by Robert D. Kugel CFA |
9/2/2008 | Article ID: V08-31 | Article Type: VentanaView
Summary
Our research shows that most companies don’t use to the fullest the capabilities of their enterprise resource planning (ERP) system to automate cross-functional processes and to capture data that can be useful in managing performance. Not doing the former impedes efficiency, especially in administrative functions that add little value, while ignoring the latter blunts effectiveness and prevents organizations from achieving better results. Why do companies neglect to draw more value from their ERP systems? Our research indicates that it is because Finance and the lines of business have ceded the management of these systems to their IT departments, which confines its efforts to system maintenance, not enhancements that would add to the business value of the system.
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Our benchmark research finds that few companies make full use of their expensive ERP investments. To save time and money in implementing this software, they tend to stick to existing business processes, which fail to take advantage of technology-driven enhancements. Once their ERP system has been implemented, companies are reluctant to make changes to it other than standard maintenance upgrades because they find such changes difficult. Ventana Research thinks this approach is short-sighted and wastes a strategic resource.
While our research uncovered companies using ERP and other application software in new ways to address business issues, they could be doing considerably more in terms of revamping processes, and here, too, their ERP systems can help. Companies should be putting more effort into instituting end-to-end processes such as procure-to-pay and order-to-cash. Only half of the companies participating in our research have implemented the latter, even though they can achieve a substantial payback through reducing working capital and administrative overhead and increasing customer satisfaction. Not quite half employ electronic invoicing and payment, despite the cost reductions this mature technology can drive. And less than one-third use electronic imaging, even though this well-established technique streamlines paperwork-intensive processes in areas such as accounts payable.
Our benchmark research shows that a majority (58 percent) of companies find it difficult or very difficult to change their ERP systems to adapt to changing information needs. For this reason, many companies fail to incorporate important performance metrics or don’t do valuable analyses (such as tracking leading indicators for the business). While it may take some effort to incorporate this information, failing to do has the IT tail wagging the corporate dog.
We have identified several barriers to using ERP in more innovative ways. One of the more important is that finance executives often are unaware of how the software can help sustain newer, more productive and more effective business practices. Understandably, finance executives are not motivated by technology change per se; they want to see innovations that improve revenue or the bottom line. Simply put, they see the problem, but they do not consider their ERP system as part of the solution. We believe this nearsightedness is a major barrier to the adoption of new approaches in finance organizations and other parts of the business. In the eyes of finance executives, ERP may be a mission-critical system, but that criticality is confined to keeping the business up and running in its current form and executing established functions and processes. It does not necessarily extend to a more intensive use of these systems’ proven capabilities to improve business processes and support performance management and enhancement initiatives.
Assessment
Finance executives must take a closer look at their ERP systems and stop thinking of them as IT’s responsibility. Our research finds many opportunities for companies to improve their business practices and enhance results using practical, proven capabilities of their ERP system. But they are blocked by the longstanding problem that business people don’t know enough about IT and IT people don’t know enough about the business. We believe that companies can best address the issue by establishing an ERP steering committee consisting of people with IT, finance and line-of-business roles. Like any such companywide initiative, the success of this steering committee will depend on the degree of senior-level support it receives and the capabilities and drive of the people on the committee.
Related Research Notes:
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