Ventana Research frequently finds that senior finance executives believe their enterprise resource planning (ERP) software has failed to deliver sufficient value. There was some factual basis for this perception. Surveys performed in the 1990s consistently showed ERP deployments fell short of expectations for return on investment (ROI) because implementation costs were higher than projected and promised benefits were harder to achieve. That these systems have ongoing costs for maintenance fees and upgrades further reinforces this view among some CFOs. But there is evidence that companies underestimate the positive financial impact ERP systems can have. We believe many CFOs are not achieving all the potential benefits from these systems because their negative perceptions have caused them to underutilize ERP systems in the areas of process improvements and innovation. We advise finance executives to work at increasing the value their companies receive from this core business system.
In the 1990s companies spent billions of dollars buying and implementing enterprise resource planning (ERP) suites, which integrate and automate corporate activities such as finance, distribution, supply chain management and human resources. In the first part of the decade, business boomed as consultants promoted business process re-engineering as a way to improve competitiveness. Later, companies replaced their accounting systems because of Y2K concerns and to integrate European monetary systems. For many, the results were underwhelming, for a number of reasons. Consultants and software vendors promised more than the systems could do, and buyers colluded by engaging in wishful thinking. Projects were managed poorly or botched. There weren’t enough skilled consultants, and some failed to integrate ERP with other critical enterprise systems. Employees sometimes sabotaged re-engineering efforts, and too little attention was paid to training them to use the new systems.
Nonetheless, companies have been able to achieve measurable, positive returns on ERP investments. The Hackett Group, a benchmarking consultancy, tracks the cost as a percent of revenue of running a finance department. According to its data, that percentage today is about half of what it was in 1992 when it published its first “Book of Numbers.” In our judgment, this reduction is attributable mostly to IT investments, particularly in ERP systems. Applying the percentage decline to the revenues of the Fortune 500, we calculate that in operating their finance departments these companies save US$60 billion annually.
Why, then, do finance executives fail to see the benefit? Ventana Research believes the main reason was that the initial implementations and upgrades were clearly expensive and painful, while the benefits have been diffuse, often realized over time and relatively invisibly through better execution and avoided costs.
In our view, the misperception that ERP has failed to deliver value is the main reason finance organizations have not taken better advantage of its capabilities. Although many operating processes were enhanced as part of the initial deployments, some companies have not continued to refine them. Too many corporations treat their transaction systems with benign neglect. Few finance departments take advantage of ERP systems’ ability to manage end-to-end processes (from procure to pay, for example) or to automate manual processes. Too few companies have implemented paperless processes such as electronic invoice matching. In our opinion, this approach is as wasteful as leaving production lines idle. Moreover, it is a dangerous attitude to have as the software industry consolidates, leaving companies vulnerable to future business disruptions if they wind up on the wrong end of a vendor combination.
Assessment Like the telephone, ERP systems have become necessary for Global 2000 companies to do business. Yet like the telephone, the ways in which organizations apply the technology can make a significant difference in the value they receive from the investment, both in reducing their operating costs and executing their core business processes more effectively. Realizing greater value from ERP systems is a matter of focusing attention on the effective use and alignment of people, process and technology. Especially in the era of Sarbanes-Oxley requirements, finance departments in U.S. public companies must rethink their processes to eliminate manual operations and streamline the flow of information. They may have to address organizational concerns before being ready to make better use of their ERP systems; a chief issue is ensuring open communications between finance and IT departments. Applied properly, ERP systems can support process improvement.
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