Enterprise resource planning boomed during the Y2K crisis period, but three years on, few will say the system has delivered the expected results, Angus Kidman reports

Published in AustralianIT, March 25 2003

ENTERPRISE resource planning systems -- which manage everything for large corporations from manufacturing processes to financials -- are a cornerstone of any large enterprise IT system.

But despite the millions of dollars invested in it, ERP has a very mixed reputation.

"ERP systems regularly fail. They're either too expensive or get cancelled or take far too long," says Marc Englaro, a consultant with open architecture industry association si2, summing up many of ERP's perceived weaknesses.

Although basic systems that could be described as ERP have been available for a decade or more, the real boom for ERP came with the advent of the Y2K problem. Many companies, faced with the choice of either recoding existing large business applications or starting again, took the opportunity to upgrade to a new suite of applications.

Big-name business software players such as SAP, J. D. Edwards, PeopleSoft and Oracle found their businesses booming, as did a host of more specialised manufacturing software companies.

Those who took the plunge early have, in many cases, achieved substantial success.

"Companies that approached us in 1998 and put substantial time and effort into choosing an ERP solution that was the best fit for their business have been the most successful," ANZ managing director for J. D. Edwards, Ian Hodge says.

Later arrivals haven't been so lucky.

"Y2K is a classic example," Englaro says.

"So many of those projects went past the end of 1999 and they had to patch up their back-end systems anyway."

While ERP has delivered benefits to businesses in general, it hasn't delivered as many as were expected.

A study of ERP projects across Australia, Europe and the US by analyst Accenture summarises the position: most of the companies surveyed achieved less than half of the benefits they had anticipated from ERP.

While 70 per cent had achieved improved financial management, just 53 per cent had managed to improve their production cycles, and only 36 per cent had managed to increase revenue.

"There remain many dazed executives wondering where the value has been from all that capital investment," Hodge says.

The promised benefits of consolidating information in a single ERP system have been hard to capture. A study of finance organisations by Hackett Research finds that they typically drew information from an average 2.7 separate ERP systems, and even those producing the best results still relied on an average of 1.7 ERP data sources.

ERP benefits achieved by organisations Improved financial management - 70% Faster, more accurate transactions - 69% Better managerial decision-making - 63% Improved inventory and asset management - 60% Ease of expansion/growth and increased flexibility - 55% Fewer physical resources and improved logistics - 54% Cycle time reduction - 53% Improved customer service and retention - 47% Headcount reduction - 40% Increased revenue - 36% Source: Accenture

Other studies are more optimistic.

A 2002 survey by Harvard Business School finds 86 per cent of businesses using ERP described their systems as "successful".

Despite some well-publicised hiccups, many businesses have used their ERP systems as a basis for online and B2B transactions.

"The problem is that people don't put enough emphasis on the business case for ERP," says Englaro. "A lot of people don't look at the benefits to their business in broad dollar terms."

Once ERP is up and running, it also requires ongoing investment and maintenance.

"Think of it as home improvement, where, if you do nothing, your environment will start to deteriorate," Gartner analyst Yvonne Genovese remarked in a research note last year.

Despite such concerns, ERP is unlikely to go away.

A study by analyst Alinean finds that 28 per cent of IT investment continues to be in ERP.

Analyst IDC estimates the global ERP market will hit $US117 billion ($193 billion) by 2005.

However, the way those investments are made has changed.

"Companies can rarely afford large-scale investments in ERP systems as in decades past," chief executive of ERP provider Cincom Thomas Nies says.

"Today they want to implement quickly and get a rapid return on investment.

"To meet this challenge, many ERP software companies are changing to component-based solutions. This allows a company to select the components that provide the quickest ROI and later add other components, or the balance of the complete system."

That strategy brings its own risks.

A study of ERP upgrades by AMR Research finds that taking on upgrades incrementally is more expensive than a company-wide hit.

Businesses adopting partial ERP solutions are more likely to rely on external expertise, which can prove costly.

The same AMR study finds that companies using external consultants take nearly twice as long and spend twice as much money as those relying on internal staff.

A particular target for many ERP vendors is mid-sized businesses.

According to Gartner, less than 50 per cent of medium-sized businesses have introduced ERP.

Which ERP vendors will compete for that space remains to be seen.

"There will be continued rationalisation in the market as smaller players struggle with the adoption of new technology, such as interoperability and web services, just as we saw some vendors fall by the wayside with the move to client/server and subsequently web enablement," Hodge says.