How ERP is Similar to an Out of Control Octopus

Executive Summary

• ERP has grown into an out of control octopus that has taken over IT.
• The implications of such high overhead systems go little covered in IT media.

Introduction

Economics gave us the useful term “externality.” When an entity engages in a behaviour that places costs on other entities for which it does not compensate them, this is referred to as a negative externality. The ERP craze has been primarily an exercise in the perpetuation of a negative externality on the part of ERP vendors and ERP implementation companies on ERP buyers. Given the evidence of poor ERP functionality and costs, it is incredible that it has gone on for this long. It is the greatest misallocation of resources in the still relatively young enterprise software industry.

See our references for this article and related articles at this link.

The Results of Research into ERP Systems

My analysis of the research into ERP systems tells a fascinating story about how software is purchased. I have explained the issue of ERP systems to several people—from executives to technical resources, to laypeople. A beneficial analogy to use with people not familiar with ERP is to think of ERP as an octopus. ERP systems began as one thing, and now they are an unruly and expensive octopus, which connects throughout the enterprise but mostly in unproductive ways. The following quotation brings up an interesting point that more companies should consider.

“Over the last two decades, companies have plowed many billions of dollars into enterprise resource planning (ERP) systems and the hardware required to run them. But what, in the long run, will be the legacy of ERP? Will it be viewed as it has been promoted by its marketers: as a milestone in business automation that allowed companies to integrate their previously fragmented information systems and simplify their data flows? Or will it be viewed as a stopgap that largely backfired by tangling companies in even more systems complexity and even higher IT costs?” — Nicolas Carr

The Reality of ERP ROI

ERP software is a category of software with a very low ROI (if one limits the financial returns to the ERP system itself), and a negative ROI when one looks at how ERP negatively impacts a company’s overall software investment. For instance, the adverse effect on the company’s other applications, as well as how ERP isolates companies from customers and suppliers. In the book, Enterprise Software Selection: How to Pinpoint the Perfect Software Solution Using Multiple Information Sources, I describe how most companies that buy enterprise software lack the inherent ability to validate the claims made by software vendors. Also, they are often led down the garden path to a bad decision by consulting companies that place their interests ahead of their clients. ERP systems became so popular because the actual claims about their benefits were never appropriately analyzed.

How The Lucrative Nature of ERP Leads to Censorship on the Topic of ERP Benefits

Because ERP systems have been so lucrative for software vendors and consulting companies, there has been a strong incentive for them to get companies to purchase them. For decades, when a company complained to their consultants about their current system’s shortcomings, the consultants commonly responded that what the company needed was an ERP system (cue the oversimplified explanation of how ERP systems integrate all of the company’s processes). One can imagine how many times this same conversation has played itself out at companies around the globe. The unfortunate fact of the matter is that most ERP systems were purchased without appropriate research; a substantial percentage of them were obtained because they were seen as the “thing” to implement. This faulty logic controls many IT purchase decisions, as the following quotation attests.

“Interviews with the managers confi rmed that if a successful strategic IT (e.g., laptops to salespeople) was implemented by one or two firms, the other competitors soon followed the lead. Thus, although the IT intensity of the industry increased, no net performance effect was observed.” — The Relationship Between Investment in Information Technology and Firm Performance: A Study of the Valve Manufacturing Sector, Information Systems Research

The Misleading Sales Job of ERP

At its heart, ERP was a misleading and oversimplified, although a highly compelling concept. It was never a good investment and now hinders a company’s ability to leverage the Internet and reduces its ability to gain value from its other applications. ERP was based upon several false assumptions that have been explained throughout this book. The central premise of ERP—that you could have a single set of integration applications from a single vendor that would always meet the implementing company’s needs and therefore significantly reduce and almost eliminate the need to integrate to other applications—was delusional when it was first proposed. It is even more delusional now.

How Cloud and (AWS and Google Cloud, etc..) Works Against ERP

The development of information systems in the form of the Internet and SaaS/PaaS/IaaS service providers has worked against ERP. ERP is primarily closed systems, but SaaS/PaaS/IaaS are open systems.

The future of information systems will involve mixing and matching the best solutions from a variety of vendors, with much of the data storage and processing being handled remotely. The IT burden on companies will be significantly reduced, and ERP has no place in this model. The more that companies cling to their ERP investments, the less they will be able to participate in this open approach to accessing application functionality. Forward-thinking companies will consider their ERP investments as what they are: sunk costs. They will migrate to better functionality in other systems and take a piecemeal approach to ERP. The logics that were used to sell ERP systems were never anything more than hypotheses. When I explain why any well-promoted concept should have evidence to support it, often the listener repeats the hypothesis back to me. At that point, I have to say, “Yes that is the hypothesis, but there is no evidence to support it.”

Of course, anyone has the right to propose any hypothesis they like. However, while a hypothesis may turn out to “make sense” or seem likely, it’s only through testing that we can know for sure. If a hypothesis has had a full opportunity to be tested (after 30 years, ERP has undoubtedly had this opportunity) and has proven false, then it is time to dispense with the hypothesis and to move to a new one. That is how all knowledge advances. Two dominant vendors—SAP and Oracle—were installed at the top of the enterprise software hierarchy because of ERP.

This development has been unfortunate for the enterprise software market, as these two actors have abused their power by offering their clients low value and high costs, and by using account control techniques. Many other ERP vendors were never able to capitalize on their ability to sell ERP software and to sell different types of software.

Is There Truly No Alternative to ERP?

Proponents of ERP make it sound as if there are no alternatives to ERP, or that the alternatives are “poorly integrated” (which is another way of saying that there are no alternatives). A misleading argumentative technique frequently used by people who are not interested in evaluating or discussing alternatives is to judge ideas as not representing valid alternatives. When an option is presented, they may say, “That is not a real alternative,” when it is an alternative; it is simply not an alternative, they agree.

Reversing the Evidence Requirement for ERP

Arguments are certainly simplified when you state that all other alternatives are not real alternatives, do not provide evidence to support your claims, and announce that you have chosen the one real option. The following quotation is an example of this type of argument.

“If I’m a major enterprise, especially a manufacturer, what’s the cost of NOT having an ERP system?”

This frames the question in reverse and is an example of the logical fallacy of shifting the burden of proof. It is designed to mostly ask the person on the other side of the argument to prove that ERP is not a good investment. This is called “proving a negative.” The responder is asked to prove that ERP is not a good investment. This is not how proof works in science. We don’t start off by making a contention, providing no evidence, and then asking the other person to prove our statement is incorrect. But since the question was asked…the bulk of evidence shows that the benefits of ERP systems are small. Therefore, naturally, the costs of not having an ERP system are less than the cost of having an ERP system, both in terms of implicit and explicit costs. A company with no ERP system will incur fewer software-related costs and gain better functionality (by choosing the best software for its needs rather than whatever their ERP vendor is offering).

“What are my alternatives to accomplish the same objectives? I submit those alternatives are few and poorly integrated.”

There are a wide variety of alternatives available to accomplish the same objectives. Quite a few financial and accounting applications can be selected and connected to any number of other applications to replicate (and significantly exceed) what ERP does. Secondly, while ERP systems are better integrated to themselves, which is a highly parochial way of looking at integration, ERP offers no integration benefit for connecting to a company’s other systems and may provide higher integration costs than non-ERP environments. Here is a further quotation from the failed Air Force’s ECSS initiative:

“It’s not worth the money to poorly implement anything. It’s worth the money to take the time, hire people with the appropriate knowledge, and do the necessary planning and testing to minimize the chances of an ERP installation failing.”

Unending Excuses by ERP Consultants and Vendors on ERP Failures

In this statement, the individuals take the standard approach to analyzing ERP failures: the failure of the ERP project was related 100 percent to how it was implemented and not related to issues with the ERP system itself. How do faulty implementation methodologies explain the low satisfaction rate with ERP systems as a whole? How did a system, which has never shown much financial and operational benefit to companies, gain its halo? Were all ERP systems incorrectly implemented? These types of comments are extremely common among ERP proponents, but they offer no evidence and no new information. They provide nothing more than an excuse, which—thirty years into ERP history—is becoming somewhat stale. The evidence, which few have any interest in reviewing, is that ERP systems produce a meager return on investment, and in other ways are significant distractions for companies, drawing energy away from other initiatives. All of the investment of time and money in ERP must be compared against what it could provide if invested in other areas.

Options for ERP

ERP proponents like to present the idea that there are not options for ERP. They go a step further. They state that there aren’t real alternatives to whatever ERP they happen to have resources they can bill for. Then after they buy ERP, they tell their customers they don’t have options outside of buying applications from the same vendor that made the ERP system. Consulting companies are very good at leading companies down a restricted number of options, all of which end up benefiting the consulting company itself.

Here is the truth, there are a large number of options to ERP systems, and furthermore to how any ERP system is used. Here are just a few alternatives — without getting into any specific vendor offerings.

1. A commercial ERP system can be purchased, but large areas of it unused, and combined with better external functionality.
2. A commercial ERP system can be purchased, but large areas of it unused and connected to custom functionality/custom applications rather than porting the code to the ERP system (that is not recoding everything in say SAP’s ABAP and porting to the SAP system)
3. An open-source ERP can be used, and with the large extra pool of money, any number web-based (hosted on AWS or Google Cloud for example) applications can be developed and connected to the ERP system.
4. ERP can be dispensed with entirely, and a financial solution can be connected to both specialized applications and custom coded applications.
5. ERP can be dispensed with entirely, and a custom-coded solution can be created which covers financials and other and combined with specialized applications.

Conclusion

These are just five options. Any number of permutations are possible from these options. The evidence of decades of ERP projects heading back to the 1980s is clear; no company of any size or complexity will use an ERP system by itself without support from other applications.