The vast majority of smaller companies today make their most critical business decisions based on spreadsheets and underpowered desktop accounting packages. Those that manage to succeed in spite of these limitations will eventually find themselves kicking the tires of a full-blown ERP system to manage their organizations' end-to-end business processes — from financial reporting to inventory management, and from human resources to sales support, forecasting, customer relations and more.
However, before smaller companies take the plunge into an integrated ERP environment, there are a few steps they can take to help their organization prepare for the transition, and to ensure that the investment produces maximum rewards in terms of streamlined processes, real-time reporting on key business indicators, and ideally, decreased costs and improved profitability.
Taking the ERP Plunge
If you think the concept of enterprise resource planning (ERP) for a small to midsize business (SMB) still seems a little counterintuitive, you're not alone. On the surface, the idea of a small company adopting technology originally designed and designated for the large enterprise appears to be a contradiction in terms. However, SMBs across the globe are rapidly coming to accept that they must ignore the oxymoronic overtones and embrace ERP best practices if they harbor any hope of surviving long enough to eventually become an enterprise-class organization.
A recent Aberdeen Group survey of nearly 800 SMBs in various markets indicates that nearly one-third have already implemented ERP solutions. The same small business sector was registering adoption rates of only 11 percent as recently as 2006, according to the research firm Saugatuck Technology Inc. The growth is even more astonishing among SMBs that specialize in areas such as distribution and manufacturing, where ERP adoption has now soared to 72 percent and 63 percent, respectively, according to Aberdeen.
What's driving smaller companies to finally consider taking a big-company approach to managing their business operations? Reasons vary, but there's growing realization that integrated ERP packages have become more affordable and easier to implement, and there's also a mounting body of evidence indicating that SMBs that adopt ERP solutions are more successful. In fact, according to the June 2010 Aberdeen report, “Think Your Company Is Too Small for ERP? Think Again,” even SMBs that exhibit the least effective ERP implementations have been shown to “outperform those without [ERP], in terms of process, organizational and knowledge-management capabilities.”
Steps for Planning and Preparing for ERP Adoption
ERP implementation experts and SMB executives who have lived through an ERP transformation firsthand tend to agree on certain precautions and best practices for SMBs that are contemplating an ERP implementation of their own. Here are a few of the most prevalent recommendations:
Accept that your small to midsize business is an “enterprise-in-the-making.” Few new businesses launch with the express goal of remaining small. In fact, it should come as no surprise that the smaller a company is, the more highly it ranks the importance of growth. For example, SMBs with annual revenues below $50 million pinned their biggest hopes on higher revenues in 2010, according to Aberdeen, with 58 percent citing revenue growth as their top goal. Meanwhile, 49 percent of companies between $50 million and $100 million placed growth above other considerations, compared with 46 percent of SMBs between $100 million and $250 million. Only 43 percent of companies with revenues already over $250 million said that revenue growth was their highest priority this year.
Todd Linscott, president of Torelli Bicycle Co., a small importer and distributor of specialized racing and road bikes based in North Hollywood, Calif., is currently undergoing an implementation of an SAP solution (see accompanying article and video on Torelli's “InformationWeek SMB On Location Makeover”). His advice to fellow SMB owners: If you want customers to perceive you as a large company — and, in fact, if you aspire to actually become one someday — it's imperative to adopt the same operational best practices as the companies you wish to emulate.
“We looked at what kind of company we want to become in five years, and realized that we need to start making the transition now,” Linscott said.
Make your move early. Linscott also points out that SMB managers need to heed the signs that they are outgrowing their current financial and business management practices and applications, and act before it's too late.
In the case of Torelli, the company had been struggling for years against the limitations of its existing hodgepodge of desktop applications. When Linscott purchased the operation from its founder a few years ago, financials were being run on an outdated DOS-based system. Among other drawbacks, the software could not recognize “modern” PC improvements, such as the USB interface for printers and peripherals. As parallel ports — and the printers and supplies that support the old interface — became increasingly hard to procure, Linscott reluctantly made the switch to a desktop accounting system.
While it was now much easier to print spreadsheets and “canned” reports, he found new limitations as well. The popular accounting package lacked essential capabilities for managing Torelli's international supplier base. These included support for multiple currencies, and the ability to calculate “landed costs,” which take into account tariffs, duties, freight, insurance and other outlays required to procure goods from abroad. Without the ability to know the exact and total cost of acquisition for a given part or SKU, Linscott found that when managing his company's margins, he was essentially “flying blind.”
Like Linscott, some SMB owners eventually come to the realization that despite the added cost of implementing an ERP solution, the cost of delaying it could be higher still.
Prepare mentally as well as physically. Researching how to acquire and accommodate the physical servers and systems you will need on-site, if you choose to host the ERP software locally, or evaluating the increasing array of software-as-a-service (SaaS) offerings that have become available — these are considerations that, while extremely important, address only the physical aspects of the implementation process. Equally important, yet much more frequently overlooked, is the mental prep work that needs to be done before the first switch in the actual implementation process is ever thrown.
Brian Hedrick of Navigator Business Solutions, an SAP reseller based in Pleasant Grove, Utah, has overseen dozens of SMB installations, and he has observed that there is one common ingredient to ERP implementation success: leadership.
Fear of change is part of human nature, Hedrick said, and asking employees at a company of any size to abandon their timeworn traditions and the comfort of familiar processes and packages can be somewhat unnerving in the best of circumstances. Smaller firms are not immune, and in fact, the close quarters and fast, informal communications that can occur inside companies with fewer than 100 employees can mean that rumors and unsubstantiated fears can spread like wildfire, sabotaging progressive projects before they ever get under way.
Having a proactive management team that takes the time to accurately communicate the reasons behind the switch to a new ERP platform, and the anticipated benefits to each employee and department, increases the probability of success and shortens the payback period substantially, according to Hedrick. Laying the mental groundwork lets employees buy into the process before the changeover occurs, making them more resilient to adopting the new routine and encountering the inevitable hiccups that occur with any retrofit project of this scale.
Don't try this at home. The vast majority of SMBs that are currently running their business based on spreadsheets, packaged accounting software, homegrown applications or what have you are likely to have implemented those systems without having tapped outside consulting resources. However, sophisticated ERP packages that integrate nearly all aspects of a company's business processes in a single interface and dashboard bring an added degree of complexity. Even those that are specifically designed for ease of use in a small-business environment and may in fact be easy to operate once configured and installed, may not be suited for a do-it-yourself approach.
In its recently published report, “ERP for Small and Mid-sized Companies: Time for a Decision,” Saugatuck Technology analysts counsel SMBs that after they have done their due diligence, chosen the right solution for their needs and planned exactly how they will utilize the new system to its full affect, when it comes time to actually implement the solution, they should turn to a professional with specific ERP configuration and implementation expertise.
“Saugatuck strongly recommends working with a local software reseller, consulting firm or systems integrator familiar with the different types of ERP, their providers, and preferably, familiar with your business, as well,” the company advises. Choosing a reliable and experienced implementation partner, such as one that works with established ERP firms such as SAP, is another important step toward ensuring a successful transformation, according to the report.