Deciding which technologies your businesses should and shouldn’t invest in is difficult, to say the least. On the one hand, you want to be the one responsible for innovation and growth within your company. But you also don’t want to be the one to pull the trigger on a failed project. So, is an ERP software investment worth the risk? To find out, you need to weigh the benefits of ERP, specifically how ERP system advantages and disadvantages breakdown when compared against each other.
Whether your business is large or small, there are several benefits of ERP software your company could gain. Enterprise resource planning software (ERP) is a suite of customizable applications that allow businesses to integrate and manage their most important processes. Although there are plenty of advantages, it’s not all smooth sailing; ERP has its disadvantages, too.
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ERP Software Selection Myths
But before we share the key advantages and disadvantages of ERP systems, we’d like to dispel some myths around ERP. As we’ve found in our discussions with technology buyers, selecting and implementing a new ERP solution can confound even the most experienced IT professional. It’s this confusion that leads to many of the myths and fallacies surrounding ERP software selection. Here’s a quick reality check as you embark on your ERP selection project:
1. The Cost of an ERP Should be the Biggest Factor
ERP systems will ideally last for at least five years. Many companies use their systems for much longer. Because of this, it might be more cost effective to buy a comprehensive system with a bigger price tag than to “save” money on less expensive software that doesn’t fit your company’s needs.
Weigh what each ERP solution can offer against the goals you have set for your company. Your return on investment (ROI) will depend on the overall value derived from your ERP over time. The best ERP system is one that meets your anticipated requirements now and in the future — and it may not be the cheapest option.
2. ERP Selection Should be Entirely Managed by the IT Department
Your IT team will most likely spend the most time conducting research and performing the implementation, but your entire company will reap the benefits of an ERP system. It’s imperative that your ERP selection team includes stakeholders from your key business operations in addition to your IT department. For example, you’ll want to get feedback from those in charge of your company’s most important functions. They’ll have the insight into how the software should support and enhance current operations.
In addition, make sure to speak to the personnel who will be using the software on a daily basis. Their needs and wants should be a top concern, as their ability to use the system will ultimately decide if it’s a success or a failure.
3. ERP Selection Should be Entirely Managed by Consultants
While many people believe ERP implementation can be managed solely by their IT staff, there might be just as many who don’t consider their input at all. Some companies hesitate to incorporate their IT team, as they’re already taxed to the limit managing day-to-day operations. But that doesn’t mean consultants are a replacement for your internal teams who work with your existing systems on a daily basis.
A consultant will likely have a better understanding of the software and even your industry, but your own IT team plays a critical role by applying their knowledge of your company to ensure a successful ERP selection project. Your IT team will have a better idea of what kind of system is needed in order to provide the security and scalability required by your business. They’ll also have first hand experience managing any systems you already use and wish to integrate into your ERP.
Read more on choosing the right system: Technology Selection Boggles the Minds of CIOs — and Everyone Else
4. The More ERP Functionality, the Better
To understand why going for the most ERP features might not be your best selection strategy, you want to consider two important factors: what makes an ERP software vendor successful and what drives success for your company. A software company can thrive by making software that meets the needs of their target market without overwhelming them with unneeded functionality.
Likewise, many organizations can become more successful by simply streamlining operations. The takeaway is not to be dazzled by software that has countless capabilities. Instead, focus on the solution that addresses each of your business’s actual needs. Choosing a software that can do a lot of what you don’t need is never the right solution.
5. The Research Phase Ends When You Contact a Vendor
Your ERP software choice may seem like the perfect fit on paper, but will it meet your needs in the real world? It’s always a good idea to get live demonstrations of your critical processes or a software trial before signing any long-term deal. Unfortunately, failed ERP implementations and buyer remorse are far too common.
The cost to your business in wasted resources and lost opportunity can be devastating. Ask each ERP vendor on your shortlist to provide a reasonable way for you to experience the software as well as the type of support you can expect. Buying ERP software means having a long-term relationship with the vendor, including their customer service reps and technicians. It’s a good idea to give yourself time to observe and assess the relationships that come with your new software.
Advantages of ERP
Now that we’ve cleared up some misconceptions, it’s time to move onto why companies all around the globe are implementing ERP software.
Enterprise resource planning systems are an asset for many organizations. They make your business run smoother by unifying and protecting your information, automating processes, and producing easy-to-understand trends. With these and many more capabilities, the benefits of ERP systems in an organization make your day-to-day operations and long-term planning more efficient. Below are several of the biggest ERP benefits when implementing this type of software:
1. Focused IT Costs
Although ERP is often a large investment, it can unify your IT costs and improve efficiency. Instead of spending resources on multiple systems that all need dedicated staff, infrastructure, support teams and licenses, you can focus all these costs into one ERP. Additionally, if you spend more on disparate systems than you would on a centralized ERP, you might even save on IT costs overall. Using a single system also reduces training requirements for end-users, since they only need to learn one system rather than interacting with numerous individual applications.
While an ERP can include numerous functional areas such as customer resource management (CRM), accounting, HR management and supply chain management, the design of the system is to be modular. This lets you use only the pieces that align to your needs. At the core, an ERP is the glue that binds other systems and their data together. Some ERPs let you integrate numerous third-party systems into a unified whole.
2. Total Visibility
This benefit of ERP is one of the biggest selling points for the software. ERP allows total access to every important process in your business by making data from every department easily accessible to you and your senior management. For example, you can monitor inventory levels on a daily basis, including future consignments that are yet to be received and inventory currently in transit. By knowing precisely where you stand regarding inventory levels, you can control your working capital on a more precise level.
In addition, the availability of all of your company’s information in a centralized location allows for increased collaboration and more streamlined completion of tasks. This complete visibility provides more coherent workflows and allows inter-departmental processes to be easily tracked with maximum efficiency. All of this makes it possible to make quick decisions in confidence, as you can rest assured that you’re seeing the full, complete picture at any given moment.
3. Improved Reporting and Planning
Along with improved visibility, better insight is a major advantage of ERP. Implementing an ERP suite across departments means your organization has a single, unified reporting system for every process. By having a single source of truth, an ERP system can readily generate useful reports and analytics at any time. This software gives you the ability to analyze and compare functions across departments, without the hassle of multiple spreadsheets and emails. One of the most popular reports involves finances (go figure). Standard financial reports such as income and cash flow statements generally are built-in, and custom reports can be quickly generated without IT intervention.
In addition to this, many ERP vendors also offer business intelligence services with their software. This BI functionality allows businesses to gain a deeper level of analytical insight into their operations. These insights aid in corporate planning by identifying both operational strengths and problem areas that need improvement. Providing this kind of detailed view into a company’s data gives ERP users the ability to make better-informed decisions based on trends and metrics.
4. Complete Customization
One of the biggest advantages of enterprise resource planning software in the present day is its modular makeup. Most ERP vendors offer several applications that can be implemented together according to business needs. Barring a few exceptions, each application is designed to be able to stand alone or integrate with the larger suite. This way, your company can pick and choose which components work best and can leave out what you don’t need.
Another aspect of customization involves how the software is implemented. The two major deployments are on-premise and through the cloud. With an on-premise system, physical software must be purchased and installed on all company computers and servers. With a cloud-based system, the entire software bundle is handled completely off-site by an ERP provider.
5. Improved Efficiency
Along with reduced IT and training costs, an ERP can reduce the time and effort required by your workforce to carry out their daily activities. Properly implemented, an ERP can greatly reduce or eliminate repetitive manual processes, thus freeing up team members to focus on revenue-affecting tasks. The system likewise can aid in the adoption and enforcement of industry best-practice processes, aligning all actions across the enterprise.
6. Customer Service
Your company’s clients also receive ERP system benefits, even if they don’t know it. Because client information is centralized and streamlined, your sales team will be able to focus on building and maintaining customer relationships instead of maintaining spreadsheets. At the end of the day, the number one thing a business should be concerned about is customer acquisition and retention. Through the end-to-end tracking and insight offered by an ERP, you can provide better customer interaction from targeted marketing all the way through late-phase customer service.
Most up-to-date ERP suites also support eCommerce integration. This means your business will be better able to handle web-based order processing and client interactions.
7. Data Security and Quality
One of the biggest advantages of an ERP system is data security. After all, at the heart of the ERP concept is data. Sharing data across functional silos such as customer service, sales, marketing and business development enhances collaboration throughout a company. The other side to widespread data access is controlling who can see and edit the information. ERP solutions have intrinsic controls to ensure the security of your data.
Further, what helps ERPs maintain a high level of data security is that they provide a single input system. Merging information from multiple systems often causes conflicts between sources, but having a single repository of information helps improve the accuracy, consistency and security of your company’s data.
Both on-premise and cloud-based ERP systems offer your organization a higher degree of security. The database system the ERP runs off of also enables centralized backups of your critical and sensitive data. Cloud-based ERP systems, despite what many people think, offer an extra layer of security. Since all of your company’s data is managed through the cloud, they employ round-the-clock security experts to ensure their servers are protected. This makes it far more difficult for hackers to run test attacks like they would on a private server.
8. Improved Collaboration and Workflows
Collaboration is an essential part of a thriving business. But more often than not, companies find their teams working in silos simply because collaboration requires more time and effort. But ERP makes collaboration a piece of cake. An ERP platform streamlines the process of collaborating with others by providing employees with access to the data they need when they need it. They do this by providing an interdepartmental database, where information from each department is funneled into one centralized location.
This allows for real-time project updates and better communication across the whole company. With an ERP system in place, every employee has on-demand access to the entire company’s wealth of data, which allows them to see the big picture. In turn, this gives your employees the tools they need to make proactive decisions while making them feel more valued. The net effect on your business is increased efficiency and reduced operational costs associated with manual data tracking, as well as higher employee engagement.
9. Standardized Business Processes
Most ERP systems are developed according to industry best practices. These tried-and-true processes bring major benefits to the table for businesses of all sizes. It also allows businesses to standardize their own processes and systems, which further enhances productivity and efficiency.
These processes deliver consistent results that allow you to continually improve the way in which you operate your organization. And because many processes are automated, errors and costs are greatly reduced. As a result, there’s less friction and improved synergy between departments.
10. Facilitated Regulatory Compliance
One of the most difficult ongoing tasks for businesses is meeting compliance requirements. Maintaining perfect accuracy within your financial records isn’t exactly easy, but needs to be done nevertheless. ERPs aid in regulatory compliance by virtue of secure and validated data, combined with built-in reports. These reports can also be automated to reduce the cost of continual audits. Additionally, many ERP vendors take specific regulations into account such as the Sarbanes–Oxley Act (SOX) and the Federal Information Security Management Act (FISMA).
11. Improved Supply Chain Management
For companies that deal with the moving of physical inventory and production, an ERP system bolsters supply chain management in a variety of ways. This improvement results in shortened lead times, more on-time deliveries and many other benefits that enhance the overall operation and success of your business. Through a well-designed ERP platform, your supply chain can become better and more responsive via improved demand forecasting, inventory management, procurement and more. A streamlined supply chain also facilitates manufacturing innovations, which can help you reduce costs and develop exciting new products that give your business the competitive edge it needs to stay ahead.
In addition, an ERP can dramatically improve profitability and reduce overages involving inventory and production. Unified insight into sales, production and delivery schedules permit stock levels to be optimized rather than relying on “best guess” estimates for upcoming volumes.
12. Superior Scalability
To ensure the ongoing success of your business, you have to keep an eye on the future. All too often, businesses fail to plan properly and experience serious growing pains that pose serious roadblocks to whatever progress they’re enjoying. Having a system in place that can elegantly and efficiently accommodate your company’s growth is of the utmost importance, and the right ERP system makes it easy.
Whether you’re expanding your customer base; entering new markets; rolling out new processes, departments or products; or are otherwise growing your business, adding new functionality to an ERP platform is easy with the right software vendor. Just make sure that when you’re speaking to vendors they understand your intentions for growth in the future.
Disadvantages of ERP
With so many benefits of enterprise resource planning systems, you might be ready to start comparing systems. But it’s equally as important to understand the drawbacks and risks of this type of software to make sure ERP is the right system for your business. The following are the main ERP disadvantages buyers might experience when implementing a new system:
1. Cost of the Software
If you choose to invest in a traditional ERP, you could easily end up spending five figures for a single license. For many, this is by far the biggest disadvantage to ERP software. The upfront cost of the software alone can be prohibitively high, especially for small-to-medium-sized businesses. SMBs can avoid the upfront costs with a cloud solution, which typically can be paid for on a monthly basis. However, this means users only have access to the system as long as the monthly payments continue, which can make a cloud-based solution the slightly more expensive option over a product’s lifetime.
2. Cost of Implementation and Maintenance
While the software alone is a major investment, the implementation process can cost nearly four times as much. Businesses must take into account the cost of manpower and time necessary for a successful deployment. You may need to hire additional IT staff, ERP consultants, software training specialists, etc. Vendors offering traditional systems typically charge a fee for maintenance on top of the license fee. Moreover, you might need to invest in new hardware to properly support your ERP, such as servers and compatible mobile devices. And again, you’ll need to designate individuals to maintain them.
3. Customization Process
Customization is one of the best aspects of ERP, but it can easily and quickly get out of hand. Customizing your ERP software takes a lot of time, effort, expertise and money. But too often, businesses completely underestimate how many resources are needed and either don’t finish their customization or end up going way over budget. According to Eric Kimberling, many companies may also lean on customization when their chosen system doesn’t really fulfill their business needs. Customization can end up diminishing the best practices built into the system and make it more difficult to upgrade in the future.
ERP software solutions provide numerous capabilities, but that also means the software can be complex and difficult to use. It’s not unheard of for companies to get swept up in all the potential of an ERP but fail to plan properly for its implementation. Some businesses may find themselves with systems too large and complicated for their processes, leading to a poor ROI. This is especially true if you can’t convince your team to adopt the software due to the complexity.
Should You Invest in ERP or Not?
When making a decision about which platform is right for your business, it’s important to consider the pros and cons of ERP software. But you shouldn’t let the potential downfalls scare you away from the tools that could take your business to the next level. Experts like Kimberling recommend making an honest assessment of your organization’s needs and problem areas and then seeking out an ERP system that will give your business the most potential to improve. If you need some help getting started on product research, check out our ERP comparison scorecard.
For most companies, the advantages of ERP systems often outweigh the disadvantages. The potential for totally streamlined business functions and boosts in productivity over the long-term makes the benefits of implementing ERP systems a worthwhile investment of time and resources.
Are there any other ERP advantages and disadvantages we didn’t mention? Please let us know by leaving a comment below!