The ABCs of ERP - Enterprise - CIO

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The ABCs of ERP

Getting started with Enterprise Resource Planning
By Christopher Koch

What is ERP?

How can ERP improve a company's business performance?

How long will an ERP project take?

Will ERP fix my integration problems?

What will ERP fix in my business?

Will ERP fit the ways I do business?

What does ERP really cost?

When will I get payback from ERPand how much will it be?

What are the hidden costs of ERP?

Why do ERP projects fail so often?

How do I configure ERP software?

How do companies organize their ERP projects?

Is a "single instance" of ERP better?

How difficult is it to upgrade ERP software?

Will service-oriented architecture (SOA) replace ERP?

How does ERP fit with e-commerce?

Can I use ERP to manage a network of foreign suppliers?

What is ERP?
Enterprise resource planning software, or ERP, doesnt live up to its acronym. Forget about planningit doesnt do much of that
and forget about resource, a throwaway term. But remember the enterprise part. This is ERPs true ambition. The software attempts
to integrate all departments and functions across a company onto a single computer system that can serve all those
departments particular needs.
Building a single software program that serves the needs of people in finance as well as it does the people in human resources and
in the warehouse is a tall order. Each of those departments typically has its own computer system optimized for the particular ways
that the department does its work. But ERP combines them all together into a single, integrated software program that runs off a
single database so that the various departments can more easily share information and communicate with each other.
That integrated approach can have a tremendous payback if companies install the software correctly.
Take a customer order, for example. Typically, when a customer places an order, that order begins a mostly paper-based journey

The ABCs of ERP - Enterprise - CIO

from inbox to inbox throughout the company, often being keyed and rekeyed into different departments computer systems along
the way. All that lounging around in inbox causes delays and lost orders, and all the keying into different computer systems
invites errors. Meanwhile, no one in the company truly knows what the status of the order is at any given point because there is no
way for the finance department, for example, to get into the warehouses computer system to see whether the item has been
shipped. "Youll have to call the warehouse" is the familiar refrain heard by frustrated customers.
ERP vanquishes the old standalone computer systems in finance, HR, manufacturing and the warehouse, and replaces them with
a single unified software program divided into software modules that roughly approximate the old standalone systems.
Finance, manufacturing and the warehouse all still get their own software, except now the software is linked together so that
someone in finance can look into the warehouse software to see if an order has been shipped. Back in the 90s ERP was developed
as a tightly integrated monolith, but most vendors software has since become flexible enough that you can install some
modules without buying the whole package. Many companies, for example, will install only an ERP finance or HR module and
leave the rest of the functions for another day.

How can ERP improve a company's business performance?

ERPs best hope for demonstrating value is as a sort of battering ram for improving the way your company takes a customer order
and processes that into an invoice and revenueotherwise known as the order fulfillment process. That is why ERP is often referred
to as back-office software. It doesnt handle the up-front selling process (although most ERP vendors have recently developed
CRM software to do this); rather, ERP takes a customer order and provides a software road map for automating the different
steps along the path to fulfilling the order. When a customer service representative enters a customer order into an ERP system,
he has all the information necessary to complete the order (the customers credit rating and order history from the finance module,
the companys inventory levels from the warehouse module and the shipping docks trucking schedule from the logistics module,
for example).
People in these different departments all see the same information and can update it. When one department finishes with the order it
is automatically routed via the ERP system to the next department. To find out where the order is at any point, you need only log in
to the ERP system to track it down. With luck, the order process moves like a bolt of lightning through the organization, and
customers get their orders faster and with fewer errors than before. ERP can apply that same magic to the other major
business processes, such as employee benefits or financial reporting.
That, at least, is the dream of ERP. The reality is not so rosy.
Lets go back to those inboxes for a minute. That process may not have been efficient, but it was simple. Finance did its job,
the warehouse did its job, and if anything went wrong outside of the departments walls, it was somebody elses problem. Not anymore.
With ERP, the customer service representatives are no longer just typists entering someones name into a computer and hitting
the return key. The ERP screen makes them businesspeople. It flickers with the customers credit rating from the finance
department and the product inventory levels from the warehouse. Did the customer pay for the last order yet? Will we be able to
ship the new order on time? These are decisions that customer service representatives have never had to make before, and
the answers affect the customer and every other department in the company. But its not just the customer service representatives
who have to wake up. People in the warehouse who used to keep inventory in their heads or on scraps of paper now need to put
that information online. If they dont, customer service reps screens will show low inventory levels and reps will tell customers that
the requested item is not in stock. Accountability, responsibility and communication have never been tested like this before.
People dont like to change, and ERP asks them to change how they do their jobs. That is why the value of ERP is so hard to
pin down. The software is less important than the changes companies make in the ways they do business. If you use ERP to

The ABCs of ERP - Enterprise - CIO

improve the ways your people take orders and manufacture, ship and bill for goods, you will see value from the software. If you
simply install the software without trying to improve the ways people do their jobs, you may not see any value at allindeed, the
new software could slow you down by simply replacing the old software that everyone knew with new software that no one does.

How long will an ERP project take?

Companies that install ERP do not have an easy time of it. Dont be fooled when ERP vendors tell you about a three- or sixmonth average implementation time. Those short (thats right, six months is short) implementations all have a catch of one kind
or another: The company was small, or the implementation was limited to a small area of the company, or the company used only
the financial pieces of the ERP system (in which case the ERP system is nothing more than a very expensive accounting system).
To do ERP right, the ways you do business will need to change and the ways people do their jobs will need to change too. And
that kind of change doesnt come without pain. Unless, of course, your ways of doing business are working extremely well (orders
all shipped on time, productivity higher than all your competitors, customers completely satisfied), in which case there is no reason
to even consider ERP.
The important thing is not to focus on how long it will takereal transformational ERP efforts usually run between one and three
years, on averagebut rather to understand why you need it and how you will use it to improve your business.

Will ERP fix my integration problems?

No. It seems almost quaint to think of it today, but back in the days before Y2K, enterprise software vendors, and, more forcefully,
the management consultants who installed the stuff, sold ERP as a magic bullet that companies could use to escape the coming
Y2K apocalypse, create seamless technology integration across the company and force your silos of isolated, sociopathic
bureaucrats to start working together. It was an irresistible sell to businesspeople.
Its true that ERP was designed to solve integration problems, but it worked only in the theoretical environment of the
vendors development labs. Developers who believe they are modeling an entire business in software dont spend much time
thinking about how that system will connect with other systems. Who needs other systems when were creating the whole thing
right here?
Of course, as soon as companies began buying these products, it became clear that enterprise software was another chunka
much larger and better integrated chunk to be sure, but still a chunkof software in a complex architecture of IT systems
that desperately needed to talk to one another and exchange information. The vendors created clunky, proprietary methods
of connecting their systems with others, which have improved over the years, but that misses the point. The architecture of
these systems, in a broad sense, was just like the ones that they were intended to save you frommonolithic, highly integrated
and difficult to change.
No problem, said the vendors. Some of your maintenance and support fees are going to future R&D. As we develop new pieces to
add in to our highly integrated suites, well let you upgrade to the next version for free and you can gradually get rid of all those
other troublesome chunks. Again, it sounded great to the people buying the stuffbusinesspeople.
But who could afford to install enterprise software as it was envisioned in the vendors R&D labs? Very few. CIOs built
complex integration links from enterprise software to other systems to keep the business running. Or they chunked up the
installation, building dozens or even hundreds of unique installations of the same enterprise software to meet the needs of
individual departments or businesses that all had to be linked together. The high degree of integration envisioned in the R&D lab
was tenuous at best inside most organizations.

The ABCs of ERP - Enterprise - CIO

Gradually, enterprise software vendors came to realize that to serve customers better, they needed to break up their suites
into application components and create complex ways to link to them over the Internet so that customers would not have to
rewrite connections to pieces of the suite such as financials, which didnt change much.
The final death knell for the original enterprise software architecture model came in 2004 when the major enterprise software
vendors all announced that they were offering packages of integration middlewaretacitly acknowledging the reality that had
been clear since middleware was first invented decades ago: Integration happens best outside of specific software applications,
not inside them. The enterprise software vendors have been conspicuously absent from the Web services standards
movement, looking ever more like the Dark Princes of Lock-In while the originators of the lock-in concept, IBM and Microsoft,
looked like white knights for doing the lions share of work to create free (so far, anyway) standards for integration in Web
services. And its great stuff. How ironic that those companies that were going to save your CEO from integration in 1999 have
been the laggards in developing truly useful enterprise integration.
This is not to say that ERP is a boondoggle, or even that the software isnt valuable to the companies that bought it. Even though
most vendors have had some big bumps in the road, most of their products work well. The happiest customers are those who
used enterprise software to create new capabilities and processes that they could not express in software with their old systems.
But back in 1999, many CIOs talked about ERP as an integration strategy, about replacing systems that had more and
better functionality than the enterprise software they were installing in order to be more integrated, more efficient when the
new software was installed. For the few companies that could afford to install enterprise software in the manner envisioned in
the vendors R&D labs, they may have gotten there. Many are still maintaining the custom code they had to write for outraged
business users who lost capabilities they had in the old software.

What will ERP fix in my business?

There are five major reasons why companies undertake ERP.
1. Integrate financial information;As the CEO tries to understand the companys overall performance, he may find many
different versions of the truth. Finance has its own set of revenue numbers, sales has another version, and the different
business units may each have their own version of how much they contributed to revenue. ERP creates a single version of the
truth that cannot be questioned because everyone is using the same system.
2. Integrate customer order information;ERP systems can become the place where the customer order lives from the time a
customer service representative receives it until the loading dock ships the merchandise and finance sends an invoice. By
having this information in one software system, rather than scattered among many different systems that cant communicate
with one another, companies can keep track of orders more easily, and coordinate manufacturing, inventory and shipping
among many different locations simultaneously.
3. Standardize and speed up manufacturing processes;Manufacturing companiesespecially those with an appetite for
mergers and acquisitionsoften find that multiple business units across the company make the same widget using different
methods and computer systems. ERP systems come with standard methods for automating some of the steps of a
manufacturing process. Standardizing those processes and using a single, integrated computer system can save time,
increase productivity and reduce headcount.
4. Reduce inventory;ERP helps the manufacturing process flow more smoothly, and it improves visibility of the order fulfillment
process inside the company. That can lead to reduced inventories of the materials used to make products (work-in-progress
inventory), and it can help users better plan deliveries to customers, reducing the finished good inventory at the warehouses
and shipping docks. To really improve the flow of your supply chain, you need supply chain software, but ERP helps too.
5. Standardize HR information;Especially in companies with multiple business units, HR may not have a unified, simple method

The ABCs of ERP - Enterprise - CIO

for tracking employees time and communicating with them about benefits and services. ERP can fix that.
In the race to fix these problems, companies often lose sight of the fact that ERP packages are nothing more than
generic representations of the ways a typical company does business. While most packages are exhaustively comprehensive,
each industry has quirks that make it unique. Most ERP systems were designed to be used by discrete manufacturing companies
(that make physical things that can be counted), which immediately left all the process manufacturers (oil, chemical and
utility companies that measure their products by flow rather than individual units) out in the cold. Each of these industries has
struggled with the different ERP vendors to modify core ERP programs to their needs.

Will ERP fit the ways I do business?

Before the checks are signed and the implementation begins, its critical for companies to figure out if their ways of doing business
will fit within a standard ERP package. The most common reason that companies walk away from multimillion-dollar ERP projects
is that they discover the software does not support one of their important business processes. At that point there are two things
they can do: They can change the business process to accommodate the software, which will mean deep changes in longestablished ways of doing business (that often provide competitive advantage) and shake up important peoples roles
and responsibilities (something that few companies have the stomach for). Or they can modify the software to fit the process, which
will slow down the project, introduce dangerous bugs into the system and make upgrading the software to the ERP vendors
next release excruciatingly difficult because the customizations will need to be torn apart and rewritten to fit with the new version.
Needless to say, the move to ERP is a project of breathtaking scope, and the price tags on the front end are enough to make the
most placid CFO a little twitchy. In addition to budgeting for software costs, financial executives should plan to write checks to
cover consulting, process rework, integration testing and a long laundry list of other expenses before the benefits of ERP start
to manifest themselves. Underestimating the price of teaching users their new job processes can lead to a rude shock down the
line, and so can failure to consider data warehouse integration requirements and the cost of extra software to duplicate the old
report formats. A few oversights in the budgeting and planning stage can send ERP costs spiraling out of control faster than
oversights in planning almost any other information system undertaking.

What does ERP really cost?

There arent any good numbers to predict ERP costs because the software installation has so many variables, such as: the number
of divisions it will serve, the number of modules installed, the amount of integration that will be required with existing systems,
the readiness of the company to change and the ambition of the projectif the project is truly meant to be a battering ram
for reengineering how the company does its most important work, the project will cost much more and take much longer than one
in which ERP is simply replacing an old transaction system. There is a sketchy rule of thumb that experts have used for years
to predict ERP installation costs, which is that the installation will cost about six times as much as the software license. But this
has become increasingly less relevant as the market for ERP has slowed over time and vendors have offered deep discounts on
the software up front.
Research companies dont even bother trying to predict costs anymore. A few years ago, the dearly departed Meta Group did a
study looking at the total cost of ownership (TCO) of ERP, including hardware, software, professional services and internal staff
costs. The TCO numbers include getting the software installed and the two years afterward, which is when the real costs
of maintaining, upgrading and optimizing the system for your business are felt. Among the 63 companies surveyedincluding
small, midsize and large companies in a range of industriesthe average TCO was $15 million (the highest was $300 million and
the lowest was $400,000). While its hard to draw a solid number from that kind of range of companies and ERP efforts, Meta came

The ABCs of ERP - Enterprise - CIO

up with one statistic that proves that ERP is expensive no matter what kind of company is using it: The TCO for someone who uses
the system a lot over that period was a staggering $53,320.

When will I get payback from ERPand how much will it be?
Dont expect to revolutionize your business with ERP. Its contribution is optimizing the way things are done internally rather than
with customers, suppliers or partners. Again, value depends on ambition. If ERP is the focus of an effort to bring
dramatic improvements to the way a company does business, it will bring more value than if the project is treated as a simple
systems replacement. And even if ERP does bring dramatic change, because it affects mostly existing "back office" processes such
as order management rather than creating new revenue opportunities, the bottom-line value may not be much. Veterans say ERP
is more a cost of doing business to make the company operate more efficiently than something that offers dramatic payback. And
most veterans say it takes six months or more to get the new systems and processes running up to snuff. A Meta Group study of
63 companies a few years ago found that it took eight months after the new system was in (31 months total) to see any benefits.
The median annual savings from the new ERP system were $1.6 millionpretty modest, considering that ERP projects at
big companies can cost $50 million or more.

What are the hidden costs of ERP?

Although different companies will find different land mines in the budgeting process, those who have implemented ERP
packages agree that certain costs are more commonly overlooked or underestimated than others. Armed with insights from across
the business, ERP pros vote the following areas as most likely to result in budget overrun.
1. TrainingTraining is the near-unanimous choice of experienced ERP implementers as the most underestimated budget item.
Training expenses are high because workers almost invariably have to learn a new set of processes, not just a new software
interface. Worse, outside training companies may not be able to help you. They are focused on telling people how to use
software, not on educating people about the particular ways you do business. Prepare to develop a curriculum yourself that
identifies and explains the different business processes that will be affected by the ERP system. One enterprising CIO hired
staff from a local business school to help him develop and teach the ERP business-training course to employees. Remember
that with ERP, finance people will be using the same software as warehouse people and they will both be entering information
that affects the other. To do this accurately, they have to have a much broader understanding of how others in the company
do their jobs than they did before ERP came along. Ultimately, it will be up to your IT and businesspeople to provide that
training. So take whatever you have budgeted for ERP training and double or triple it up front. It will be the best ERP
investment you ever make.
2. Integration and testingTesting the links between ERP packages and other corporate software links that have to be built on a
case-by-case basis is another often-underestimated cost. A typical manufacturing company may have add-on applications
from the majore-commerce and supply chainto the minorsales tax computation and bar coding. All require integration
links to ERP. Youre better off if you can buy add-ons from the ERP vendors that are pre-integrated. If you need to build the
links yourself, expect things to get ugly. As with training, testing ERP integration has to be done from a process-oriented
perspective. Veterans recommend that instead of plugging in dummy data and moving it from one application to the next, you
should run a real purchase order through the system, from order entry through shipping and receipt of paymentthe whole
order-to-cash bananapreferably with the participation of the employees who will eventually do those jobs.
3. CustomizationAdd-ons are only the beginning of the integration costs of ERP. Much more costly, and something to be
avoided if at all possible, is actual customization of the core ERP software itself. This happens when the ERP software cant
handle one of your business processes and you decide to mess with the software to make it do what you want. Youre playing
with fire. The customizations can affect every module of the ERP system because they are all so tightly linked together.
Upgrading the ERP packageno walk in the park under the best of circumstancesbecomes a nightmare because youll
have to do the customization all over again in the new version. Maybe it will work, maybe it wont. No matter what, the vendor
will not be there to support you. You will have to hire extra staffers to do the customization work, and keep them on for good to
maintain it.

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4. Data conversionIt costs money to move corporate information, such as customer and supplier records, product design data
and the like, from old systems to new ERP homes. Although few CIOs will admit it, most data in most legacy systems is of little
use. Companies often deny their data is dirty until they actually have to move it to the new client/server setups that popular
ERP packages require. Consequently, those companies are more likely to underestimate the cost of the move. But even clean
data may demand some overhaul to match process modifications necessitatedor inspiredby the ERP implementation.
5. Data analysisOften, the data from the ERP system must be combined with data from external systems for analysis purposes.
Users with heavy analysis needs should include the cost of a data warehouse in the ERP budgetand they should expect to
do quite a bit of work to make it run smoothly. Users are in a pickle here: Refreshing all the ERP data every day in a big
corporate data warehouse is difficult, and ERP systems do a poor job of indicating which information has changed from day to
day, making selective warehouse updates tough. One expensive solution is custom programming. The upshot is that the wise
will check all their data analysis needs before signing off on the budget.
6. Consultants ad infinitumWhen users fail to plan for disengagement, consulting fees run wild. To avoid this, companies
should identify objectives for which its consulting partners must aim when training internal staff. Include metrics in the
consultants contract; for example, a specific number of the user companys staff should be able to pass a projectmanagement leadership testsimilar to what the consultants have to pass to lead an ERP engagement.
7. Replacing your best and brightestIt is accepted wisdom that ERP success depends on staffing the project with the best and
brightest from the business and IS divisions. The software is too complex and the business changes too dramatic to trust the
project to just anyone. The bad news is a company must be prepared to replace many of those people when the project is
over. Though the ERP market is not as hot as it once was, consultancies and other companies that have lost their best people
will be hounding yours with higher salaries and bonus offers than you can affordor that your HR policies permit. Huddle with
HR early on to develop a retention bonus program and create new salary strata for ERP veterans. If you let them go, youll
wind up hiring themor someone like themback as consultants for twice what you paid them in salaries.
8. Implementation teams can never stopMost companies intend to treat their ERP implementation as they would any other
software project. Once the software is installed, they figure the team will be scuttled, and everyone will go back to his or her
day job. But after ERP, you cant go home again. The implementers are too valuable. Because the implementers have worked
so closely with ERP, they know more about the sales process than the salespeople and more about the manufacturing
process than the manufacturing people. Companies cant afford to send their project people back into the business because
theres so much to do after the ERP software is installed. Just writing reports to pull information out of the new ERP system will
keep the project team busy for a year at least. And it is in analysisand, one hopes, insightthat companies make their
money back on an ERP implementation. Unfortunately, few IS departments plan for the frenzy of post-ERP installation activity,
and fewer still build it into their budgets when they start their ERP projects. Many are forced to beg for more money and staff
immediately after the go-live date, long before the ERP project has demonstrated any benefit.
9. Waiting for ROIOne of the most misleading legacies of traditional software project management is that the company expects
to gain value from the application as soon as it is installed, while the project team expects a break and maybe a pat on the
back. Neither expectation applies to ERP. Most of the systems dont reveal their value until after companies have had them
running for some time and can concentrate on making improvements in the business processes that are affected by the
system. And the project team is not going to be rewarded until their efforts pay off.
10. Post-ERP depressionERP systems often wreak cause havoc in the companies that install them. In a recent Deloitte
Consulting survey of 64 Fortune 500 companies, one in four admitted that they suffered a drop in performance when their ERP
system went live. The true percentage is undoubtedly much higher. The most common reason for the performance problems is
that everything looks and works differently from the way it did before. When people cant do their jobs in the familiar way and
havent yet mastered the new way, they panic, and the business goes into spasms.

Why do ERP projects fail so often?

At its simplest level, ERP is a set of best practices for performing the various duties in the departments of your company, including
in finance, manufacturing and the warehouse. To get the most from the software, you have to get people inside your company to
adopt the work methods outlined in the software. If the people in the different departments that will use ERP dont agree that the
work methods embedded in the software are better than the ones they currently use, they will resist using the software or will want
IT to change the software to match the ways they currently do things. This is where ERP projects break down.

The ABCs of ERP - Enterprise - CIO

Political fights erupt over howor even whetherthe software will be installed. IT gets bogged down in long, expensive
customization efforts to modify the ERP software to fit with powerful business barons wishes. Customizations make the software
more unstable and harder to maintain when it finally does come to life. The horror stories you hear in the press about ERP can
usually be traced to the changes the company made in the core ERP software to fit its own work methods. Because ERP covers
so much of what a business does, a failure in the software can bring a company to a halt, literally.
But IT can fix the bugs pretty quickly in most cases, and besides, few big companies can avoid customizing ERP in some fashion
every business is different and is bound to have unique work methods that a vendor cannot account for when developing
its software. The mistake companies make is assuming that changing peoples habits will be easier than customizing the software.
Its not. Getting people inside your company to use the software to improve the ways they do their jobs is by far the harder challenge.
If your company is resistant to change, then your ERP project is more likely to fail.

How do I configure ERP software?

Even if a company installs ERP software for the so-called right reasons and everyone can agree on the optimal definition of
a customer, the inherent difficulties of implementing something as complex as ERP is like, well, teaching an elephant to do the
hootchy-kootchy. The packages are built from database tables, thousands of them, that IS programmers and end users must set
to match their business processes; each table has a decision "switch" that leads the software down one decision path or another.
By presenting only one way for the company to do each tasksay, run the payroll or close the booksa companys
individual operating units and far-flung divisions are integrated under one system. But figuring out precisely how to set all the
switches in the tables requires a deep understanding of the existing processes being used to operate the business. As the
table settings are decided, these business processes are reengineered, ERPs way. Most ERP systems are preconfigured for most
of the major processes, however, allowing just hundredsrather than thousandsof procedural settings to be made by the customer.

How do companies organize their ERP projects?

Based on our observations, there are three commonly used ways of installing ERP.
The Big BangIn this, the most ambitious and difficult of approaches to ERP implementation, companies cast off all their
legacy systems at once and they install a single ERP system across the entire company. Though this method dominated early
ERP implementations because of the need to revamp old systems for Y2K, few companies dare to attempt it anymore because it
calls for the entire company to mobilize and change at once. Most of the ERP implementation horror stories from the late 90s warn
us about companies that used this strategy. Getting everyone to cooperate and accept a new software system at the same time is
a tremendous effort, largely because the new system will not have any advocates. No one within the company has any
experience using it, so no one is sure whether it will work. Also, ERP inevitably involves compromises. Many departments
have computer systems that have been honed to match the ways they work. In most cases, ERP offers neither the range
of functionality nor the comfort of familiarity that a custom legacy system can offer. In many cases, the speed of the new system
may suffer because it is serving the entire company rather than a single department. ERP implementation requires a direct
mandate from the CEO.
Franchising strategyThis approach suits large or diverse companies that do not share many common processes across
business units. Independent ERP systems are installed in each unit, while linking common processes, such as financial
bookkeeping, across the enterprise. This has emerged as the most common way of implementing ERP. In most cases, the
business units each have their own "instances" of ERPthat is, a separate system and database. The systems link together only
to share the information necessary for the corporation to get a performance big picture across all the business units (business

The ABCs of ERP - Enterprise - CIO

unit revenue, for example), or for processes that dont vary much from business unit to business unit (perhaps HR benefits).
Usually, these implementations begin with a demonstration or pilot installation in a particularly open-minded and patient business
unit where the core business of the corporation will not be disrupted if something goes wrong. Once the project team gets the
system up and running and works out all the bugs, the team begins selling other units on ERP, using the first implementation as a
kind of in-house customer reference. Plan for this strategy to take a long time. Interestingly, many companies that initially installed
ERP using a franchising strategy are now trying to consolidate as many of those different instances of ERP as possible down into
a handful or even one for the entire company.
Slam dunkERP dictates the process design in this method, where the focus is on just a few key processes, such as those contained
in an ERP systems financial module. The slam dunk is generally for smaller companies expecting to grow into ERP. The goal here
is to get ERP up and running quickly and to ditch the fancy reengineering in favor of the ERP systems "canned" processes.
Few companies that have approached ERP this way can claim much payback from the new system. Most use it as an infrastructure
to support more diligent installation efforts down the road. Yet many discover that a slammed-in ERP system is little better than
a legacy system because it doesnt force employees to change any of their old habits. In fact, doing the hard work of
process reengineering after the system is in can be more challenging than if there had been no system at all because at that point
few people in the company will have felt much benefit from the new software.

Is a "single instance" of ERP better?

An "instance" refers to the number of discreet versions of ERP software you have in your company. The original vision of ERP was
that companies should have a single instancethat is, a single implementation of the software running on a single database
that serves the entire company. It would mean no duplication of information in different departments or in different geographic
divisions and thus better integration and information quality across the company. Upgrading the software would also be easier
than with multiple customized instances of ERP across the company.
But few companies installed ERP that way. First, there were the technology limitations: databases, networks and storage
systems couldnt handle the load, and bandwidth was still expensive enough that linking globally based divisions together on a
single database was expensive. Worse, different business units often had unique processes or resisted the ones that came in the
ERP box. All these factors combined caused many big, global corporations to install dozenseven hundredsof instances of
software from a single ERP vendor.
Today, many of those early barriers have come down. So does it make sense to create a single (or a significantly reduced number)
of instanceswhile also getting rid of outdated or feature-poor systems from other vendors? Like most complex technology issues,
it depends.
There are some compelling reasons to undertake such a project now. For starters, the Sarbanes-Oxley Act, the governments
post-Enron accounting legislation requires that financial reports have a verifiable audit trail. With a single instance, all of a
companys financial data will live in one application and will originate from one source, eliminating consolidation errors and
greatly reducing the time it takes to close the books. Having a single data source could also create new revenue opportunities and
cut costs. Companies would be able to run reports that show cross-promotion opportunities, places where they could reuse
equipment or leverage purchasing power. Also, AMR estimates that companies should budget $4.3 million for a single-instance
order management module versus $7.1 million for multiple instances.
But despite these benefits, rip-and-replace is a difficult pill for CIOs to swallow, many of whom are just shaking off the
multiyear, multimillion-dollar hangover of their first ERP project. And theyre wondering if there isnt another cure for their

The ABCs of ERP - Enterprise - CIO

integration headaches: Web services and the promise of service-oriented architecture (SOA). Web services couldwith the
emphasis on couldallow CIOs who have invested in best-of-breed solutions to integrate their standalone systems without
either shelling out millions for single instance or tying their companys future to a single vendor. Trouble is, Web services and SOA
are still immature and require complex planning and a long list of programming and architectural talents inside the IT department
and dont forget implementation time and cost.
Most pundits believe some form of standard, simple, vendor-independent integration will emerge over the long term, but that
doesnt help CIOs today. Most experts recommend waiting for better integration standards if the costs of operating your systems asis dont outweigh the costs and benefits of ripping and replacing with a single instance and the business is not missing out on
important revenue opportunities because of problems with the current system.
Essentially, single instance and Web services/SOA are two ways to get to the same place, and CIOs will need to choose which path
to lead their company down. For much more detail on this choice, see Ben Worthens piece "Extreme ERP Makeover" www.cio.
com/archive/111503/erp.html Here are some very basic guidelines:
You should consider single instance if you...

Have fairly commonplace business processes that extend across all divisions
Have older systems that need to be replaced
Have multiple ERP instances from a single vendor

You should consider an integration layer if you...

Have divisions with unique business processes that cant be changed

Consider an existing investment in best-of-breed solutions a competitive advantage
Want an environment in which it is easy to integrate new applications

How difficult is it to upgrade ERP software?

Its extremely difficult, unless you are one of the rare companies that did not tinker with the system while installing it. In the early
days of ERP, vendors pursued a vision that has since been disproven: Business processes built into the software should be
adopted by every customer. Change your business to fit the system. CEOs like the sound of reengineering, but take that logic to
the departmental head who wont be able to serve her customers as well with the process in the software box and
suddenly reengineering sounds less compelling. CIOs were forced (or acquiesced) to tinker with the innards of these packages
to avoid losing valuable chunks of business processes, and it made their lives hell. Vendors ignored this reality for years. They
thought changing the system to fit your own processes meant you were a weak girly man who couldnt stand up to your
business people. Those processes couldnt be any good anyway if they hadnt made it into the vendors best practice pool when
they developed the stuff. Modifying the core code of ERP was like turning your Pinto into a low rider. You just voided the
warranty, dude. Tough luck. ERP vendors would not support customized versions of their software.
When a new version of the highly integrated suite arrived with cool new features, customers sometimes could not afford to install
them because they had made so many changes to the previous version. CIOs had built so many different links to the
enterprise systems to get them working with other systems in the company that an upgrade was akin to starting over. Many of the
old links had to be torn apart and rewritten to fit with the new version. And many of those rewrites were completely pointless. The
new suite might have one new piece and nine others that had changed little since the last version. But it was all so integrated
together that every custom link had to be redone, even to the pieces that didnt change.

The ABCs of ERP - Enterprise - CIO

When vendors began breaking up and componentizing their suites to make them easier to integrate with each other and with
legacy systems inside the company, they also broke up one of the value propositions that had been so enticing in the first place:
free upgrades. Freed of the suite model, enterprise software vendors started charging fresh license fees for the new components
they developed. Many early ERP suites had their development frozen. Customers could continue to get support, but newer
features cost extra and worked much betteror sometimes onlywith the newer version of the vendors software. And CIOs
stuck with the old suites began wondering where all their maintenance fees had gone. They couldnt afford to upgrade to the
newer, componentized version of the vendors software models and if they could, theyd pay a new license fee for their trouble.
In theory, early users of ERP paid for those new versions of the software through yearly maintenance fees to the vendor that
every ERP vendor charges. The largest percentage of those fees went to R&D rather than to support and maintenance of
existing software. But the economics became untenable for vendors. When the ERP boom crashed after 2000, sales of new
software slowed to a crawl and vendors said they were forced to charge for new components. It may be true, but it ended the short
era of free upgrades.

Will service-oriented architecture (SOA) replace ERP?

No. Every company needs a core transactional system that records the information from its most important business processes.
But companies are realizing that ERP is shifting from being the sum total of their software architecture strategy to being a
component of a larger strategy based on expressing technology as specific business services that business people can
easily understandsuch as customer record or get credit rating, for examplerather than arcane software applications like ERP.
The services strategy entails building an integration layer that is separate and distinct from any of the software applications
including ERPin a companys portfolio. The foundational pieceknown as the messaging infrastructureis like a good
executive assistanttranslating, routing and monitoring information from different systems without these systems needing to
connect directly. Adding, changing or removing a system becomes a matter of modifying a single link, rather than ripping
apart connections to all the different systems it may need to communicate with.
But while the messaging infrastructure makes connecting systems easier, it doesnt free business processes from their
mainframe prisons, or eliminate redundancies in applications, or provide any impetus to create a useful architecture. Indeed, a
good messaging infrastructure can perpetuate the chaos by making it easier to deal with.
Messaging has long lacked a higher purpose, a strategy. Service objects (or just plain services) are that strategy, and it is the
second core piece of the integration layer. This is an old concept, based on object-oriented programming from the 80s.
Services extract pieces of data and business logic from systems and databases around the company and bundle them together
into chunks that are expressed in business terms.
At telecom company Verizon, for example, the service called get CSR (get customer service record) is a complex jumble of
software actions and data and business logic extractions that uses Verizons messaging infrastructure to access more than 25
systems in as many as four data centers across the country. Before building the get CSR service, Verizon developers wanting to
get at that critical lump of data would have to build links to all 25 systemsadding their own links on top of the web of links
already hanging off the popular systems.
But with the get CSR service sitting in a central repository on Verizons intranet, those developers can now build a single link to
the carefully crafted interface that wraps around the service using the Web services standard simple object access protocol

The ABCs of ERP - Enterprise - CIO

(SOAP). Those 25 systems immediately line up and march, sending customer information to the new application and
saving developers months, even years, of development time each time the service is used.
The most interesting new feature being developed by the ERP vendors today is the extent to which they will make their software
part of a service SOA using their own homegrown integration software, known as middleware, and Web services so that
customers can more easily link ERP with other types of software in the architecture. Each vendor has claimed fealty to the concept
and each has its own vision of how to create an integration layer independent of its own software that is capable of linking to any
other piece of software in the universe. But view their pronouncements skeptically because if they do it well they will eliminate
an important piece of their competitive differentiation: dominance over the software acquisition process of their customers.
When CIOs call themselves a SAP shop or an Oracle shop, its because software from those companies dominates
their architecture and new software from those providers works better with their existing code base than does code from other
vendors. Vendors who make integration with their software truly universal eliminate the built-in advantage they have with
existing customers. Some ways that vendors use their new middleware strategies to keep customers: The middleware is offered
only to customers who upgrade to the latest version of ERP, or customers are charged a fee for using the middleware to link
with software from another vendor.

How does ERP fit with e-commerce?

ERP vendors were not prepared for the onslaught of e-commerce. ERP is complex and not intended for public consumption.
It assumes that the only people handling order information will be your employees, who are highly trained and comfortable with
the tech jargon embedded in the software. But now customers and suppliers are demanding access to the same information
your employees get through the ERP systemthings such as order status, inventory levels and invoice reconciliationexcept
they want to get all this information simply, without all the ERP software jargon, through your website.
E-commerce means IT departments need to build two new channels of access into ERP systemsone for customers
(otherwise known as business-to-consumer) and one for suppliers and partners (business-to-business). These two audiences want
two different types of information from your ERP system. Consumers want order status and billing information, and suppliers
and partners want just about everything else.
Traditional ERP vendors are having a hard time building the links between the Web and their software, though they certainly all
realize that they must do it and have been working hard for years to develop it. The bottom line, however, is that companies with
e-commerce ambitions face a lot of hard integration work to make their ERP systems available over the Web. For those
companies that were smartor luckyenough to have bought their ERP systems from a vendor experienced in developing
e-commerce wares, adding easily integrated applications from that same vendor can be a money-saving option. For those
companies whose ERP systems came from vendors that are less experienced with e-commerce development, the bestand
possibly onlyoption might be to have a combination of internal staff and consultants hack through a custom integration.
But no matter what the details are, solving the difficult problem of integrating ERP and e-commerce requires careful planning, which
is key to getting integration off on the right track.

Can I use ERP to manage a network of foreign suppliers?

ERP was designed at a time when process management was an internal affair. The systems have lagged behind the explosive
growth of globalization and offshore outsourcing of manufacturing. When most U.S. manufacturing was still mostly local,
companies could link their ERP systems through expensive electronic data interchange (EDI) connections. But EDI links (and

The ABCs of ERP - Enterprise - CIO

ERP systems themselves) never penetrated much beyond a manufacturers top tier (read biggest, richest) of suppliers, due to the
cost of installing and managing the links at the supplier. In third-world manufacturing destinations, even an Internet connection is
often a luxury. The market for managing the core ERP information (orders, inventory, etc.) of the extended supply chain, is only
now beginning to emerge.

Senior Editor Christopher Koch can be reached at ckoch@cio.com.

Related article: The ABCs of Supply Chain Management.

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