by Robert D. Kugel CFA |
9/2/2008 | Article ID: V08-30 | Article Type: VentanaView
Summary
Does an enterprise resource planning (ERP) system have a positive, measurable impact on a company’s performance? Our benchmark research shows that a majority of people think not. We believe this finding reflects a misperception promoted more than a decade ago when several research firms published studies showing little improvement of efficiency within a year or two of implementing new ERP systems. In our judgment, these studies were flawed; to the contrary, a well-known benchmarking firm’s data shows that the cost of operating a finance organization (measured as a percent of revenues) was cut in half during the 1990s as companies increasingly adopted integrated financial systems. We also find that these negative attitudes work against enhancing the value of ERP systems because executives fail to recognize the value they already have created and therefore are unwilling to make investments to extend their utility. To address this issue, Ventana Research recommends companies create an ERP steering committee that proposes changes to enhance the value of the ERP system and oversees their implementation.
View
Our benchmark research has shown that people in business operations and finance do not see their ERP system having a positive, measurable impact on their organization’s performance. Specifically, we asked participants from more than 300 organizations if their system has a positive, measurable impact on seven capabilities that can promote performance improvement (including compliance and corporate governance, image capture for processing paper documents, electronic invoicing and payment, and managing travel and expenses). Only about half of participants said their ERP systems have increased insight and visibility or enhanced internal control. Only about four in 10 said that using their ERP system drove down operational costs or optimized business processes. Just 30 percent said its use raised employee productivity, and only 21 percent stated it increased collaboration between the company and its customers.
The negative opinions do not appear to stem from a belief that ERP is inherently incapable of supporting innovations that could improve organizational performance. Our research shows that while finance and line-of-business participants acknowledge that in theory ERP systems can drive and support these sorts of improvements, in reality they do not use them as much as they could. For example, 79 percent of participants said ERP could be used to change management reporting, but only 59 percent of those whose companies had innovated in this area used ERP to do it. (One example of this would be using more of the operating information collected by the system to enhance performance management efforts.) There were some areas in which a majority of participants reported implementing innovative processes using ERP, but our study suggests that in many areas business managers have not done so.
The essential issue is a self-fulfilling prophecy. Executives do not expect ERP to enhance their company’s efficiency and effectiveness. Therefore, they do not look to take advantage of the more advanced capabilities of their ERP system (and so the subject never comes up), or they are unwilling to make the investment of time and effort to implement proposed changes.
To be sure, our research found areas where companies had a high propensity to use ERP for key functions, such as purchasing (75 percent), accounting and the financial close (73 percent) and financial reporting. In other words, the further one moves away from well-established uses of ERP, the less likely companies are to employ it to address business issues.
Assessment
One unfortunate divide has persisted since the start of the computer age: Businesspeople do not understand enough about how IT can help them address critical business issues, and IT does not understand enough about the need to apply available technologies to solving business problems. Ventana Research believes there is considerable room for companies to use ERP systems and other application software to improve their business results, but addressing this opportunity should not be haphazard. Companies should establish steering committees with senior-level authority to ensure that they examine the IT dimensions of pressing business issues, find opportunities to improve business processes through technology initiatives and set priorities for implementing these solutions. This sort of collaborative effort could go a long way toward identifying opportunities and implementing innovations that will improve a company’s results. We believe it is important for finance and line-of-business people to view ERP as having a positive impact on their company’s performance. The absence of such a positive view keeps companies from using their ERP systems more to enhance their business operations.
Related Research Notes:
The ERP Steering Committee
Taking the first step to achieving a higher return on this major software investment
The Effective CFO
For finance leaders, efficiency isn’t enough any more
CFOs of Midsize Companies Can Do More
IT helps Finance take a strategic role
Roadblocks to Greater ERP Success
Misperceptions may be keeping your company from a greater ROI
Get More from Your ERP Investment
It’s time to take ERP to the next level of performance
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