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ERP IMPLEMENTATION – FACTS AND COSTS

LAKSHMANARAO UDANDRAO 
on 19 June 2008


ERP IMPLEMENTATION – FACTS AND COSTS
 
Enterprise Resource Planning (ERP) is a business management system which integrates multifarious functions of an organization. The success or otherwise of an ERP largely depends on selection of a suitable ERP system and its implementation partner. It   depends on the nature of the business and the magnitude of the size of the organization. The infusion of modern technology in business has changed as to how the current enterprises function. With growing pressure to deliver positive and fruitful results to the stakeholders and high-risk market place, most organizations use some or the other form of enterprise software that helps them work faster, reduce costs and be more competitive. Good ‘technology architecture’ is also essential for any organization that wants to limber up and streamline processes, according to experts. Nobody today says “I don’t want an ERP”. The real question they’re asking is ‘Can I handle one?’ and how much it costs.
 
Enterprise technologies comes in many forms, but there are two broad choices; go with individual software to handle different tasks (e.g. one each for human resources, manufacturing, supply chain management, finance etc.,) or go for an Enterprise Resource Planning solution that combines multiple functions in a flexible package. Again in ERP there is different kind’s available viz., SAP, Oracle, Baan, PeopleSoft, JD Edwards etc.
 
Fundamentally, enterprise resource software works by creating a large database of information that users can draw from and contribute to. For example, an employee raises purchase requisition by logging into company ERP system, the purchase requisition is automatically sent to the concerned superiors / competent authorities for approval, then checked against the inventory available and then sanctioned or rejected. If sanctioned, it will be forwarded to the purchasing department for procurement and a Purchase Order will be generated and this all happens automatically. But twenty years ago, all this would really have sapped time of indenting department and purchasing department as well.
 
Organizations’ today use ERPs to bring various departments (e.g administration, payroll, inventory, finance etc.,) onto the same platform. This is because any ERP has a number of embedded business functions that can be simultaneously run throughout the enterprise. “Organizations’ which have several products, complex schedules and spread operations can tremendously benefit by the implementation of ERP,”
 
An ERP can also be customized to handle different tasks and different industries. This can be done right from generating Purchase Requisition to processing of the invoice and final payment.
 
Today, several organizations need to implement IT solutions, including non-business enterprises such as Health Care Industry, social services organization like CRY / CARE etc.
 
An ERP that delivers one hundred percent is unheard of, as some initial hiccups may arise before the personnel involved get used to working with the new system. 
 
A good, well-implemented ERP integrated different functions in a more cohesive manner, reduces time gaps and asks for human intervention where required.   ERP can reduce cycle times, reduce inventory, improve resource utilization, improve customer response, utilize information effectively and in turn improve profitability dramatically.
 
The greater the care taken during evaluation and selection of the ERP product, lesser the time for implementation, and greater the chances of success.
 
FACTS COSTS TO BE CONSIDERED:
 
1. NEED FOR AN ERP:
Organizational need TO GO IN FOR (going for) an ERP needs to be evaluated based on the size of the organization and nature of the business. If it is a small or medium sized organization, it would typically have to invest lesser amount. However, it is up to the organization, S management and INFORMATION TECHNOLOGY (T) department to conduct careful research into the package and how it will work for them, customization required and how the organization will take care of recurring costs incurred on integration from legacy systems, updating, training, troubleshooting post go-live support costs etc.   In addition it is very much important to have experience and skilled personnel at the controls.
 
 
 
2. SELECTION OF AN ERP:
Business Process Reengineering is a pre-requisite for going ahead with a powerful planning tool, ERP. An in- depth BPR study has to be done before taking up ERP. Business Process Reengineering brings out deficiencies of the existing system and attempts to maximize productivity through restructuring and re-organizing the human resources as well as divisions and departments in the organisation
Business Process Reengineering evolves the following steps:
i)        Study the current system ;
ii)      Design and develop new systems ;
iii)    Define Process, organisation structure and procedure ;
iv)    Develop AND customize the software ;
v)      Train people ;
vi)    Implement new system ;
Once the BPR is completed the next task is to evaluate and select a suitable package for implementation. Evaluation of the right ERP package is considered as more crucial step. Evaluation and selection involves:
ü      checking whether all functional aspects of the Business are duly covered ;
ü      checking whether all the business functions and processes are fully integrated ;
ü      checking whether all the latest Information Technology (IT) trends are covered ;
ü      checking whether the vendor has customizing and implementing capabilities ;
ü      checking whether the business can absorb BOTH THE CAPITAL INVESTMENT IN HARDWARE AND SOFTWARE MAINTENANCE (the) costS ;
ü      checking whether the RETURN ON INVESTMENT (OI) is optimum ;
 
 3. CHECKING THE TOTAL COST OF OWNERSHIP:
Computing the total cost of ownership (TCO) for each of the ERP products was a tricky issue. TCO comprises licensing cost, implementation cost, hardware cost, annual maintenance contract (AMC) networking cost, etc. Licensing cost may be determined on the basis of named users or concurrent users or may be a combination of both. There are hidden costs, which if not understood will come out in the implementation stage, which will raise the TCO substantially. 
Investment required in ERP is very high and an inappropriate selection of ERP could prove to be a nightmare for the company. Meticulous planning is therefore required in the selection process. 
      The following costs are associated with ERP implementation:
 
       HARDWARE COSTS:
a)      Data center space capable of housing, powering, backup power ;
b)      Special power requirements for uninterrupted power supply, power distribution units) ;
c)      Server hardware (viz., database server, application servers, other internet servers, management appliances, infrastructure servers such domain controllers etc) ;
d)     Disk subsystem hardware (each system in the landscape requires a database server and thus a disk subsystem, database, license and so on) ;
e)      Network infrastructure (switches, hubs, routers and all cabling) ;
f)       Disaster Recovery infrastructure ;
 
           LICENSING COSTS:
a)      License fee and ongoing annual maintenance fee for operating system for each server ;
b)      License fee and ongoing annual maintenance fee for the Database Management System for each database server in every system of ERP system landscape ;
c)      ERP vendor license fees and ongoing annual maintenance fees ;
d)     License fee of tools and other service applications involved in supporting ERP ;
 
            TRAINING   AND KNOWLEDGE TRANSFER    COSTS:
a)      Initial training costs for entire workforce involved in ERP implementation functional and technical as well ;
b)      Training cost of the end users and key users ;
c)      Costs involved in transferring the business process knowledge to consultants, support staff etc., ;
 
             PERSONNEL COSTS:
a)      Costs associated with hiring project manager (s), project coordinator(s), project librarian / documentation specialist and so on ;
b)      Costs related to technology-focuSsed members like the Solution Architect, database administrators, application and other technical specialists’ ;
c)      Costs related to functional specialists, developers, and business process experts, technical and functional consultants ;
d)     Opportunity costs scarifiedby temporarily assigning people to the ERP project. Backfilling their previous line-of-business, technology support or other roles within the organization ;
e)      Travel and other infrastructure costs ;
 
 OTHER COSTS:
a)      Management system costs (typically ERP aware application capable of monitoring the systems historically) ;
b)      Incremental Computer Operations costs, depreciation etc ;
c)      Incremental Help Desk costs ;
d)     Break / fix hardware maintenance contracts ;
e)      System installation (server, disk subsystem, Os, database, and each specific ERP component or product) ;
f)       Costs of middleware applications which integrates the legacy systems and ERP ;
 
BENEFITS FROM ERP:
Benefits form ERP is of two kinds, tangible and intangible. 
Tangible benefits are those benefits which can be quantified in monetary terms and intangible benefits cannot be quantified in monetary terms but they do have a very positive and significant business impact.
TANGIBLE BENEFITS:
           
                                                              i.      Lowering the cost of products and services purchased ;
                                                            ii.      Significant paper and postage cost reductions ;
                                                          iii.      Improves the productivity of process and personnel ;
                                                          iv.      Inventory reduction ;
                                                            v.      Lead time reduction ;
                                                          vi.      Reduced stock obsolescence ;
                                                        vii.      Faster product / service look-up and ordering saving time and money ;
                                                      viii.      Automated ordering and payment, lowering payment processing and paper costs ;
           INTANGIBLE BENEFITS:
                                                        i.            Can reach more vendors, producing more competitive bids ;
                                                      ii.            Accurate and faster access to data for timely decisions ;
                                                    iii.            Saves enormous time and effort in data entry ;
                                                    iv.            More controls thereby lowering the risk of mis-utilization of resources ;
                                                      v.            Facilitates strategic planning ;
                                                    vi.            Uniform reporting according to global standards ;
                                                  vii.            Improved customer response ;
                                                viii.            Increases organizational transparency and responsibility ;
WHY AN ERP FAILS IN SOME CASES:
a.       Lack of effective project management ;
b.      Inability to resolve issues and make decisions in timely manner ;
c.       Resources not available when needed ;
d.      Perceived or real lack of executive support ;
e.       Software fails to meet business needs ;
f.       Underestimated levels of Change Management ;
g.      Improper communications ;
h.      Insufficient end user training ;
i.        Failure in gap analysis ;
j.        Failure to identify future business needs ;
k.      Technological obsolescence ;
l.        Failure to make available user-friendly checklists / guidelines to meet individual needs of each department / area work  
ERP selection is very different from purchasing off-the-shelf software like accounting or payroll packages. It doesn’t need much skill to evaluate accounting software since it does not impact the business as a whole, and moreover, accounting practices are fairly standardized everywhere. Therefore, if an accounting package works for company A, there is a good chance that it will work for company B too. But the same logic does not work with ERP. There are a number of cases where the same ERP product has been successfully implemented in company A but failed miserably in company B. We need to analyze carefully as to why ERP fails and take appropriate preventive measures.
 
Further, no IT initiative can be effective if it is not aligned with the company’s business objectives. It is, therefore, necessary to formulate a business strategy to achieve business objectives and then align IT initiatives to achieve them. ERP implementation may be one among such initiatives.
 

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