Thinking of adopting an enterprise resource planning (ERP) system? It can help take your business to a whole new level of productivity and profitability. But it’s a huge undertaking. And after all that effort and investment, you may be left wondering whether it will pay off.
An ERP system is all-purpose software with modules that manage your key business functions—everything from inventory to finances, human resources and operations. No more struggling to integrate various types of systems in each department. The ERP system does it all.
The downside is they can be expensive and time-consuming to implement. About three-quarters of ERP purchases don’t provide a return on investment, says BDC consultant Rick Shaw. One-third of the systems don’t even go live.
“People think an ERP system is a panacea—that it will solve all of their problems,” says Mr. Shaw. “But you have to first make sure your business processes are running well. Otherwise, it’s like building a house on a poor foundation.”
To decide whether it’s time to invest in ERP you need an information and communications technology (ICT) plan that conforms to your overall strategic plan. As part of putting together the ICT plan, here are three steps that will tell if your business is ready to take the ERP plunge.
- Assess your current technology Review your current software and user training. This will help you see if you can make do with your existing systems. Mr. Shaw says he frequently gets calls from companies complaining that their software isn’t meeting expectations—only to find it’s just suffering from what he calls “application erosion.” This is the inevitable degradation of software performance over time. Failing to do necessary updates and maintenance is often the culprit. Another common problem is lack of employee training. “Companies often think, ‘My people know how to do their job,’ so they skimp on training,” Mr. Shaw says. “It’s as if someone knows how to drive a regular car and then they try to drive a $4-million Formula One race car. If you didn’t get the right training, you’ll just get into the ditch deeper and faster.” Many companies find all they really need is a remedial implementation of their existing software, Mr. Shaw says—instead of an expensive new ERP system.
- Evaluate your future needs Thoroughly assess your company’s information technology needs over the next several years as indicated by your business strategic plan. Also be sure to involve employees. This will help ensure their buy-in if you go ahead with an ERP purchase. “If the CEO decides, by himself, to put in the system, it probably won’t succeed. Your chances are better if you get the users’ buy-in from the beginning,” Mr. Shaw says.
- Do a cost-benefit analysis Define the financial impact of your problems and proposed solutions. How does systems performance affect your business? Compare the cost of revamping existing systems versus the ERP option. Be sure to consider how each solution will affect your market share. Don’t forget to include implementation and training costs. Many businesses underestimate these, but they can be a big expense. An ERP system may be warranted, Mr. Shaw says, if you’re turning away business because of a technology bottleneck and if your current systems can’t be improved. There’s no rule of thumb for how big a business should be to consider ERP. Mr. Shaw says one of his clients is a $35-million company that relies on an off-the-shelf accounting package and a customized inventory control system. It does fine without ERP. Meanwhile, another client has just 15 employees and is benefitting from an ERP system. A much more important consideration is the complexity of your products or services. Look at the “depth” of your products (how many components they’re made of) and their “breadth” (how many different types of products you have). ERP systems especially make sense for deep, broad product lines.
Content in this section is provided in partnership with the Business Development Bank of Canada. BDC provides entrepreneurs with financing, venture capital and consulting services. To find out more go to BDC.ca.