If you want Mitch Pisik to spring for an ERP upgrade, don’t talk to him about bits and bytes. The president and...
CEO of Breckwell Products, a manufacturer of home heating products, wants to hear about only one thing: cash flow.
“What’s the incremental cash outflow for hardware, software and training, then the incremental cash inflow for increased efficiencies, higher sales, improved margins, lower costs?” Pisik said. “If you sell it as a revenue and cash-flow enhancement opportunity, it will be viewed as such [by senior managers].”
Pisik isn’t the only one who thinks this way. ERP consultants and systems integrators agree that selling the business benefits of an ERP upgrade is essential when IT budgets remain tight and top managers resist any new spending, particularly for expanding large-scale ERP systems that have already cost hundreds of thousands -- if not millions -- of dollars.
“We hear a lot of people say, ‘I’d rather quarantine my ERP base and invest in new product development or a better supply-chain platform,’” said Bob Parker, group vice president of research at IDC Manufacturing Insights. “Given the constraints, they are making the choices around business value rather than IT efficiency.”
Nevertheless, ERP remains the heart of business-process and financial-management systems, and delaying necessary upgrades or not taking advantage of innovations can impede productivity, security and regulatory compliance efforts. Here’s how ERP veterans make the ERP upgrade business case, using arguments that resonate with CEOs and CFOs.
ERP best practices for upgrades
First, while it’s natural for senior execs to focus on the cost of the investment, IT managers should steer the conversation toward the larger idea of how an ERP upgrade can improve operational efficiency or customer service. Start by assessing current performance, including any glaring gaps, then talk about potential improvements. “Tell them: ‘Here’s how we could be doing business, and here’s how ERP can be a tool that’s going to help us get there,’” said Paul Sita, principal of Innovative IT Consulting, which specializes in ERP systems for midsized companies.
IT managers can’t talk the talk alone. Elicit help from the business-unit managers who suffer the pain of underperforming ERP applications. “They can demonstrate where it takes a superhuman effort to keep things running or where there are a lot of wasted steps,” Sita explained. “Top management probably doesn’t even realize where some of those inefficiencies are.”
Now it’s time for the money talk. Describe how the new ERP features will address specific shortfalls and work with business managers to estimate potential savings in costs and staff time.
The ROI of ERP upgrade innovations
CEOs and CFOs may not be impressed with the latest and greatest ERP technologies, but sometimes these innovations offer important reasons for upgrades. Just make sure to translate techno talk into the language of business benefits. One prime example is the trend to embed business-intelligence (BI) and analytics tools within ERP applications.
While initial ERP implementations focused on re-engineering business processes, today’s BI-infused upgrades revamp decision-making processes, according to IDC’s Parker. This allows business managers to use concrete data to identify poorly performing products and decide when to eliminate them. Conversely, analytics can flag when to accelerate an internal product-development effort because of changing market conditions. For procurement managers, analytics can quantify the tradeoffs of sole vs. dual sourcing a particular product, including factors such as tooling costs and the risk of shortfalls.
“Explain to management that an upgrade allows you to better use all the good information you’re generating with your current ERP system, thanks to tightly integrated analytics, portals and collaboration technologies,” Parker added.
The importance of some ERP innovations extends far beyond internal operations. Many tier 1 OEMs and distributors have spent the downturn squeezing out inefficiencies by automating key components of their supply chains. This requires their partners to upgrade internal systems for sophisticated electronic transactions and for exchanging data about customer demand, inventory levels, production schedules, and forecasts.
Reducing risk in ERP upgrades
Another compelling argument for expanding ERP systems is the risks that arise when companies delay upgrades for too long. At the top of the risk list is running ERP versions that are unsupported or minimally supported by the vendors, said John Hoebler, director of enterprise systems at MorganFranklin, a systems integrator. Companies can become cut off from the constant stream of patches and fixes that close security vulnerabilities or address features requested by user groups, Hoebler said.
Finally, an upgrade is also an opportunity to reduce the costly, customized code that might have seeped into the ERP implementation. Over time, this housekeeping step can cut cost-of-ownership expenses by 20% to 30% by easing the development efforts needed to maintain and revise the application, Parker said.
Sita is currently helping one of his clients to document the benefits of an ERP upgrade. The customer now runs a highly customized, 10-year-old version of an ERP application that needs $1.1 million in new spending.
“Upper executives always start off by thinking, ‘Why should I spend a million dollars for new ERP features?’” Sita said. “But of course the choice isn’t $1 million vs. zero. From a pure dollars and cents perspective, there’s a cost of doing nothing because of the inefficiencies that exist in how they currently operate.”