What is ERP? Enterprise resource planning systems explained

ERP definition

Enterprise resource planning (ERP) is a system of integrated software applications that manages day-to-day business processes and operations across finance, human resources, procurement, distribution, supply chain, and other functions. ERP systems are critical applications for most organizations because they integrate all the processes necessary to run their business into a single system that also facilitates resource planning. ERP systems typically operate on an integrated software platform using common data definitions operating on a single database.

ERPs were originally designed for manufacturing companies but have since expanded to serve nearly every industry, each of which can have its own ERP peculiarities and offerings. For example, government ERP uses contract lifecycle management (CLM) rather than traditional purchasing and follows government accounting rules rather than GAAP.

Benefits of ERP

ERP systems improve enterprise operations in a number of ways. By integrating financial information in a single system, ERP systems unify an organization’s financial reporting. They also integrate order management, making order taking, manufacturing, inventory, accounting, and distribution a much simpler, less error-prone process. Most ERPs also include customer relationship management (CRM) tools to track customer interactions, thereby providing deeper insights about customer behavior and needs. They can also standardize and automate manufacturing and supporting processes, and unify procurement across an organization’s business units. ERP systems can also provide a standardized HR platform for time reporting, expense tracking, training, and skills matching, and greatly enhance an organization’s ability to file the necessary compliance reporting across finance, HR, and the supply chain.

Key features of ERP systems

The scale, scope, and functionality of ERP systems vary widely, but most ERP systems offer the following characteristics:

1. Enterprise-wide integration. Business processes are integrated end to end across departments and business units. For example, a new order automatically initiates a credit check, queries product availability, and updates the distribution schedule. Once the order is shipped, the invoice is sent.
2. Real-time (or near real-time) operations. Because the processes in the example above occur within a few seconds of order receipt, problems are identified quickly, giving the seller more time to correct the situation.
3. A common database. A common database enables data to be defined once for the enterprise with every department using the same definition. Some ERP systems split the physical database to improve performance.
4. Consistent look and feel. ERP systems provide a consistent user interface, thereby reducing training costs. When other software is acquired by an ERP vendor, common look and feel is sometimes abandoned in favor of speed to market. As new releases enter the market, most ERP vendors restore the consistent user interface.

Types of ERP solutions

ERP systems are categorized in tiers based on the size and complexity of enterprises served:

• Tier I ERPs support large global enterprises, handling all internationalization issues, including currency, language, alphabet, postal code, accounting rules, etc. Tier I vendors include Oracle, SAP, Microsoft, and Infor.
• Tier I Government ERPs support large, mostly federal, government agencies. Oracle, SAP, and CompuServe PRISM are considered Tier I with Infor and CGI Momentum close behind.
• Tier II ERPs support large enterprises that may operate in multiple countries but lack global reach. Tier II customers can be standalone entities or business units of large global enterprises. Depending on how vendors are categorized there are 25 to 45 vendors in this tier.
• Tier II Government ERPs focus on state and local governments with some federal installations. Tyler Technologies and UNIT4 fall in this category.
• Tier III ERPs support midtier enterprises, handling a handful of languages and currencies but only a single alphabet. Depending on how ERPs are categorized, there are 75 to 100 Tier III ERP solutions.
• Tier IV ERPs are designed for small enterprises and often focus on accounting.

ERP vendors

The top ERP vendors today include:

• Oracle
• SAP
• Microsoft
• Workday
• Sage
• Infor
• Epicor
• ServiceNow
• QAD
• Salesforce

Selecting an ERP solution

Choosing an ERP system is among the most challenging decisions IT leaders face. In addition to the above tier criteria, there is a wide range of features and capabilities to consider. With any industry, it is important to pick an ERP vendor with industry experience. Educating a vendor about the nuances of a new industry is very time consuming.

To help you get a sense of the kinds of decisions that go into choosing an ERP system, check out “The best ERP systems: 10 enterprise resource planning tools compared,” with evaluations and user reviews of Acumatica Cloud ERP, Deltek ERP, Epicor ERP, Infor ERP, Microsoft Dynamics ERP, NetSuite ERP, Oracle E-Business Suite, Oracle JD Edwards EnterpriseOne ERP,  Oracle Peoplesoft Financial Management and SAP ERP Solutions.

ERP implementation

Most successful ERP implementations are led by an executive sponsor who sponsors the business case, gets approval to proceed, monitors progress, chairs the steering committee, removes roadblocks, and captures the benefits. The CIO works closely with the executive sponsor to ensure adequate attention is paid to integration with existing systems, data migration, and infrastructure upgrades. The CIO also advises the executive sponsor on challenges and helps the executive sponsor select a firm specializing in ERP implementations.

The executive sponsor should also be advised by an organizational change management executive, as ERP implementations result in new business processes, roles, user interfaces, and job responsibilities. Reporting to the program’s executive team should be a business project manager and an IT project manager. If the enterprise has engaged an ERP integration firm, its project managers should be part of the core program management team.

Most ERP practitioners structure their ERP implementation as follows:

1. Gain approval: The executive sponsor oversees the creation of any documentation required for approval. This document, usually called a business case, typically includes a description of the program’s objectives and scope, implementation costs and schedule, development and operational risks, and projected benefits. The executive sponsor then presents the business case to the appropriate executives for formal approval.
2. Plan the program: The timeline is now refined into a work plan, which should include finalizing team members, selecting any external partners (implementation specialists, organizational change management specialists, technical specialists), finalizing contracts, planning infrastructure upgrades, and documenting tasks, dependencies, resources, and timing with as much specificity as possible.
3. Configure software: This largest, most difficult phase includes analyzing gaps in current business processes and supporting applications, configuring parameters in the ERP software to reflect new business processes, completing any necessary customization, migrating data using standardized data definitions, performing system tests, and providing all functional and technical documentation.
4. Deploy the system: Prior to the final cutover, multiple activities have to be completed, including training of staff on the system, planning support to answer questions and resolve problems after the ERP is operational, testing the system, making the “Go live” decision in conjunction with the executive sponsor.
5. Stabilize the system: Following deployment, most organizations experience a dip in business performance as staff learn new roles, tools, business processes, and metrics. In addition, poorly cleansed data and infrastructure bottlenecks will cause disruption. All impose a workload bubble on the ERP deployment and support team.

Hidden costs of ERP

Four factors are commonly underestimated during project planning:

• Business process change. Once teams see the results of their improvements, most feel empowered and seek additional improvements. Success breeds success often consuming more time than originally budgeted.
• Organizational change management. Change creates uncertainty at all organization levels. With many executives unfamiliar with the nuances of organization change management, the effort is easily underestimated.
• Data migration. Enterprises often have overlapping databases and weak editing rules. The tighter editing required with an ERP system increases data migration time. This required time is easy to underestimate, particularly if all data sources cannot be identified.
• Custom code. Customization increases implementation cost significantly and should be avoided. It also voids the warranty, and problems reported to the vendor must be reproduced on unmodified software. It also makes upgrades difficult. Finally, most enterprises underestimate the cost of customizing their systems.

Why ERP projects fail

ERP projects fail for many of the same reasons that other projects fail, including ineffective executive sponsors, poorly defined program goals, weak project management, inadequate resources, and poor data cleanup. But there are several causes of failure that are closely tied to ERPs:

• Inappropriate package selection. Many enterprises believe a Tier I ERP is by definition “best” for every enterprise. In reality, only very large, global enterprises will ever use more than a small percentage of their functionality. Enterprises that are not complex enough to justify Tier I may find implementation delayed by feature overload. Conversely, large global enterprises may find that Tier II or Tier III ERPs lack sufficient features for complex, global operations.
• Internal resistance. While any new program can generate resistance, this is more common with ERPs. Remote business units frequently view the standardization imposed by an ERP as an effort by headquarters to increase control over the field. Even with an active change management campaign, it is not uncommon to find people in the field slowing implementation as much as possible. Even groups who support the ERP can become disenchanted if the implementation team provides poor support. Disenchanted supporters can become vicious critics when they feel they have been taken for granted and not offered appropriate support.

Cloud ERP

Over the past few years, ERP vendors have created new systems designed specifically for the cloud, while longtime ERP vendors have created cloud versions of their software. Cloud ERP There are a number of reasons to move to cloud ERP, which falls into two major types:

• ERP as a service. With these ERPs, all customers operate on the same code base and have no access to the source code. Users can configure but not customize the code.
• ERP in an IaaS cloud. Enterprises that rely on custom code in their ERP cannot use ERP as a service. If they wish to operate in the cloud, the only option is to move to an IaaS provider, which shifts their servers to a different location.

For most enterprises, ERP as a service offers three advantages: The initial cost is lower, upgrades to new releases are easier, and reluctant executives cannot pressure the organization to write custom code for their organization. Still, migrating to a cloud ERP can be tricky and requires a somewhat different approach than implementing on on-premises solution. See “13 secrets of a successful cloud ERP migration.”