The Problems with How Companies Buy ERP Software
What is ERP Implementation?
ERP implementation has several components, including business analysis, software selection, solution design, software implementation, software training, and IT support. This is often a large-scale project that spans anywhere from six months to three years. It can be led by a project management team within the company, or components of it can be outsourced to an ERP consulting firm. Generally, company executives’ deep understanding of the enterprise processes is combined with ERP consultants’ deep understanding of business management solutions to design and buy ERP software.
The Common Trend in ERP Selection & Implementation
The typical journey for buying ERP software has evolved into one of RFP templates, ERP software comparison checklists, unmeaningful demonstrations, and an arbitrary ranking of software – when in reality, there is no perfect ERP software. The perfect software should be custom-selected and custom-designed for every business’s unique needs.
There are a large number of ERP failures seen across every industry and organizations of all sizes. ERP failures result in lawsuits on consulting firms, irreparable brand image damage, severe profit and customer loss, and millions of dollars lost in direct costs. What can you do to ensure ERP implementation success? Below we’ve outlined the typical buyer’s journey for ERP selection and implementation – including the problems with each step, and what you can do to ensure a successful ERP implementation project.
The Conventional Journey for Buying ERP Software
1. Budget Approval
When you buy ERP software, the proposal of executing an ERP implementation project can be sparked by any person in the organization. But regardless of whether it’s an Operations Manager who has noticed one too many problems on the ground floor, an IT team who has recognized room for improvement, or a CFO who is seeking more visibility into their financial performance, the first step typically taken is creating a budget. To be approved by the executive board, this budget must detail the estimated costs of buying the ERP software, the scope of the ERP solution design, and approximate ERP consulting costs.
Because ERP pricing really depends on what your organization is looking for and wanting to achieve, there is no ballpark estimate readily found. Instead, companies will usually contact ERP vendors to ask for an estimated budget based on the ERP functionalities they are searching for.
Once you contact an ERP vendor about pricing estimates, they recognize your search for an ERP as a big sales opportunity. Thus, ERP vendor sales representatives will often give you a number that is underestimated based on the needs of your company, in hopes that a lower price might attract you to buy ERP software from them.
What To Do Instead
First, conduct research on the general list of costs in ERP implementation, including software fees, maintenance fees, hardware fees, and implementation services. There are plenty of ERP pricing guides and templates from ERP consulting groups and trusted sources like Gartner, that can be easily found through a Google search. But to get a more accurate estimate, talk to industry colleagues or software consultants that hold years of experience in your field. By understanding what each of these consist of, you will be able to consult experts with more equal footing.
Determine which functionalities your organization truly requires in a new ERP, and shave away all the attractive add-ons that don’t directly contribute to your goals. Enter any conversation with this list handy to ensure you aren’t distracted by additional modules.
Still, to get an accurate estimate, you will need to contact an ERP expert. Consider contacting an ERP consulting group instead of ERP vendors, because they will give an estimate based on your situation rather than on one particular software. Ask for the individual costs on your prepared list instead of a ballpark estimate to avoid an underestimated number.
2. Defining Requirements with an RFP
Upon consolidating a list of the organizations’ current challenges and bottlenecks, you will create a Request For Proposal (RFP) that describes the objectives and scope of the ERP project. Most often, the project lead will use an RFP template designed for ERP implementations. The RFP template will have a very lengthy list of requirements for you to evaluate, check off, and put a priority ranking on. After you’ve filled out the RFP template and thus determined the scope of the project, it is ready to be sent to ERP vendors to solicit bids.
In the first step, project leads will define the scope of the project by listing the objectives, target ROIs, budgets, risks, project team, and more. This is commonly executed through an RFP template that can be presented to both the company executive board and potential qualified ERP consultants.
Using an RFP template can quickly lead to scope creep before you have even launched your project. What often happens is the person filling out this RFP template will check off “yes” on many more requirements than are needed. It is very easy to become overwhelmed and distracted by the many features that advanced ERPs now offer, and thus it is way more common to say “yes” rather than “no” to a future-focused functionality. RFP templates are an extremely common approach – because they work and reduce the workload in this step, but very often, they can easily add on a lot of unnecessary costs and deviate you from the original objectives. Learn more in our blog post, Why You Should Avoid RFP Templates for ERP Implementation.
What To Do Instead when you buy ERP software
Instead of creating an RFP based on specific software functionalities, create one based on a list of specific objectives you wish to achieve in creating a new solution.
Ensure that these objectives follow the basic framework for SMART goals: specific, measurable, achievable, relevant, and time-bound. Ensure that you cut out all broad requirements that cannot be properly measured. When the requirement cannot be measured with specificities or numbers, any ERP vendor can twist their solution description in a way that aligns to your broad goals. Consider the following examples of replacing broad goals with more specific goals:
Broad Goal: “We want to achieve 50% growth over the next few years.”
Specific Goal: “We want to achieve 50% growth within the next three years, without adding an extra person to the operations line.”
Broad Goal: “We want to achieve global expansion.”
Specific Goal: “We want to achieve global expansion while keeping all management on one platform and without including a currency convertor or language convertor.
3. Sending RFP to Software Vendors
After the team approves the RFP, they will send it out to many ERP software vendors. This can be a long list of vendors if the company does not already have an idea of the options out there. Upon receival of an RFP, software vendors will let companies know if they are able to meet the scope of your solution design.
It’s inevitable that ERP vendors will want you to buy ERP software from them, even if there is barely any match. Vendor sales representatives will sometimes describe functionalities using a loophole that still convinces you they meet your RFP requirements. If there is even remotely a fit, ERP vendors will do their best to check off as many boxes on your RFP as possible.
What often ends up happening is each ERP vendor will meet many different requirements on your RFP, but none of them will meet all of them – because you have listed so many items. Then, you are stuck with a confusing decision where each ERP is offering different things; you will have to make a compromise, resulting in an inadequately-designed solution.
What To Do Instead
It all comes down to narrowing down very specific objectives and requirements for your ERP project. To do this, work backwards. Instead of waiting until the end of the implementation, prepare your marking rubric with quantitative numbers before the project even starts and use this to write your RFP, if you choose to use one. Include quantitative numbers like target ROIs, target profit margins, increase in efficiency, increase in revenue, and more meaningful measures. Defining very specific requirements and sticking to them will help eliminate a huge number of ERP solutions, helping you narrow down your options more effectively.
An alternative to using an RFP is working with ERP advisors who are experts at doing a thorough analysis of your business in relation to technology. With their expertise in business technology management, they will work alongside you to determine more accurate objectives.
4. Software Demonstrations
After your team narrows down to a handful of prospective solutions, you need to evaluate them in detail and do a thorough comparison. The common approach is a software demonstration presented by the solution provider using either your company’s data or industry data. It is recommended to provide a sampling of assorted company data, so the demonstration will more accurately reflect a typical day of work with the ERP.
ERP software demonstrations span anywhere between 2 and 24 hours; the demonstration is often longer when there are numerous optional components and add-ons in your solution. When you are sitting through multiple demonstrations, what’s most likely to happen is you will select the solution that was backed by the most entertaining and convincing speaker – not the solution that is the best fit for your needs. Furthermore, due to the recency effect, things that happen last often leave the most imprinted impression, so you may end up choosing the final solution. Often vendors will try to schedule their demo last because of this reason.
While you hold the best understanding of your business, you cannot become an expert in a handful of ERP solutions over the course of a lengthy software demo, and you may end up more confused than ever. Truly understanding the functionalities, benefits, and pitfalls of a new ERP solution takes many months. And inevitably, without a deep understanding of business technology options, you will simply choose the seller who delivered the most memorable presentation.
What To Do Instead
Working with ERP consulting firms that offer multiple solutions allows you to design just one solution that can be added to, or changed, based on your objectives. ERP consultants are experts in the popular ERP options out there and paired with their years of experience in your particular industry, are able to select and design a solution that best matches your goals. The value of an ERP consultant is their expertise and deep understanding of business technology management.
Of course, a good ERP consultant will do a software demonstration of the solution that you designed together, but this way, you can put your full attention to just one well-designed solution. A demonstration that is focused to the key elements, allows you to absorb and understand the path forward rather than trying to drink from the firehose.
5. ERP Selection
After weeks of sending out RFPs, communicating with ERP providers, and watching software demonstrations, the time comes to select and buy ERP software. A common approach here is to revisit the RFP or use an ERP Evaluation Checklist template to compare solutions. The solution with the most advanced functionalities and lowest cost is typically chosen.
To reiterate, it is nearly impossible to gain a thorough understanding of a new management system through a few demonstrations. Software selection requires in-depth research to develop an understanding of various system benefits and pitfalls – but most importantly, its particular fit for the enterprises’ processes, limitations, needs, and long-term goals. Commonly, companies forget about their original objectives and select the most “attractive” solution.
A missing component to this step is evaluating your ERP vendor’s credibility and case studies of other companies similar to yours. Understand that some solutions are more suited to certain industries.
What To Do Instead
Once again, the benefit of partnering with an ERP consultant in this step is that they are able to share their advanced knowledge of ERP solutions. Unlike ERP vendors, ERP consultants do not get a commission for selling a certain software. With your best interests in mind, they are able to assist you in choosing the best solution that can be customized to your needs and that can integrate with your current systems.
6. Design the Implementation
After selecting an ERP, the project team works with the vendor to design a solution with any required customizations, add-ons, and integrations. The implementation also includes an ERP training schedule and a change management plan for a smooth integration into your company.
When you buy ERP software first and design the details of the solution afterwards, you move forward with significant limitations and a “work with what you have” approach. There may be a more suitable solution for your particular industry and organizational processes.
A common occurrence at this step is Scope Creep or Scope Seep, where either the solution provider or your own team convinces you of add-ons that you don’t actually need – and that aren’t helpful to your objectives.
What To Do Instead
To address the problems of this late stage, you must start at the beginning of the project. Select an ERP partner that starts with solution design rather than software selection. While this may be more costly and time-consuming initially, it greatly reduces the chances of a failed ERP project. Enter your project with the understanding that templates, checklists, and a one-size-fits-all approach will not help your organization reach its full potential.