Enterprise resource management (ERM) implementations are expensive and slow to turn a cost savings, according to a study by the Meta Group of Stamford, Conn.
Meta refers to enterprise resource planning (ERP) as ERM because the industry research firm has found about 90 per cent of ERP systems are involved in management operations such as finance and payroll.
“It’s clear that ERM cost savings are elusive,” said Peter Burris, senior vice-president and co-research director of Meta.
“Derived benefits such as a more flexible application foundation should drive returns (on investment) and should drive implementation. If folks are focusing on cost savings and that’s what’s driving the implementation, a lot of our clients are discovering that not only do they end up being disappointed in the returns, but also end up with a much less flexible, much less modern application platform than they require or expect,” Burris said.
Meta’s study of 63 companies found ERM implementations constitute a significant portion of a company’s IT spending. Calculations of an average three-year total cost of ownership for ERM as a percentage of corporate revenue ranged from 1.5 per cent to just under 3.5 per cent, according to the study.
“This is clearly a sizeable IT commitment under any circumstances. Most businesses do not spend in a given year two (per cent) or three per cent of their corporate revenues on IT. Obviously, this is amortized over a three-year period, but (ERM) is clearly one of the biggest things anyone is going to do in IT,” Burris said.
That expense is often greater than anticipated, said Barry Wilderman, vice-president of the application delivery strategies unit of Meta.
“[Companies] were taken by surprise with how much more it cost than they thought, sometimes up to 50 per cent more. A lot of it is scope changes and a variety of factors and poor management along the way. But quite often the costs of implementing ERM are dramatically higher than what people thought at the beginning,” Wilderman said.
The study also showed when the costs are set against the quantifiable benefits of ERM in what Meta calls the net present value (NPV), first appearances would show cost far outweighing benefit.
“Net present value deals with all of the costs: the total cost of ownership, hardware, software, professional services, internal staff and post-implementation costs. Then we balance that against cost containment or revenue containment, then it turns out the net present values are negative,” Wilderman said.
“On a simplistic basis, one could assume that these projects destroy value. We would say that’s too simplistic, that you need to account for the intangible benefits and the overall value of creating an infrastructure in order to move forward with areas like customer relationship management, electronic commerce and supply chain,” Wilderman explained.
“It’s almost impossible to quantify the benefits of closing the books earlier or putting in a payroll system, yet we know that this type of benefit is going to have enormous return as we look at some of the new software applications in workforce management.”
Burris agreed, saying not to look at ERM as a monolithic program to solve all of a company’s problems, but to view it as an application platform upon which the company can build additional functionality that may not be part of the ERM application itself. He also noted that current ERM implementations are often part of a year-2000-readiness strategy.
“ERM implementation is only the beginning…you have to do it as a tool for integrating business, for implementing derivative application function,” Burris said.
Burris said ERM applications have a fixed cost that is not getting any cheaper with time, and getting into ERM early is important.
“Folks who are getting into this late in the game will not accrue the same benefits as people who got in early, from a competitive standpoint. They have to adjust their priorities of what they want to get out of an ERM application,” Burris said.
The study also found a fairly consistent implementation time of two to three years for ERM applications. Burris said much of the unexpected cost of implementation arises from extended professional services during this time. He said users should not expect any show of returns until after about two and a half years of operation.