by Coenrad Alberts and Georgina Stubbs of Deloitte Consulting
There has been talk about the demise of Enterprise Resource Planning (ERP), however the ERP industry is thriving. Major ERP vendors are reporting healthy profits and organisations globally are currently implementing or re-implementing ERP systems or going through the planning phase.
The playing field has changed however. There are fewer ERP software vendors and the ERP solutions out there are robust, rich in functionality and stable. Organisations no longer have to make grudge purchases (classic example was the millennium bug) and are a lot more tech-savvy. ERP investments now have to be backed with a solid and sound business case.
This paper provides insight into the key cost considerations of an ERP investment and some of the crucial decisions that should be considered regarding the organisation’s ERP strategy going forward – in order to implement a sustainable, scalable and cost-effective solution that will cater for the organisation’s future growth and requirements.
Here are 8 key drivers to consider when reviewing your enterprise resource planning investment strategy:
1. Software
Select the right solution for the right job.
Vendors no longer advocate ERP solutions as cure-alls. They rather recommend that organisations implement ERP solutions to provide core enterprise functionality and select best-of-breed point solutions to meet specific requirements, e.g. specific billing requirements.
The advent of SOA has made integration of multiple systems easier and more efficient. It is, therefore, often advisable to implement a solution that fits the problem rather than to manipulate both the solution and the problem in an effort to make them fit, sometimes at the expense of critical business requirements.
By carefully selecting a hybrid of solutions that will directly address best-practice business requirements, the initial implementation effort will be reduced, user adoption will be increased and because customised development will be reduced, so will the ongoing cost of ownership.
Investigate Software as a Service offering.
Many ERP software vendors these days offer “Software as a Service” (SaaS).
By subscribing to a SaaS application, rather than purchasing licences outright, you avoid the initial overhead associated with implementing conventional software. You don’t incur the capital investment of a typical software implementation, such as purchasing and maintaining servers, housing them securely, and installing and maintaining the software – an overhead that can be four to five times the cost of the original licence fees.
SaaS applications also leverage economies of scale achieved by “multi-tenancy”, because many customers can run their applications on the same unit of software and even on the same infrastructure, e.g. advances in security and virtualisation make it possible for multiple customers to share databases.
When you subscribe to a SaaS application, you pay a monthly or annual subscription fee. Compared to a traditional software licence, this subscription payment structure can work to your advantage. An ongoing monthly expense is often easier to incorporate into your budget than a large one-time outlay, and if you cancel or change your subscription, you do not lose a large initial investment. And, as SaaS subscriptions are based on metered usage, you pay for what you use.
Another key aspect of SaaS is that you gain immediate access to the latest innovations and upgrades, however the potential downside of SaaS is that you cannot customise the solution to meet your specific requirements.
2. Hardware and Infrastructure
Consider hosting.
Even if you don’t subscribe to SaaS, one option to contain your investment in hardware and infrastructure is hosting, whereby you rent servers and the associated infrastructure from a third party and pay on a monthly basis, rather than investing in the equipment upfront.
Reputable hosting service providers offer holistic IT infrastructure support, meaning that your organisation can have access to a fully redundant IT infrastructure, including disaster recovery facilities, delivered on the latest technology platform and maintained by highly skilled IT technicians, without the associated costs and risks. Service providers guarantee uptime to suit your requirements and often offer other services such as domain management and registration, internet connectivity, 365/24/7 operations monitoring of your servers, physical and information security services, UPS and generator power, daily tape back-up facilities, provision of statistics, reports on bandwidth and network utilisation, fault correction initiation, encryption and LAN and WAN support.
Not only do these services reduce your investment in the actual infrastructure, they also reduce the need for your organisation to have a large IT department with the expertise to service all the different components of the infrastructure, and the availability to provide 24/7 support.
The duration of your implementation is also reduced, as the hardware infrastructure is already in place.
3. Implementation costs
Investigate available industry-specific preconfigured solutions.
By selecting an industry-specific preconfigured solution, you can reduce the impact on your business, the implementation costs and the duration of the implementation, while ensuring that your solution is based on industry best practices. The customisation effort is also reduced because industry specific components are already pre-built, e.g. specific costing models, data templates and load programmes, banking interfaces and workflow.
Quality preconfigured solutions provide organisations with an accelerated implementation that starts with a working and fully pre-documented and preconfigured system, which can be rapidly configured into a productive solution.
These solutions have been developed based on years of hands-on industry experience and are based on best practices which are continually refined over the years.
Choose your implementation partner with care.
Ensure that you have consultants who understand your business and industry and are “business led, but also technology enabled”. Consultants that understand your industry will be able to facilitate design discussions and make meaningful contributions to functional and technical documentation. They will also be better equipped to anticipate and manage scope changes based on a deeper understanding of industry-specific requirements.
4. Training and change management
Ensure that your investment in training and change management provides a real return.
Although it is strongly recommended that you do not reduce the investment in training and change management, it is also important to ensure that the return on that investment adds tangible value to the implementation project and the organisation. Don’t be afraid to ask your service provider for detailed training and change plans that identify clear deliverables aligned to tangible and measurable outcomes.
It is also critical to ensure that you don’t pay lip service to these items and that there is executive sponsorship, without which your investment will be wasted.
5. Ongoing maintenance
Consider outsourcing to meet ongoing maintenance requirements.
By outsourcing the management and maintenance of your applications, you will reduce the need to build, maintain and train a team of specialised and senior application consultants, which is becoming a more cumbersome task as organisations implement a hybrid of solutions, thereby increasing the diversity of skills required.
Ensure that your application management service providers proactively add value through their support services, rather than just react to problems. By providing you with statistics on which types of problems occur frequently, value adding service providers enable you to address those problems at source, i.e. by identifying the root cause – for example: where more training is required or where a different solution should be considered. These statistics can also be used to optimise your support contract by reducing the support hours required over a period, as the solution beds down or your users become more skilled.
6. Process efficiencies
Measure potential process efficiencies.
Effective business process design, based on industry best practices (such as the Deloitte best practice IndustryPrints), is essential to ensure that process efficiencies are achieved and to reap the real benefit of your ERP implementation.
Processes can be measured, costed, benchmarked to similar organisations and then mapped to solutions to identify where real process efficiencies will be achieved, and where manual manipulation, duplicate transaction processing, etc. can be eliminated.
When considering the ERP investment, this tangible benefit should be accounted for.
7. Tax efficiencies
Don’t overlook potential tax efficiencies.
A well-designed, tax-enabled ERP Solution can increase speed, accuracy and data integrity, all of which are important, particularly when working through last-minute updates at either quarter-end or year-end. These improved data collection processes also help companies better manage workflow, which, in turn, increases visibility. Furthermore, it provides greater control over information, and the associated movement or flow of work allows the tax function to be more effective and to report virtually in real time. This makes the organisation more nimble when it comes to business decisions and the related tax implications of such decisions and frees up the tax department to spend more time performing value-added activities, such as strategic income tax planning.
A tax-enabled ERP solution provides opportunities to benefit from tax savings ideas directly and indirectly associated with ERP implementations, such as maximising R&D tax credits and deductions, training incentives, transfer pricing, customs and excise, VAT optimisation and other appropriate strategies.
As organisations redesign processes and install enterprise-wide systems to create a competitive advantage, they often consolidate legacy systems and initiate process improvements that, at best, do not enhance the tax reporting process and, at worst, actually impede access to tax-sensitive information and do not take advantage of potential tax savings.
8. Shared services
Ensure that you implement the most efficient and effective operating model.
A large number of support processes in IT, finance, procurement and HR (including payroll) are repetitive and not unique to the individual business but rather add value through operational excellence, delivering zero defect at the lowest cost. Other processes are more ad hoc and knowledge involved, adding value through maximum benefits at appropriate cost, only when necessary. Both transactional and knowledge-involved processes can take advantage of benefits through a shared services model, either internal or outsourced.
An example of such a model is the Deloitte Mining Shared Services (DMSS) platform, which provides cost-effective back-office process support to mining companies with a need to focus on core business operations and also to create a low, fixed-cost overhead structure.
This service delivery model allows mining companies to co-source and/or outsource transactional and knowledge processes and take advantage of the cost benefits offered by consolidating and streamlining back-office processes. While the shared services centre runs these processes, mining companies retain some functionality based on the individual organisation’s requirements and business case.
Summary
So – far from dying – ERP is alive and well and back on the Executive Committee’s agenda. But the conversation today is very different to that of 10 to 12 years ago. Traditionally, organisations invested time and money selecting the right ERP solution to meet their needs; however, nowadays there are fewer Tier 1 products to choose from – and most of them offer similar functionality with some minor variations in their value propositions.
This means that, while it is important to select the right product (whether an organisation is considering an upgrade, reimplementation or replacement), there are other discussions to be had and decisions to be made. The decisions will have a more significant impact on the initial and ongoing cost of the investment and the impact to the business.
These decisions need to consider all the innovative and varied options available to finance this investment, and derive maximum value, and this is what will drive the business case. And, whereas a robust business case was not a requirement when the implementation of a new ERP was not an option, it has now become critical to justify this semi-discretionary investment.
If you have any questions or require a more detailed discussion, contact Coenrad Alberts at calberts@deloitte.co.za or Georgina Stubbs at gstubbs@deloitte.co.za
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