintenance fees it paid to cover upgrades. 

“We paid maintenance for nothing,” states CIO Hanna. 

Not all CIOs feel that way; nevertheless, IT leaders have been frustrated with ERP maintenance costs for years. Recent budget cuts and hiring freezes have brought the issue to a head, making relationships with ERP vendors more tense than ever.

The tension has risen in part because, with so many IT projects still on hold, big ERP vendors have been “forced to live off maintenance contracts,” says Paul Hamerman, an analyst at Forrester Research. 

The major vendors have made some gestures to quell such uprisings. For example, SAP is addressing customer complaints about maintenance by delaying the start of planned price increases and stretching them out over seven years, according to Janet Wood, the executive vice president of Maintenance Go To Market. SAP has also worked with large user groups to devise ways to measure the value of enterprise support, Wood says. Oracle maintenance is a flat 22% of licensing fees and the vendor rarely negotiates.

Still, some CIOs say that for ERP to have a viable future inside their companies, stretching out price increases isn’t enough; they have to change drastically how much it costs to maintain it. Some are enticed by discount third-party maintenance providers.

Others meanwhile are finding that around 90% of all maintenance money paid out to vendors is pure profit and are having no time or tolerance for vendor games. 

However, when a CIO decides to move away from provider support, he has to ensure that the internal IT people become more savvy about the ERP systems the company relies on—able to fix what may go wrong. 

New technology tricks 

ERP isn’t much different today than the technology early adopters installed 15 years ago. But new technologies make traditional ERP seem dated. “The concept of ERP is not dead, but the technology under it is,” says Bill Brydges, managing director of the ERP practice group at the consultancy MorganFranklin. 

Cloud computing, mobile applications, social knowledge sharing and predictive analytics, present trouble spots for CIOs trying to move ERP systems into the future. The pay-as-you-go, elastic economics of cloud computing are coaxing CIOs to question how ERP should be delivered.. They also wonder, with other parts of the enterprise becoming accessible via cell phone, which parts of the ERP system can and should be available in the palms of users’ hands. And there’s a screaming need for better analysis tools to make sense fast of the data generated by ERP suites.

With their significant investment in existing code base, ERP vendors can’t keep up, Brydges says. It’s a classic problem: They have a legacy core to tend and it’s not like every module in an ERP suite can be smooshed onto a Blackberry or an iPhone.

Cloud computing looms as one of the “interesting disruptions” in IT now, and ERP is no exception, says Clayton Christensen, professor of business administration at Harvard and an expert on disruptive innovation.

Some CIOs are looking for cloud services from their ERP vendors to get out from under the upgrade-and-compatibility testing grind. But so far there’s no option to put mainstream ERP systems in the cloud, causing customers to miss out on a way to cut the cost of operating their biggest, perhaps most basic systems.

Newer vendors, particularly those whose business model is software as a service, may be able to pick off parts of the ERP market by offering specific cloud-based modules. Supplementing core ERP systems with individual packages or services from other vendors would help most IT departments serve employees and job candidates better, and is fast gaining popularity among CIOs. 

The once and future ERP 

CIOs have to take charge of what the future of ERP is going to be. Treating ERP as legacy IT may be hard for some who have invested so much time and energy planning, implementing and tweaking these systems. But adopting this mind-set will help CIOs move ERP—and their companies—ahead. Modifying the base applications judiciously, if at all, will minimise expense and time devoted to software that now provides the most basic functionality. Everyone does accounts payable, so don’t waste time customising it. 

A solid stance on maintenance—forcing vendors to sell you on its value, rather than just sell you a deal—will push customers ahead financially. Many CIOs may want to consider dropping maintenance fees to primary ERP vendors if they, too, feel other resources can fill the gap, using instead a wealth of resources available online. 

Meanwhile, CIOs need to keep making noise about bringing in upstart vendors that offer the technology the big guys don’t.