A CFO would want to know why a plant manager is keeping machine tools idle when they could be put to profitable use -- and rightly so. Yet most companies are guilty of not fully utilizing another expensive capital asset: their enterprise resource planning (ERP) system.
Although the term "business process reengineering" may sound passé, companies should be putting more effort into process reengineering to improve efficiency and effectiveness by instituting end-to-end processes. In many cases the ERP software that companies already own can help them do this, without even having to make a major upgrade to it. What's the biggest hurdle? It may simply be understanding what's possible.
ERP software's capabilities -- and the expectations that users place on them -- have evolved substantially since mass adoption began in the early 1990s. Most companies have achieved simple process efficiency. The Hackett Group found that the cost of running the average finance organization shrank by nearly half during the 1990s; this achievement can be attributed largely to the nearly universal adoption of ERP systems over that period. And the impact of this improvement is not trivial: We calculate it adds $60 billion annually to the operating profit of the Fortune 500 alone. With that mission accomplished, it's time for companies to focus on raising their use of ERP to the next level.
Many businesses can use their ERP tool to achieve step-function improvements in productivity and to enhance organizational effectiveness. But our research shows that most are not taking advantage of newer but proven process improvements, such as using end-to-end process automation (order-to-cash or purchase-to-pay, for example) or replacing paper with digital documents. Many companies could also be using ERP to accelerate their periodic closing process.
ERP systems also can and should be used to enhance organizational effectiveness. While documenting accounting transactions has been a core function of ERP systems (often the main one), these applications are capable of recording a broad range of operational data that plays a critical role in scorecards (balanced or otherwise), key performance indicators (KPIs) and driver-based planning. Moreover, many companies are not using nonfinancial metrics to improve performance, either because they ignore data they already collect or they fail to collect the data their ERP system is capable of delivering.
What's Stopping You?
Why don't many companies make better use of their ERP systems? Perhaps the most important reason holding back ERP's potential is the attitude of finance executives toward these systems. Research suggests they believe it's someone else's job to find new and better ways to use the software to improve the effectiveness and productivity of their organization. While they agree that ERP has the potential to support a range of useful changes, in practice they make few improvements. Another factor may be their tepid assessment (justified or not) of whether the software has had a measurable positive impact on the performance of the company. In our recent research study, only half of the survey's respondents thought ERP improves performance insight, process visibility and internal control. Just four in 10 reported it lowers operational costs or helps optimize business processes. Less than one-third said it raises employee productivity. We see a chicken-and-egg syndrome at work here: If there is no attempt to make better use of ERP software because executives do not believe it will produce results, then it cannot deliver those enhancements.
ERP systems were once ridiculed as white elephants. The fact is, an ERP system is not a low-energy lightbulb, which starts saving you money as soon as you flip the switch; ERP software comes with a learning curve that makes users increasingly adept over time. It's likely that a large percentage of the efficiency improvement in finance departments was achieved through avoided cost: Companies grew but did not need to hire people to handle the increased volume. Thus, the benefit of an ERP system escaped notice.
Another common misconception is that it's too hard to make changes to an ERP system. Yet unless your ERP system is more than five years old and has never been upgraded, many improvements will not require major changes. Like any enhancement to a capital asset, increasing the productivity of your ERP system will take some time, effort and money. Judging whether it is worthwhile should be the result of an objective assessment, not prejudice.
All this being said, we need to add one cautionary note: The consolidation of the software industry over the past three years has added a further consideration to any assessment of which changes to make. Corporations such as Infor, Microsoft and Oracle have assembled a portfolio of once-independent ERP vendors. The good news is that these corporations are financially sound and have an important incentive (your recurring maintenance payments) to keep existing users happy by supporting installed applications for an extended period. However, users need to understand each company's road map for the continued support and upgrades of these systems before making additional investments.
The ERP Steering Committee
One unfortunate divide has persisted since the start of the computer age more than half a century ago: The business side doesn't understand enough about how IT can help it to address critical business issues, and the IT side doesn't understand enough about the need to apply technologies to solving business problems. Today, we see another dimension to this digital divide between business and IT. Application vendors have been so successful at developing products that most companies have more opportunities to effect improvements than they have resources (time and money) to pursue them.
There is considerable room for companies to use ERP systems and other application software to improve their business results, but addressing this opportunity should not be haphazard. Companies should establish steering committees with senior-level authority to ensure that they are examining the IT dimension of their pressing business issues, finding opportunities to improve business processes through technology initiatives and setting priorities for implementing these solutions. This sort of collaborative effort could go a long way toward identifying opportunities and implementing innovations that will improve a company's results.
