Pursuing Business Value and Cost Effectiveness with Cloud ERP
By Casey Hall, CIO & Advisory Partner, Aventine Hill Partners
Cloud computing more than just a benefit
Right now, I believe small to middle market companies are better positioned than large companies to gain real value from ERP with cloud computing being one reason. Large companies naturally have technical scale but have the challenges of more business complexity and how to align broad and diverse organizations and processes. They generally have a legacy ERP that carries within it years of historical compromises so platform changes are not easy. Cloud computing provides small to middle market companies with flexible options to gain scale and lower upfront cost of implementation when seeking a new ERP.
Cloud computing is more than just a benefit to the customer. An up and coming SaaS ERP vendor has lower barriers to achieving scale since they can also subscribe to services to support their platform. There are trade-offs to be considered but I think the scales are tipped right now to empowering middle-market companies with technologies in ways that previously would have been higher cost and higher technical risk to manage. Our firm has two key applications on multi-tenant SaaS subscriptions and one application hosted. The upfront costs of implementing these applications were low. We do have to manage our subscription counts closely to avoid having cost creep as subscription contracts tend to have favorable terms for the vendors. Vendor sales teams tend to have flexibility on price but not on terms.
ERP Fueling Innovation
Based on the industries I have worked in, a primary power of ERPs has been to create a standard business process platform that scales easily as a business grows. Standardization enabled both organic growth and merger/acquisition synergies. A trade-off has often been that innovation is not as fast as business leaders would like. However, for companies where innovation is focused on quickly creating new product lines, a well-configured ERP allows business leaders to be confident that they will be able to manage new supply chain and service processes components efficiently. So, middle market companies can benefit from standardization in multiple ways.
In terms of internal innovation, SaaS ERPs typically have a regular cycle of enhancements that are applied to the environment two to three times per year. While many of these changes are minor and may not be useful to a specific business, a company can be aggressive in adopting new functionality that becomes available. The risk I have seen is that not all vendors are equally competent at designing and implementing enhancements updates.
Cloud ERP generally requires more emphasis on a company selecting for business process fit and knowing how to implement process change
Investing in Better Implementation Techniques
My experience is the platform technology components of ERPs are easier to manage and develop cost avoidance strategies for. SaaS solutions also address this by converting traditional IT costs into subscriptions. The costs I have seen companies struggle with are more related to implementation. Budget overruns, delays, and functionality gaps are all too frequent. Implementing an ERP is not something a company does all the time so their internal skillset and experience may be limited. ERP vendors often do not have methodologies that help companies navigate the process in a way that reduces the risk and professional services costs. If there is one thing that all ERP vendors could do to change the perception of how costly their products are, it would be to invest in better implementation techniques, especially in areas related to how companies define their processes, master data, and reporting.
Cloud ERP simplifies some implementation challenges but accentuates others. Cloud ERP generally requires more emphasis on a company selecting for business process fit and knowing how to implement process change. This is because true SaaS solutions require adoption of configurable functionality that has inherent process design assumptions. Customization risk and cost is avoided in exchange for having to adjust to the business process assumptions driving the system design.
ERP and Big Data Analytics
It is important to draw a distinction between “I need big data analytics because my business is data” and “There are big data technologies that can help me do analytics better.” Many middle market B2B companies are really in the second category. They may be better off thinking hard about whether they can crisply define the decisions they want the ERP to enable and pursue a “little data” strategy. If a business really can hone in on the specific data that actually matters, then the technology choices can be less esoteric. It is sometimes very hard to make things simple but when it can be done, the upside is huge. Our firm is not yet investing in additional analytics technologies because we believe that we can define a set of metrics that will drive improved decision-making with our current applications. On the other hand, there are some B2B and most large B2C businesses that are hugely data intensive. Big data technologies are required to find the nuggets in the data that then can be targeted to drive business decisions.
The Wave of IoT in ERP
The Internet of Things (IoT) is what will drive more middle market B2B companies to consider that maybe they should be “big data” companies after all. Whether it is internal data from the devices the company uses to conduct business or internet connected products the company sells and services, the growth curve for data is steep. A company with a very tight view of what data matters to them will likely be able to use IoT internally in an efficiency play with targeted integration to the ERP. This is a narrower path to value but is also less risky and easier to manage. For data intensive companies who invest heavily in IoT or who sell internet connected products, I think the biggest challenge is security, not ERP.
Prioritizing for Driving more Value
The single most important factor for getting value from an ERP is whether the company has a good understanding of how their business should operate.ERPs often have more functionality available to be implemented than most companies are able to exploit. Prioritizing specific processes for improvement makes it easier to validate what unused functionality will provide benefits and can be successfully implemented.