What is an ERP?

Are you in manufacturing and are unfamiliar with ERP? Watch this short introductory video to see just how important manufacturing software can be for small to mid-sized manufacturers and job shops.

Putting the Enterprise into the Enterprise System

Enterprise systems appear to be a dream come true. These commercial software packages promise the seamless integration of all the information flowing through a company—financial and accounting information, human resource information, supply chain information, customer information. For managers who have struggled, at great expense and with great frustration, with incompatible information systems and inconsistent operating practices, the promise of an off-the-shelf solution to the problem of business integration is enticing.

It comes as no surprise, then, that companies have been beating paths to the doors of enterprise-system developers. The sales of the largest vendor, Germany’s SAP, have soared from less than $500 million in 1992 to approximately $3.3 billion in 1997, making it the fastest-growing software company in the world. SAP’s competitors, including such companies as Baan, Oracle, and PeopleSoft, have also seen rapid growth in demand for their packages. It is estimated that businesses around the world are now spending $10 billion per year on enterprise systems—also commonly referred to as enterprise resource planning, or ERP, systems—and that figure probably doubles when you add in associated consulting expenditures. While the rise of the Internet has received most of the media attention in recent years, the business world’s embrace of enterprise systems may in fact be the most important development in the corporate use of information technology in the 1990s.

But are enterprise systems living up to companies’ expectations? The growing number of horror stories about failed or out-of-control projects should certainly give managers pause. FoxMeyer Drug argues that its system helped drive it into bankruptcy. Mobil Europe spent hundreds of millions of dollars on its system only to abandon it when its merger partner objected. Dell Computer found that its system would not fit its new, decentralized management model. Applied Materials gave up on its system when it found itself overwhelmed by the organizational changes involved. Dow Chemical spent seven years and close to half a billion dollars implementing a mainframe-based enterprise system; now it has decided to start over again on a client-server version.

Some of the blame for such debacles lies with the enormous technical challenges of rolling out enterprise systems—these systems are profoundly complex pieces of software, and installing them requires large investments of money, time, and expertise. But the technical challenges, however great, are not the main reason enterprise systems fail. The biggest problems are business problems. Companies fail to reconcile the technological imperatives of the enterprise system with the business needs of the enterprise itself.

An enterprise system, by its very nature, imposes its own logic on a company’s strategy, organization, and culture.(See the table “The Scope of an Enterprise System.”) It pushes a company toward full integration even when a certain degree of business-unit segregation may be in its best interests. And it pushes a company toward generic processes even when customized processes may be a source of competitive advantage. If a company rushes to install an enterprise system without first having a clear understanding of the business implications, the dream of integration can quickly turn into a nightmare. The logic of the system may conflict with the logic of the business, and either the implementation will fail, wasting vast sums of money and causing a great deal of disruption, or the system will weaken important sources of competitive advantage, hobbling the company.

It is certainly true that enterprise systems can deliver great rewards, but the risks they carry are equally great. When considering and implementing an enterprise system, managers need to be careful that their enthusiasm about the benefits does not blind them to the hazards.

The Allure of Enterprise Systems

In order to understand the attraction of enterprise systems, as well as their potential dangers, you first need to understand the problem they’re designed to solve: the fragmentation of information in large business organizations. Every big company collects, generates, and stores vast quantities of data. In most companies, though, the data are not kept in a single repository. Rather, the information is spread across dozens or even hundreds of separate computer systems, each housed in an individual function, business unit, region, factory, or office. Each of these so-called legacy systems may provide invaluable support for a particular business activity. But in combination, they represent one of the heaviest drags on business productivity and performance now in existence.

Maintaining many different computer systems leads to enormous costs—for storing and rationalizing redundant data, for rekeying and reformatting data from one system for use in another, for updating and debugging obsolete software code, for programming communication links between systems to automate the transfer of data. But even more important than the direct costs are the indirect ones. If a company’s sales and ordering systems cannot talk with its production-scheduling systems, then its manufacturing productivity and customer responsiveness suffer. If its sales and marketing systems are incompatible with its financial-reporting systems, then management is left to make important decisions by instinct rather than according to a detailed understanding of product and customer profitability. To put it bluntly: if a company’s systems are fragmented, its business is fragmented.

The 3Cs of SaaS ERP: Cost, Customization, Control

The 3Cs of SaaS ERP: Cost, Customization, Control

Traditionally, companies have had to buy, build, and maintain their IT infrastructure in an expensive and complicated process. the three C of SaaS ERP cost customization controlSaaS ERP provides businesses with an alternative where they can subscribe to services on a shared infrastructure via the Internet. Given the many advantages of the SaaS model over on-premise, businesses of all types and sizes are flocking to the cloud. The main reasons for the popularity of SaaS ERP, according to a study by ERP analytics firm Mint Jutras, have much to do with the three “Cs” – cost, customization, and control.

Cost

Costs are reduced in various ways when using SaaS ERP instead of on-premise software. The first is through lower IT overhead, as much of the spending required for implementing conventional enterprise software (purchasing and maintaining software, servers, their secure location, installation, maintenance, patching and service contracts) is eliminated. In fact, Phil Wainewright, analyst with Summit Strategies, calculates the cost of traditional enterprise software implementation to be 4-to-5 times the cost of the original license.

SaaS provides consumers with a pay-as-you-go service through monthly or annual subscription costs, a feature not usually offered with on-premise software. These pre-defined charges become predictable IT spend and incorporate into a company’s yearly budget. In some cases, businesses are able to cancel their subscriptions at any time. Moreover, many SaaS ERP services are based around per-user per-month charges and sometimes metered usage, so companies only pay for what they use; accounts can be added or removed at any time to suit the changing needs of the organization.

Customization

SaaS ERP hosting provides customers with software updates and upgrades installed automatically or on request as soon as they become available. The SaaS cloud is easy to customize without the need to add hardware, software, or bandwidth even as a company’s user or usage base grows.

The majority of modern ERP hosting solutions offer configuration options that allow users to think they are customizing the application when really they are not affecting the code or preventing future software upgrades. This is often beneficial as it gives clients a sense that they are personalizing their SaaS environment without losing out on any new, innovative features.

Customers who do need to edit code should seek out vendors offering solutions that support customization. Typically, these will be offered under a single-tenant environment but can also be found in multi-tenant environments, where changes can be hidden or made optional for other customers.

Control

Control and security must be a major concern for businesses regardless of the deployment method they choose. On-premise implementation is mistakenly considered to be more secure than SaaS ERP cloud hosting by many consumers when, in fact, small companies who lack an in-house IT security expert are more at risk of systems being compromised than their SaaS counterparts in the cloud. The vast majority of espionage is actually done internally, not externally.

Understanding the importance of data security to businesses, SaaS ERP hosting providers rely on high-tech data centers to offer uninterrupted and reliable service. Aspects of any SaaS infrastructure that should be considered mandatory include skilled resources, network redundancies, stand-by power, up to date security, intrusion prevention and high performing servers, just to name a few.

Other advantages of SaaS ERP

There are various other advantages to SaaS ERP that have increased its popularity over on-premise implementation. Though not considered as significant to many customers, they have doubtless helped shape the rise of SaaS ERP hosting:

As the software is already running when delivered, implementation tasks that would be encountered with on-premise licensed software are eliminated. This decreased deployment saves companies huge amounts of time and money.
The SaaS environment makes it easy for ERP cloud hosting providers to monitor how customers are using various applications and can use these metrics to improve usability, performance, and functionality.
The burden of maintenance is taken away from the IT staff, allowing them to focus on the software which produces the ROI on investment. With SaaS, there is no need to manage upgrades or troubleshoot problems.
In the end, the three Cs of cost, customization, and control are making SaaS ERP the preferred technology solution for many businesses.