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Summary
Today's tough economy is leading people to keep their cars longer and find ways to get more out of them. Ventana Research thinks the same should apply to enterprise resource planning (ERP) systems. Companies spend a great deal of money on their financial information systems, and budgets are tightening, making this a time to focus on getting a higher "return on ERP" (ROERP). Our benchmark research finds that a majority of corporations underutilize the capabilities of their ERP systems. In particular, they miss opportunities to automate routine activities or simplify cross-functional processes. As a result, they are burdened with higher costs and lower effectiveness than they might have, which in turn prevent finance organizations from focusing on value-creating activities. It's like driving your car in the lowest gear and then being puzzled and annoyed that you can't go as far or as fast as you want yet are paying more than you'd like for gas. In this case, the problem is that most executives and managers don't know their ERP system is stuck in first gear.

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Ventana Research finds that failure to use ERP systems to their fullest stems from three interconnected factors. One is that business delegates the ERP maintenance responsibility entirely to the IT department. IT naturally focuses on making an existing system more efficient to operate, rather than improving its operational effectiveness. The second is that most business and finance executives have little or no idea what ERP systems are capable of doing and therefore do not demand more from them. The third reason is the perception that ERP systems are too difficult to change and therefore enhancements are not worth considering. To the address the first two issues, an organization needs a steering committee from both business and IT to strategically manage the ERP systems because business people don't know enough about IT capabilities and IT doesn't know about business requirements. As to the third, major changes to ERP systems are rarely simple, but decisions about whether to make changes should be based on facts, not perceptions, and should evaluate expected business benefits as well as costs.

There are a couple of deeper issues at work, too. Starting in the 1990s, corporations facing pressure to increase profitability looked for ways to cut administrative expenses. They targeted finance organizations as a source of margin improvement during that downsizing decade, with some success: The cost of operating the department relative to sales was cut almost in half. We assert that most of this improvement was the result of implementing ERP and business intelligence systems. Combined, they increased the efficiency of recording transactions and creating business reports from this data.

However, CFOs and controllers have never understood that ERP contributes to their efficiency, even though their own finance department is more productive. We think this is because IT research published in the 1990s purported to show that ERP systems were failing to deliver on promised savings. These studies were deeply flawed in at least two respects. Most focused on whether improvements had occurred in the first 12 to 18 months of the system's rollout. In retrospect it's clear that achieving significant savings required a longer time frame. Gaining advantage was not a matter of just flipping a switch after implementing a new IT system because other changes in business processes also had to take place. Often, savings did not come from direct cost reductions but from avoided costs stemming from increased productivity. In many cases, companies grew, but the size of the finance staff remained the same. Furthermore, that research was based on interview samples heavily weighted with people in IT departments, who likely did not have a clear picture of the full business and financial impacts.

As for the second deeper issue, CFOs tend to focus on efficiency, not on effectiveness; for example, they benchmark time spent on a specific process without asking either why the process is necessary or why it should be done in this particular way. Not surprisingly, the major efficiency increases in finance departments took place in the 1990s; since then there has been little improvement, probably because most of the obvious, ongoing savings have been achieved.

Assessment
We find that a majority of companies can make better use of their ERP systems to improve the effectiveness of the finance department and the company as a whole, as well as improve their efficiency by enabling process redesign. To begin, we advise them to bring together a steering committee to assess potential enhancements to the ERP system, their value, their business purpose and the desired benefits. To be effective, this committee should have a serious executive mandate for change. The second step is to determine the costs of these changes and compare them to the benefits; the third is to lay out a timetable for implementing ERP system enhancements. Very likely, even for changes that will produce notable business benefits, many of the improvements will not require purchasing software, will require only limited consulting help and internal resources, and will not require a major effort in business process re-engineering. Thus, for a modest investment, your company could significantly improve its ROERP.