Choosing the Right ERP System

Choosing the right ERP system (ERP = Enterprise Resource Planning) is a strategically significant decision for a company and can either hinder or "boost" the efficiency of business processes and agility in adapting to new market requirements (keyword: interfaces or Business Intelligence) for years to come. At the same time, implementing such software is a process that IT managers or CEOs only go through a few times in their lives (if at all), and without an experienced consultant, you can rarely draw on your own experience in this area. The high risks involved in implementing ERP systems and the resulting strong long-term commitment to the supporting IT partners make it all the more necessary to proceed carefully and wisely when selecting the "right" ERP system and partner.

In this blog article, I would like to share some experiences and insights from my work as an ERP consultant. For more than 15 years, I have been responsible for or accompanied countless ERP system implementations. I have also repeatedly advised companies and organizations during the evaluation phase when deciding on an ERP system. Numerous requirement and specification documents from consultants have crossed my screen. These projects often included replacing an existing legacy ERP solution or connecting to other ERP systems (e.g., in affiliated companies). Over the years, this has provided a fairly good overall picture of the ERP topic, even though my main focus is on the product Microsoft Dynamics 365 Business Central (formerly Microsoft Dynamics NAV).

What is an ERP System?

First, we should clarify what an Enterprise Resource Planning system actually is. As the name suggests, the basic idea of an ERP system is to manage and organize resources as efficiently as possible and without unnecessary interfaces for the company's value creation. By mapping the most important processes in one system, everything can be integrated and carried out in real time, without cumbersome coordination between systems. Ideally, you can look into the system every day and get a picture of "what is happening right now," instead of having to gather and consolidate information from various systems over days or weeks.
 

Example of the Advantages of an Integrated ERP System

An example of an integrated approach is that the shipping department can see directly before posting the delivery note whether the customer has an overdue payment balance. In companies without an integrated ERP system, shipping employees first have to check with accounting (or even with the tax office if they manage invoices and payments). As a result, goods continue to be delivered to the customer, even if they have been in arrears for a long time. This only becomes apparent when accounting consolidates its data for the monthly closing.

Which Areas Does an ERP System Cover?

Typically, ERP systems cover the following business areas:

• Financial accounting, including topics such as asset accounting, cost accounting, payments, cash flow/liquidity
• Supply chain management, i.e., coordinated management of 
  • Purchasing, 
  • Inventory management, 
  • Sales
• Production and logistics

Many ERP systems also provide modules for the following areas:

• Service and maintenance
• Project management
• Customer Relationship Management (CRM)

And of course, there are also very individual modules that may be crucial for a company's operations in a particular industry.
 

Selection Criteria for the Perfect ERP Solution

You should definitely consider and evaluate the following topics when choosing an ERP system, so you don't realize later that you took the wrong turn from the start:

Generalist vs. Specialist

Do you want software that is broadly equipped in terms of functionality but may not cover many of your industry's specialties as standard? Or do you tend to prefer a – usually lesser-known provider with fewer installations – who has specialized precisely in your special requirements?
 
The generalist is usually technologically better and more modern and offers many modules and interfaces, but requires more customization to meet your requirements. In the analysis phase, you have to explain many specialties to the consultants, as they may not know them (which can also be an advantage, as they question many things neutrally).
 
The specialist ERP provider knows your industry, is present at the same industry events (such as trade fairs, association meetings), and you usually save a lot of time in the analysis and implementation phase, as well as special customizations. On the other hand, these companies are often smaller and have had the problem in recent years that, although they can offer many features in the software, the product is no longer technologically up to date, as the companies are financially overwhelmed by the transformation process (e.g., to the cloud).

Eco-System and Partner Landscape

The "eco-system" refers to things like:

• Are there many available and affordable service providers and consultants who can implement the system?
• Are there third-party modules that extend functionality, ideally even an "app store"?
• Do manufacturers of other systems and services provide standard interfaces for the ERP system?

ERP systems like SAP or Microsoft Dynamics 365 Business Central usually score highly in this category due to their widespread use. If there are not enough implementation partners for a product, there can be very long waiting times for system implementation and later customizations. If you can rely on a broad network of companies – such as Microsoft with its worldwide partner network, which develops add-ons for the solution – this usually saves enormous costs, as you don't have to have these functionalities developed individually.
 

Degree of Coverage of Business Processes

Of course, the classic fit-gap analysis (i.e., determining the delta between your own requirements and the standard functionality of the ERP system) must always be carried out before deciding on an ERP product. This is done in a classic approach via a requirements and specification document and a workshop. In an agile project approach, a "scoping meeting" is held at the start of the project to clarify the basic requirements for the system with a consultant. The better a company already knows and has documented its own processes, the easier it will be to carry out the fit-gap analysis. Not infrequently, however, workshops end up in a discussion among departments about process issues that have never been discussed internally before. This can lead to wrong decisions when selecting the ERP system. Startups often have it easier in this respect, as they are still flexible enough to adopt the ERP system's processes as their own.
 

Standard Product vs. Customizable Software

A crucial question regarding the choice of software is whether you are able to make your own individual developments to the system and how complex it is to keep these up to date with future software updates. The ability to customize is both a blessing and a curse. A blessing, because you can implement a perfect solution for specific issues, which may even mean a strategic competitive advantage in the market. The downside is the long-term costs of maintaining and updating these customizations, and it becomes increasingly difficult to get standard support for the product and retain knowledge about the customizations in your own company and with the partner. Some systems on the market, such as Microsoft Dynamics 365 Business Central, offer a middle ground in the cloud model with extension technology, enabling good upgradeability even if you need individual customizations to the standard software.
 

Licensing Model and Costs

Depending on which user groups use the system and how, "show-stoppers" often arise very quickly in this area. Key questions here include:

• Does each user need to be licensed, regardless of the level of software usage (named user)?
• How many power users are there, and how many users only use the system occasionally (e.g., for time tracking for projects or production orders)?
• Does access by third-party software (interfaces), hardware (e.g., handheld scanners), and analysis tools require separate licensing?
• Can a license be shared by multiple users, e.g., if several production employees use the same workstation for time tracking? Or if, for example, part-time staff share a license in the morning and afternoon (so-called "concurrent user" models).
• Are there costs that are billed per transaction (e.g., based on the number of customers, invoices, or other booking processes)?
• Are there special prices and discounts for non-profit organizations or specific use cases?
• How do usage costs increase with the number of users? There are models that are initially inexpensive but increase exponentially with a larger number of users.
• How is third-party access to the system licensed, such as suppliers, logistics service providers, or customers with whom you work in an integrated way?

These components then form a cost calculation. It is important to correctly capture all factors in the so-called "total cost of ownership" (TCO) and include them in a calculation. Both a short-term and a medium-term view, which already includes an update cycle, should be calculated. It is regularly difficult to compare cloud operation with on-premises operation, as on-premises operation includes a significant number of hidden costs (such as electricity, backups, maintaining know-how, security patching, etc.) that are difficult to determine.
 

Cloud vs. On-Premises

Even though the trend in recent years has clearly been towards cloud applications that do not require investments in your own infrastructure, in some cases an on-premises solution may make more sense (e.g., for data protection reasons or due to poor mobile and internet availability). However, many providers no longer offer on-premises solutions or invest no more money in the legacy on-premises solution in favor of developing the cloud solution. If you choose a cloud solution, important questions include:

• Where is the data stored (GDPR, etc.)?
• What availability and service levels are guaranteed?
• What data export options are available if you want to switch cloud providers later?
• What backup and data protection options are provided by the vendor?
• How often are there updates in the cloud, and does this lead to restrictions in software operation? Do you have control over the timing and scope of upgrades?

Software Architecture and Technical System Requirements

This refers to how the ERP system is technologically designed and implemented. In this area, the wheat is often quickly separated from the chaff. Important criteria include:

• Is it still a traditional Windows application that needs to be installed on a PC? Or is it already a more modern architecture that distinguishes between data storage, application, and frontend and is scalable?
• On which systems must the software be executable: Windows, Mac OS, iOS, Android, etc.? Which versions are supported?
• Is the software operated with mouse & keyboard or also via touch?
• Are there restrictions for web applications regarding supported internet browsers?
• Does the system require a specific database technology (e.g., Oracle, MySQL, Microsoft SQL, etc.)?
• What data volumes and how many users can the system handle efficiently? Are 100,000 customers a problem? How long does a detailed search in these records take? How many orders can be processed simultaneously by different users per day?
• Can the ERP solution be integrated into the existing security infrastructure, e.g., via single sign-on functionality? Or does the software have its own user management with separate identities that must be managed separately?
• Can the system handle different languages and character sets? (e.g., Chinese or Greek characters, Unicode support, etc.)
• Are security updates provided regularly? And for how long?

Important Functional Architecture Decisions

In addition to technical architecture decisions, functional architecture features play a very important role in system selection. Some companies have enthusiastically implemented software only to find out later that it is not fit for the company's future. Important functional features include:

• Multi-client capability, i.e., can several companies be managed simultaneously with the software, e.g., to map a holding structure.
• Multi-currency capability, i.e., can transactions be posted in multiple currencies and, for example, can the currencies in one client be consolidated into a parent company currency.
• Multi-GAAP capability, i.e., can the system perform closings according to multiple legal accounting systems, such as HGB, IFRS, IAS, etc.
• Multi-country capability, i.e., are the legal requirements, especially in accounting, met for each country and regularly maintained and provided by the vendor? Caution: Changing the language does not mean that business processes are also booked according to the logic of that country!
• Multi-site and intercompany capability, i.e., can individual companies within the same group process business transactions with each other? Is it possible, for example, for a subsidiary to take over central order planning, production planning, or purchasing planning for other locations and clients?

Of course, many of these features apply more to larger companies. However, don't be fooled: today, even small companies quickly have an e-commerce site up and running and suddenly start selling goods to other countries with different currencies. So company size alone is not sufficient for this consideration.

Interfaces and Interoperability

Especially in today's "cloud economy," it is increasingly important that your software can easily communicate with other services. Therefore, consider:

• Does the software provide standard interfaces that third-party software products can easily access? Are the technologies offered widespread and state-of-the-art?
• Do the interfaces ensure that the business logic of the ERP software is maintained and that no faulty data records can enter the system?
• Is there good integration with standard software such as Microsoft Office, especially Microsoft Excel?
• Can the system even be integrated with cross-system workflow technologies such as Microsoft Automate, so that business processes can be mapped across multiple systems?
• How are the interfaces authorized and how is security ensured when the interfaces are available externally?
• Do providers of other systems, such as document management systems (DMS), provide standard interfaces to the ERP system?

Reporting Capabilities

There are a number of systems that ensure the mapping of business processes but provide little support for data analysis beyond a few standard reports. The topic of "Business Intelligence," i.e., the analysis and evaluation of data and the insights gained from it, is a very important feature of modern ERP systems. For this reason, when deciding on a system, you should check:

• What reporting options does the system offer as standard, and how easily can these be adapted to your own requirements?
• Are there standard interfaces to software products such as Microsoft Excel, Microsoft Power BI, etc.?
• Is it easy to access the ERP system's data model, and can it be integrated into a data warehouse?
• Are legally required evaluations and reports provided (also for different countries)?
• Is there only a simple Excel/CSV export, or can dynamic communication be carried out via a web service?

Data Migration

ERP systems are the central system for a company's master data. This raises the question:

• How can data be imported into the system?
• How can data be exported from the system?

Both questions are especially important for cloud systems, e.g., if the vendor terminates/discontinues the service and the company is forced to quickly switch to another system. Depending on how quickly and easily data can be imported, there can be enormous savings during software implementation, as you are not dependent on costly IT partner services.

Vendor Reliability and Market Presence

Implementing ERP software is complex, time-consuming, and usually expensive. It is all the more annoying if you find out shortly after implementation that the software is being discontinued by the vendor or, for example, the ERP product has been sold to another vendor. As a rule, it is advisable to rely on vendors who are expected to exist for a long time and have an interest in continuing the product line. The question about a "roadmap" for the ERP product in question should always be asked. If the vendor cannot present a plausible and future-oriented plan, you should be skeptical and consider whether you want to bet on this horse.

This criterion undoubtedly explains why companies like SAP, Oracle, or Microsoft enjoy a very high level of trust in their ERP systems, as it can be assumed that these companies will still exist in 10 years.

Access to Knowledge and Training Materials, Vendor Support

Finally, when choosing an ERP solution, you should pay attention to how well users are supported with know-how for the project. Training and maintaining know-how are essential cost factors in the implementation and operation of ERP software. Important questions in this context are:

• Is there good online help for the product that is practical and helpful?
• In which languages are the materials provided?
• Are there learning paths and process-related training materials from the vendor or third parties?
• Are there special certifications for the product?
• Are there forums and communities for the product on the internet that are active and indicate an active user base?
• How well are product innovations documented and presented?
• Is there support from the vendor for support requests that only they can resolve?
• Is there even the possibility to submit and track feature requests directly with the vendor?

Conclusion

Of course, there are many other sensible selection criteria for an ERP system besides those mentioned here. However, this blog post makes it clear: costs are just one of many criteria.

An inexpensive ERP product can become very expensive very quickly if you don't look closely at the other criteria mentioned here during the selection process. Since you, as a customer, only implement an ERP system a few times in your life, it is advisable in most cases to consult an experienced advisor for such a system decision, who has proven expertise in assessing the points mentioned above. Feel free to contact us at dc AG if you need support with these topics.