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IT Challenge: When is ERP consolidation the right move?

In this IT Challenge, learn how to know when ERP consolidation is the best move for streamlining a company's ERP.

The IT Challenge of the Month for January 2013:

My company is deciding between consolidating our multiple ERP systems and just scrapping the whole thing and starting with one new ERP system. How can we figure out which option is the best choice?

Do you have a solution to this challenge? Have you encountered a similar issue at your business? If so, please contact the editors and share your suggestions or experiences. 

IT Challenge respondents will receive a free copy of a new book from SAP Press.

And be sure to check back here all this month -- we'll be posting solutions from experts and readers as we receive them.

From industry analyst and CEO of Constellation Research Ray Wang:

When looking at instance and ERP consolidation, you'll want to assess a few things:

1. Here's your chance to go back to the drawing board. I'd take the time to think about what you want to achieve with ERP. Start with the end in mind. Figure out what you want the future state to look like. Is consolidation happening because you want to enable mobile or better analytics, or drive down the cost of support? All are valid reasons. Start from that design point and work your way down to the key objectives.

2. Determine which system is the newest and best option for the "go forward" system. You can do that by looking at the age of the system. If it's older than seven years and not upgradeable, scrap it. 

If the types of business that the system are running differ from your business model, for example process versus discrete manufacturing, scrap it.   

Look at the amount of customization put into that system. If you can't do an upgrade of that system because of all the customizations, scrap it.

Look at geographical diversity. Are you operating in many locations? Do you want to go down to one or two systems because of downtime and upgrade issues?

Then there's the cloud question. Most midmarket companies are still in the on-premises world, but an upgrade gives you a shot at looking at the opportunities in the cloud. The tradeoff is the same as renting versus buying. It's the big decision.

If there is no go forward system that you can use among the different ERP systems, then you should look at what the new system should look like.

3. Compare all the costs of ownership between the current landscape and a new landscape. Here's the good news. If you have they money to buy a new ERP, the vendors will be clamoring all over you to sell you one. There's healthy competition in the market for new sales -- just make sure you work with someone who has experience in vendor selection. They can make sure you not only strike a good deal on licenses, but don't overpay for maintenance in the long run, and secure the right terms and conditions in your software contract. Think about all elements of the software ownership lifecycle. This include selection, implementation, ownership, maintenance and renewal. You'll want to think of business conditions such as mergers, divestitures, moving a plant or location. These shouldn't change how you buy software, but you'll want to include these scenarios in your contract to avoid issues down the road.

4.  Use this as a broader opportunity to look at your company's business and technology strategy alignment. Do a sanity check to see if you are getting the most out of your technology today. Merging many disparate systems isn't easy. You'll find that if you can do all the pre-planning work before you buy any software, it'll save you a ton of time to do your homework first before you call in the vendors. 

From industry expert and author Steve Phillips:

If "consolidating systems" means developing complex interfaces between aging ERP packages, this is not the best solution in the majority of situations. However, if consolidation implies migrating all business units into one of your existing ERP systems, instead of buying a new package, there are some important trade-offs to consider. These include implementation costs, software functionality and on-going support.

Using one of your existing ERP systems will likely end up costing a lot less for implementation across the organization. However, if any of the items listed below have major problems with the current system, purchasing a new ERP system is usually the better choice. The potential issues with the existing system may include: 

1) It does not address the current -- or near-term -- needs of each business unit, without significant modifications.

2) Most software modules within the system are not designed to support multiple businesses / plants in a single database.

3) The application is not fully supported by the software supplier.

4) The system is running on technologies that are obsolete or close to it.

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Enterprise Consolidation viewed firstly as a business initiative will drive the team towards an alignment and discovery plateau where the choice between a "fresh start" and a "leveraged consolidation" will become clear.

This question should ideally be viewed as a logical outcome of a thorough alignment and discovery diagnostic which produces a business case for the best path for change. The business operations, technology enablement, and organizational structure (e.g., shared services, rationalized local departments, etc.) are all considered and the optimal outcome is defined in those terms - which then makes clear to the researcher - which path is most likely to achieve the objective.
If you attempt to answer that question before you discover - you may land in the east when your business desires you face the west !
A thorough assessment, guided by a specially designed and proven methodology, is the only way.
This assessment should focus on the areas of process, data, technology and people. It should investigate the reasons for differences, and compare those to best practices, and quantify the delta between them.
In addition, a business case should be compiled comparing the cost and risk of maintaining the status quo, versus consolidation (the answer is often surprising), and a detailed road-map with phases and options should be presented.
If this is tightly governed by the appropriate methodology, and a crack team conducts the assessment in a low-business-impact and flexible manner, the confusion surrounding consolidations (how to start, the risk and cost etc) can be clarified and presented in a compelling way for approval.