Many small to midsize companies handle tasks like payroll, accounts receivable and payable, billing, sales, and purchase orders, and more with accounting software. In recent years we have seen Enterprise Resource Planning (ERP) software take up the mantle of company accounting tasks as part of a larger functionality that includes analyzing and executing all the core activities of the many departments in your business.
Once considered an option for only larger companies, ERP systems are now easily scalable for companies of all sizes. However, is upgrading to an ERP system the right solution for your company? before choosing an ERP system, understand that it may require careful planning as well as a drastic cultural shift within your company. Today we will present five questions you should ask yourself before taking the plunge to upgrade to an ERP system.
1. Are you utilizing your current technology?
Oftentimes companies experience fixable issues with their current accounting software, inhibiting them from getting the most out of what they already own. While stepping up to a shiny new software suite may seem attractive, often companies experience issues based on underutilization of the existing platform. These will not be solved by purchasing an expensive new software.
- Is your software up to date? If you haven’t been keeping up with your software package’s updates you are not going to be able to take advantage of new features that have been rolled out since you first adopted the platform. Regular updates also improve performance for the end users.
- Are you keeping up with training? If the people who use your software are not up to date on the latest features, you may be impeding your ability to make the most of the platforms you have already invested in.
- Do you have an effective software governance strategy? Do all the users of your current software operate under a common set of policies, structures, and processes? The efficiency and accuracy of your business processes rely upon this. If you can get all of your team operating with the same parameters and processes but still experience issues you should consider upgrading to an ERP system.
2. Are your business processes clearly defined?
Aside from having the right technology and people within your company, it is imperative that your company’s business process is clearly defined before making any changes to your accounting system.
Which business process does your company employ? Does it focus on executing operational tasks, delivering value to a customer through a product or service? Does it support management processes like HR and accounting services? What about a governance strategy, making sure your company upholds stakeholder expectations and is in full compliance with a set of guidelines?
Think of the purpose of implementing your business process. Is it helping your organization meet its goals within a certain time frame using adequate resources? Have you created a visualization with graphs and charts, or mapped out how certain processes flow into others? Address these questions before upgrading. ERP systems do not fix broken processes.
3. Does your current accounting system inhibit growth or your bottom line?
If so, then it may be time to make the switch. However, a common mistake made by companies is not understanding if their current accounting system even has these effects. Accounting systems are not commonly the bottleneck for growth and affecting a company’s bottom line.
Poorly managed cash flow can be detrimental to a company, and this is why accounting software exists. So even if your current system is experiencing problems, refer to our first point and update your software to get a better snapshot of money coming in and money going out. In doing so, you may have found your solution.
4. Have you performed a cost-benefit analysis?
If you truly value time, money, and return on your investment, you will run a cost-benefit analysis (CBA). Instead of blindly jumping into an ERP system, compare the cost of revamping your existing system first. A CBA is one of the best ways to weigh the risks of infrastructure enhancements and operational costs.
Performing a CBA will also help you understand how many systems the ERP system will replace. ERP systems can track business resources like inventory and raw materials, overhead, and commitments like employee payroll, purchase orders, and custom orders. This sounds comprehensive, but does your company actually need these capabilities at the moment?
5. Do you have the funds to do this?
As mentioned earlier, there are many benefits to switching over to an ERP system, but it can come at a great cost. If your company is not prepared to take on these additional costs, then you may be strapped for cash in the long run. A typical ERP system installation for mid-sized companies can run anywhere from $150,000 to $750,000 with a 10% to 15% standard license renewal fee. This includes several hidden costs such as:
- User licenses. The number of people in your organization who use an ERP system directly affects the cost of the system. It is a simple relationship – the more departments using the ERP, the more user licenses are required. If you choose to limit the number of users you may not achieve all the benefits the ERP has to offer.
- Implementation fees. This can be a significant cost. Consider factors like infrastructure upgrades and database management. Work closely with potential ERP vendors to identify all of these costs.
- Customization Costs. ERP systems are rarely implemented as a totally “off-the-shelf” solution. Surveys of companies that use ERP software indicate that only a small percentage of them use the software “as-is,” with the vast majority requiring customization of the software to meet their specific end-user needs.
- Support Costs. Ongoing support and maintenance need to be considered as part of the cost of your system. System failures, user errors, and other system issues may trigger these expenses.
- Short-term productivity losses. You may take a hit in your productivity as you implement your new system. Be prepared for the effect this may have on your bottom line.
- Upgrade costs. Will you need to upgrade the system on a regular basis? Be sure to consider this ongoing cost.
- Additional staffing needs. Moving to an ERP system can have great benefits for your business, but with a caveat. Recent surveys of small to mid-size companies that have implemented ERP systems indicate that about half were not able to take full advantage of the systems because of staffing shortfalls. If you are considering an ERP system as part of a major initiative, be sure that you are prepared to scale up appropriately to take advantage of your new capabilities.
Conclusion
An ERP system is a powerful tool that can provide your company with an important edge. Deciding to explore the possibility of adopting an ERP is a smart decision. But as we have seen, there are many factors to consider when making this decision. IT research firm Gartner reported in 2014 that 75% of all ERP projects ended up failing. Panorama Consulting followed up in 2015 with 562 companies that adopted an ERP system and found that these failure rates are increasing by 5% every year. Most companies that experienced failures said that they felt there was a lack of communication and transparency regarding the total cost of the project.
It is important to go into the process with a complete understanding of what is going to be required and an open mind as to whether you are making a smart decision. With a realistic approach and an honest evaluation of your company’s needs, you are much more likely to make a smart decision about whether to select an ERP, as well as which system will work the best for you.
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