How to Understand The Fake Integration Benefits for ERP

Executive Summary

• ERP systems were sold based on reduced integration costs.
• Learn how the ERP systems increased most integration costs.

Introduction

Enhanced integration was one of the major selling points of ERP. The hours of PowerPoint presentations that have been created since the first ERP systems were sold describe the great cost savings and integrative benefits that implementing companies would receive from a “solution” where all the main applications used the same database. One of the assumptions about purchasing an ERP system was that the buying company would implement all of the modules and decommission their current software. I discussed this briefly in a previous section. This oversimplified assumption was self-serving for the concept’s promoters but not considerate of the buyer’s needs. The fact is, some of the company’s pre-existing applications could not be replaced by ERP, and for a variety of excellent reasons.

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Here are two of the common scenarios in which companies that implemented ERP found themselves:

Scenario 1: When Companies Replaced All Pre-Existing Systems with ERP

In rare cases, companies eventually replaced every one of their existing systems with ERP, representing a perfect match with what the ERP salespeople proposed.

1. Some companies that followed this approach paid far more than they had anticipated customizing the ERP application to replicate part of their current solutions.
2. Some companies that followed this approach lost functionality and wished they had not gone 100 percent ERP, but could not go back once they had completed the switch.
3. In some cases, they removed all existing systems and replaced them with ERP, and were happy with both the cost and the functionality that resulted from doing this.

Scenario 2: When Companies Replaced Some of the Pre-Existing Systems with ERP

In most cases, companies did not implement all of the modules that they had purchased.

• General estimates are that an average of 60 percent of the modules was implemented, and 40 percent were unimplemented.
• Other times, companies implemented all the modules but were unable to decommission pre-existing applications because those applications did something of value for the company, and it would have required too much work to customize their new ERP system.

Advantages of ERP Integration?

Contrary to most assumptions, ERP systems provide no advantages in terms of integration to other systems, and in fact, present several disadvantages:

1. No Integration Advantage: ERP systems were not designed to integrate well with any other system, except for electronic data interchange (EDI). ERP vendors proposed that their systems integrated better with the other applications that they offered for sale. However, this contention is also dubious. Many applications sold by ERP vendors (Oracle is a good example) resulted from acquisitions. These applications have different heritages than the vendor’s ERP system. Oracle created adapters for these disparate applications, but their value is questionable.
2. Low Quality and Uncompetitive Middleware: Even when the non-ERP vendor applications were developed internally (such as with SAP), the applications did not integrate very well. I have many years of experience integrating external planning systems to SAP, and contrary to what ERP vendors say, not as many of these applications integrate into the ERP system as what is led to believe. Part of the reason for this is that ERP vendors are not necessarily good at creating middleware (the software that connects other software). Some (such as SAP) are not at all skilled in creating integration applications of any type; they severely lag behind the best vendors in the middleware software category. Therefore, the customer ends up purchasing middleware by default from a company that is uncompetitive in that software category. I discuss this in the following articles that I wrote to inform companies that they were significantly underestimating the short-term and long-term effort involved to maintain the SAP ERP to SAP APO integration application called the “core interface” (CIF). The CIF is an SAP-to-SAP interface, but while it can be brought up quickly, it is so maintenance-intensive that over the long term, I debate whether it is better to develop an adapter from scratch in Why I No Longer Recommend Using the CIF.

ERP companies typically entirely exaggerate how much integration their systems provide. The following is an excellent example of this.

“As companies buy Oracle ERP Cloud, Oracle is seeing more companies attach other Oracle services, such as human capital management. Companies don’t have to buy Oracle HCM Cloud and Oracle Sales Cloud, since Oracle ERP Cloud integrates with cloud and on-premises applications from other providers. But companies see advantages in buying cloud applications from the same provider because those apps are designed to work together, eliminating the integration work that’s often required to weave together cloud services from different providers.” – Oracle

This is a complete lie on the part of Oracle, but it is the type of lie frequently told to customers.

The Unfortunate History of ERP “Integration”

Here is a much more effective solution than I have described above: ERP vendors should never have been allowed to procure other vendors. They should not have created external applications, and instead should have published an integration standard and let the middleware vendors (those that were skilled at creating middleware) create the adapters. ERP companies had no interest in this solution. Instead, they intended to use their position at their customers to sell in more software. Often this software was poorly integrated and uncompetitive with best-of-breed applications (outside of just the ERP system). In this way, the ERP companies put their interests ahead of their customers’ interests, as explained in the quotation below.

“Of course, as soon as companies began buying these products, it became clear that enterprise software was another chunk—a much larger and better integrated chunk to be sure, but still a chunk—of software in a complex architecture of IT systems that desperately needed to talk to one another and exchange information. The vendors created clunky, proprietary methods of connecting their systems with others that have improved over the years, but that misses the point. The architecture of these systems, in a broad sense, was just like the ones that they were intended to save you from monolithic, highly integrated and difficult to change.“The high degree of integration envisioned in the R&D lab was tenuous at best inside most customers.” — CIO

The Increased Need for Integration

ERP systems integrated some areas of functionality used by the company, but certainly not all things. And again, because most companies have so many applications, there is still a lot of integration work that needs to be done. A 2001 study found that ERP increased the need for integration.

“ERP technology does not offer an integrated solution but amplifies the need for integration.” — ERP and Application Integration

ERP as a single architecture.

“Although ERP is touted as a single architecture, ERP applications usually contain different generations and sources of technology. Third-party applications are acquired and amalgamated into the platform, sometimes by name only. In total, this makes the environment complex for the customer and diffi cult to change over time. ERP suppliers have become system integrators. [emphasis added] The sheer size and number of applications makes moving all the applications forward a diffi cult task. Application functionality often lags.” — ERP Alternatives

Short Term or Long Term Benefit?

In terms of ERP’s impact on application integration, companies did not see any immediate benefit. But was there a longer-term benefit? Unfortunately, after extensive searching, I was unable to find research data that compared what portion of the IT budget was consumed by application integration before and after ERP implementations. The shortage of research on this topic is particularly disturbing when one considers how confidently those who sold ERP systems predicted that integration costs would decline. However, findings in the study ERP and Application Integration are not promising.

“ERP technology does not offer an integrated solution but it amplifies the need for integration. Enterprises faced integration problems when they attempted to incorporate other applications with an ERP system. Only EDI applications were integrated successfully (81 percent) with ERP infrastructure. This high integration rate derives from the fact that EDI technology follows similar concepts to AI (application integration).” — ERP and Application Integration

This shocking quotation states that ERP “amplifies the need for integration.”

But wait, how can that be the case?

It is because ERP applications are self-integrated, the problems that ERP systems have with interfacing with other systems is higher than the benefits derived from ERP’s self-integration. That is yet another amazing statement.

The quotation goes on to say as much.

“All observations discussed above indicate that ERP systems cannot be seen as a reliable solution to integration problems as ERP modules co-exist with other applications. Additionally, there is a need to integrate the ERP solutions with other applications. However, this incorporation causes serious problems, especially with companies.” — ERP and Application Integration

ERP may have been a step forward for the integration of the ERP modules, but they were a major step backward for all other forms of integration. However, the only important measurement is total integration—not how much the integration effort was reduced for one application. It is important to consider that no study demonstrates that ERP systems reduce integration costs, and at least one study demonstrates that ERP increases integration costs. This exact statement may be used the next time you hear a person promote the integration benefits of ERP systems: ask him/her to produce the study that demonstrates this “well-known fact.”

Project Experiences with SAP ERP

My personal experience with SAP ERP is that it is a complicated system to write interfaces for, but this level of difficulty varies for each ERP vendor. SAP does not even export data in rows and columns but instead uses something called an intermediate document or IDOC. This is a hierarchical document, which is difficult to read, and time-consuming to write transformation scripts for which will convert the document into rows and columns. Unfortunately, IDOCs also change between versions of SAP, and a single movement of a character by one place can render the integration unusable and require a script rewrite. However, when these IDOCs are changed, it is often not communicated by SAP—so you find out when something breaks. Generally, others who work in SAP ERP integration tend to agree that SAP is difficult to integrate, although they will not go on record as saying so; if one wants to continue to work in an area, it’s better, of course, to keep silent. I did not perform an analysis of all ERP systems to determine integration difficulty. I found it far easier to integrate into some of the lighter open-source ERP systems. Still, it is no coincidence that these applications were developed more recently than Tier 1 ERP applications.

Although there are too few studies upon which to base any definitive conclusion, it is equally possible that ERP systems increased the integration costs that were incurred by companies. But either way (whether it is a wash, or whether ERP increases integration costs), the story does not have a positive outcome. That they most likely did not reduce their integration costs (and quite possibly increased their integration costs) would be quite surprising to companies that gave up so much for the promise of an integrated system.

What is Promised by SAP in Integration

What buyers who follow this strategy often find is that the integration, which is promised during the sales process, is often far less than advertised. This is true of SAP for whom it is a longstanding policy to overstate the degree of integration between its applications. The following article on the CIF is a description of the many integration problems between SAP ERP ECC/R/3 and SAP APO. However, the same problem generalizes to other SAP products.

However, it is certainly not a policy, which is limited to SAP. Instead, it is one of the significant sales misrepresentations/strategies of large software vendors. For software vendors that have grown through acquisition such as Oracle, JDA, and Infor, their “suites” provide minimal integration benefit over purchasing a variety of applications from unrelated software vendors. Each application acquired by these serial acquirers has its heritage, unrelated to the heritage of the acquiring vendor. Therefore the integration “benefits” that are so aggressively promised during the sale process are mostly an illusion. All that happens is that the buyer creates a faster implementation time projection, which must then be changed some duration in the implementation. However, while the integration benefits are illusory, the buyer loses out on the more applicable functionality that could be obtained by making a genuinely competitive process out of the software selection.

ERP and the Internet

There are few people (with the natural exception of ERP vendors themselves) who will debate the notion that ERP systems are walled off from the Internet. Since ERP developed, the Internet has become a significant force, and web front-ends have greatly improved application interfaces and the ability to connect various applications. This point is reinforced by a 2007 article in the MIT Sloan Management Review.

“Just as companies were undertaking multiyear ERP implementations, the Internet was evolving into a major force, changing the way companies transacted business with their customers, suppliers and partners.”

Here’s a concrete example of how far integration has come since ERP first became popular. I recently installed an application called Yesware off of the Internet. Yesware automatically integrates with my Gmail to track emails, and also integrates with a variety of CRM applications; this is integration across Internet servers by different companies that have decided to cooperate. These are two applications that are communicating over the Internet to one another—each performing a different function—and each aware of what the other is doing. All of these adapters are created for me, and all of them work transparently.

My integration effort was limited to clicking a button to install Yesware and rebooting my email client. This is the future of application integration across the Internet. Of course, none of this capability existed when the concept of ERP was developed. In stark contrast, most ERP software—and particularly on-premises ERP software—still sits with dated application interfaces and manually intensive ways of interacting with other systems. Getting most ERP systems to do what I did with Yesware, Gmail, and a CRM application would be a significant initiative at a company and cost quite a lot of an ERP system’s functionality following quotation:

“As the web increasingly becomes the medium for information exchange, your on-premises ERP is increasingly a disconnected silo from the rest of the world.” — Craig Sullivan, NetSuite

Rootstock, which covers much of the functionality of an ERP system, does work similarly, as it is part of the Salesforce.com platform. But Rootstock is more of an exception. Most ERP systems do not work this way.

Errors in the Platitudes Regarding ERP Integration

Executive decision-makers, and also researchers, have some general misunderstandings about the state of integration. The following is an example.

“Information integration is a key benefit of ES. This integration can replace functionally oriented and often poorly connected legacy software, resulting in savings in infrastructure support costs. Furthermore, improvements in operational integration enabled by ES can affect the entire organization and therefore can positively impact fi rm performance. As discussed below, ERP systems also provide benefi ts in the area of transaction automation, SCM systems provide more sophisticated planning capabilities, and CRM systems facilitate customer relationship management.” — The Impact of Enterprise Systems on Corporate Performance

This and other similar quotes confuse functionality with the system that brings that functionality, in much the same manner as those who confuse an economic system with a particular form of production.

Analyzing Quotations

Let’s parse this quotation to analyze it properly because there are several assumptions contained within:

1. New software can replace poorly connected legacy software: It’s unclear why the legacy systems were so poorly connected in the first place, as was suggested by ERP salesmen during the early stages of ERP’s popularity. All enterprise software faces these integration challenges. Notice the researchers in this quote are using “ES” not “ERP,” as they propose that all enterprise software has advantages in integration over legacy systems. However, no evidence is given as to why this is true. Systems must be made to work with other systems. An ERP system is more integrated to itself, but as I have explained earlier, that is not the end of the story. Furthermore, enterprise software infrastructure costs have not declined due to ERP being implemented. Some vendors do allow their applications to be integrated easily into other systems that are not their own. However, SAP and Oracle do not promote ease of integration to systems from different vendors. Instead, they sell closed systems to companies, getting them to buy into the SAP or Oracle ecology. Even if one vendor provides multiple systems, the systems will not share the same database, and many of the adapters that are offered are of questionable value.
2. ERP systems also provide benefits in the area of transaction automation: This may have been a differentiator when ERP was first introduced, but now less expensive applications like RootStock or ERPNext can automate transactions as well as any Tier 1 or 2 ERP system. There is no reason to give up so much leverage and pay such a high price for automation that can be found in applications from software vendors that are far easier to deal with.

“ERP systems replace complex and sometimes manual interfaces between different systems with standardized, cross-functional transaction automation.” — The Impact of Enterprise Systems on Corporate Performance

This paper was written in 2005, but manual interfaces between systems were replaced a long time ago. There is standardized cross-functional transaction automation, but that is only within the ERP application and not between the ERP application and the many different systems with which it must interact.

“Another benefi t of ERP systems is that all enterprise data is collected once during the initial transaction, stored centrally, and updated in real time. This ensures that all levels of planning are based on the same data and that the resulting plans realistically reflect the prevailing operating conditions of the fi rm. For example, a single, centrally developed forecast ensures that operational processes remain synchronized and allows the firm to provide consistent order information to customers (Bancroft et al. [1998]).” — The Impact of Enterprise Systems on Corporate Performance

Unless the company uses an ERP system only (and no other systems), the example above is inaccurate. On projects, I have spent quite a lot of time working on how the supply chain planning system will pull data from the ERP system and how the planning recommendations will be sent back. Data pulls from the ERP system for reporting or business intelligence must also be timed, and this is not a real-time feed. These are just two examples, but all systems that are connected to ERP face the same questions and limitations. The only thing that is true about the above quotation is that the ERP system has updated transactions (stock transfers, purchase orders, financial transactions), but this functionality is generic.

Customization of ERP

Customization rarely works smoothly and becomes something that the company must maintain in the long term. Customization of ERP systems is one of the most expensive customizations a company will ever pay for, as it means hiring programmers at the top of the market and developing from within the ERP software vendor’s environment. This is explained in the following quotation.

“’We could have written ABAP code, but the cost of ABAP programming and maintenance is enormous,’ says Bill Waters, MMS’s director of information services. With Oberon, MMS saved the initial programming effort and will save even more whenever it upgrades its packaged apps. Oberon provides prebuilt connectors between the two systems and is committed to maintaining and enhancing these links so MMS doesn’t have to.”

The Efficiency of Customizing ERP Applications

ERP applications are not known as efficient applications to customize.

“The problem is the lack of a full set of application development tools in ERP packages. Major ERP vendors may publish APIs, include a low-level programming language, reveal their underlying data schema, and even provide some customization tools. But they don’t usually provide testing and debugging—or much of the other functionality developers expect.” — ERP: More than an Application

Customization is a near-universal requirement for ERP systems. According to IDC, 87 percent of respondents to their survey performed moderate to extensive customizations in their ERP system, and estimates from other sources move that figure up to 96 percent.

“During the past two years, Data Exchange has invested several million dollars in its systems overhaul. A good portion of that money went toward custom coding. ‘Each business is unique,’ Malchicoff says. ‘We did a gap analysis of what Oracle could do and what we needed to do for our business.’ The company wrote nineteen modules comprising fifty thousand lines of code for such things as logistics, process control, and data mining. That effort was just as significant as deploying the ERP software—and it cost just as much, an amount Malchicoff had to calculate as part of his ROI analysis.” — Making ERP Add Up

How Many Releases Behind the Latest Version

More than a third of small to mid-sized manufacturers that use on-premises ERP operate between two and three releases behind the most up-to-date version of their ERP system. Furthermore, because the modules within the ERP system are so tightly integrated, there is no easy way around the module in order to connect directly into the ERP’s financial system. The reason for this is clear: if we use ERP’s inventory system as an example, the inventory system must have the full information on all inventory movements, even if there is no standard way for the ERP’s inventory module to process the movement.

While many articles describe ERP systems as inflexible, they miss out on the distinction that I just explained: part of this inflexibility is due to the over integration of ERP systems. In one article that followed the “ERP is inflexible theme,” the IT analyst firm IDC did an excellent job of elaborating on one aspect of ERP inflexibility:

“ERP systems in general are not designed to be flexible; in fact, most are designed to provide and automate repeatable business processes. While there is substantial benefit to this automation and predictability, there are also risks and costs.”

The inflexibility of Umbrella Term for ERP Shortcomings

“Inflexibility” is used as an umbrella term for many ERP shortcomings, but “over integration” is the term I use to explain the specific problem that results in inflexibility. ERP systems cannot represent all the different business processes that exist in a system, and its introverted design limits a company’s ability to implement these business processes without considerable and expensive customization. One of the reasons that ERP vendors and consulting companies make so much mention of best practices is because ERP’s coverage of business processes is restricted, making it necessary for ERP vendors to have a readymade argument for using to convince the company not to implement its preferred—and in many cases valuable—business process, and to accept a substitute that requires the company to make all the adjustments. How ERP Sets the Integration Agenda for All Other Applications If you check out the websites of non-ERP vendors, you will find them littered with various certified (by the ERP vendor) integration adapters. (Most of these certified adapters are more marketing sizzle than reality as described in What Are SAP’s Vendor Integration Certifications.)

Integrate Applications of ERP Vendors

Non-ERP vendors must show their ability to integrate with the applications of ERP vendors. During the presale presentation to the customer, they often pay homage to the customer’s existing ERP system (particularly to SAP and Oracle because of their popularity in the market) by talking about the great relationship they have with that ERP vendor, and if possible, by discussing the details of as many joint implementations as possible. I have been critical of software vendors in the inventory optimization space who dilute their message by stating in their marketing literature that they “work with” ERP vendor functionality, rather than replace ERP functionality. These vendors have sophisticated solutions with functionality that is head and shoulders above what can be found in ERP systems.

Yet, because they are concerned about offending the ERP vendor, they are as non-confrontational as possible, even to the point of misrepresenting what their applications actually do. For instance, when they refer to SAP on their websites, they could not be more deferential, as I explain in the following article How to Understand Why Software Vendors are Fear SAP.

Conclusion

ERP vendors continually propose false information on the integration benefits from ERP. The integration benefits never turned out to be true, but they remain mostly unquestioned because of the army of ERP vendors, consultants and industry paid IT analysts that provide the bulk of information about ERP to customers.