During my 12 years as a consultant on ERP implementations, some of my corporate clients have made some great decisions, while others succumb to pitfalls that derail their projects. Here are some of my impressions of how the big players sell ERP to potential customers and how businesses typically select a particular vendor.
Don’t miss the series
This article is the final installment of a three-part series. Part I: "Selecting an ERP system: Build or buy?" Part II: "Four factors that shape the cost of ERP"
The economics of ERP software
To understand ERP vendors’ sales tactics, you must consider the economics of scale that drive many of these companies. Big players such as Oracle, SAP, and PeopleSoft have invested hundreds of millions of dollars to develop ERP applications. For these firms, the cost of burning a CD copy of the software is marginal. In other words, any contract for an out-of-box implementation of their products is basically pure profit.
With so much at stake, ERP vendors often go to elaborate ends to court potential customers. This strategy often includes flying potential clients to the vendor site, using stretch limos, and providing luxurious accommodations and meals—all part of the company pitch on the merits of their ERP solution.
A vendor once brought me an entire box of Cuban cigars and asked me to give them to a potential client I was representing. When I told the vendor rep that the client did not smoke, he insisted that I keep the cigars anyway. Because I am an industry consultant, I have had offers to fly to vendor sites (first class, of course) just so that the companies could show me their latest offerings.
What to expect with the sales pitch
At the most basic level, all ERP products serve identical functions in managing business processes. So to make a sale, ERP vendors need to establish a significant difference between their product and the competition.
I’ve found that many ERP vendors make outrageous claims about the superiority of their products. Some software vendors offer million-dollar money-back guarantees if their software fails to perform at least twice as fast as the competition, while other vendors tout their products’ robust functionality and ease of use.
In addition to software licenses, ERP vendors will try to sell you additional consulting and technical support. Your final project quote may include several thousand hours of programming and consulting services. Remember that vendors commonly charge a premium for consulting services—you may find cheaper talent on the open market.
The politics of a successful ERP evaluation team
Any initiative on the scale of an ERP implementation should be reviewed by a client evaluation team. But when building this team, many companies underestimate the ultimate impact of an ERP solution on their business. Successful companies appoint representatives at the highest levels within each business area to their evaluation teams. CEOs must make it clear to all participants that choosing the right ERP product is critical to the whole business.
I have seen VPs who do not fully understand the critical nature of an ERP decision send subordinate managers to evaluation meetings. This type of delegation defeats the purpose of the evaluation team, and companies that allow VPs to shirk their responsibilities often become mired in “analysis paralysis” and never reach consensus on product selection.
An ERP evaluation team commonly consists of senior IT management, along with selected senior representatives from each area of the business. This team is charged with evaluating the relative merits of potential ERP vendors and selecting the one that best meets the business needs of their enterprise.
Here’s fair warning: From the outset, IT managers often find themselves at odds with line-of-business management representatives. A VP from accounting might find a certain product’s functionality highly desirable, but IT managers may recognize some serious technical issues that need to be addressed. IT managers—most of whom have only a vague familiarity with the nuances of various business functional areas—are charged with weighing the technical resource issues with the desires of individual VPs, and that can create friction.
As a general rule, a successful ERP evaluation team has a well-defined hierarchical structure. A senior vice president is placed in charge of the effort to eliminate infighting between the different functional areas and the IT department. This senior vice president’s job is to give appropriate weight to all team members’ issues and choose a tool based solely upon objective and quantifiable criteria.
Factors to watch for during the evaluation
Unfortunately, real-world choices for ERP solutions often are based on nonquantifiable factors. Some companies may choose a particular ERP vendor solely because it dominates the marketplace in its vertical market space. Obviously, that shouldn’t be the primary consideration. Here are the key points IT managers should consider during the evaluation process:
Plan for cost overruns
As a general rule, the human resources expense for an ERP implementation is three to four times the original cost of the software package. For example, an ERP solution costing $4 million should require an HR budget in the range of $12 million to $16 million. ERP vendors often make more money selling consulting services than they do from the sale of their software. The company that is implementing the ERP solution would not want to pay an hourly rate to the vendor for consulting services. Instead, the goal is to write the contract to make the vendor accept a fixed price for all implementation costs.
The temptation to customize the ERP solution
The typical management complaint, “I don’t want to change our business processes,” is very dangerous. I’ve seen how improper customization of ERP solutions on initial implementation can cost a company many millions of dollars when it comes time to upgrade its ERP software. Functional managers must understand the expense associated with customizing ERP solutions, and VPs must be willing to change the way that they do business to conform to a noncustomized ERP solution.
Identify the areas of competitive advantage
My advice throughout this series of reports is consistent on the topic of competitive advantage—an ERP solution should not touch any existing systems or practices that give the company a clear advantage over its competitors. It would be lunacy for a company that relies on its shipping and billing systems for a competitive advantage to choose an off-the-shelf ERP solution to manage those critical business processes.
Companies should evaluate each of their business needs and carefully judge how important each one of the ERP areas is in terms of its ability to compete in the marketplace. Your ERP solution should include areas that offer a clear, noncompetitive function.
An ERP solution should be customized only when the customer will gain a clear, competitive advantage. Otherwise, the customer is better off changing the way that they do business to accommodate the packaged solution.
Determining the scope of the ERP solution
Most ERP vendors separate their functional business areas into modules, which are priced separately. An ERP vendor may offer an accounting module, human resources module, and a manufacturing module, and it’s up to an evaluation team to find the best fit for its organization. IT managers should remember that since most companies do not purchase all available modules, IT must build bridges between whatever you did not buy.
The big picture
Although I have described some challenges of working with ERP vendors, I believe that ERP ultimately does have value for the enterprise through the integration of various business practices. The system itself doesn’t have a problem with diverse platforms; it just creates a headache when you need to make changes. After company takeovers or downsizing initiatives, many IT managers are faced with heterogeneous systems that run on different hardware platforms, use different network protocols, or have different database structures. A global ERP solution is so appealing because it ends the nightmare of building bridges between such disparate systems. That alone makes the sometime-frustrating process of dealing with vendors and internal clients well worth the effort.
If you were giving advice to IT managers about selecting an ERP vendor, what is the most important tip you would pass along? Post a comment or send us a letter.