Understand the risks and rewards of each approach to procuring ERP software
Enterprise Resource Planning (ERP) procurement is one of the most ambitious and challenging undertakings for any organisation. The process of acquiring a single system that spans the entirety of your operations is a task fraught with commercial, contractual and operational risks, but promises significant rewards. If managed well, it has the potential to transform your organisation. If mishandled, it can lead to costly and visible failures.
Read this blog to discover:
- The importance of using the right ERP procurement method
- Common challenges in ERP procurement
- 4 routes to procuring ERP software
- The risks and rewards of each method
In many ways, procuring and implementing ERP software can be like tearing down your organisation’s operational infrastructure and rebuilding it from scratch. It touches on every core process, from finance to human resources, supply chain management and customer engagement. The potential benefits from the concise and accurate (single point of data) management insights can be immense, impacting efficiency, strategic decision-making and future growth.
However, we have seen numerous examples where ERP procurement has failed to deliver on its promise, leading to high-profile issues and wasted investment. The key question is, how do you avoid these pitfalls and successfully procure and implement a system that’s fit for purpose? Below, we outline four methods that organisations typically consider and highlight the risks and rewards of each one.
Method 1: The Chain of External Consultants
This method is often associated with large, complex organisations, where multiple layers of external consultants are brought in, to design, specify and oversee the procurement and implementation of the ERP system. It’s been a common approach for many years, especially among large enterprises with significant budgets, but the downsides are now better understood.
In this model, the external consulting team will typically conduct a comprehensive business process re-engineering exercise to produce a future-state operating model. The ERP system is then designed, configured and implemented to support this vision. The benefit is clear: your organisation is redesigned to operate optimally, with all processes aligned to a unified vision and a single ERP system underpinned by that future state.
However, this is the most transformational type of ERP procurement and also one of the riskiest.
While the consultants will offer expertise in transforming your business processes, this method can easily overrun in both time and budget. Costs escalate as the scope of the transformation grows and the risk is that, without a clear understanding of your future business needs and the alignment of your people, processes and technology, the project often derails.
Another critical factor is the division of responsibility. Many organisations assume that by hiring external consultants, they have offloaded the commercial and operational risks. However, in many cases, the buyer ends up assuming much of the risk by default, with little recourse to redress if the project goes off track. This is often because the organisation thinks they are contracting for the external consultant to buy, procure and support the implementation of an ERP solution. In fact, the organisation would be more effectively advised to procure the external consultant’s advice separately to the ERP solution it provides and implements.
Key takeaway: This approach should be carefully thought through in detail to ensure your organisation can:
- Fully prepare to manage the complexity and risks of this type of transformation
- Thoroughly map out its future-state needs
- Understand how to contract separately for an external consultant’s advice to the ERP solution and implementation services.
Method 2: The ‘Out of the Box’ (or ‘Vanilla’) Solution
At first glance, the ‘out of the box’ ERP solution seems like a simple, attractive option. The promise is that by adopting a pre-configured system designed to follow industry best practices, your organisation can quickly align its operations with tried-and-tested models.
For many organisations, particularly those in industries with well-established processes, this can be a cost-effective and relatively fast approach. The ERP provider will deliver a system that follows industry standards, minimising the need for customisation and reducing implementation complexity.
However, the biggest risk comes from how closely aligned your business is with industry best practices. If your organisation is highly specialist and has to operate in silos, or if its processes deviate significantly from these standards, you may find that an ‘out of the box’ solution fails to fit your needs. For example, a highly customised financial or supply chain operation may require more flexibility than a standardised solution can provide. If your processes do not map well to the system, you may face expensive and time-consuming rework post-implementation.
Furthermore, with this method, the liability is often shifted onto you. Once you have signed off on the system, the vendor’s liability to do anything other than what has been signed off likely ends, even if the solution fails to meet your specific needs.
Key takeaway: The ‘out of the box’ method can offer good value for organisations that align with industry best practices. However, without a deep understanding of your existing processes, you risk implementing a system that doesn’t fit. Before committing, ensure you fully assess how your operations align with the ERP’s standard features.
Method 3: Gap Fit
The ‘gap fit’ approach is widely regarded as a more structured and informed method of ERP procurement. It begins with a detailed analysis of your organisation’s existing processes, allowing you to identify precisely how the ERP solution needs to support your current and future operations.
In this approach, you map out your current state processes, how you would like to see those processes improve (the future state) and then engage ERP providers to demonstrate how their solutions can meet your unique future state requirements. Rather than adopting a generic, best-practice model, you actively evaluate each system to see how well it closes the gaps between your current processes (where appropriate) and your future-state goals. This ensures that the ERP system is configured to the unique needs of your organisation, reducing the risk of misalignment during implementation.
This approach provides a much higher degree of certainty, as you are evaluating potential solutions based on a well-defined understanding of your organisation’s needs. We’ve seen this method work effectively for a number of clients who have successfully implemented new ERP systems ahead of schedule and under budget. By following a gap fit approach, you are often able to ensure that the system meets your precise requirements, on time and on budget.
Key takeaway: The gap fit method is ideal for organisations that want to minimise risk by ensuring the ERP solution is configured to their specific future state processes. It offers a higher chance of successful implementation and better alignment with your business needs.
Method 4: Going Into the Cloud – on your own…
Cloud-based ERP solutions are now much more commonplace, offering flexibility and scalability that traditional on-premise systems cannot match. This method, albeit with external consulting support if required, is more commonly approached with the hiring of internal teams. Subject to your internal resourcing capacity, it can allow for a DIY approach to ERP procurement and involves selecting a cloud solution and configuring it internally or with minimal external support.
With cloud-based systems, you benefit from lower upfront costs, as there is no need to invest in infrastructure. You also gain the ability to experiment with configurations in a sandbox environment, testing different scenarios before full deployment. This makes it an appealing option for organisations that have the internal expertise and resources to handle the technical and operational challenges of customising and configuring their own ERP system.
However, this method places much of the responsibility for ensuring the solution is fit for purpose on you, the buyer. If your internal team lacks the technical know-how or if your organisation requires complex customisations, this approach can lead to unforeseen issues down the road.
Key takeaway: The cloud method is ideal for organisations with the technical capability to manage and customise their ERP solution internally. It offers substantial cost savings and flexibility but demands a high level of expertise and internal commitment to ensure success.
Conclusion
Each ERP procurement method has its strengths and weaknesses. The right choice depends entirely on your organisation’s specific needs, structure and internal capabilities. While the chain of external consultants remains a traditional but risky approach, the out-of-the-box method can be cost-effective but risky if your future processes are more specialist and don’t align with the system’s built-in capabilities. The gap fit approach offers a more tailored and reliable solution, while the cloud approach gives you maximum flexibility at a lower cost but requires strong internal expertise.
Ultimately, the key is to assess your organisation’s unique requirements, capabilities and desired outcomes before choosing the procurement method that best suits you. By taking a structured, informed approach, you can reduce the risks of ERP procurement and ensure that your system delivers the business value you need.
Photo Credit: van Van Es
