Heading into 2006, spice giant McCormick & Co. Inc. saw some pretty clear signs that an SAP ERP system upgrade was in its future. SAP 4.6c, which the company had deployed in 2002, was just about to lose maintenance coverage, which meant McCormick was facing significant consulting charges whenever there was a problem going forward. Newer releases also boasted software functionality the company needed -- specifically, advanced supply chain management (SCM) functions and vendor-managed inventory capabilities that were lacking in their existing platform.
Rather than wait for the system to become a burden, McCormick opted in 2006 to proactively orchestrate an upgrade to SAP ERP Version 6.0. It didn't hurt that Version 6.0 sported new Web functionality and architecture changes that would facilitate ERP integration and new capabilities that -- though not needed immediately -- would definitely play a role in McCormick's future.
"We run our business on SAP, and not having the proper service and maintenance was a risk we weren't willing to take," said Terry DellaVecchia, McCormick's director, Enterprise System Technologies.
Many companies feel the same way about enterprise resource planning (ERP) software, today the lifeblood of business. ERP is designed to be an integrated system that handles the transactional side of a business, including financials, inventory planning and order management, along with the operational side -- everything from manufacturing to human resources (HR) and dealing with suppliers and customers. While early versions of ERP had a narrower focus around manufacturing, HR and financial components, subsequent releases have expanded to incorporate SCM, logistics and warehouse planning, and customer relationship management (CRM), among other capabilities.
Ideally, ERP systems should serve as the primary source for all critical data while delivering analytics and reporting functions that help companies make better decisions. If they don't, or if one of these scenarios sounds familiar, it may be time for an ERP upgrade.
No. 1: Upgrade an ERP system that's more than five years old
While there is no so-called expiration date for ERP software, experts suggest the five-year mark as an inflection point to re-examine a system and evaluate whether it still has the muscle to efficiently run the business.
There are some telltale signs that an ERP system has run its course. In addition to lack of maintenance and support, ongoing problems caused by complex integrations and customizations can indicate the need for an upgrade, as would the lack of new user interface enhancements and Web, business intelligence (BI) and business process management (BPM) improvements that categorize many of the newer ERP offerings.
No. 2: Upgrade when ERP system integration is difficult.
Ease of integration is a particularly thorny problem driving many companies to consider an ERP upgrade. As companies spend time and dollars building custom software integrations to address their specific business processes or to accommodate third-party systems, they often end up with a complicated mess of custom code that becomes difficult to scale and support as more functionality and end users are added to the system.
"When you're spending more time integrating or managing a kludge of older systems and new functionality that was bolted on from third-party applications or internally developed software, you need to ask whether it's time to upgrade to a single ERP system and get rid of the integration and maintenance work," said Joshua Greenbaum, principal of Enterprise Applications Consulting, a consultancy specializing in enterprise software. New ERP platforms, almost all of which are based on a service-oriented architecture (SOA) foundation, go a long way in reducing integration and maintenance costs, Greenbaum noted.
No. 3: Upgrade when an ERP system is missing the "modern" features and functions required to efficiently run the business.
Many new ERP offerings are packed with new business intelligence and Web functionality that help companies meet evolving business requirements to allow customers to send orders electronically, for example, or to access accounts 24/7 online.
"It could be a functionality issue -- maybe a manufacturer needs advanced logistics tracking or support for vendor-managed inventory," Greenbaum said. "If a system isn't able to perform those tasks that partners or large customers require, then it's time for a reassessment."
No. 4: Upgrade when employees, partners and consultants aren't using the system -- or aren't available to fix it.
Beyond feature-envy, outdated ERP systems can be a huge disincentive to keeping internal customers using the system -- not to mention a turnoff for attracting and retaining new talent. Specifically, finding experts to support aging ERP systems can be a problem, as is hiring top-quality consultants, who often aren't interested in working with older ERP platforms that don't support the latest technologies.
"Anyone who takes ERP consulting seriously is very wary about getting stuck on an old release because it will hurt their skill set on an open market," said Jon Reed, an SAP mentor and president of jonERP.com, an independent consultant specializing in SAP. Similarly, he said, if companies find users backing away from the system because it's outdated-looking or because it doesn't work well with Microsoft Office and other important productivity tools, it's clear the ERP platform has run its course.
No. 5: Upgrade when it's obviously time, whether the hard upgrade ROI is clear or not.
Experts disagree about whether making a hard ROI case is necessary for justifying an ERP upgrade. Some, like McCormick's DellaVecchia, say a level of business case justification is needed, but not nearly as necessary as with other systems. According to AMR Research Inc., formal ROI analysis used to be required 70% to 80% of the time to justify an ERP upgrade; now it's more like 10% to 15%.
"People think all capital purchases require an ROI analysis, but in the case of ERP, it's not as common as you think," said Jim Shepherd, AMR senior vice president. "It's sort of like infrastructure -- you don't do an ROI analysis on whether you need electricity or water. There's an understanding now that an ERP system is not an option -- it's an absolute requirement for business."