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ERP: Still A Challenge After All These Years

Investment in ERP and enterprise apps in general remains the top IT spending priority this year, driven by regulatory compliance imperatives, application-consolidation plans, and the move to shared services, Forrester Research finds. -- Sidebar to: ERPzilla
Enterprise-resource-planning software implementations have often been fragmented and departmentalized, and different applications have had varying levels of success. Financial and human-resources applications have been the most successful in supporting the needs of most types of businesses, while companies have struggled to implement packages that support the core production and product/service delivery operations.

As a result, ERP software providers have expanded their product footprints to address deeper industry-specific operational requirements as well as historic best-of-breed applications areas, such as customer-relationship management and supply-chain/supplier-relationship management.

Recent Forrester survey data shows that investment in ERP and enterprise applications in general remains the top IT spending priority for 2005. A major driver for many large companies is regulatory compliance imperatives, such as Sarbanes-Oxley for public companies and FDA Part 11 for biotechnology and pharmaceutical organizations. Regulatory compliance continues to serve as a catalyst for some overdue systems consolidations and upgrades to achieve better controls. At the same time, companies recognize that support and integration costs may be reduced by consolidation to fewer systems and application instances and are also driving toward shared services. Finally, another driver is modernization of hardware and software, as most systems were deployed in the mid- to late 1990s.

Most large companies have complex ERP environments consisting of customized packages from multiple vendors, as well as an array of internally developed software that must integrate with the packages. However, businesses face the following ongoing ERP software challenges:

  • There's a perpetual gap between package functionality and business needs. Companies address the gap by customizing the software, building extensions, or buying specialized, best-of-breed packages. These remedies limit flexibility as business needs evolve and increase implementation and integration costs--customization and integration comprise about a third of the cost of the initial implementation.
  • Customization is compounded by an unwillingness to change business processes. Alignment of business processes to ERP software, rather than modifying the software, has proven to be a success factor for many implementations. At least as many, however, took advantage of vendor-provided tools to adapt the software to the nuances of their business. This often raised implementation and support costs well beyond the business value of the software changes. Next-generation application architectures promise greater business-process flexibility, but the customization dilemma isn't easily solved.
  • ERP environments are costly to maintain. Companies spend between 20% and 33% of their implementation costs every year on maintaining the systems. Escalating vendor maintenance fees along with mandatory upgrades contribute to higher costs of ownership. Customization increases ownership costs, as the applications become more difficult to upgrade.
  • Larger companies typically have multiple ERP packages and vendors. These fragmented environments result from divisional autonomy or acquisitions. Even when a common vendor is used, multiple installations are common, and software versions vary. While multiple ERP systems may be necessary to meet the varying needs of operating units, it's more difficult to aggregate enterprise data (for example, financials and HR) and to achieve economies of centralized business processes and IT operations.
  • Integration of systems is complex. Integration between ERP packages and other internal and external systems has traditionally been handled through point-to-point batch integration. Although improved ERP vendor integration tools and open standards are making integration easier, systems integration remains a major IT challenge, as ERP systems are the transactional hub of the enterprise. Because proprietary packages and bespoke legacy systems remain very much a part of the application landscape, the need for traditional, point-to-point interfaces may not be eliminated for several years.
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