Enterprise Resource Planning: It's In the Morphing
For enterprise resource planning, or ERP, the operative verb is morph, as in transform.
By John Makulowich
For enterprise resource planning, or ERP, the operative verb is morph, as in transform.
Today it applies not only to the various systems and their modules, but also to its application in different sectors, both private and public, manufacturing and service. ERP morphing extends from the serious effort by one IT research firm to redefine its scope, all the way to a multiyear investigation by a federal agency to review the need for standards.
How important is all this activity? Suffice to say, it is attracting the attention of most of the major players, from IBM Corp., Armonk, N.Y., up and down the ERP food chain. In fact, Big Blue, now seeking the throne of e-business, considers ERP worldwide one of its five major priorities.
In the IT research arena, the META Group Inc., Stamford, Conn., is morphing the ERP envelope with its notion of enterprise resource management, or ERM, in a newly released, comprehensive, multiclient study, "ERM Solutions and Their Value."
And the National Institute of Standards and Technology in Gaithersburg, Md., the standards arm of the Commerce Department, is hard at work trying to define a role for itself in ERP interface standards, specifically for manufacturing.
For Bob Carlson, IBM director of solution sales in the public sector, ERP is one of the firm's top five global strategic initiatives. The company prides itself on having participated in what is now known as ERP almost since the founding of the field in the 1950s. In fact, one of the leading and largest ERP firms, SAP AG (Systems, Applications and Products in Data Processing; Waldorf, Germany), was founded in 1972 by five German ex-IBM executives.
The depth of IBM corporate commitment to ERP is clear from the number of competency or best practice centers it has established for the major vendors, as well as the size of its professional support teams. For example, 1,000 SAP-qualified engineers populate the IBM competency centers in the United States and spend their waking hours implementing the SAP ERP packages with clients.
The company also has invested heavily in industry-specific support, as well as created dedicated teams to service the federal government and public sector.
With the increasing penetration by the Internet, intranets and extranets into business-to-business and business-to-consumer transactions, ERP is likely to morph further from tools like outsourcing and increasingly interactive World Wide Web browsers that allow more e-business and e-commerce opportunities.
Among the trends IBM hopes to exploit are the accelerated effort by both vendors and systems integrators to reduce the time to market for ERP solutions and increased investment by vendors in specific sectors, such as federal, state and local government.
IBM is pushing its own value-added wrinkle by selling a set of templates it built that allows firms to configure the different ERP modules to meet the specific needs of their own enterprise, rather than fit their operations into the mold created by ERP vendors.
It serves to show that however far ERP has come over the last few years, the issues identified by Thomas Davenport in his seminal Harvard Business Review article, "Putting the Enterprise into the Enterprise System," (July-August 1998) are still critical, yet often overlooked.
As Davenport said: "Enterprise systems [i.e., ERP] appear to be a dream come true. These commercial software packages promise the seamless integration of all the information flowing through a company ? financial and accounting information, human resource information, supply chain information, customer information."But, he noted, "An enterprise system imposes its own logic on a company's strategy, culture and organization." And it demands answers to a number of key questions, such as: What will be the effect on our organization and culture? Are there other alternatives for information management that might actually suit us better than an enterprise system?
Those questions serve as cautious reminders when reviewing the conclusions of the META Group in its newly published, 172-page study, "ERM Solutions and Their Value."
The company surveyed more than 60 organizations that put in place ERP/ERM systems, then compared seven leading vendors (Baan Company N.V., J.D. Edwards & Co., Lawson Software, Oracle Corp., PeopleSoft Inc., SAP AG and System Software Associates) in areas such as cost to implement, total cost of ownership and time to benefit, and finally quantified the benefits and net present value of ERP/ERM systems.
According to the study, the time to implement ERM applications from specific vendors ranged from 18 months to 26 months, with an average time to implement of 23 months. The total cost of ownership for the implementation and the following two years ranged from 0.4 percent of the user company's revenue to 1.1 percent.
META Group also reported it takes two and one-half years from project initiation to achieve a quantifiable return on investment for an ERM system. Ninety percent of these benefits are associated with cost reduction.
The average net present value of all the companies studied was -$1.5 million. Further, the average time to implement was 23 months, with an average of eight months to achieve benefits. Therefore, average time to benefit was 31 months.
According to Barry Wilderman, META Group vice president of application delivery strategies service, the most stunning result was the negative net present value.
"But we urge the user of our survey to look much more deeply at both quantified and intangible benefits," he said.
The result serves to highlight, as the study notes, that "ERM solution decisions must be motivated as much (or more) by the attainment of indirect benefits as by return from quantifiable benefits sufficient to offset costs over time."
The survey stressed that ERM should be measured with four key metrics. The first is total cost of ownership, which includes hardware, software, professional services and internal staff costs.
The survey noted that total cost of ownership as a standalone metric had limited value. That said, the average total cost of ownership for an ERM account was $15 million.
The second metric is time to implement, which is the duration to implement the solution and the time until tangible benefits were achieved.
The full time span is referred to by the survey as time to benefit.
The third metric is quantified benefits, including cost containment and revenue attainment as well as qualitative or intangible benefits.
The last metric is net present value and includes hardware costs, software costs, professional service fees, internal staff costs, post-implementation costs and quantified benefits.
Enterprises must evaluate the broader impact of ERM on supply chain economies, customer loyalty, application interoperability and faster business cycles "because traditional measurement methods centered around cost reduction are not effective in measuring the true value of ERM solutions," Wilderman said.
He observed that while the study did not differentiate specifically between manufacturing and service ERM, a whole new set of drivers on the service side are emerging in areas such as work force effectiveness and knowledge management.
In the same vein, he divided service companies into those that are project oriented and those that are administrative. Consulting firms were grouped into the former category, and federal agencies, for the most part, in the latter group.
Lastly, he noted the division of the enterprise into ERM, supply chain (for business-to-business dealings) and customer relationship management, which covers sales, service and marketing.
Of particular interest to systems integrators serving the federal government market is one eye-opening set of data, the distribution of the implementation cost. Averaging $10.6 million per ERM site, the four categories of implementation cost accounted for these percentages:
* software, 17.5 percent;
* hardware, 13.8 percent;
* professional services, 45.5 percent;
* internal staff, 23.2 percent.
As the study noted, purchased professional services account for most of cost of implementation. When combined with internal staff, this labor component counted for 69 percent of the ERM implementation cost.
According to Wilderman, ERM's key in the federal sector is the overall management framework.
"With scope creep and drift constant issues, the requirements definition is crucial," said Wilderman. "Projects tend to take on a life of their own. It is important to put together a world-class team to manage these projects, including business line experts and people from systems integration."
While the META Group study indicates it is possible to achieve savings by reducing IT costs by consolidating disparate systems in a single ERM solution, the greatest rewards are connected with fundamental business transformation.
To be successful, noted the report, ERM must be part of a comprehensive business plan or driven by a strategic issue such, as year 2000 compliance, and must prompt integration and change, echoing points made or alluded to by Davenport in his article.
According to the META Group, the impact of intangible benefits, such as improved information access, enhanced customer satisfaction and reduced financial closing time, is difficult to isolate and quantify. But they must be taken into account to accurately justify the time and expense requirements of ERM.
Overall, the study found, ERM applications remain a suitable choice for enterprises that must integrate key operational functions. However, the META Group recommends considering and measuring a broader range of criteria than traditionally used when evaluating ERM solutions.
Barry Wilderman
Elizabeth Malis
Enterprise Resource Management (ERM):
Enterprise Resource Planning or Enterprise Systems:
Environmental Cost of Ownership:
ERM Functional Complexity:
ERM implementations:
Implementation Cost of Ownership (ICO):
Net Present Value (NPV):
Post-Implementation Costs:
Quantifiable Benefits:
Time to Benefit (TTB):
Total Cost of Ownership (TCO):