In the early 1990s, change happened less rapidly. Product cycles were slower, communication occurred mostly by telephone and fax, and email was still a novelty. If you wanted to boost sales, you hired more sales personnel. Let’s just say you could afford to move “a little slower.”
But over the last few years, the pace of business and innovation has accelerated dramatically. Today’s speed of change places stresses on business process. Worker expectations have changed on how they want to engage with your business systems. And your customers have changed the way they want to engage with you. Businesses can now go global in an instant, ecommerce has opened up new sales and customer service channels and the last decade has seen the birth of several hyper-growth companies.
Owning an ERP system that can only be upgraded every four or five years (at best) is simply not enough to maintain competitiveness with your peers. Business and technology are now moving so quickly that even if you do invest six months and $1 million in an ERP upgrade, the end result will be out of date by the time it’s completed. Worse still, old ERP is fundamentally incompatible with the way companies need to be structured for success.
It’s time to explore the eight ways that your aging ERP system is holding back your business.
1. Legacy ERP Drains the Innovation from Your IT Budget
Fact: Between 50% and 90% or more of a typical IT Budget is spent on maintenance, not innovation.
The key to knowing how aligned your ERP systems are with your business imperatives is measuring how much of the IT budget is devoted to innovation rather than maintenance.
How much of IT’s time can you devote to addressing new business requirements, rather than day-to-day operations such as patches, fixes, support calls and otherwise managing your infrastructure? Take a hard look at the aging, version-locked ERP system you are running right now, and do the math.
Analysts from Forrester to Gartner measure this allocation closely, and find that maintenance spend can range from 50 percent to more than 90 percent of a typical IT budget. Only a fraction is left over for meeting business needs. It’s no wonder, considering the average cost of an Oracle or SAP deployment can be between $12 million and $17 million, according to CIO magazine. Subsequent recurring maintenance fees, infrastructure upgrades, integrations and ongoing IT maintenance can quickly consume the IT budget.
Simply changing the equation and reallocating the IT budget from maintenance to innovation is almost impossible with old ERP, because every costly old on-premise ERP upgrade, patch and fix is “opportunity cost” —money and time that isn’t spent on tailoring ERP to meet the needs of the business. Worse still, businesses have little left over for managing core areas such as security and reliability. For example, does your business have budget left over to manage a second data centre?
But your competitors are already changing their budget allocation—and cloud computing is the tool that enables them to do it, by cutting IT costs by 50 percent or more. They’re able to reduce spend on maintenance, and increase spend on such value-added activities as creating new cross-functional workflows and reporting processes, adding sales channels, entering new markets and improving connectedness between internal and external systems. That adds up to a decided competitive advantage, while the company gains enterprise security, redundancy and data recovery that would be cost prohibitive as internal company initiatives.
In 2013, Shaw Carpets, a $4.5 billion subsidiary of Berkshire Hathaway and manufacturer of flooring and turf products for commercial, residential and institutional markets was looking to expand its manufacturing facilities into China and needed a new ERP solution to support China and subsequent subsidiaries that would be created in the APAC region. Faced with the reality of an aging on-premise ERP solution and the associated pain of maintaining the customizations, the company was faced with the problem of version lock. Shaw Carpets had to choose between retooling the customizations with every upgrade of the core ERP system (and burning their IT resources in the process) or staying on outdated releases. While staying on older releases was ‘safer’ it prevented the company from taking advantage of the latest and greatest functionality from their on-premise ERP vendor.
“We were spending 3 percent of our revenue on SAP. By switching to NetSuite, we reduced that cost to 0.1 percent of revenue.” – Asahi Kasei, Spandex America
One of the company’s key requirements was a platform that guaranteed that their customizations would work with newer releases of products, without killing their IT resources in the process. Shaw Carpets ended up choosing NetSuite and is now enjoying the benefits of zero upfront capital expenditure, rapid deployment across 11 subsidiaries and counting. Most importantly, Shaw is taking advantage of the latest functionality that NetSuite offers every six months WITHOUT worrying about any customizations.
2. Business Regulations Demand Fluidity; Brittle and Outdated ERP Fails to Keep Pace
The accounting and regulatory environment is in constant flux as governments tighten fiscal policy through sales and corporate tax changes, or accounting bodies implement more stringent requirements such as FASB’s ASC 605-25 rules governing revenue recognition for “multi-element” products and services. These kinds of changes place enormous pressure on finance organizations. An out-of-date ERP is simply not designed with change in mind. How could your SAP R/3 install circa 2005 ever have known about revenue recognition changes that would be hitting in 2014?
TCO for NetSuite cloud is 50 percent less than legacy on-premise.
The gulf between your ERP and your current business operating environment is filled with spreadsheets and headcount. This is the “putty” that fills the gap that your ERP was meant to automate. Revenue recognition schedules suddenly migrate to spreadsheets, local geo tax reports get massaged through CSV exports and manual entry, and sales tax calculations suddenly start becoming error-prone affairs.
The fact is that your on-premise ERP will never track with change—because on the rare occasion you upgrade it, the operating environment will already have changed, and spreadsheets and personnel once again rush to fill the gap.
Has your operating environment changed but your ERP stayed the same? Welcome to spreadsheet hell.
In contrast, cloud-based ERP aligns continuously with your operating environment. It applies the same philosophy to corporate ERP that’s behind web-based applications like TurboTax Online—you’re always up to date to adhere to the latest accounting rules, tax regulations and compliance standards. These upgrades are rolled out regularly by the cloud ERP vendor as necessary and while you sleep, your ERP is updated with the latest regulations and requirements. The result is less risk, less headcount and more time spent on strategic rather than operational tasks.
3. Aging ERP Is a Drag on Business Velocity
The web enables business to go global instantly—reaching many millions of customers in a year or two, whereas it used to take a decade or more to make that type of progress.
Some of today’s fast growing publicly traded companies like GoPro are growing because they are not shackled to their on-premise ERP systems. Had these companies relied on an upgrade to the installation of their on-premise ERP system to take advantage of innovation, who knows where they’d be today? For example, GoPro has been able to expand into new distribution partnerships to maintain its growth by extending its core systems into portals and connections that process orders, manage stock and deliver up-to-date information to suppliers and distribution partners. And the most important thing is that they have been able to build this infrastructure in the space of just two years because they went with a flexible cloud-based ERP platform that supported and aided their rapid growth rather than relying an on-premise system that would have hampered their growth.
“We’ve build a very internationally reaching business from a sole headquarters here in California. I think what made a lot of that work was our ability to push out real-time information to our distributors and to customers that were in different time zones.” – Stephen Baumer, CTO, GoPro
Your ability to compete is diminished if you’re running an aging install of Microsoft Dynamics NAV or Epicor that was designed for when businesses grew incrementally— country by country, market by market, over years and decades. The old way of doing business meant deploying multiple ERP instances and databases for each market. It meant hiring IT in each location, setting up offices, procuring software and hardware, and enduring onerous setup processes. IT budget, resources and time were the constraining factors for business growth.
Cloud applications like NetSuite provide the engine to drive growth, enabling businesses to lay down an applications footprint for each country and subsidiary in weeks—not months or years. Cloud ERP spares businesses from having to worry about scaling up expensive IT resources and large capital expenditures on IT infrastructure. The result is velocity that creates true competitive advantage.