Homegrown enterprise resource planning (ERP) programs were created to use businesses’ information technology (IT) infrastructure to help grow and manage companies.
In the 1990s, the early adopters of homegrown ERPs spent millions of dollars to modernize their technology. Their goals were making it easy to run daily operations, increase competitiveness and find ways to be more efficient. The cost of developing such an ERP system was high, making Homegrown ERP systems a prized possession for larger corporations. Only those with a strong inhouse IT team and deep pockets could build and maintain them.
For some companies, the issue of deciding whether to use an ERP system and then picking one was deep rooted. Organizations that grew through mergers and acquisitions added ERP systems as part of the package.
Other companies dealt with classic cases of “Software Snowballing” where an ERP was mixed with other software, none of which was designed to share information. This method of mixing stand-alone products drastically raises the cost of integration. It makes sharing data more complex while also adding expensive software licenses and product maintenance costs.
The good news is that was the old day. Older ERP systems lacked the flexibility and rich features of today’s modern ERPs.
During 2019’s CPhI North America 2019 Convention on Pharmaceutical Ingredients conference held in Chicago, Xcelpros staff met with decision-makers from organizations who are neck-deep in older homegrown ERP systems. These companies find themselves having vital resources slowly but steadily drained.
The people we spoke with unanimously agree that ERPs of the past are adding inefficiencies and straining existing resources. These companies recognize the importance of an effective ERP. They want to convert their investments into a program that promotes growth, collaboration and efficiency.
Early adopters were encouraged by what their ERPs brought to their companies. They kept adding more resources to the system. Over time, some critical functions started unraveling. For example, the accounting module could not keep pace with global standards such as generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS). This inability to keep up leads to non-compliance issues.
From a maintenance standpoint, vendors of older systems started focusing on newer technologies. Companies with old programming tools and operating systems were left high and dry. In some cases, key personnel were tasked with maintaining an ERP on the verge of retirement. Most of our guests realized that updating a legacy system wasn’t practical since the technology is dated. With challenges outweighing the benefits, most of our guests at the CPhI were looking for a newer alternative.
Cost of Staying in Denial
One major issue for companies with homegrown legacy ERPs is the stack of standalone software. Each piece handles one part of the organization’s business processes. Licensing costs to maintain these programs often results in expensive bills at the end of every fiscal year.
The result, or what we call “the cost of staying in denial,” is severe. It grows with every passing day. Some of the common challenges faced by enterprises using homegrown ERPs are:
- 1.High costs to benefit ratio in maintaining legacy systems compared to modern products.
- 2.Incompatibility with popular business applications such as Microsoft Office 365, stifling collaboration.
- 3.Expensive integration required to perform regular tasks such as sales visualization. This often leads to high latency.
- 4.High people costs to maintain older tech that is already retired or will hit its end of life soon. In addition to the tech, the people who know to maintain it may also be leaving, putting pressure on newer staff who are hesitant to learn outdated products.
- 5.High costs of using a private datacenter to run the application, which is expensive. Many telecom firms worldwide are selling them to private companies. This includes Verizon and AT&T in the US.
- 6.Disruptions to normal business operations caused by upgrading the older ERP system. It is a time-consuming, expensive process.
- 7.Lack of collaboration because stand-alone applications limits growth opportunities and competitiveness.
To sum up the challenges, it is a typical case of application explosion with disjointed data sources also known as “the problem of too many.” Randomly applying partial solutions over time sucks up computing resources, increasing the overall cost of ownership.
It’s Time to Retire Legacy Systems
The companies Xcelpros spoke to at CPhI agree that their legacy systems are eating into their productivity and their limited resources. We wondered why, when chief executive officers and other top managers were aware of these issues, they had not already moved on to a modern ERP system.
Our research uncovered these issues:
- Replacement costs and other economic considerations
- A regressive mindset of, “if it ain’t broke don’t fix it”
- Resistance to change management
- Emotional attachments
It’s Too Expensive to Replace
We found comments about the perceived cost of a new ERP system were interesting, mainly because they were inaccurate. However, costs associated with switching to a new system were the most frequently cited reasons by our guests at CPhI’19.
This mindset and myth challenges years of ERP systems providers showing that new ERP systems typically save them money.
A current ERP such as Microsoft Dynamics 365 Finance and Operations actually costs up to 50 percent less than an on-site legacy system for a 100 employee company, business application provider Skyward Techno states.
When ERPs were first introduced about 30 years ago, their main feature was a uniform database that could sync information across business functions. It would ease decision making, the manufacturers claimed.
It was true … briefly. After ERPs came other targeted business applications. They include human resource management (HRM), customer resource management (CRM), product lifecycle management (PLM) and supply chain management software. Each program had its own unique database promoting “best of breed” software for their respective functions.
Companies that bought into that mindset then are now facing the problem of too many competing programs. A major issue is that specialization denies these firms the opportunity to harness the power of insights gathered by shared data.
A 2016 survey by Panorama Consulting found that nearly 65% of the organizations who implemented an ERP cited replacing outdated ERPs as the major driver for the change. The findings cited in the study matched with what we uncovered at the CPhI conference.
Figure: 1ERP Replacement Statistics
With changing trends, best practices have morphed into more optimized processes that promote efficiency and shed workplace complacencies. At a time when profitability is stressed and finding a newer market is challenging, the right technology for your business can be the edge you are looking for.
Combating Resistance to Change
The adage, “If it ain’t broke, don’t fix it” is as archaic as legacy ERP systems. Delaying key technology decisions is costing companies every day they wait. Modern ERP systems such as Microsoft Dynamics 365 lowers operational costs especially when compared to older software.
The Bureau of Labor Statistics (BLS) estimates the wage for skilled labor is $17 to $25 an hour per worker. Using a median wage of $21/hr., production managers responding to sudden demand spikes need additional man hours to meet the demands. Not including overtime required by the federal Fair Labor Standards Act (FLSA), the labor costs of dealing with these demand spikes can quickly exceed projections.
Modern ERPs such as Microsoft System Dynamics 365 Supply Chain Management let companies forecast trends. This software helps plan resources, track jobs plus manage materials and scheduling. The result is a more efficient operation.
Panorama Consulting estimates that modern ERPs ability to integrate data and create accurate forecasts can lower labor costs by 20%. Reducing labor cost is just one of the many positive ways a modern ERP benefits your business.
Managing Change Effectively
Change is inevitable even with technology. Change Management has been underestimated when adopting ERP. The result is implementation failure.
Change management includes designing the right framework for transitioning from unlearning the old and accepting the new way of working. Applying change management requires careful planning, making the role of ERP consultants more critical than before.
Part of this was mentioned in the 2019 Panorama Consulting report. It states that 68% of poll respondents had intense to moderate focus on Change Management during an ERP implementation. The overwhelming response shows the importance of organizational change management. It must include key leadership buy-in, effective communication, a robust training strategy and hiring consultants.
Figure: 2Importance of Change Management in ERP Implementation
At least 50% of ERP implementations are intended to make employees more productive. The importance of change management in erp implementation cannot be undervalued as it impacts nearly half of your organization’s strength. It is something that needs meticulous planning and must not be pushed as the last item on a long list.
Break the Emotional Attachments
Emotional attachments were never documented as reasons to stay with legacy ERPs. However, some of our CPhI guests defended them even though they also agreed that the cost of maintaining them outweighed their benefits.
Some of these people are averse to change. When an older system can’t scale up, they customize it without knowing what will happen. That method may have worked years ago. Today? Modern companies want optimized processes that promote efficiency. Having a complacent workforce is no longer acceptable.
Older ERP systems have hidden costs. Once they require that actions be documented and stored somewhere. If that information isn’t recorded, inefficiencies cannot be detected during a year-end performance review.
Old Systems Cost Money Today
Companies spent huge sums to develop or license a homegrown ERP a decade or two ago. They are paying more for its maintenance today than a modern system costs.
Newer, younger developers don’t know how to update older systems to meet modern needs. The technology in them is too old. This causes companies using them to be less efficient, reducing their ability to compete with modern firms. Older companies using stand-alone systems are unable to leverage analytics and consumer insights. They also lack collaboration between modules such as finance and inventory. Modern ERPs have these connections.
What can a modern ERP System mean to your business?
Modern ERPs are much smarter and efficient than their predecessors. They connect and unify processes and information across business functions such as Finance, Human Resource, Manufacturing, Supply Chain, Logistics, Procurement and Sales. Their connected d esign makes the system more agile, providing benefits that stand-alone systems cannot.
Some of the benefits are:
- Making informed decisions
- Driving collaboration and innovation
- Increasing transparency
- Promoting efficiency
- Reducing dependence on human workers
- Increasing productivity
- Complying with quality and other government standards
Microsoft Dynamics 365 for Finance and Operation is one such ERP. It comes with cutting-edge technologies such as Artificial Intelligence (AI), Machine Learning (ML), Prescriptive Analytics and powerful visualization. Everything is unified under a single ecosystem. The ERP drives business results by integrating data across an organization. It provides meaningful insights easily accessible from a cellphone or handheld device. Backed by Microsoft, it is not only secure but flexible and scalable.
Most companies own at least one Microsoft product since Windows operating systems are on 87 percent of the world’s computers. Business applications such as PowerPoint, Excel and Word are a regular tool for most organizations.
Microsoft Dynamics 365 has a similar look and feel to popular products such as Windows and Office 365. It’s ease of use and familiar look which makes switching over a much easier task.
ERPs have undergone a metamorphosis. They are no longer backend record keepers. Instead, they provide a versatile powerhouse that aids in making impactful decisions accurately and quickly. Modern versions cost less than what many firms pay to keep older systems running.
Break the myth that ERPs are an all or nothing solution. Using Microsoft Dynamics 365, you can pick and choose the right modules for your business, adding more features and scaling up or down when situations change.
When updating to a modern ERP, consider using an established vendor whose product vision caters to your present-day requirements and your future needs. Firms that are part of Microsoft’s Independent Software Vendor (ISV) network have the extensive industry knowledge to guide you through your ERP journey.
Ask yourself a question: “Is my ERP system a roadblock to profitability?” If the answer is remotely “yes,” contact Xcelpros. We’ll bring the coffee.
Planning to transform you business with Modern ERP, book a consultation with our experts.