making the business case for enterprise resource planning 070913

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Ziff Davis Research © All Rights Reserved 2012

Making the Business Case

for Enterprise Resource

Planning (ERP)

August 2012

®


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Making the Business Case for Enterprise Resource Planning (ERP)

White Paper

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Making the BusinessCase for EnterpriseResource Planning (ERP)A Ziff Davis White Paper

Steve Tuffill

Table of Contents

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

What benefits should be expected from a full ERP conversion? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Some Pre-Requisites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The Creation of a Successful Business Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Tangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Attributes of an Ideal ERP System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Recent Changes in the Integration of ERP into Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Comparing ERP Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

SAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Microsoft Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

IFS Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Apprise Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

DEACOM Integrated Accounting and ERP Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

About the Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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Ziff Davis | White Paper | Making the Business Case for Enterprise Resource Planning (ERP)

ziffdavis.com

Executive Summary

Enterprise resource planning (ERP) is the domain of information systems technology and

works across departmental and business unit boundaries. In simple terms it hooks up

information with interested parties and creates new information by logically combining data

to create new resources.Studies have shown that organizations in the growth stage of their

lifecycle typically need to formalize their information technology systems. In this Guide, we’ve

recruited some Customer Relationship Management (CRM) thought leaders to explain in

detail what you must consider when enabling and accelerating your growth through CRM

strategies and technology.

ERP is about the creation of new applications and new database resources that can be

shared with partners, depending on who you consider your partners to be. Its partners can beinternal partners, or partners in companies that you are working closely.We’ll provide a set of

guidelines that will assist in helping you make the sustainable transition from a small business

into a midsize business – and hopefully lay the framework for sustained growth and maturity

after that.

To create a business case for ERP, it will take some convincing of senior management on

the benefits of going through a risky and expensive transition process which hooks up a

considerable amount of sensitive data. It seems almost unconscionable that anyone could be

convinced of the benefits. In fact it’s all about anticipating and enabling others to foresee the

benefits that are hidden in this new venture.

ERP has been a so-called weasel word – or something meant to sound meaningful -- for

many a top executive, particularly the ones who have a hard time understanding what the

benefits might be. On the face of it, ERP is a massive resource-draining exercise. What’s

more, much of the restructuring which comes as a direct result of it involves changes to the

business processes that may have worked just fine for many years without failure. This can

be seen as a radical change and cannot be undertaken without some positive proof that the

undertaking will be truly beneficial.

The truly astonishing thing about ERP is that it lays you open to the outside. It takes a

breakthrough of insight to accept that sharing your company data with outsiders will actually

make improvements in your data transport that will definitely affect the bottom line in a

positive manner.

In this discussion on how to make an effective business case for ERP, we shall examine the

strategies that will help us reach a point where a case can be made that is convincing enough.

We will want to leverage the best and most efficient processes to maximize profitability. Read

on to learn about creating a foolproof business case for ERP.


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Page 4 of 15Making the Business Case for Enterprise Resource Planning (ERP)


What benefits should be expected from a full ERP conversion?One of the big problems about the justification of ERP is that it is not always seen as being

beneficial from all levels. The people who are in the front line of the business and who make

daily decisions about data will always appreciate the benefits because they will be able to

see them first hand. Some senior executives will be able to see the benefits and some may

not. So the best way to approach this is to make sure that all the people who would normally

understand the benefits of an ERP conversion will be aware of what they are.

The intentional integration of every function in the company means that everything

from human resources, sales, distribution, accounting, supply chain management, and

manufacturing are tightly amalgamated.

• Connectivity improvements

Once the information system portals have been opened to the outside world, the data

transport infrastructure will be greatly improved and become capable of investigating

trading relationships with prospective partners, thereby reducing the cost normally

incurred by doing so.

• Greater transactional recoverability

When the modifications have been made for integrating the applications and

enhancing the interfaces that will occur in the database, there will be far greater ability

to recover the data at the transaction level. This will have the effect of improving data

integrity and data security in the long run.

• Better functionality

By integrating data and increasing database portability you will get better information

which is accessible by a far larger user base. Consequently, the information will be

retrieved much more rapidly and with a far higher degree of accuracy.

• Greater facility with the user interface

In actuality, the user interface is somewhat of a two-way street. Users will have

wish lists which will help you determine the best line of approach to create the best

processes. Enhancement of interfaces will occur only because the quality of input is

far improved, once they have been overhauled.

• People working better and in harmonyUltimately, at the end of a tour de force, making radical changes, and going through

quite a lot of stress, your people will end up being better people. Moreover, because

of the nature of ERP, you will end up with a far better team than was in place before

the conversion.


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Some Pre-Requisites

It is very important to be completely familiar with all of the current business processes before

implementing a new ERP system. This means getting to grips with each process and having a

strong familiarity as to how the ERP system is going to improve each one. This is normally the

domain of the business analyst consultant and for business reasons this is probably the most

cost-effective approach, since any mistakes early on could be very costly later, certainly when

everybody’s scratching their heads and trying to figure out why it all went so badly wrong

Certainly, it would be advisable to cost in some business analysts in order to be 100% sure

of how the new system will integrate. The most important part of this is to evaluate the new

system in actual financial terms, creating a snapshot both before and after the new systemhas been implemented.As we begin to look to the future, let’s quickly look back at the typical

journey organizations like yours have taken.

Also, although this may seem like common sense to most, any new system has its quirks.

And for many reasons which are beyond the scope of this document, the new system will

probably have one or more major software updates. In order to avoid an update becoming a

major downgrade, it is important to engage technical support from the vendor company at an

early stage, to avoid system clashes and other untoward occurrences as a result of installing

software.

In a nutshell, the best kinds of prerequisites are the kind where everything is set out clearlyand everybody is on board. This way there are no unknowns, or if they are, they can quickly

become “known’s.” And another thing that is absolutely crucial to implementing ERP without it

costing the company dearly is to make sure that the entire business is involved, and that there

are no areas which are not covered by the new system. If there are areas which are outside of

the scope of the new ERP system, they could easily interfere with the whole business process,

because of their exclusivity which will hinder the flow of data and hence information.

The Creation of a Successful Business Case

When a successful business case is created, essentially what is happening is that the people

who have the authority to write the checks and pay for the consultants are being shownwhy they should invest in a new system and the reasons for the new system producing the

realization of greater profits and ultimately a return on investment (ROI) at a point that is

predetermined by the people who are suggesting the new system.


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The math is simple: after a specific time period, the company will definitely make more moneythan what has been invested into the new system that is now being proposed. This is ROI. If

nothing else, it is a watertight way of looking at why a business system is worthwhile to invest

in. And, if things do not turn out the way they were promised, then fingers will begin to be

pointed at the consultants who promised them.

There are very few exceptions. The exceptions do not really apply to an elective business

decision where a company is choosing to have a new ERP system installed. The sort of

exception that is being referred to here is the type where some new legislation has been

introduced by the Fed and this has forced a software upgrade for all kinds of new business

processes which have to be in place. For example, when the Fed introduced multifactor

authentication, this meant an enormous sea change in business processes being carried out

in financial institutions and all of their associated vendors. Looking retrospectively at thischange of business process in this industry sector, it has made an enormous improvement

to the security of individuals’ financial transactions using the public Internet, saving money in

many different areas because of the heightened security and reduction of risk. So, this set of

exceptional circumstances ended up being ultimately beneficial to one and all.

Although, the introduction of a new ERP system is purposely to improve and recommended

by consultants who are convinced that this will happen, it is the company personnel who are

pushing for an upgrade who need to make the business case to the CFO or other people who

write the checks that pay for these things. So, again it is down to a communication exercise

between the converted and those who have a natural skepticism because they realize how

much can go wrong and how much it will inevitably cost if it doesn’t produce the goods.

The most important thing is to make sure that the people who are doing the investigation of

the new ERP system have as much information at their fingertips as can possibly be. They

should have as many alternative systems as are economically possible to choose between.

They should hire on some well-respected and talented people who know this field well and

can make recommendations based upon personal experience. Between everybody involved,

they should all sit down at least weekly and discuss the pros and cons of all the systems that

have been passed in front of them, making judicial decisions as to how to move forward.

None of this should be arduous. The part that will be arduous will be the implementation

phase. Upfront, the process should be even-paced and forward moving, making progress on adaily basis to evaluate the best possible system to put in place.

The creation of a successful business case for a new ERP system will involve working up a

set of case justifications. These are tangible and intangible justifications, and each has their


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merits. The tangible results are self-evident and produce results that can be measured inquantified arithmetic. For example, if a process will reduce the amount of the salary or wage

bill for a month, by a specific number then this saving of outlay can be factored into the results

calculation.

The intangible results are more difficult to quantify, but probably more important in some

respects than the tangible ones, because you may not be able to place a direct value on each

one, but it may make a remarkable difference to your bottom line via the improvement of service

or efficiency in your organization. How these intangibles get put into a business case is one of

the ways in which it will be explained to the check writers that the new system is either going to

save money or increase the profit margin.

Tangibles

Now let’s look at some of the direct results of adding tangible benefits to an organization.

They are several areas where tangible results can be gained by applying ERP. They are:

manufacturing, sales, purchasing, finance, technical, head counting, management of inventory,

cost of carrying inventory, counting inventory and re-fulfillment costs.

Manufacturing

A company that moves to an ERP system that integrates planning will reap the rewards from

the best utilization of machines and coordination with people who run them. The manufacturingdepartment will have a great knowledge of how the production process works, but will often be

badgered by the sales department whose only understanding of manufacturing is that it should

get out the most products in the least possible time to the most amount of customers. When

these two departments talk to each other via ERP, the conflict will be all but gone, because ERP

is in place to make the most efficient use of processes.

Sales

In the sales department, internal sales will be boosted by the sharing of accurate inventory

information. Ultimately, inquiries that involve stock in pricing can be automated and higher focus

given to the placing of orders. This will likely reduce the amount of personnel required for thisdepartment. At the same time it could increase sales revenue radically because sales-making

information is at everybody’s fingertips at the click of the mouse.


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Purchasing

Supply and demand can both be facilitated with ERP. So in the same way that sales will be

improved by an ERP system so can EDI (electronic data interchange) facilitate purchase

orders and other wholesale transactions. An ERP workflow system will create the authority for

approving or declining purchases on direct purchase requisitions therefore removing the need

for intervention.

Finance

In the finance department, ERP can begin to manage both accounts receivable and accounts

payable consequently reducing debtor days. Reducing debtor days means a decrease in therequirement for cash to pay for this by reducing working capital. Also, the ERP finance function

is a must to get the business case even considered in a serious way.

Technology

With the technical process, ERP is likely to be replacing a system that relies on paper or legacy

systems. Technology has to move forward and replacing paper-based systems will reduce

costs both in terms of personnel moving the paper and the speed of process. There is a strong

possibility that your current system is end-of-life and replacement with ERP would match

costs equally by streamlining the processes and removing the need for maintenance of legacy

equipment.

Computer equipment typically becomes less expensive to purchase new, and more expensive

to maintain after each 2 to 5 year period. That is to say that the cost of repair and maintenance

increases proportionately on older machinery and parts become progressively obsolete. While

the older systems deteriorate and become more expensive to maintain, newer equipment runs

far cheaper per megabyte of memory which brings down the cost of storage at the same time.

Along with storage, processing speed increases exponentially.

Head Counting

Surprisingly enough, the headcount is not likely to dramatically reduce with the introduction ofan ERP system. Headcount savings using integrated systems however can occur occasionally.

This sort of saving will likely happen when two departments, traditionally run separately, come

together by the sharing of data that has been facilitated by ERP. Certainly anything that

involves rekeying data because of lack of combined processes will reduce the headcount. And

the only other thing to consider is that retraining ultimately will end up being costly.


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Management of Inventory

With the advent of RFID, QR and barcodes, much of the archaic inventory checklist systems

become out-of-date, while they are replaced with modern wireless hand scanner machines and

RFID equipment that tags inventory automatically. Meantime even barcodes are superseded

with RFID and QR. All of this new technology increases accuracy, speed and real-time

inventory location.

Cost of Carrying Inventory

Safety stock percentages of even 8% to 10% would be reduced by 50% and inventory

carrying costs could amount to well over a third of the value of the inventory. These costsinclude insurance, loss, damage, taxes and obsolescence, not counting other factors involved in

maintaining the inventory. If the inventory is worth $30 million, then, at an 8% safety stock level,

there is nearly $2½ million dollars that could be better spent elsewhere.

Counting Inventory

Of course, stock-taking takes on a completely new light with automated processes. Even

complex systems that require end-of-day truck-offloading and passing of stock back into

warehouse inventory, become a snap with automated QR or RFID tagging. Not only is this a

considerable savings in time, but when a daily turnaround requires accurate calculation which

might not be able to be met using manual systems, ERP can get the job done easily, providingstaff with extra time to spend on more profitable pursuits, such as checking the next EDI

transaction round or making sales calls to customers.

Re-fulfillment Costs

Re-fulfillment or the replacement of wrong goods or wrong quantities, can be extremely

expensive. Two bad picks a day may be one thing, but add to this a pair of bad deliveries, and

there could be as many as 70 or 80 errors a month which translates into tens of thousands

of dollars annually. Doing the math, several things must be added together to compute the

total time to reverse a bad delivery. In the warehouse alone, there is additional time required

for picking replacement items, packing them and shipping them. Then there is the costof collecting the deliveries that were wrong and replacing them, which unless the logistics

department is very skilled, could mean an extra trip on a route that’s not working on the day

when they have to be replaced. In the accounts department, this is a headache, locating the


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bad order and rewriting it, reconciling it in the weekly accounts figures, as well as creating anew replacement order to send to the customer. And, if there is an adjustment of cost, there

is even more work. An ERP system will not only reduce the amount of errors but also should

there be errors, these will be covered by the system, automating the whole RMA process. So,

even if management is not sold on the other aspects of ERP, just streamlining the RMA process

alone would be a good reason to go with ERP.

Attributes of an Ideal ERP System

Supply and demand can both be facilitated with ERP. So in the same way that sales will be

“An enterprise resource planning (ERP) system is an attempt to create an integrated productthat manages the majority of operations in a company. What is different about ERP systems,

is that they integrate across functions to create a single, unified system rather than a group of

separate, insular applications.” (Alshawi, 2004, p. 454) What makes an ERP system different

from the frameworks of a generalized nature, is the integration of accounting functionality with

the system as a whole.

The evaluation criteria for an ideal ERP system are support, flexibility, functional fit, maturity, and

continuity. Some challenges to acquiring the optimum system are the ability to supply according

to specific requirements, the transfer of knowledge from customer to vendor, certain customized

maintenance, continuous quality, and future proof of investment.

When the first contact is made with the ERP vendor, it is imperative that service-level

agreements are drawn up (SLA), and that an understanding is arrived at in terms of the support

level that is needed for your particular organization. Both sides, the vendor and your company,

must work with flexibility to arrive at an amicable arrangement.

It is worth doing some background checks on any company that intends to sell you an ERP

system. You need to ensure that the company has considerable maturity in this arena and

can maintain continuity along with functional fit. Quite a bit of time must be spent on learning

what the vendor’s abilities are to supply to your company according to your own very specific

requirements.

All of this comes down to the transfer of knowledge from you, the customer, to the ERP vendor,

and this will need to be arranged over a series of meetings. Sometimes there are certain

customized maintenance arrangements which need to be put in place right up front before


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anything is installed. What you need to see in the new vendor is a continuous quality and thefuture proof of your investment in them.

Some Definitions of an ideal ERP system, set out in realistic terminology:

1. It must provide a system that supports the business process to achieve

higher efciency and effectiveness both in the application of single

activities and the business process as a whole. This means that whatever new

system has been installed, it must be better than what was there before. Also, it must

increase the business process efficiency and make methods more effective across the

whole business territory.

2. It must provide a system that supports the business process to achieve

higher efciency and effectiveness both in the application of single

activities and the business process as a whole. This means that in an operation

of any size, the speed and effectiveness of the implementation of new technologies will

support the achievement of competitive advantage thereby benefiting the bottom line.

3. It must be acceptable by all users. This means that it is no use installing a new

system that incites objection and opposition because this will be counterproductive

enough to bring the whole system down and, in the worst-case scenario, consequently

stop the business from operating.

Recent Changes in the Integration of ERP into Organizations

The question is frequently asked as to whether the incoming ERP system will restructure

the organization, or whether the organization will determine the possibility of integrating it.Realistically the matter is mutual, and depends entirely on how advanced the processes are

that have been developed by the organization prior to integrating ERP.

Comparing ERP Systems

“Theoretical and empirical arguments lean towards attributing direct effects to ERP,

believing it to possess intrinsic organizational virtues. Because of the difficulty

of making an ad hoc inventory of organizations employing ERP software, earlier

statistical studies have largely ignored the integration of ERP into the organization.”

Source: international Business Research, Vol. 5, No. 2, February 2012


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Many ERP systems exist, some very expensive, others that have various specialized attributesfor certain key systems, such as Microsoft Dynamics which are split into different sub-groups.

The SAP system exists everywhere and a good deal of thought should be put into whether

a small company would really benefit from taking on SAP, even though it is feature-rich, and

compared with many other ERP systems, there is little that it does not have. For example

where other systems might require a third-party plug-in to integrate warehouse management

and point-of-sale, SAP covers both of these eventualities. Then there is DEACOM Integrated

Accounting and ERP Software that is highly comprehensive but typically does not cover

payroll, HR or the automation of professional services. It must be born in mind that some of

these ERP systems are merely integrated accounting systems that do nothing much else than

improve the accounting. For an ERP system to be truly beneficial, it needs to go across the

whole organization, integrating business processes, accounting and even human resources.

Each ERP system can be purchased and will usually cost from a couple of hundred dollars to

several thousand dollars per user. Then there is likely to be a setup or fixed fee and an annual

maintenance fee which is budgeted per user. So, taking the decision to purchase an ERP

system is no light matter. Half the battle is proving that the several thousands of dollars which

it is likely to cost, will be recouped within a certain timeframe under the auspices of ROI. ROI

will need to be proved before anybody signs their name to the purchase of a new system.

In fact, in order to guarantee ROI, it would be advisable to hire a specialist in ERP consultancy

to make a professional comparison of all systems applicable to the company that is seeking

the installation.Here are some comparisons of different ERP providers and the featured applications that they

provide, along with approximate costs to take them on :

Vendor Name Feature Discussion Approximate Cost

SAP A German company withaffiliates all over the world.

Completely compre-

hensive, with nothing left

out. A total all-inclusivepackage that will fit any

organization provided they

can afford it.

Total license basis:

(upon application.)


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Microsoft

Dynamics

Everything is covered

except for construction

and point-of-sale.

Total license cost:

c$700,000

IFS

Applications


except for warehouse

management, point-of-

sale and payroll

Total license basis:

c$1,125,000

Apprise

Distribution


except for fixed assets,

manufacturing process,

manufacturing make to

stock, manufacturing

make to order, service

management, professional

services automation,project costing, time

billing, North American

payroll, HR, contact

management, CRM,

business performance

management, construction

and point-of-sale.

Total license cost:

c$187,500

DEACOMIntegrated

Accounting and

ERP Software

Everything is coveredexcept for service

management, professional

services, automation North

American payroll, HR and

nonprofit organizations.

Total license basis:(upon application.)


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Conclusion

ERP requires serious consideration in order to provide a business case for a system that

will improve on the current business processes and transform a company. This paper has

described many aspects of ERP, its benefits and its installation process, and pointed towards

further information resources to consult.

We have touched on the methodology of how to make an effective business case for ERP, and

have examined the strategies that can help us reach a point where a case will be made that is

convincing enough. We have described how to leverage the best and most efficient processes

to maximize profitability. Here are the components for creating a foolproof business case for

ERP.


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Steve Tuffill, is a freelance technical and creative writer based in

Valencia, CA. Steve has worked in business computing for some

25 years, and has been writing since 1998 covering many technical

and business-related topics. Re has written for Toolbox since 2006.

You can reach Steve at [email protected]

About the Expert

Alshawi, S. (2004). Integrating diverse ERP systems: A case study. Journal of Enterprise InformationManagement, 17(6), 454-462. Retrieved from http://www.emeraldinsight.com/journals.htm/journals.htm?articleid=852288&show=html&WT.mc_id=alsoread taken from: Abstract, “Integrating ERP Into TheOrganization: Organizational Changes And Side Effects” (International Business Research: Vol. 5, No. 2;February 2012) taken from: Burns, M. (2008). Enterprise software survey 2008. Retrieved from http://www.camagazine.com/archives/print-edition/2008/sept/columns/camagazine4469.aspx

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