Common Mistakes in ERP Selection

What are the common mistakes in ERP selection?

Many companies may not know that selecting the wrong Enterprise Resource Planning (ERP) solution can be a costly and sometimes, fatal mistake.  If you search on Google “ERP causes bankruptcies“, you can find many articles and case studies of corporate failures caused by mistakes made in selecting ERP.

This article uses real-life cases that I encountered over more than 2 decades of my ERP career to illustrate the common mistakes made in ERP selection.

Measurement of Successful ERP Selection

Before we talk about mistakes in Enterprise Resource Planning (ERP) selection, it will be appropriate to define what is considered successful ERP selection.

An Enterprise Resource Planning project is an investment project.  Therefore, my measurement of a successful ERP selection is the Return on Investment (ROI) of the project when compared to well-selected and well-implemented ERP projects.

These ROI includes:

Improvement and Benefits to Business

The measurement of the returns of the ERP project will be how the project brings improvement and benefits to your business.  These improvements and benefits may be quantifiable and non-quantifiable.

Quantifiable Benefits

These are results that can be measured and quantified to ascertain the benefits of the Enterprise Resource Planning (ERP) project:

• Inventory Reduction
• Lost sales due to stock out and obsolescence
• Reduction in direct labor costs in processing orders and producing the products to fulfill the orders
• Improved margin
• Free Up Cash
• Reduction in lead time
• Reduction of Penalty due to delivery delay and errors, etc.

Non-Quantifiable Benefits

These are benefits that are apparent but difficult to measure in tangible terms:

• Better Accounting Controls
• Improve Visibility for better management Planning and Controls
• Image of the Company
• Improve Staff Morale, etc.

Total Costs of Ownership (TCO)

One common mistake during ERP selection is to only consider the initial cost of the project. It is not easy to change Enterprise Resource Planning software and implementation vendor once the project commenced.  I often see companies select the cheapest ERP solution and vendor based on the lowest quoted costs and became locked in by the vendor.  Eventually, these companies spent a lot more money on the subsequent customizations and support costs for many years to come.

So, it is important to consider the total costs of ownership when assessing the costs of your ERP project.

Initial Costs

This is probably the most obvious cost of the ERP project.  This includes:

• Services such as consultancy, project management, training, and even additional temporary human resources
• Software and Hardware
• Internal Costs such as additional efforts and resources needed during implementation
• Time to Result – The longer the project takes, the risks of changes in business requirements and human resource turnover during the project implementation will increase

Running Cost

There will be recurring costs in running the ERP system after the project goes live:

• Recurring Maintenance Costs from Services and Software
• Internal Running Costs such as additional IT or human resources to keep the ERP system running.

Upgrading Costs

Some companies may not realize that they eventually need to upgrade their Enterprise Resource Planning (ERP) solutions.  This may happen on average for between 5 and 7 years or even longer.  No matter how long a company tries to stretch the lifespan of their ERP system, this will eventually happen and there will be costs involved in doing this.  These costs include:

• Services to implement, upgrade, train, or migrate to the chosen version of future ERP solution
• Additional Software costs for upgrades or new implementation
• Switching Costs of the additional costs or difficulties in changing implementation vendors or the ERP solutions

Companies will have a more complete assessment by comparing the benefits and TCO (Total Costs of Ownership) to well-selected and well-implemented solutions.

Common Mistakes in ERP Selection

After understanding how we can measure the success of Enterprise Resource Planning (ERP) selection, let me use some of my encounters over more than 2 decades of my EPR career to illustrate the following common mistakes in ERP selection:

• Selecting Customized software
• Blindly Believe in Brands and Awards
• Employing Wrong IT Persons
• Neglect Implementation and Not being Prepared to put in Time and Effort
• Outsource Consultants from other Countries solely for Cheaper Costs
• Trying to include Too Many Non-Critical Processes in ERP
• Focus only on Features and Functions
• See it as a One-Time Project neglecting Long-Term Sustainability
• Engaging Con-man Consultant

Cases of Customized Software

I had encountered multiple cases of companies that implemented customized software as an alternative to off-the-shelf Enterprise Resource Planning (ERP) Software.  They believed that customized software is the best way to cater to their unique business requirement.  So far, none of them ended well. The only difference is that some may realize that they had got into trouble (but some refused to admit it) and some believed that those troubles were normal.

Case Study 1: Online Furniture Company

An online furniture company sells its products through its e-Commerce websites.  It has an in-house team who develops its e-Commerce site.  The same team customized ERP within its e-Commerce platform for inventory management.  Even after 5 years, bugs in the system resulted in order fulfillment challenges, errors, returned goods, and delays.  Their inventory record was inaccurate and they incur penalties due to delivery errors and delays.  They had more than 4 months of financial account closing in their backlog.

Due to new management requirements, they decided to implement an off-the-shelf ERP solution with integration to their multiple e-Commerce websites in 2019. With good selection and implementation, their new mid-sized ERP solution went live within 4 months.  It was integrated into their three e-Commerce sites together with finance, purchasing, warehouse management (WMS), and bar code mobility scanner for logistics.

With good project management and implementation, the project went live with the e-Commerce integrated without interruption to their e-Commerce sites just after a 7-hour cut over from midnight.

The result?  They reduced a 20% of headcount 3 months after implementation. The ROI of the project was less than 1 year even just considering the reduced human resources costs.

Case Study 2: Engineering Company

An engineering company engaged a software company to develop a customized system to handle their business.  Their business requirement included Finance, Inventory, Manufacturing, Services, and Project Manufacturing, but the customized system could not handle all of these requirements, so, manual work is needed daily.

Even after 10 years of using and improving the customized system, there remained many bugs.

They recently selected an off-the-shelf ERP solution and commenced the implementation in Aug of 2022.  From the information that I received, the cost of the customized software is nearly 3 times the cost of a standard ERP with many comprehensive and proven functionalities.

Case Study 3: Supermarket

I came to know of a supermarket chain that set up an IT team to build their own ERP and POS (Point-of-Sales).  Their rationale is that they can have a system that fully meets their “unique” requirement and eventually, sell it to other supermarkets.

I estimated that their annual IT HR Costs will be at least SGD 1M, which is more than enough to implement a good off-the-shelf ERP with POS.  It will be much cheaper and faster to go live.

To date, they had not managed to sell their in-house customized ERP to other supermarkets.  I believe it is due to the following:

• No supermarket will buy a solution from their competitor as they will be concerned about revealing their trade secret
• Their unique processes may not be usable by other supermarkets
• Building, supporting, and selling standard software is much more complex than building an in-house customized software

Why Not Customized Software

Customized software instead of implementing an off-the-shelf Enterprise Resource Planning (ERP) Software can never be more cost-effective than off-the-shelf software because of the following reasons:

Few Businesses are Really that Unique

How unique can your business processes be and cannot be changed?  From my personal experience, at least 80% of companies can fit into standard ERP solutions.

Price

How can software developed for one company be cheaper than one that is used by 1000 companies for the same functionality?  The only possibility is to have much-reduced functionalities for the customized software.

How can the support of customized software be cheap when there is only one vendor who can support you without competition?

Project Timeline

How can customized software go live faster than a ready-made product?

Quality

How can customized software be of better quality and fewer bugs than a ready-made product that went through many years of upgrading and bug fixes?

Future

It will be difficult to support when the programmers leave the company.  Often, due to time pressure, documentation during development will be very limited.  Even if they were produced, they were seldom updated.  This makes it challenging to support customized software.

Future Upgrade

If the technology expired, the only way to upgrade is to start another new customized software.

Lockdown by Vendor/Programmer

And the biggest risk of engaging a vendor or internal programmer for customized software is the lockdown effect.  You cannot change to another vendor once the project is completed.  Software developers of customized software make most of their revenue from support and not from new projects.  And if you employ internal resources for development, you may be held ransom by the programmer if he is the only one who knows the program.

Case of a Retail Furniture Company

In the late 1990s, one of the largest furniture companies in Singapore with its own building at Sg. Kadut was looking for Enterprise Resource Planning software. The owner was the vice president of the Singapore Furniture Association. They wanted the best ERP to match their corporate image and expect most of the implementation work to be done by consultants.

They wanted to limit his staff involvement because they were “very busy”.  Their IT team only had one Junior IT Executive who traveled daily from Johor Bahru across the border to work in their Singapore office.

End Results

They selected the “Best” ERP for implementation and bankrupt a few years later.  I am not sure if the ERP project went live.

Mistakes Observed

• Blindly Believe in Brands and Awards of the ERP vendor
• Employed wrong IT Persons for the ERP project
• Neglected about Implementation and Not being Prepared to put in Time and Effort

Case of Engaging Consultants from other Countries Solely on Costs considerations

In 2020, an Online Hotel Booking Company in Singapore approach me for assistance to turn around their failed ERP project.

They engaged ERP consultants from another country with a cheaper consulting rate to implement an off-the-shelf ERP with integration to their e-Commerce portal.  The project could not go live with many bugs due to bad customizations after 2 years.  The total costs paid until that time were at least 50% higher than if they engage a good local vendor.

Lesson Learned

• Consultants from other countries may not understand the local requirement, language proficiency, and urgency
• The man-day rate may be lower, but the total man-day will eventually be much higher
• The expectation of Quality of Work is different

Trying to Include Non-Critical Processes

It is common that companies to desire to include all their business requirement into one ERP solution without understanding the pros and cons of doing so.  One of the typical examples is payroll, which is not a standard module in most Enterprise Resources Planning solutions.  These wishes have to be evaluated individually to determine their ROI of inclusion.  For the case of payroll, I will suggest that the company should evaluate the effort needed to process the payroll before considering the solutions.  Whether this is done once a month, daily, or needs laborious work to track the overtime pay and project costs.  What are the standard solutions (e.g. Payroll Software) available and whether integrating them into the ERP can achieve the objectives at lower costs and risk?

I recently watched a Youtube video presented by a claimed digital transformation consultant who claimed that ERP is dead because there is much more software with better functionalities as compared to the individual modules in an ERP.

This argument has been around since I started my involvement in ERP in the late 1990s.  We must remember that ERP is a solution to handle the business processes from “Order to Cash”.  Anything beyond that will be a bonus and may be optional.  Some requirements may make sense to include in ERP, some may be better to integrate with another solution, and some may be better to handle separately outside the system.  The evaluation team should evaluate the options against the total cost, risk, and returns.

Focus only on Features and Functions

Some evaluation teams and consultants use a selection scoring list containing the features and functionalities that they need or want for their ERP.  Very often, these scoring lists were provided by one of the ERP vendors with the functionalities skewed to give an advantage to themselves.

ERP is not just about features and functions.  Answering a “Yes” for the availability of “Sales Order” does not indicate the detail in the sales order or how difficult for those functionalities to be used in your business processes.

As an ERP presales consultant previously, I know that some ERP presales consultants avoid going into detail about how their ERP executes the particular business process as it is time-consuming to configure and will expose the cumbersome of using their ERP software. 

I believe that knowing how the ERP software executes the Process Flow is Key in ERP selection.  And, implementation service can be even more important than the features.

See it as a One-time Project Neglecting Sustainability

Some companies only see ERP projects as a one-time implementation.  They neglect the future risks and costs such as switching costs and the risk during future upgrades.  ERP selection needs to consider the impact over a long timeline.

Engaged Con-Man Consultant

When I was selling Enterprise Resource Planning Software previously, I sometimes dealt with consultants who were engaged by companies to help them in the ERP evaluation.  They were usually management or IT consultants but seldom an experienced ERP consultant.  Some of them even asked for kickback if they recommend the ERP software that I was selling.

Enterprise Resource Planning is a very specialized domain that general IT or management consultants may not understand enough.  It is not just about technologies, features, or business processes.  For example, even though Microsoft sells 4 ERP solutions, most of the staff at Microsoft may not even know that their companies have ERP solutions or understand what is ERP.  This illustrates that ERP knowledge and experience are not common among IT people.  Those consultants who have hands-on experience, and exposure to users’ and vendors’ environments are even rarer. 

Conclusion

Making mistakes in Enterprise Resource Planning (ERP) is real and sometimes, can be fatal.

Arm yourself with sufficient knowledge which can only be achieved over a long period and wide exposure.  When time is not on your side, get credible external help to minimize your risk and achieve better ROI in your ERP selection.

You do not know what you don’t know.  So, get appropriate assistance when needed.

Learn More about the author, Raymond Yap, and how we can help you.

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