The risks of ERP systems and how they can hurt your business
Summary: In this article, we’ll see how reliance on ERP systems as a core management solution can cost your company big both in the short term and the long term and can do irreversible damage to business. Case studies of companies deemed “too big to fail” prove that ERP failures can happen to any business and that extreme caution should be taken before deciding to use ERP.
The basics: what is ERP and how does it work?
The acronym ERP stands for enterprise resource planning which, in short, is the process of integrated management across a business’ primary processes. It is often achieved through software systems and as such the acronym usually refers to the technologies that facilitate it. ERP software, which usually consists of several integrated systems, does the task of collecting and interpreting data from throughout a company’s departments in order to provide an accurate view of core processes and ensure the whole operation is running smoothly. In essence, ERP is a means by which different departments communicate with each other in order to monitor and conduct business.
How could ERP possibly be a bad thing?
Great question. While the idea of inter department communication to achieve core goals is certainly appealing to businesses, the actual execution isn’t quite as simple or helpful as the acronym makes it out to be. Even the biggest companies are not immune to the blunders associated with ERP software. Here, we’ve listed five of the biggest pitfalls of ERP systems and the real world examples that demonstrate the devastating consequences of ERP failure.
1. Substantial upfront costs
The first problem companies run into when trying to implement ERP systems is the upfront cost of the software. While cloud-based systems tend to be sold as a subscription, on-premise software requires upfront payment for the perpetual license. These costs can be prohibitive to growing companies and can also mean that the investment fails in the event that the software proves not to be financially beneficial, leaving a company with both a useless software product and the need to replace it.
2. Selected software not suitable for the industry
Different industries have different requirements. As such, ERP systems need to be carefully selected to ensure that they will work well to fulfill the specific needs of a company within the industry. As mentioned above, ERP can be expensive to implement and should a company fail to correctly select a software system, the cost of correcting the mistake can be huge both in terms of cost and in time spent implementing a bad system. This was the case with the U.S. Navy when they spent a staggering $1 billion on four separate ERP systems around 1998. What they found was that the systems were redundant and as a result had to be scrapped and replaced entirely. While the U.S. military has enough funding for a do-over, many businesses do not have that same luxury and as a result the stakes in choosing ERP are much higher.
3. Insufficient flexibility
Because each company has unique needs, flexibility is among one of the most important traits in a good ERP system. Unfortunately, many software companies take shortcuts and end up creating an oversimplified system that is “perfect” for the client right out of the box. This error was best exemplified by Waste Management’s costly $100 million SAP mistake which had to be settled out of court after ERP failed to deliver on a system that supposedly didn’t need the flexibility of customization. WM lost not only the money spent on the software, but also the two years that it had spent implementing it as well as the hundreds of millions of dollars that ERP provider had promised WM would save by using their ERP. Overall, reliance on an ERP system can end up trapping a company in a system that is too rigid to meet demands.
4. Overwhelming features
On the opposite end of the spectrum, softwares with too many features can also prove counterproductive. If an ERP system has more features than needed, companies will spend an unnecessary amount of time training employees how to use the software and will continue to lose time and money when employees find the system too difficult to use. This was the case when Avon attempted to roll out an ERP system intended to be used globally. However, the system was too complicated for sellers to use and Avon representatives left the company en masse. As a result, the software never made it out of its test region of Canada and instead, Avon took approximately a $125 million loss in addition to a substantial hit to their stock value. Moral of the story: sometimes less is more.
5. Lack of integration
As with most centralized systems, ERP is meant to integrate with other softwares to create a customizable and fully-functional system that serves all of a businesses’ departments. However, this is no guarantee that the softwares will actually integrate to the centralized ERP. This was the case with tech giane Hewlett-Packard when they attempted to implement a $160 million ERP designed to integrate and automate their existing processes. Instead, what they got was a faulty system that didn’t integrate with their existing softwares and lost valuable data. Further, HP missed out on approximately $400 million of revenue shortfall because the company was too caught up trying to correct their ERP disaster to turn an uptick in demand into realized profits. As the Hewlett-Packard fiasco demonstrates, automation and integration are crucial parts of managing a supply chain successfully and when ERP fails to deliver on its promises, it’s businesses who pay.
ERP failures at a glance
ERP: High risk, high cost
While the rewards that ERP software promises are tempting, the reality is that no system is immune to blunders, and unfortunately ERP blunders are common and can be quite costly. When giants such as Hewlett-Packard, Avon, Waste Management, and even the U.S. military fall victim to the pitfalls of ERP, it’s time to reconsider its role in your business. Before purchasing or subscribing to an ERP system, one would do well to consider alternatives that better suit the particular needs of their company and come with lower risk of failure (especially ones that come at lower cost).