I’m very excited about today’s post because I’ve been working on it for quite some time. When I decided to write about the commonly used HR technology terms, ERP (Enterprise Resource Planning) was at the top of my list. Organizations talk about having ERPs or getting ERPs but I really had some challenges identifying exactly what it was.
So I made it my mission to find someone who could enlighten us. Thankfully, I was introduced to Brian Sommer, founder of TechVentive, Inc., a global advisory firm providing thought leadership and marketing expertise in the technology arena.
Brian, what is an ERP?
[Sommer] Such a simple question – Yet it is one that gets argued to death in courtrooms as there is no standard definition for it. ERP (Enterprise Resource Planning) is the successor to MRP (Materials Resource Planning), a term that described a combination of manufacturing, financial and materials management software functionality.
Today, ERP suites generally refer to some combination of accounting, human resources, supply chain, professional services, manufacturing, customer relationship management and/or other modules. ERP is a marketing moniker not a fixed set of application software. Anyone can pretty much call any group of two or more software apps an ERP suite.
How does an ERP compare to a HRMS?
[Sommer] ERP refers to a broader scope of applications and potential users. HRMS is entirely focused on one major functional or process area (human resources) while ERP may canvas a much larger part of the organization.
Is an ERP considered to be SaaS? Does it operate in the cloud?
[Sommer] Many ERP products were created when everything ran on-premises (i.e., before Al Gore invented the Internet). Over time, some of these applications were enabled for other deployment methods such as a hosted services, private clouds and single-tenant, hosted cloud solutions. Very few multi-tenant cloud ERP solutions exist today although Plex, Kenandy and Rootstock are three of note. Many more are coming, though.
The last paragraph covered cloud/non-cloud deployment methods but the other part of the issue is how the software is paid for/acquired. SaaS (Software-as-a-Service) refers to the ability to pay for software on a periodic usage basis (e.g., monthly usage fees) vs. a pre-paid, one-time license. SaaS generally refers to software that is acquired on a subscription basis. Many cloud solutions are sold via a subscription basis. However, cloud vendors often offer more favorable subscription pricing to customers who are willing to lock-in for a longer term (e.g., 3-year subscription) and/or prepay a significant amount of the subscription upfront. Today, you can get:
- On-premises products on a subscription basis or license
- Cloud products (mostly) on a subscription basis with deeper discounts for longer-term subscriptions
- On-premises solutions that can also operate in hosted, third-party or vendor-provided clouds
- Private cloud versions of most on-premises solutions (and a scant few multi-tenant solutions) in a private cloud setting
And, if all that isn’t confusing enough, there are also multi-instance solutions, too. I’ve written entire articles on that deployment method.
(Editor’s Note: You can read more about Software-as-a-Service (SaaS) and the Cloud in our Everything #HR Needs to Know about HR Technology series.)
What are the benefits of having an ERP?
[Sommer] At its core, an ERP solution is really a suite of integrated applications. To get the most from an ERP suite, the applications should:
- Share the same data model, tables and files
- Use the same development tools
- Have a common user interface and user experience
- Come pre-integrated from one application to another
- Use a minimal number of unique reporting tools
- Predominately use the same data storage medium (e.g., in-memory database, RDBMS, file access method)
- Behave and look like the same development created all modules, with the same tools and architecture at roughly the same time.
Unfortunately, many vendors create an ERP suite via a mix of self-developed applications and acquired products. If the acquired products were simply interfaced to the old ERP products, the solutions look ungainly and can behave quirkily. Some vendors even try to cloud-wash older on-premises ERP products by adding an acquired cloud application to the suite. As before, these Frankenstein creations might be hyped as a modernized ERP solution but it’s only modern at its extremities.
Historically, the benefits of an ERP solution originated from:
- Significant reduction in non-value-added activities (e.g., manual work, workarounds, redundant data entry, etc.)
- Improved efficiencies and productivity of the existing internal workforce
But, these productivity and efficiency gains alone will no longer carry the day as repeated re-installs and upgrades of older generation products only present small, marginal improvements to the organization. Most firms find the marginal or incremental benefits of implementing a new ERP to be substantially less than their incremental costs. This is why so many vendors (of mostly older or out-of-date ERP software) pitch their solutions in the context of having a low TCO (total cost of ownership) instead of it offering a great return on investment (ROI).
More modern ERP solutions go quite a bit further from a benefits perspective though. They use powerful analytics to accomplish things like reduced workforce attrition, better targeting of prospective customers (and recruits), improved customer service, etc. These are often accomplished via the incorporation (or modernization of ERP) of massive datasets, machine learning, smartphone telephony, geolocation services and dozens of other modern capabilities.
Are there challenges to having an ERP?
[Sommer] ERP solutions, just because of their all-encompassing business scope, are things to carefully implement. Lots of policy, process and configuration decisions must be made prior to implementation. And, of course, there usually is a lot of data to convert during the implementation, too.
The biggest challenge for many firms though is often economic. In a study we did a couple of years ago, we learned that the biggest single cost for on-premises ERP wasn’t the license, cumulative maintenance fees, hardware, systems software or initial implementation costs. Nope – the biggest cost was the permanent IT headcount to patch, maintain and upgrade the software over its useful life.
Multi-tenant ERP solutions are, for the most part, maintained by the vendor and this materially lessens the required IT personnel costs. When the vendor maintains the software, it also means that users don’t have to wait for other higher priority IT projects to get completed before their upgrades are processed.
Some will speak of vendor lock-in as an issue with large ERP software suites. It’s a legitimate concern as the switching costs of moving from one large software suite to another can be quite high. Switching ERP suites also introduces other potential risks as well. In some cases, companies have been unable to process customer orders when their ERP solution failed. Great due diligence on software (and implementers) is always advisable with any software project especially an ERP effort.
But taken as a whole, these large suites often offer great advantages. There’s often a reduction in (sneakernet) manual interfaces/integrations, fewer spreadsheets in use, fewer errors, faster access to critical business data, etc.
Is an ERP secure?
[Sommer] As long as there are skilled malcontents (or disgruntled employees), IT systems will be vulnerable. In another research effort we did, we looked at a year’s worth of data breaches and found that most were concentrated in a couple of industries (higher education and financial services). Almost all of those involved private or in-house data centers. Less than 1 percent involved a cloud service.
I’d recommend anyone considering new software to see if it meets the requirements/standards found in ISO27011, SAS 70 Part II/SSAE 16/ISAE 3402 or other criteria. This is especially true for companies employing an on-premises or private cloud solution. Does your firm’s data center meet these requirements? If not, get these fixed before implementing or consider one of the more secure multi-tenant cloud ERP products.
What do you see is the future of ERPs?
[Sommer] Old, static, unchanging ERP software is of limited value anymore. Those products were designed for the Industrial Age. However, most firms today must compete within the digital age. An ERP that wasn’t designed for big data, the Internet of Things (IoT), omni-channel retailing, etc. is out of sorts with the modern world and of no value.
We’re already seeing a second wave of cloud ERP (and HR) software emerging. These solutions are built on in-memory database technology. They can supplement their data prowess with Hadoop datasets, image files, non-relational information, weather data, social sentiment data, etc. These 2nd Generation ERP tools were designed first and foremost for the digital age firm – a firm that collects, dissects and acts on the heaping of mounds of data thrown off by consumers, suppliers, equipment, etc. every second. These solutions exist to serve the modern firm – not your grandfather’s factory.
A huge thanks to Brian for sharing his experience. If you want to hear more of his insights, be sure to follow him on Twitter @BrianSSommer.
The big takeaway for me in today’s post was Brian’s comment about the difference between total cost of ownership and return on investment. It’s a point that applies to many of our business activities not just ERPs.2