How to Start an ERP Business

So, you’re considering starting an ERP business?

With over 27 years of experience in the ERP industry, including successful turnarounds and startups of ERP businesses, I hope that this article will provide valuable insights for those planning to venture into the ERP business.

Why Start an ERP Business?

Most people start their ERP businesses for the following reasons:

• They possess software development experience and believe they can create superior ERP software compared to what is currently available in the market, and usually believe that they can do it cheaper.
• They have worked in the ERP industry and recognize an opportunity to establish their own ERP business, often by becoming a distributor for established ERP software vendors.

Developing Own ERP Software vs. Distributorship and Implementation Partner

After years of working in the ERP industry, it’s clear that there are limited business advantages to developing new ERP software in a mature market full of established players. Even with sufficient funding and expertise, the return on investment (ROI) and time required to achieve economies of scale can be lengthy. Additionally, the market’s volatility increases the risk of developing a new ERP system that can generate substantial and sustainable profits.

Therefore, my recommendation for starting an ERP business is to become a distributor and implementation partner for established ERP software.

Advantages and Disadvantages as Distributor and Implementation Partner

This approach offers the following advantages and disadvantages:

• You’ll receive guidance and support in software, implementation, and marketing, allowing you to launch your business quickly without spending time and resources on software development.
• You’ll be required to pay distribution and software royalty fees.
• You may face competition from other distributors offering the same ERP software.

False Beliefs of Developing New ERP

Some individuals believe they can achieve more by developing their own ERP software. They hold the following beliefs:

• Their software functionalities will surpass what’s available in the market.
• They prefer to retain the entire revenue rather than paying royalties or software costs to software principals.
• They believe they can create a cheaper ERP solution that is as good as, if not better than, established ERP software.

Unfortunately, these beliefs often stem from insufficient understanding and experience with ERP.

Let me illustrate this with a personal encounter involving a friend who designed his own ERP. He claimed his system was superior because it allowed users to change an invoice after it was posted, whereas established ERPs required a lengthy process of reversing the invoicing process or posting an adjustment journal. However, he was unaware that these steps were designed to meet accounting control requirements. Similarly, other software developers often claim their ERP offers functionalities not found in established systems, when in fact, those functionalities are already available.

Differences between Off-the-Shelf ERP and Customized Software Implementation

It’s crucial to understand the differences between off-the-shelf ERP systems and customized software businesses:

• Implementing an off-the-shelf ERP differs from developing customized software. In ERP projects, the key principle is to align customer business processes with standard ERP functionalities whereas customized software attempts to align the functionalities with the customer business processes.
• The ERP market is mature, with a history of over 50 years and many established software providers. Developing a new ERP takes a considerable amount of time to achieve ROI. And you have to compete against established ERPs who achieved breakeven many years ago.  Those with limited ERP fundamentals often attempt to reinvent the wheel, making it exceedingly challenging to succeed against established competitors.
• ERP projects involve long sales cycles, implementation times, and project risks. Developing a robust ERP system requires refinement over multiple implementation cycles, each averaging between 4 and 9 months for a mid-size ERP.
• Underestimating the time and resources required to develop a world-class ERP is a common pitfall. The challenges lie not only in the technological aspects but also in understanding various corporate operations, from accounting principles to inventory management and manufacturing, etc., as well as how these components integrate seamlessly. A good ERP must comply with regulations such as accounting (GAAP) while providing control and functionality.
• An ERP system is built to last for decades, requiring continuous upgrades and expansions. Therefore, hard-coding all functionalities will lead to long-term problems. A well-planned software development process that includes careful long-term planning and control is essential.  The ERP software should be configurable, allowing process changes in implementation projects without extensive coding. Proper software architecture design is crucial to ease future expansion and upgrading.

Alternatives to Developing Own ERP Software

An alternative path is to start as a distributor and implementer of established ERPs as a transition phase before considering developing your own ERP. This approach offers several advantages:

• You can gain valuable insights into ERP implementation and software functionalities.
• Many modern ERP software systems feature architecture that facilitates the development of add-ons and extensions by third parties. This allows you to create your own solutions that extend the core ERP functionalities without reinventing the entire system.
• However, you should evaluate the impact of non-competitive clauses in your partnership agreement if you plan to develop your own product in the future.

If You Still Want to Develop Your Own ERP

If you still have a strong desire to start by developing a new ERP, I advise selecting addressable niche markets. The chosen market must be sizable, providing sufficient demand, and not adequately served by established ERP software. Thorough research should be conducted to identify potential competitors in the niche market. However, based on experience, very few untapped niches remain, as established ERP providers often cover them direct through core functionalities or third-party add-ons. If possible, consider integrating the business logic of your software into established accounting software to expedite your development cycle.

What You Need to Start

Consider the following steps when starting an ERP business:

• SWOT analysis: Assess your strengths, weaknesses, threats, and opportunities within the ERP market. Identify your areas of expertise and the industries you have experience in. Having an existing customer base is advantageous.
• Define your target customers: Define the customers you want to serve.  This will determine the 3 dimensions of your business strategy: Pricing, Software Functionalities, and Service Level.  Each dimension represents a trade-off. For example, if you aim for low pricing because you want to serve small companies, then, comprehensive product functionalities, and high-level service may be compromised.
• Develop your marketing strategy: Determine how to attract customers and craft your unique marketing message.
• Conduct thorough research on the ERP market: If you plan to be a distributor, identify the target ERP system and understand the support, profit margins, and partnership arrangements offered by your potential software provider.
• Cash flow planning: Accurate cash flow planning is critical for a startup’s success. Consider both inflows (revenues) and outflows (salary, rent, cost of goods sold, etc.). Double the timing and halve your initial revenue estimates, as revenue may take longer to materialize and may be lower than anticipated. Similarly, double your initial expense estimates, as starting an ERP business often involves more cash outflow than expected.

Marketing and sales are vital for initial success, while implementation and project delivery are crucial for long-term growth and sustainability.

Conclusion

Of course, starting a successful new ERP business is much more complex than what is listed above.

Your definition of success will determine your approach to starting an ERP business. For a quick return on investment, becoming a distributor or implementation partner for established ERP systems is recommended. However, if you are passionate about developing your ERP software, ensure you have sufficient resources and plan over a longer horizon. Additionally, consider the middle-ground option of starting with an ERP distributorship that allows you to create your add-ons and extensions.

1st ERP Consulting offers mentoring and advice to help you start and elevate your ERP business to new heights.  Contact us today to schedule a discussion. We can help you strategize and optimize your ERP business, ensuring you are prepared for the challenges ahead.

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