How To Understand Alternatives to Standard ERP Advice

Executive Summary

• ERP vendors and consultants propose that there are no alternatives to ERP.
• Learn about very realistic ERP alternatives.

Introduction

ERP promoters make a severe misrepresentation in their discussions of ERP by suggesting that there is no alternative to ERP. To think that there is no alternative, one would have to be biased (either financially—they work in or somehow make money from ERP—or nonfinancial—they are used to ERP environments), or they don’t understand the enterprise software market very well. There are plenty of alternatives to ERP. Some of the alternatives call themselves “ERP” because this has become the desired terminology, even though they would not meet the technical definition of ERP.

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

Is Criticism of ERP Simply Negative and Counterproductive?

As part of a broader and quite exciting article about enterprise software, Cynthia Rettig was critical of ERP and SOA software and implementations. In this article, she begins with the following explanation of how IT grew as a percentage of investment since 1970.

“Back-office systems—including both software applications and the data they process—are a variegated patchwork of systems, containing fifty or more databases and hundreds of separate software programs installed over decades and interconnected by idiosyncratic, Byzantine and poorly documented customized processes. To manage this growing complexity, IT departments have grown substantially: As a percentage of total investment, IT rose from 2.6 percent to 3.5 percent between 1970 and 1980. By 1990 IT consumed 9 percent, and by 1999 a whopping 22 percent of total investment went to IT. Growth in IT spending has fallen off, but it is nonetheless surprising to hear that today’s IT departments spend 70 percent to 80 percent of their budgets just trying to keep existing systems running. “But these massive programs, with millions of lines of code, thousands of installation options and countless interrelated pieces, introduced new levels of complexity, often without eliminating the older systems (known as ‘legacy’ systems) they were designed to replace. In addition, concurrent technological and business changes made closed ERP systems organized around products less than a perfect solution: Just as companies were undertaking multiyear ERP implementations, the Internet was evolving into a major new force, changing the way companies transacted business with their customers, suppliers and partners. At the same time, businesses were realizing that organizing their information around customers and services—and using newly available customer relationship management systems—was critical to their success.

“The concept of a single monolithic system failed for many companies. Different divisions or facilities often made independent purchases, and other systems were inherited through mergers and acquisitions. Thus, many companies ended up having several instances of the same ERP systems or a variety of different ERP systems altogether, further complicating their IT landscape. In the end, ERP systems became just another subset of the legacy systems they were supposed to replace.”

So much money now flows from the ERP industry that criticism is not well tolerated. A lot of water has passed under the bridge here; many entities (whose pockets would be lined by the sale) recommended ERP systems to clients, even though there was no evidence that the ERP systems would improve the condition of these companies. Several of those who criticized Cynthia Rettig had the following to say:

“There’s really nothing new in [Ms. Rettig’s] analysis. But Rettig goes a step further and says there’s no hope for the future. In fact, while she doesn’t offer any remedies for her gloomy prognosis, she does quash one—service-oriented architecture (SOA).”

The beginning of this quotation provides an example of the logical fallacy argument from repetition. Those who dislike research or someone else’s conclusions, but do not have anything of substance to add offer this standard criticism. Rettig disagrees with the proposal that SOA will solve the problems of ERP (a prognosis that ended up being true). Why is that considered “gloomy”?

SOA to the Rescue?

If there is little evidence that SOA will remedy the issues with ERP, then why invest resources into it? Secondly, if there is “nothing new” in Rettig’s analysis, perhaps the analysis is synthesized differently. Furthermore, I read through countless articles on ERP that repeated unfounded statements regarding the benefits of ERP—and Rettig’s analysis, and I can’t recall anyone criticizing these generic articles that could have come off of a copy machine from previous articles. Yet, one of the first articles to be critical of ERP as a concept is not new? What is this author’s definition of new? The explanation that ERP systems have performed poorly by any measure and have a bleak future is not generally accepted, so her analysis is new in the sense that it explains something that is usually not known. Rettig’s article is novel in many ways; it is not original research but does an excellent job referencing multiple sources of original research.

Furthermore, there is nothing new in the multitude of articles about the opportunity of ERP or about getting more value from ERP or how SOA was going to make all the ERP investments worthwhile. But no one seems to criticize those articles—because they are promotional. In terms of the criticism regarding “not offering any remedies,” firstly, not every form of analysis needs to provide a solution. The very idea that research or observations need to provide remedies (why would anyone think that is true?) is itself a pretext for rejecting research. This does not give a positive outlook. The remedy should be self-evident: reduce one’s investment in ERP software, and do not place one’s bet on SOA as a solution.

As it turns out, this remedy would have been the correct choice. This type of criticism deliberately evades the obvious behavioral adjustment that is implicit with Cynthia Rettig’s analysis. As long as the standard is what is favorable rather than what is true, the evidence required for a promotional statement will always be lower than the evidence necessary for a critical statement.

Reducing ERP Dependency

Companies will benefit if they reduce their dependency on ERP—particularly “Big ERP”—in even small ways. Any redirection of resources away from ERP (for example, replacing ERP functionality with external systems) should benefit the company over the long term. However, companies that buy new non-ERP software that helps them manage their businesses better rather than their ERP software must still pay the support cost of the system, and they will pay the same amount even if they turn off portions of their ERP system. This is a significant reason as to why so many companies have continued to implement uncompetitive functionality in their ERP systems when so many better solutions are available in the marketplace: they are attempting to utilize their pre-existing investment in their ERP system.

However, our research demonstrates that this is a faulty logic: companies can only expect to save 12.5 percent of the application’s TCO by leveraging the sunk cost of a previously implemented ERP system. Other applications that are specifically designed to meet business requirements (aka best-of-breed) have better ratings in a variety of compensating criteria. Companies must consider which costs are higher: the cost to purchase better software plus pay the support cost of their ERP system, or the continuing indirect costs associated with their ERP system, including:

1. A longer implementation
2. More customization expense
3. A higher-risk implementation
4. Lower functionality/worse fit of functionality
5. Lower usability
6. Lower maintainability

The Research is Conclusive for the Negative Hypothesis

Once all the negatives are recognized, ERP cannot even be shown to improve the financial performance of companies. The only real demonstrated benefit of ERP has been to the ERP vendors and implementation companies, not to the actual buyers of ERP software. A purchase of an ERP system is an extremely effective way to lock in a customer to a vendor and to allow the vendor to sell other applications to current customers. Have ERP systems been beneficial for SAP, Oracle, IBM, Deloitte, and all manner of consulting companies? There the evidence is clear: ERP has dramatically benefited those that sell and implement ERP software. Therefore, if you want to benefit from ERP, sell it, or implement it, but don’t buy it.

ERP Adjustment

The value of Big ERP is not there. Some of the highest rates in the enterprise software space are being charged for what amounts to basic functionality. The resources can be transitioned from Big ERP to applications that offer a better ROI. ERP disintegration is a term that I have coined to describe what should be the next phase of ERP: that is, to begin to give up the long-dead idea that ERP can meet all of a company’s needs (the original proposition for ERP), and that “getting the most” out of ERP is the best strategy for a company to follow. Getting the most from ERP translates very to merely give the least to your business. Rather than trying to get ERP to do things that it is not good at doing, more diverse applications should be brought into the fold, along with more analytical skills. The ERP period was a period when many people turned their brains off and put their trust in ERP vendors and in official “authorities” (all of whom had financial conflicts of interest) to answer all of their questions and to meet all of their requirements. With ERP disintegration, true system integration skills will be brought back within implementing companies, and custom solutions will be developed that fit the company’s needs. On average, companies still have 60 percent of their ERP systems modules implemented. It’s been a long road, and the payoff has been poor.

It is now all too obvious that the promise of ERP will not be realized, and it will not get better in the future. Too often, applications were purchased from the ERP vendors because customers preferred to go with familiar vendors over vendors whose software best met their business requirements. IT departments have been covering up the deficiencies in software purchased from the major ERP vendors for many years now, and it has led to poor outcomes. Companies looking for the easiest route to enhancing the value of their IT spend should break the cycle of dependency on their ERP vendors and create a competitive environment that rewards software innovation and the best software available. This means running tighter and more analytical software selections, and comparing what is currently implemented in the ERP system against applications that could improve the area.

Free from Overinvestment in ERP

Freed from overinvestment in ERP, the company can choose the best software for its needs in each area and then integrate this software directly to the finance system. However, for those who already have ERP, the question becomes: What to do with the ERP system, and how to best leverage it?

Mostly, the effect of the ERP system must be minimized. Different areas of the ERP system will gradually cede ground to other applications, and the more quickly this happens, the more quickly companies can improve their IT by leveraging the better functionality in non-ERP applications. As a result, ERP vendors will have less influence over your company, and your company may not need to upgrade its ERP system as frequently. Remember that there is no reason to look to other software from the ERP vendors, or to give their preferential software treatment.

One approach to detaching from your ERP system is to deactivate complete modules or portions of modules. ERP systems are modular, and in fact, most companies have not implemented all of the modules in their ERP system, but instead continue to use other applications and connect them to the ERP system—although they pay a high price in integration costs and functionality incompatibility to do so. A company can run one module or several modules, and can slowly decommission portions of each module and attach best-of-breed applications. A company that is running a sales and distribution module, along with a production planning module and finance/accounting module, could deactivate the production planning module and instead use a best-of-breed production planning and execution system from the vendor of their choice. They would then integrate this production planning module back to the ERP sales module and the finance/accounting module, instead of integrating the external production planning and execution system to the production planning module, which would then interact with the sales module and the finance/accounting module.

There are plenty of alternatives to an ERP centric approach, and many companies use them. I have included a few alternatives in this book, but this book is directed toward a review of the research on ERP.

ERP Alternatives Per Company Size

Larger companies tend to be the bread and butter of large ERP vendors such as SAP and Oracle. Mid-sized companies do not use anywhere near the amount of functionality offered by these software vendors. SAP and Oracle started off building their software around the needs of big companies. They adjusted their software to appeal to smaller companies, but their solutions are overkill for anything but the larger companies. Therefore, when people address the topic of Big ERP, it is from the perspective that ERP has proven something—at least at big companies. When they do this, they mostly accept the assumptions they have heard from the marketing departments of ERP vendors and their lieutenants, the large consulting companies. As I have shown in this book, research has proven that the fanciful projections regarding ERP were marketing hyperbole. To accept the position that “ERP must be helpful” is to accept something that has never been proven. It is argumentum ad numerum—a fallacious argument—that concludes the proposal is true because many people (and companies) believe it to be true.

Options for ERP

ERP proponents like to present the idea that there are not options to ERP. In fact, 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 commerical 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.

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.

Cap Gemini and their ERP software Business

Cap Gemini has a very large and lucrative ERP software business recommending and implementing primarily SAP and Oracle tier 1 ERP software. When clients approach Cap Gemini, the answer is always the same, regardless of the client’s requirements. This is curious because this ERP software, in particular, scores poorly across multiple criteria ranging from implementation duration to the satisfaction level of customers. In fact, the only criteria where they seem to excel is providing Cap Gemini with strong financial returns. Unknown to most corporate buyers, the ROI of tier 1 ERP software have been researched in the academic literature – and the results are surprising – essentially no ROI can be found, which considering how much most companies spend on their tier 1 ERP software implementation, combined with the dated and mediocre functionality these applications primarily contain. This story and the explanation of the review of the research into ERP software benefits are explained in the book The Real Story Behind ERP: Separating Fact from Fiction. However, you won’t hear any of this from Cap Gemini. Cap Gemini is not about reading the academic literature or performing research, they have a lucrative business in implementing overpriced and poorly performing ERP software, and the reality of what, after decades of implementations, is becoming increasingly clear will not intrude upon Cap Gemini’s recommendations.

Getting the Right Information

Clients of Cap Gemini should not expect objective advice from an entity that makes a significant portion of its income from ERP software implementations, and implementations of specific applications. For Cap Gemini, the question of recommending SAP or Oracle ERP is an easy one – its excellent for their bottom line.

However, it is not excellent for their client’s bottom line – which is why it is important that companies interested both in buying new ERP software, as well as determining the benefits of expanding the use of their present ERP software need a rigorous and unbiased source of information on these topics, the truth of which can never be learned from some company with a pure sales culture like Cap Gemini.

Conclusion

Executive decision-makers undermine their software selection process when they attempt to validate the statements about and capabilities of applications that neither they nor other people in their company have experience with. The executive decision-maker is in a position of weakness, which makes it difficult for them to make informed decisions. First-hand experience regarding all enterprise software is available and can be found on LinkedIn or Dice. Independent consultants may be hired full-time and work on-site, or be hired remotely, depending upon the circumstances and the consultant’s availability. An independent consultant is far more reliable than a consulting company for advising on a software selection. Unlike a major consulting firm, an independent consultant is not attempting to staff consultants on the project.

However, in order to minimize bias, it should be explained to the independent consultant that they will not be part of the implementation in any way. This removes any potential for financial bias and makes the consultant indifferent as to which software the company decides to implement.