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5/17/2004
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Standing at the Crossroads

Should you outsource, upgrade, or simply leverage existing technology to improve ERP system performance?

Your company has invested a lot of money in your ERP system and since Y2K, it seems to have been an endless drain on resources (money and human) to get it deployed, train users, maintain it, and "upgrade." Initial ERP investments have led to continued reinvestment due to the never-ending functional enhancements that companies must synchronize across divisions and geographies.

Companies achieved efficiency gains from their ERP deployments, but are now realizing those gains aren't providing the anticipated return on the ongoing investments. To gain real value, they must leverage ERP systems to improve processes and the effectiveness of line-of-business workers. I recently visited with clients in North America and Europe, and every one of them told me that they are looking to answer two critical questions:

1. Are we getting the value we expected from our ERP system?

2. What must we do with our ERP system moving forward to get the value we need?

What's becoming excruciatingly clear is that the expected return on ERP investments must move beyond cost savings from automating particular business activities to achieving new levels of performance throughout business processes and organizational units. The never-ending drain on resources and the need to improve effectiveness has business and IT executives beginning to examine and deploy alternative strategies.

Strategic Decision

I see three primary strategies being adopted as companies try to leverage ERP systems to improve organizational effectiveness in business processes and workers:

  1. Outsource to eliminate internal system management
  2. Upgrade or "improve" existing systems
  3. Leverage existing systems to improve efficiency and the resulting organizational performance.

Outsourcing is being talked about more and more these days, but many organizations are continuing to upgrade existing systems. You must assess your existing situation and determine what works best for your organization to reduce costs and drive more efficiency to improve performance. I've seen a variety of negative implications for even the most well-planned scenario, such as business process outsourcing. The key point I want to get across is to not let your existing software provider determine your destiny and absorb the bulk of your IT budget. One of these strategies isn't necessarily universally better or worse than the other. All have their pros and cons, which I'll explore here.

Outsourcing

As companies examine their ability to manage their own business processes and supporting systems, a new wave of business process outsourcing is hitting. In most organizations, a simple decision based on a business case with financial metrics — and that is predestined to be accepted by almost any executive — leads to the outsourcing option. Eliminating the issues of managing the maintenance and redeployment of systems seems appealing, but the cost savings may not be enough justification for outsourcing. We're beginning to see the implications of outsourcing to overall business performance.

As I pointed out in "Building Bedrock" (May 1, 2004), outsourcing can create challenges for successfully integrating and managing information to enable performance management. Although these challenges aren't insurmountable, they need to be taken into consideration when going in this direction.

I'm beginning to see customer relationship implications that are affecting some companies' ability to compete. One of the largest areas of business process outsourcing is the management of call or contact centers, where individuals and systems are used for inbound and outbound customer interaction. Some organizations have saved significant amounts of capital and resources but are beginning to see a negative impact to customer satisfaction and other related metrics.

Endless Upgrades

The second strategy focuses on continuous enhancements and system upgrades to underlying ERP systems to create improved levels of business effectiveness. The problem with this approach is continually managing the complex implementation and maintenance of ERP systems (such as SAP) leaves many organizations with a disparate set of applications and versions inside one enterprise. Just as one ERP system implementation is completed within a division, another division is already upgrading to provide some level of interoperability to connect business processes more efficiently.

Continuously upgrading systems is a serious distraction for many organizations. For some organizations, it almost appears to me to be an addictive process, with effects similar to other, more commonly recognized addictions.

Leveraging Existing Systems

The third strategy, leveraging existing systems, seems to be "the road less traveled" these days, but I do see it appealing to organizations that realize performance improvements are only possible with information that can provide insight into existing business processes and organizational performance.

At some point, the amount of investment in time and resources in ERP systems takes its toll, and a company will realize it must remove its dependency on the systems for anything more than transactional automation. Building an information framework that can leverage ERP as a transactional automation source for data and assess performance is a clean way of managing different systems.

Assess and Consider

The pressures of cost management have many companies wondering if they can manage their business processes effectively. Before you throw in the towel and outsource or succumb to the pressure of your current ERP provider and upgrade, you should reexamine and get to the root cause of your problems by assessing your performance and finding ways to optimize and align your existing efforts.

Your intentions of simplifying your ERP systems or processes could very well bring new complications that you've never dealt with inside your organization. Whatever strategy you choose — outsource, upgrade, or leverage existing ERP systems — it won't be a simple exercise. It's important to consider both cost savings and efficiency improvements when choosing your strategy.

Your ERP investments are a critical backbone of your enterprise, but they can divert your company's focus away from the essence of the business itself. Don't let the vicious cycle of ERP investments, whether inside or outside your business, become the determining factor of your overall business performance. Many new ERP solutions simply promise what was supposed to have been accomplished in the past: fusing business processes or providing collaborative processes. But are you willing to take your organization through a massive infrastructure upgrade such as Y2K all over again?

At some point, accepting the fact that you'll never have the latest in ERP at any one time and that you'll have a set of disparate systems that just need to be managed more efficiently and not necessarily upgraded will save you time and money and take your company a long way toward becoming more effective.

Mark Smith is the CEO and senior vice president of research at Ventana Research, an advisory services and research firm providing insight and education on best practices and technology in performance management.

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