ERP MATURITY AND HEALTH: IS YOUR BUSINESS AT RISK WITH YOUR LEGACY SYSTEM?

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1 ERP MATURITY AND HEALTH: IS YOUR BUSINESS AT RISK WITH YOUR LEGACY SYSTEM? 2016 Ultra Consultants 1

2 ABSTRACT Assessing your ERP system s maturity and health is a necessary and critical process. It is one that determines the value and risk that you are receiving and managing, respectively, with your current system, and is also one measure of your company s overall performance. Within this paper, our questions on ERP value ask if your company is being held back by an out-of-date legacy ERP system or the lack of an ERP system entirely, while questions on risk to your company and its ERP go beyond the risk management steps that account for daily maintenance or disaster recovery. This paper demonstrates how to measure the maturity and health of your ERP system, and what factors to account for initially as you decide to move forward with an upgraded or new system. Additionally, a calculation of approximate cost is provided, as well as checklists on value and risk to help you and your company start taking your first steps. Lastly, an appendix provides metrics and findings from a 2015 survey conducted by Ultra Consultants of ERP system users from manufacturing and distribution industries. The metrics and findings indicate a high percentage of survey respondents with older systems (5+ years) are not satisfied with the ability of their ERP software to meet their company s needs, and can clearly benefit from an assessment of ERP maturity and health. INTRODUCTION In June 2015, we authored a paper as a primer for the mid-sized company leadership team looking to develop a cloud ERP strategy, and presented therein why all businesses should be looking at cloud solutions. While that paper explains the issues that would drive a manufacturing or distribution company to consider moving from an on-premise ERP solution to cloud solution, this paper addresses two questions even more fundamental that all executives eventually ask: 1. Is it time to begin thinking about upgrading my company s ERP? 2. By staying put, what are the benefits that are being missed by my company? You may have already made up your mind on your ERP system: You re sticking with your current system, or you re starting an ERP upgrade or replacement. Whether you re staying put or moving forward, taking measure of the maturity and health of your current system will provide your company with an evaluation of the value of and risks within your system, and what factors to consider in moving forward with new or upgraded ERP Ultra Consultants 2

3 ASSESSING YOUR ERP MATURITY: VALUE, RISK AND MOVING FORWARD When looking for advice in how to measure ERP system maturity, its value and the risk of staying put or installing a new or upgraded system, there are numerous articles that introduce the fundamentals of ERP (what it is, how it is used), getting it implemented, and the benefits of ERP. However, when looking into holistic ERP maturity models, one paper, A Stage Maturity Model for Enterprise Resource Planning Systems Use (Holland & Light, 2001) 1, is the standard on the topic. In their paper Holland and Light define three stages of an ERP system: 1. Use of Information Technology: The company has a system and is using it with an in-house IT department. 2. Organizational Sophistication: The company has implemented a new ERP system and is using it in their day-to-day business. 3. Normalized ERP Implementation: The system has been implemented and has been in use in the company for at least a few months, and probably a year. This takes on three additional dimensions: a. Penetration of the ERP System: The extent to which the ERP system used by the end users in all aspects of their jobs, and the extent of system acceptance by both technical and end users. b. Strategic Value: The extent to which the system is providing value to the company or merely being used by the company to create accounting records. Also, the extent to which the ERP system been extended into Supply Chain Planning (SCP), Customer Relationship Management (CRM), Master Data Management (MDM), if it is an integration point with the internet and if it accelerates communications between customer and suppliers. c. Knowledge Management: The extent to which information from the ERP system drives the company s scorecards. Does the system provide information that is the basis of decisions made weekly and monthly? Our examination reveals that the objective of Light and Holland s paper is related more to the implementation of an ERP system versus the overall health and maturity of an existing ERP system. Their ideas on use of the system and the provision of useful information translate and integrate well into the topic of value. However, Light and Holland did not address the area of risk with respect to an older legacy system. VALUE In examining your ERP system, your initial questions must relate to value, specifically: What is the value that our current ERP system is providing? What is the value of a new ERP system? Can our existing ERP system match the value of the new ERP? Is our business being held back by the lack of an ERP system or one that is up-to-date? We have identified the following five areas of value that should be provided by your ERP system: 1. Features and Functions Supported 2. Integration with External Systems, Applications, Customers and Suppliers 3. End User Technology 4. Information 5. Culture 1 Holland, C. P., & Light, B. (2001, April 1). A Stage Maturity Model for Enterprise Resource Planning Systems Use. ACM SIGMIS Database, 32(2), Ultra Consultants 3

4 Whether you re staying put or moving forward, taking measure of the maturity and health of your current system will provide your company with an evaluation of the value of and risks within your system, and what factors to consider in moving forward with new or upgraded ERP Ultra Consultants 4

5 1. Features and Functions Supported Of the five areas of value, this is the most likely to drive a decision to move to a new ERP system. We typically find two types of situations: 1. ERP should be more than an accounting system: While at its core an ERP system does provide a method for General Ledger, Accounts Payable, Accounts Receivable and financial statements, it can and should do much more. 2. ERP should cover processes end-to-end: Most companies using one or multiple ERP systems use it for what it was intended: as a method of planning, creating and tracking customer orders, purchase orders, manufacturing orders, and inventory. But what we typically find are gaps in these processes. For example, spreadsheets and paper are supporting the additional features that the current system is not performing, and other systems may be in place supporting additional functions, but relying on manual integrations. The ERP system may have penetrated the company to an extent, but it is not receiving the full value because of gaps in the flow and the resulting business processes. 2. Integration with External Systems, Applications, Customers and Suppliers Many companies we have worked with have shared with us the following general statement: Our customers would like us to use EDI. We don t have it, but that is okay because we print the EDI order and enter it into our ERP system, just like any other order. If a company and its ERP system is not able to communicate via the preferred method of their customer, that is a problem. EDI is an older technology, but recently the Internet of Things has exploded with applications and integrations within banking, payroll, human resources, customer relationship management, forecasting and planning of inventory, shop floor machine integration, to name a few. This trend will not stop. Therefore, to add value to the company, it is important to look for point solutions which can augment the existing core ERP. To do this, an ERP system must offer technology infrastructures that support integration. A second area of integration that many companies are missing today are customer portals and supplier portals for their business partners. These portals offer the company s business partner the ability to interact directly with items and pricing, communicating directly with employees of the company via the ERP system and its processes. This is an area of potentially significant value. 3. End User Technology If you have an older system, this area should be of great interest. In our experience, many companies are pleasantly surprised when they find out the state of systems today and what has improved in the past 10 years. End user technology typically takes on the following forms: A. Look and Feel: Many systems today look like Microsoft Windows applications, specifically Outlook. ERP vendors even brag about how their product is more Windows like than Microsoft. The user experience is extended with roles and screens showing filtered information and action lists (e.g., a list of customer orders waiting for credit approval). It is no longer necessary to run a report to determine what to work on next, and managing by exception is no longer the exception. B. Workflow: The ability for events within the system to simply trigger an to a person is a very significant value to improve most business processes. Many companies today still rely on paper moving from desk to desk as the process. Eliminating all paper should be a guiding principle of an ERP implementation Ultra Consultants 5

6 C. Windows Integration: This is the ability to literally copy information from/to the ERP system and a spreadsheet, document, or trigger an . Instead of retyping price change information from suppliers or for customers into the system, it is possible to copy it directly from a spreadsheet into a grid within the ERP system. This, in turn, delivers enormous time savings. 4. Information As indicated by Light and Holland, knowledge is linked to vision and strategy. Simply, do you know what you need to know to run your business? In the past ten years, the ERP vendors have taken what used to be a separate development project and created a module generically referred to as Business Intelligence (BI). A modern ERP system offers the ability to generate reports immediately in filtered spreadsheets, in bar and pie chart forms. Also it offers BI capabilities, which is data converted into information. Typically stored in structured data warehouses, this information can take on time-based analysis like inventory turns by month, by product line, or supplier scorecards. An out of the box BI tool is typically created by role or function, thus offering the purchasing manager versus the customer service manager a different set of pre-created reports and charts. The area of information is harder to quantify for value, but is normally the second most important reason why a company will move from one ERP system to the next or upgrade the current ERP. Executives when presented with the opportunity to know more about their business and to make better decisions normally determine that the cost of the ERP is justified. 5. Culture In valuation of a company, culture is often missed. Leadership is typically looked at as the main ingredient of a positive culture. But the underlying technology that is provided to a company can be a negative influence upon its culture. For example, do your enterprise systems hold back the employees? Do employees need to work around the system to do their jobs? Have spreadsheets taken over? Have employees given up being creative in finding ways to work around the system? Do your systems empower your knowledge employees, or your shop floor? What does your system say about the culture of your company? A modern ERP system affects the culture today and in the future. Any supply chain person who is worth hiring will ask, at some point in their interview, what is the ERP system that they would be using to perform their job. Additionally, when onboarding new, especially younger, employees, their ability to quickly learn the system is directly related to how Windows like is that system. RISK In our experience, risk is where most companies begin their examination process. The current ERP system is providing some level of risk to the business, therefore questions are asked: If the system goes down or fails, what do we do? What if it is a catastrophic failure? These questions of business continuity and specifically disaster recovery are important to address. Yet while the sudden end to a system is what keeps people up late at night, it rarely happens that way. The following list of five risks may be more damaging to a business than if the system simply shut down one evening during its nightly update Ultra Consultants 6

7 Most companies believe their security to be rock solid, and would not think of deploying their system off premises. In truth, there is more value to be gained from the opposite.

8 1. System/Hardware Health Examining the health of the current system and supporting hardware is a common starting point. For example, the current system is not stable: When going to a new screen response time is slow, or printing slows down the system while it calculates the report. It is not okay to have a system running slow, since that means people are waiting for the system. Such performance deficiencies represent a huge loss in productivity and are one of the main reasons employees seek workarounds, ways to not use the system as it was intended. 2. Vendor Support In theory, and for the most part in practice, ERP vendors use funds earned from their support services annual maintenance fees to improve their systems. This is a huge benefit for their customers as the ERP system keeps pace with the changes in industry standards, in the form of new functions and integrations as well as with changing compliance requirements. Also, annual maintenance fees normally pay for phone support of any issues. If an ERP vendor has told your company they are no longer supporting their product (which is a big red flag), this means you no longer have anyone to call to ask a question. In short, you own the product. There will be no improvements created, therefore your business processes will be more difficult to improve while relying upon outside systems and custom programming. 3. IT Staff s Ability to Support How easy is it to hire new employees with experience in your ERP system and its underlying technologies? If this is difficult, then your company is at risk. Is your team experiencing increased difficulties supporting the system because they are not the people who implemented it? Or is the release version old, and your company s system has so many modifications that it is not possible to move forward with an upgrade without incurring significant consulting costs? All of these situations suggest that it is time to investigate new systems to replace the old. 4. Security Security is a risk that is typically overlooked. Most companies believe their security to be rock solid, and would not think of deploying their system off premises. In truth, there is more value to be gained from the opposite. Older, on-premise ERP systems are easier to hack. Security risks continue to rise with the use of Microsoft Excel and paper. Storage in file cabinets is typically overlooked as a potential security weaknesses related to company information. Also, many companies list credit cards on paper files or store them in their on-premise systems. This is a huge security risk and against the law, and most older systems are not Payment Card Industry (PCI) compliant. 5. Government Regulations If the system your company owns is older and you operate within an industry governed by FDA regulations, for example, you are at risk. The amount and velocity of regulations from the FDA is increasing in all industries it monitors: Pharmaceutical companies are concerned about serialization, and all companies making and selling medical-related products are subject to validation of their ERP system (similar to an ISO operating 2016 Ultra Consultants 8

9 procedure audit but more stringent), and are concerned every time a change is made to their system. Food manufacturers need to trace their supply chain by lot number back to the farm, and most of these companies do not have the processes in place to manage this requirement, nor do many of the older systems have the capability to support these efforts. Chemical companies need to track hazardous materials multiple ways, which due to lack of support by the older ERP system results in manual and paper processes. We have seen a large increase in concerns related to government regulations, and the in the needs of our clients to have systems capable of supporting processes that will adhere to these new laws. LOOKING INTO NEW ERP: FACTORS TO CONSIDER MOVING FORWARD You do not evaluate enterprise applications every day, so find people who can. Take the time to research companies who will walk you through the process of looking at your business processes, and help you determine how to change those processes and supporting enterprise applications to reduce your risks and increase the value of your system to your company. When looking at your current system and considering an upgrade, use the following five factors and associated questions as a guide in your evaluation: 1. Features & Functions ERP selection projects must keep their focus on the ability of the software to meet the functional needs of the company. Typically, a company will spend up to 80% of its time making sure that the software provides adequate coverage of a company s specific business requirements. To that end what does each company offer? What are the products for each industry / vertical? What are some of the key features and functions for each vertical? 2. Cost & Contracts An ERP system represents a major investment in capital expenses and resources. Given the magnitude of both direct and indirect costs (software, training, implementation and services), companies expend a significant amount of time understanding and negotiating costs and contracts. What does it cost, in an apples to apples comparison of the relevant aspects? 3. Company Risk Who is the ERP vendor you are buying from? How many years have they been in business, and how many years has the application been sold in the market? What are the sales of each product they represent last year, in dollars and numbers? How much of that was into your industry? How much money is invested in R&D? What are their prospects long term (are they positioned to be purchased or will they purchase another vendor)? 4. Technology & Platform Risk What is the underlying technology such as the database structure or delivery model? What direction is the vendor taking with this technology platform in coming years? Are they staying current? What is their cloud offering? Do they perform well in the key areas of User Interface and Role Centers, Workflow, and Business Intelligence? 2016 Ultra Consultants 9

10 5. Implementation & Support Risk: Will the implementation be led by a systems integration partner or directly by the vendor? Do they have experience in your industry? Who do you call when you have a problem during implementation? What is support like after Go Live? Will they make a good partner? Careful scrutiny is needed here. A vendor might deliver excellent software at a competitive price, but is destined to fail if it is not implemented effectively or supported during use in the subsequent years. WHAT ARE THE COSTS? Calculation of ERP cost can be very complicated. To derive an initial number, the following calculation can be used to approximate a cost: ((ERP users x $3000) x 2) + Hardware Cost = Approximate cost of new system 1. Count the number of users of the ERP system in your company. These are the employees who would use the ERP system at least 15% of their day, excluding warehouse and manufacturing users except supervisors and managers. 2. Multiply this number by $3,000. The product is the base software cost of the ERP system with named users (not concurrent, which is very different). 3. Multiply the software cost by two. Doubling the number accounts for the consulting services required to implement the software. 4. Consider if more hardware is required and add this cost. TAKE THE FIRST STEP: YOUR ERP MATURITY AND HEALTH CHECKLISTS The following ERP maturity and health checklists ask fundamental yes/no questions. If Yes is answered to one of these questions, it is recommended that you consider looking into an upgraded or new ERP system. Value Checklist Yes No Do the features (e.g., lot control) and functions (e.g., forecasting) supported by my legacy ERP system meet my needs as a company? Is my ERP system integrated or does it offer the technology to perform basic integrations with outside systems? Does my ERP offer a Windows like user experience, does it have workflow, and does it offer seamless integration with MS Excel? Do I use the legacy ERP system for all the information necessary to make day to day and month to month decisions how to run the business both tactically and strategically? When employees in your company say they are going to work with the ERP system, are they enthusiastic about it and are specifically the younger employees positive about the ERP system? 2016 Ultra Consultants 10

11 Risk Checklist Yes No Does the ERP system go down once a week? Once a month? Is the system so slow that you will hit enter and go to refill your coffee because you need to fill the time while you wait? Does the ERP vendor who owns the software rights to your ERP system offer support / maintenance and upgrades? Is your ERP system written in technology that is easy to find and hire new employees to support? Is your ERP system and the underlying business processes PCI compliant? Is your system able to perform the features and functions required by the government regulators of your industry? APPENDIX: SURVEY AND FINDINGS ON LEGACY ERP USERS In 2015 Ultra conducted a survey of ERP system users within the Wholesale Distribution and the following manufacturing industries: Discrete, Process, Metals, Light, Repetitive, Food Service and a handful of others. As shown in the following data and figures, there are low levels of satisfaction among survey respondents with ERP systems that are 5 or more years in age, with 63% of those either actively seeking or interested in acquiring a new system. Of course there are a multitude of reasons why three quarters of the respondents indicated they were moderately to not at all satisfied with their ERP system. To highlight just a few: Cumbersome legacy software coupled with multiple bolt on solutions. Lack of much needed functionality to compete in the marketplace. Upgrades are very difficult to accomplish, partially driven by the number of modifications we have made to the system. Seems that anything new we would like to add is very cumbersome and not clean to install. New rules for local countries are extremely difficult to turn on. As is the case with most ERP systems, too much to consider being a generic tool that is then modeled into a company specific design. Most companies never find the full value of ERP after deployment has ended. Reasons for dissatisfaction aside, we find that the satisfaction levels and needs of those with legacy ERP systems of 5 or more years in age indicates that they would benefit from the ERP maturity and health assessment strategy and checklists defined in this paper. Survey Metrics Eighty-nine percent of the respondents (Figure 1) were using an ERP system of 5 years or older, with 73% having a system of 11 years or older Ultra Consultants 11

12 Less than 5 years 11% 5 to 10 years 11% 11 to 15 years 25% 16 to 20 years 25% More than 20 years 28% Figure 1: Respondents age of current ERP systems When we asked the 89% about their satisfaction with the ability of their ERP software to meet their company s needs, only one quarter of respondents (Figure 2) said they were completely or very satisfied, with a higher percentage not at all satisfied (28%). Not at all satisfied 11% 28% Slightly satisfied 6% Moderately satisfied 42% Very satisfied 22% Completely satisfied 3% Figure 2: Percentage of respondents with ERP of 5+ years on their satisfaction in the ability of their ERP software to meet their company s needs Of those that indicated they were moderately, slightly or not satisfied, we asked why they felt this way. As shown in Figure 3, the larger the word, the more respondents who used it in their response Ultra Consultants 12

13 good user meet business extract friendly needs us ERP cumbersome manufacturing companiesfunctionality modifications customize fully outdated integrated old house difficult ability systemtool implementation data time software interface needed never issues Figure 3: Percentage of respondents with ERP of 5+ years: Words associated with lack of satisfaction in their ERP system Almost one-fifth of respondents (18%) brought up Difficult : Organization has outgrown functionality. Important data remains captured or difficult to extract. Upgrades are very difficult to accomplish, partially driven by the number of modifications we have made to the system. Seems that anything new we would like to add is very cumbersome and not clean to install. New rules for local countries are extremely difficult to turn on. Poor initial implementation makes it difficult to judge its ability. IT is functionally weak yet heavily modified so that upgrading is difficult to impossible. When we asked whether the 89 percent were considering a new ERP system (Figure 4), 63 percent of were either actively looking or thinking about starting to look for new ERP software. poor job lack new We are thinking about starting to l... 38% We are not interested in looking fo... 38% We are actively looking for new ERP... 25% Figure 4: Percentage of respondents with ERP of 5+ years interested in acquiring a new ERP system 2016 Ultra Consultants 13

14 Lastly, of that 63 percent we asked what improvements they were seeking with new ERP software. Every respondent (100%) indicated there are looking for improved productivity from new ERP software. Nearly everyone (95%) is looking for improved access to information, and a solid majority want to improve customer satisfaction and reduce costs (58% each). Improve productivity Improve access to information 95% 100% Customer satisfaction Reduce costs, increase profits 58% 58% Reduce manufacturing lead times Other 21% 26% None of the above 0% Figure 5: Improvements sought by respondents actively looking or thinking about starting to look for new ERP software Where Other was selected for improvements sought, respondents provided the following: E-commerce solution, ease of integration. Better reporting. Improve access to data. Eliminate manual document preparation. ABOUT ULTRA CONSULTANTS Ultra Consultants is an independent consulting firm serving the manufacturing and distribution industries. Organizations turn to the Ultra team for ROI-driven ERP technology expertise and business process management that improves revenue and customer satisfaction, enhances financial management and real-time decision making, improves productivity and reduces time to market. The world s middle market companies make up the Ultra Consulting client roster including aerospace and defense; automotive; chemical; consumer goods; electronics; food and beverage; industrial equipment; medical device; metal fabrication and plastics manufacturers. Ultra Consultants offer deep experience in manufacturing process optimization. The team averages over 20 years manufacturing and process experience with professional certifications in APICS, Lean manufacturing, Six Sigma Green and Black Belt, and Project Management Ultra Consultants 14