What is ERP?

Last Modified: February 3rd, 2022

9 min read

What is ERP?

ERP is short for Enterprise Resource Planning, a business software or a suite of software that helps businesses manage and monitor business processes from different departments like accounting, human resources, project management, supply chain, and etc. ERP allows for integration of these processes into one system, allowing the company to enjoy seamless communication between its departments. It is mostly used to automate business processes and data storage for greater data tracking and transparency across departments within the companies.

If you are thinking about entering markets in different countries around the world, or you are planning to expand, or you want to work with large organizations, maybe it is time for you to consider using ERP. There are several benefits of using this software like increased flexibility, more accurate accounting system, reduced paper usage and workflow increase.

There are three types of Enterprise Resource Planning Systems based on how they are implemented in the business, On-premises ERP systems, cloud-based ERP systems, and Hybrid ERP systems. Each type has its own advantages and disadvantages as well as the associated total cost of ownership.

Types of ERP Systems

• On-Premise ERP

Traditionally ERP systems are implemented On-premise in the business. Companies needed to invest heavily upfront for the IT infrastructure needed to implement that ERP system which can be prohibitively expensive for small and medium businesses. On-premise, as the name suggests, installs and deploys the ERP system in the company’s own servers and computers. Generally, On-Premise ERP systems are mostly considered as an item of capital expenditure because of the last upfront cost and the nature of the one-time license fee of several on-premise ERP systems.

• Cloud-Based ERP Systems

Cloud-based ERP systems are increasingly becoming a popular business solution especially for small and medium-sized businesses who like the flexibility and scalability a cloud-based system has to offer. Cloud-based ERP systems are generally hosted through vendors like NetSuite and can be easily accessed through web browsers. The implementation cost of cloud-based ERP systems is considerably lower compared to On-premise ERP systems which cement its popularity with small and medium-sized businesses. Cloud-based ERP systems like NetSuite are generally considered as Software-as-a-Service (SaaS) because of their recurring subscription-based licensing model.

• Hybrid ERP Systems

Hybrid ERP systems utilize both on-premise and cloud-based ERP implementation to provide a combination of the benefits and advantages of both systems at a higher cost compared to purely cloud-based implementations.

Ultimate Advantages of ERP

ERP systems provide businesses with distinct advantages through accurate business intelligence, improved efficiency, and better inter-departmental data exchanges. The greatest advantage of an ERP System is that it integrates and unifies all software that is used by businesses instead of using individual and unconnected software for accounting, invoicing, inventory, and fulfillment. ERP systems automate several crucial business processes eliminating the risk of man-made errors due to the repetitive nature of some processes.

1. Improves Data Consolidation

As mentioned in the preceding section an ERP system consolidates the data from all departments in the company and stores it in one readily accessible database for greater transparency and accountability.

2. Streamlines and Automates Business Processes

An ERP system streamlines business processes by centralizing and consolidating the data from across several departments and business processes into one omnichannel that reduces complications stemming from different software for each department. ERP systems also improve tracking of crucial data like stocks from inventory to current orders in the queue for better business intelligence.

3. Improves Relationships with Customers

ERP systems improve customer relationships by streamlining the sales processes and expediting sales fulfillment and invoicing. Customer Service and Support is also improved through integrating Customer Relationship Management (CRM) software with the ERP system, This allows for greater tracking of individual tracking from lead, to order fulfillment and support.

4. Supply Chain and Inventory Management

ERP systems provide businesses with real-time visibility in the supply chain and inventory management for better business intelligence and planning. Reducing cost and losses from production overruns and overstocked inventory.

Who Uses ERP? (Industries that heavily rely on ERP)

ERP has been broadly adopted by almost all types of businesses in different industries:

1. Manufacturing Companies

Manufacturers heavily rely on an ERP system to streamline the end-to-end business processes. ERP enables manufacturers to automate and integrate important data like inventory, production orders, and customer information all in one central system for easy management and tracking of the entire production chain.

2. Retailers and Wholesalers

Similar to manufacturers, retailers and wholesalers use an ERP system to automate their end-to-end processes to improve efficiency, reduce labor cost and waste from human-induced errors. Retailers also use ERP systems for better customer management, increased sales and marketing intelligence through integration with CRM solutions.

3. Distribution Companies

Distribution companies rely on an ERP system to automate their end-to-end business operations to reduce costs and increase profitability. Distribution companies also use an ERP system for improved customer management, increased sales and marketing intelligence through integration with CRM solutions, and real-time inventory and supply chain visibility.

4. Service Providers (Including SaaS/Software Companies)

ERP systems provide service providers like accounting, consulting, legal and professional services, and SaaS (Software-as-a-Service) subscription companies to manage their timesheet automation, automated call routing, subscription billing and revenue recognition, and improve the overall service quality.

5. Non-Profit Organizations

Non-profit organizations rely heavily on ERP systems to streamline their back-office operations and improve the efficiency of their workforce. Non-profit organizations can use an ERP system for better inventory management, employee management, improved customer management with integration with CRM solutions, marketing, and sales intelligence.

What happens in an ERP Implementation?

Build Steps

ERP systems are very complex in nature to design and implement, however, the traditional processes typically followed for an ERP system are the following:

  1. Gathering business requirements by interviewing key users from different departments
  2. Developing technical specifications based on the gathered information
  3. Designing and developing data flow models and process diagrams to understand how data flows within the system, between different departments, and with external entities
  4. Designing and developing User Interface (UI) based on the user’s roles and responsibilities
  5. Integrating database design with data flow models to meet business requirements
  6. Conducting unit level testing of the software modules developed for different departments of an organization
  7. Deploying the software solution in a production environment
  8. Conducting integration testing to ensure that all different ERP modules are integrated seamlessly into the system
  9. Maintaining, upgrading & enhancing the system by applying periodic patches and bug fixes based on business requirements.

ERP Project Cost Factors

The cost of implementing an ERP system varies based on a number of factors. Some of the variables which affect the overall cost of implementation include:

  • • Complexity of business processes
  • • Number of users, number of modules
  • • Number of interfaces required to connect to external entities like customers and vendors
  • • Types of modules that need to be implemented
  • • Functional, technical, and physical data flow between different systems with external entities

In addition, the cost of implementation increases with increasing the number of modules within an ERP system.

ERP Pricing Models

Two readily available ERP purchase pricing models exist, each with its own set of advantages and disadvantages while hybrid choices that borrow elements from both models are also available.

1. Perpetual licensing model

Perpetual licensing model is the preferred choice for organizations who want to reduce their total cost of ownership (TCO). However, perpetual licensing requires upfront payments while subscription based model reduces TCO but does not eliminate the initial investment.

2. Subscription-based licensing (SaaS)

ERP as a Service – SaaS model is the most preferred choice as it reduces initial capital expenditures and also offers predictable costs with monthly or annual subscriptions. In this pricing model, the customer pays only for what they use on a monthly basis, which typically includes software updates and technical support.

Some Project Risks and Mitigants in ERP Implementations

An ERP project is a very complex IT project to design, implement and maintain. Therefore, it is important for organizations to identify risks early on in the process and take corrective actions based on impact analysis before they materialize into critical risks. Common risks that may occur with an ERP system include:

1. Technical risks

Technical risks include programming errors, connectivity issues between servers and other modules, lack of scalability to accommodate future changes in business requirements etc.

2. Business process redesigns

Business process redesigns are required due to the introduction of an ERP system requiring changes in workflows. Changes in business processes require coordination with multiple users within the organization at different levels who have never worked together before. In addition, change management communication plans have to be developed at the same time for effective communication about these changes with all stakeholders.

3. System or data security and confidentiality risks

Risks associated with system or data security and confidentiality of information stored within a database. Therefore, appropriate technical and physical controls have to be implemented as part of an overall risk mitigation strategy.

4. Post go-live training and support

Lack of resource availability for training, and support for users after implementation as a result of insufficient investment in documentation and lack of technical support from the vendor. In addition, if users do not have adequate training on how to use new functionalities provided by the ERP system, the systems will be underutilized leading to lower returns on investments which can impact ROI projections.

5. Organization resistance

Organizational resistance for change as a result of resistance to change by managers, employees and even customers as a result of misalignment with business goals and objectives.

It is important to identify risks early and take corrective actions based on impact analysis to mitigate the negative effects.

ERP Project Management Methodologies

An organization can choose from any number of project management methodologies including Agile, Waterfall, or a hybrid approach based on the industry type, size of the project scope, and nature of the project. For example, a small and simple implementation with few modules may be best suited to an Agile methodology whereas a larger and complex implementation requiring multiple development teams would require a Waterfall approach.

1. Agile Approach:

  • • Short release cycles with frequent upgrades to build and deploy the system incrementally;
  • • Frequent customer feedback to incorporate changes based on changing business requirements; and
  • • Reduced time and cost to market the product as it incorporates various feedback throughout the development process.

2. Waterfall Approach:

  • • Solid project planning with clearly defined phases, milestones, and deliverables;
  • • Stakeholders involved in each phase of design/development is responsible for ensuring that the scope of work is adhered to; and
  • • Easier to manage project scope and stakeholders involved in the development cycle, however, requires careful management of dependencies between different phases.

3. Hybrid Approach:

  • • A hybrid approach can be taken which includes parts of an Agile methodology along with certain elements from the Waterfall methodology. For example, a phased development approach may be best suited to a complex system requiring multiple development teams. In addition, a hybrid methodology can be beneficial for stakeholders to clearly understand the project milestones and deliverables.

ERP Best Practices

An ERP system should be designed to meet the business needs of an organization. The design process should include key stakeholders from different departments within an organization, which can help identify and remove any hidden constraints that may exist in the current system.

1. Start small and build momentum:

Start with a simple system consisting of a few modules, basic functionality, and limited data requirements to provide quick business value before going live. This will ensure successful go-live with minimal disruption in productivity. In addition, users can learn how to use the new system using existing records before adding additional data to the system.

2. Plan for change management:

Change management is a key factor to consider before and after implementation of an ERP system as it helps ensure organizational acceptance, which is critical to sustainable success. Thus, organizations should include training and communication plans as part of their overall risk mitigation strategy by involving users in future technology visioning and planning to provide a smooth transition from the original system to the ERP solution.

3. Invest in implementation:

It is important to invest in implementation and go-live preparations by hiring a strategic implementation partner with deep industry expertise and experience to ensure success, especially for complex implementations that may require multiple development teams. In addition, it is beneficial to establish a dedicated project team with subject matter experts who are familiar with the industry and business processes that will be automated.

4. Ensure a smooth transition:

To provide a successful transition from the original solution, it is important to plan for post go-live activities such as ongoing support, documentation generation, and ongoing system maintenance activities. While some of these activities can be performed by the original vendor or an implementation partner, others may require IT resources within the organization.

5. Monitor ongoing system performance:

To ensure sustained success after go-live, organizations should establish a formal system monitoring strategy that includes ongoing reporting of system KPIs at set intervals as well as business metric reporting to track overall performance of the system. In addition, it is important to conduct a post-go-live review with all key stakeholders to identify and address any issues that may have surfaced throughout implementation and go-live activities.

In addition, it is important for an organization to have a designated owner or sponsor who ensures appropriate attention and resources to the project. The system should also be implemented in such a way that it can be adapted and modified as per changing business requirements, which would require periodic updates and patches to the database design and program code. The system should provide an adequate level of security for data privacy and incorporate key controls like change management, logging, auditing, etc.

Choosing the Right ERP System for your Business

For small and medium businesses implementing an Enterprise Resource Planning (ERP) system can be a huge investment and undertaking. Cloud-based ERP systems like NetSuite is the popular option for small and medium-sized businesses due to the lower implementation and upkeep cost and the experienced network of NetSuite Solutions Provider Partner that help businesses with their implementation through advisory, consultation, and support.

Serge is a Managing Partner and the head of sales and business development.

Published on: March 29, 2019