Enterprise Resource Planning (ERP)
An ERP system is an integrated suite of software programs (modules) that both facilitate and automate a firm’s business processes and transactions. While performing these functions, the system collects, processes and stores all the data associated with those processes and transactions. The typical ERP system architecture centralizes all business data into master data files and integrates and synchronizes co-dependent functions.
An ERP system typically has many different “modules” or “software functions” that correspond to the many primary and secondary business processes of the firm. These modules are usually focused around order management, manufacturing and financial activities. In the same vein, some ERP system architectures are better suited to manufacturing, others to distribution and yet others to services firms.
Three Primary Processes Integral to All Businesses
Order to Cash: This process typically comprises the accepting and recording of a customer order, shipping to a customer, invoicing a customer and collecting cash payment.
Procure to Pay: This process comprises the ordering of goods and materials, receiving goods and materials, inventory transactions (raw material to work-in-process to finished goods), inventory valuation, matching receipts and invoices for goods received, payment for goods received and control over cash disbursements.
Record to Report: This process comprises the compilation and reporting of the financial results of the other two processes.
How well a company does all three mandates the success of the company. How well does your company manage theirs?
Successfully Implementing ERP in Your Organization
1. Pick the Right Team
While the decision to install or upgrade an ERP system may be prudent, and should help manage these processes, the decision regarding who should lead the ERP project is not easy. Having finance lead the project is not always the best choice. Over-emphasizing and prioritizing finance’s pain-relief needs may miss critical requirements of the rest of the business. ERP is an operations system first and a financial system second. Not the other way around.
The problem created with this approach is that accounting and financial reporting are backward-looking functions. They record what has happened. They do not facilitate, automate or improve performance of core business processes proactively.
Some common “tells” that your current ERP system implementation may have been a finance-centric project :
- The production or operations people hate the ERP system because it just doesn’t do what they need.
- Driven by continued frustration with the current ERP implementation, the rest of the business has bought or built parallel tools.
- There are expense overruns.
- Executives are not able to get meaningful reports to help them manage the business.
These symptoms can also hide manufacturing problems.
Manufacturing people are typically resourceful and quickly find work-arounds to dysfunctional systems so they can accomplish their goals. The trap is that what may appear to be good customer delivery performance, for example, may be hiding horrendous inventory and cost variance problems beneath.
If you are still unsure about the consequences associated with an accounting-driven ERP installation, ask yourself which is more likely to create meaningful business outcomes in terms of revenue, profit, cash and corporate value: automating the score keeping, or improving and automating the Order-to-Cash and Procure-to-Pay processes?
An ERP deployment cannot, in any way, be considered complete by only deploying Accounting and Financial Reporting modules.
Frankly, a company can buy all the enterprise software they want, but unless the company’s core business processes are optimized before they are automated, that software isn’t going to help a whole lot.
For example, a McKinsey Global Institute and London School of Economics study of 100 companies in the United States, France, the UK and Germany came to these conclusions:
- Improving management practices (process improvements) increases company productivity by 8%
- Increasing the intensity of IT deployment (tools) increases company productivity 2%
- Doing both increases productivity 20%
You must fix your organization and processes before you automate. If you have inefficient business processes, all computer systems will report the same automated mess.
Recognize most contemporary ERP systems typically come with all the functionality necessary to run your business, so create a clear understanding of what it is you need to accomplish with your ERP. Define what processes need to be optimized, then automated to make the business generate cash.
“Successful ERP deployments are about improving the playing of the game first, before improving the score-keeping – not the other way around.”
Consider, bringing in an independent third-party expert to diagnose and fix these processes – then use them to implement the appropriate system modules. Bringing in an experienced, objective resource assures that current flawed processes are identified and corrected, not immortalized by automating them.
In our experience, 90% of the challenges with ERP deployment revolve around poor process optimization and ineffective module implementation, while only 10% of the time is the problem related to an ERP system’s core functionality.
3. Get Started
To optimize ROI from an ERP, whether an implementation of a new one or a re-implementation of one that isn’t delivering what it should, we suggest the following:
- Attack and optimize the core processes first. Don’t reinvent the wheel. Force yourself to evaluate why your core processes are different before immortalizing them in custom systems implementations.
- Implement and optimize the core business process ERP modules you already have before tackling additions.
- Subsume spreadsheet financial processes into the system – minimizing (hopefully eliminating) the use of Excel files, and coming closer to SOX compliance.
- If you bring in an external resource, LISTEN to the person you hire. You’re spending a lot of money for an expert guide.
Final Thoughts on the ERP Implementation Process
In today’s challenging economy, there is more pressure than ever on small to mid-size firms from their banks, CPAs, investors, and if public, the SEC to produce accurate and timely financial reports. If not automated, this task is painful and slow.
As this task falls on the shoulders of the firm’s accounting department, it is no surprise when the controller’s pleas become the loudest in the room, appealing for a new or improved ERP system to ease the pain. If you go forward, be patient, thorough and implement in the proper order – process optimization first, systems implementation second, score keeping third – do this and success is within your grasp.
Vice President, Business Strategy
Aldrich Technology LLC
Peter Adams leads business strategy for Aldrich Technology. Prior to Aldrich, Peter founded and ran Lighthouse Information Systems, a West Coast technology consultancy focused on leading clients through technological and operational challenges in order to promote growth and facilitate successful systems. While running Lighthouse for more than 35 years, Peter served clients across countless industries,…
- ERP selection and implementation
- Operations and process analysis
- Technology as a strategic asset
- Business assessments