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Summary
Ventana Research’s recent study “ERP Innovation” examined the use of enterprise resource planning (ERP) software by large corporations (those with more than 1,000 employees or more than US$100 million in revenues) and in particular how effectively they are using the capabilities provided by these systems. In assessing the latter issue, we found only a minority of companies that have extended themselves to more fully adopt processes or incorporate the technology capabilities of these systems. Most fail to capture or use information that could help them manage their business better. Companies can achieve substantially more with these core enterprise systems than ever before, but most are held back by outdated perceptions of what they can and should do with ERP.

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When companies first implemented ERP systems in the 1990s, their main purpose was to cut administrative costs; recent benchmarking data suggests that this objective has been met. Many companies in the United States also tied these initiatives to the then-popular concept of business process re-engineering, viewing ERP as a way to provide both a catalyst and support for process change. Since the 1990s ERP systems’ capabilities of have grown steadily. The breadth of business processes they support and the scope of the data they can collect have expanded, following the typical information technology evolution of automation, integration and transformation. That is, separate tasks are automated, then combined in a single system and often can be transformed into new processes that take greater advantage of computer automation. End-to-end processes such as order-to-cash and procure-to-pay are examples of how ERP systems can manage business processes that cross departmental and even corporate boundaries faster, more reliably and using fewer resources (chiefly people’s time). However, our research showed that even as ERP systems have multiplied process improvement possibilities, only a minority of companies have begun to use them.

We questioned participants in the study about their use of capabilities and modules that most current ERP systems offer. (The vast majority of the participants either had purchased their existing main ERP system within the last four years or had made a major update to it in the last two years.) We also asked whether they had adopted end-to-end processes that ERP systems typically facilitate. Overall, we found a low level of maturity in taking advantage of these opportunities. Fewer than one in 10 respondents (7 percent) were in the top quintile in using or planning to use these advanced approaches, while another 13 percent fell into the second quintile. In other words, only one company in five has matured its ERP systems to a degree of effectiveness that qualifies it to be considered a leader. In contrast, 15 percent of the companies are in the fifth quintile (that is, they use few if any advanced capabilities), and 29 percent are in the fourth. So our analysis identifies nearly half (44 percent) of the companies surveyed as laggards in using ERP systems more effectively.

In addition to process support, ERP systems can collect a range of nonfinancial information, such as units produced, number of invoices processed, time to complete processes, stock outages and so on. Companies should be using this information as part of performance management initiatives. After all, the balanced scorecard movement began nearly two decades ago when an executive at a semiconductor device manufacturer, Analog Devices, grew tired of the nearly total focus on financial metrics in management meetings. We think one reason why companies’ performance reviews focus so fully on financial metrics is that those metrics comprise the bulk of the information they gather. While 20 years ago collecting and distributing reliable nonfinancial information was painfully difficult, that is not the case today. Yet only a relative handful of companies are collecting this sort of information in their ERP systems and using it to set and assess key performance indicators. Our study found only 10 percent in the top quintile in collecting and applying nonfinancial information and another 5 percent in the second, while fully 60 percent were laggards that fell into the bottom two quintiles.

Assessment
Any competent CFO would demand to know why a manufacturing plant that could be used profitably for a second or third shift was being used for only one. Yet our research suggests a majority of companies are not using their ERP systems to their fullest advantage. We think this failing has less to do with information technology than with human behavior. In many companies a status quo attitude prevails. IT departments manage the ERP systems, but they seldom understand enough about business and finance to see how existing systems can support process improvement and business. For their part, finance and business people do not understand enough about ERP systems to be aware of their possibilities. To overcome this all-too-familiar divide, we recommend CFOs and CIOs drive a steering committee that seeks ways to use more of the capacities of their ERP systems and devises an ongoing set of process and IT enhancements. Otherwise their competitive edge will remain dull when it comes to IT support for business.

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