In 2000 Nike implemented an ERP solution in an attempt to integrate their supply chain and customer relationship management systems.
The result was a debacle that led to $100 million in foregone sales as a newly installed forecasting tool led management to produce more Air Garnett sneakers and fewer Air Jordan models.
A software glitch misestimated demand, and the error spurred a 20 percent hit to Nike’s share price along with a number of legal actions. That CEO Phil Knight could term the blow a “speed bump” owes to the company’s unparalleled brand value—arguably the world’s most recognizable—and its undammable river of revenue.
Nike eventually recovered its footing and its $400 million ERP investment.
But as a company that employs about 74,000 and sells sportswear in nearly every market around the globe, the odds of bouncing back were favorable.
For small or medium-sized businesses, however, that “speed bump” would be a head-on collision at 150 miles per hour.
The impetus for the deployment of an ERP usually stems from a competitive threat to the bottom line or high expectations for growth. Both of these scenarios often come with the desire for big changes to meet the challenge, which can hamstring a company for years as we saw with Nike.
Before making broad, organization-wide changes to your business, let’s carefully examine if your business is ready to implement an ERP solution.
1. Are you prepared to invest in ERP?
For thriving businesses, the drive to grow rapidly can be viewed as a goal in itself—simply springing from the will to make the business the best and biggest it can be. Leaders who embrace this philosophy must realize that expansion requires planning. Infrastructure must be configured to handle increased capacities, and it’s in the early stages of growth planning and execution where ERP feasibility questions bear introspection.
ERP implementation is costly—whether you’re the CFO of AT&T or a mobile phone retailer that owns three locations in Virginia. Global companies can spend a few hundred million dollars on an ERP, but those figures don’t diminish the thousands your company will shell out to buy a system tailored to your own scale.
An ERP implementation takes months if not years to complete and requires complete organizational buy-in to make it a success. Typically implementations costs 1.5 to 2.5 times the cost of ERP software itself, in upwards of upwards of $150,000 for growing or maturing companies. This doesn’t include other costs like customization, training, maintenance and activation fees that can easily blow up a project budget.
If cash isn’t available—and those reserves may not be best-suited for capital expenditures—do you have a solid relationship with lenders and the financial wherewithal to obtain debt financing for the project?
2. What are the likely outcomes in implementing an ERP?
Your managers and employees will experience growing pains and disruption from ERP implementation, and an irrefutable law of business holds that benefits should outweigh costs.
Most businesses go into a project like this with sky-high hopes and expectations, only to be disappointed when the process is much more arduous than expected.
It’s prudent to consider the risks of a less than rosy outcome or the costs of growing pains that come with significant systems change. If your company isn’t prepared for a suboptimal outcome, you can find yourself worse off from where you started.
3. Can your business tolerate disruption?
Introducing your business to sophisticated software systems won’t propel it to multinational behemoth status, but it will add layers of complexity to operations. For employees and managers, that translates to extended software training and inevitable pushback.
When contemplating the purchase of new software, you should heed the reliable Keep It Simple Stupid (KISS) strategy: Stick to the basics—and enhance individual systems where and when necessary. Changing the way you do business isn’t worth it if it ends up damaging your company culture or increases employee turnover.
4. Will re-engineering your business hinder innovation?
Keeping it simple allows you to stick to the strengths that have spawned your success. Business leaders wear many hats, and diverting attention away from ideation, sales, and marketing pursuits can test the limits of a sustainable business plan.
Ownership, management, and the labor force still need to think outside the box and be productive, even while adapting to new systems and processes. A complete systems overhaul will change the way your business operates—any software solution should enhance, not hinder, the magic that has made your business a success.
5. What are the long-term costs of ERP implementation?
On top of operational risk sits the issue of cost in dollars. The upfront investment for ERPs tend to get the most attention, but you also have to consider the hidden expenses associated with an ERP acquisition—with a further look at cost overruns should an implementation ride off the rails.
Setup fees add to initial investment, so scour contracts for disclosure on these costs and negotiate their absorption into the agreed-upon package price.
Tangible costs are easy to measure but the expense to train end-users might not be as quantifiable. How quickly will employees get up to speed with new processes? As key employees take time to grasp new systems, you not only need to measure hours spent on training but also account for soft costs: the strong probability that work quality and productivity could suffer while getting accustomed to a new way of operating.
With any large-scale organizational change, resistance can take shape, frustrations can boil, and attrition beyond expected levels may occur. Combine a potential blow to morale with the fact that the organization as a whole has little to no experience with an intricate software bundle, and you’ll begin to understand the type of bet you’re making.
A way to simplify your analysis is to consider the current processes that might not require an overhaul. ERP comes boxed with many different software modules, and maximizing the value of the system means utilizing it to the fullest.
If you’re targeting improvement in accounts payable and accounts receivable, the best bang for your buck may entail the purchase of uniquely tailored software to do those jobs. This way you can solve a specific problem, and no dollars get wasted on software modules that will lie dormant.
ERPs that bridge expansive global operations aren’t just experiments. They’re must-have solutions for huge corporations whose future sustainabilities depend on adopting and integrating complex systems in their daily lives. Big companies make costly mistakes. But, they have the financial resources to absorb hits, and reserve margin for error.
Small and medium-sized businesses may not be as bulletproof. They must take an affordable and incremental approach when deciding to implement any type of software solution. If you’re on the cusp of that decision, look beyond dollars invested to the overall impact of ERP on your employees, your corporate culture, and your vision.