The Merits of Overpaying for
an ERP Solution
Introduction
In the same way that a vase
becomes a väse after fifty bucks, accounting systems become
Enterprise Resource Planning (ERP)
systems after a million bucks. The point is that the väse is
just a more expensive vase and in many cases, ERP solutions are
merely more expensive accounting system solutions, examples of
which include SAP R3, Oracle, PeopleSoft and JD Edwards. Still,
many people pay the higher dollars, often for the sheer
prestige. These same people probably pay hundreds of dollars for
designer blue jeans which aren't really much different from
regular blue jeans. In the eighties we saw many of these same
people pay big dollars for Big Blue solutions when more
affordable PC based networks were the clear winners.
Some people just prefer to
pay more, and they assume they are getting more. In many cases,
ERP customers were getting more - more complexity, more
difficulties, and more headaches.
Two decades ago, large enterprise organizations had little
choice but to purchase Tier 1 products (ERP solutions) to meet
their accounting system needs. Traditionally, ERP
solutions typically cost millions of dollars and often took
years to implement.
Large consulting
organizations raked in hundreds of millions of dollars
recommending these solutions and then spending numerous years
helping to implement these complex solutions and making them
work. In the 2000's many companies wised up to this concept and
migrated from ERP class products to mid-market solutions and
found them easier, more affordable and much better. Even the ERP
vendors such as SAP seem to have changed their strategy by
dumping the windows based SAP R4 product, relegating the
DOS-based SAP R/3 product to maintenance status, and adopting a
Israeli-based mid-market product and redeploying it as
Business One. This article discusses these concepts.
ERP versus Mid-Market Accounting
What’s the
difference between an “ERP Solution” versus a “Mid-Market
Accounting System solution”?
Today there are not many feature
differences between these two classes of products, but that was
not always the case. Fifteen years ago, there were eight
distinct differences as follows:
Past
Feature Differences Between ERP Solutions
Because
large enterprise organizations have always needed the features
mentioned above, they often wrote enormous checks well into the
tens of millions of dollars to purchase and implement these
traditional ERP solutions. In years past, they had few choices.
Until mid-market solutions grew stronger, their only possible
alternative was to develop their own in-house software solution.
However this alternative was not realistic for the simple reason
that a single company’s programming staff could never produce a
solution better than today's top mid-market solutions such as
Dynamics NAV - a product built by hundreds of programmers over
twenty years with more than 1,000,000 users helping to debug and
refine the system?
For many
years, ERP solutions ruled the corporate world. During those
“ERP Glory Days” large enterprises shelled out billions of
dollars for these solutions. Tier 1 developers and consultants
alike raked in the money like they were raking leaves after a
hurricane on a maple tree plantation. Today these glory days are
gone, and some say that only the uninformed are still selecting
these so-called bloated, over-priced, complex ERP solutions.
Today’s New and Improved Accounting Systems
Not only do
today’s accounting systems provide most of the features offered
by traditional ERP solutions, but they are typically faster,
easier, more customizable, and less-expensive as well. By
comparison, the traditional ERP solutions have become bloated
products that are slow, difficult, and too expensive. Most of
today’s enterprise organizations have caught on to this fact as
there is a clear trend over the past four years away from the
traditional Tier 1 solutions. Consider the following example:
In 2002 I
was engaged by a $40 billion company here in Atlanta that was
using a Tier 1 ERP solution throughout the company, and company
officials wanted to switch to another accounting system. After
three months of evaluating the needs of this company, I advised
them that it would be best to stick with their current ERP
Solution because the product worked fine (after all, a cardinal
rule of consulting is “don’t fix anything that’s not broken”).
The company agreed that while this ERP solution met their needs
well, they were not happy forking out $4.5 million a year to
support this ERP solution in three separate divisions. Company
officials did not agree with my recommendation and they stated
that they were going to switch to a less-expensive solution
regardless whether I helped them or not.
Therefore
I provided a list of eight products which I had concluded would
meet their needs. Ultimately, they selected Solomon Software to
replace their expensive ERP system. Within 8 months Solomon was
fully installed and the company officials sent me several
unsolicited e-mails raving about how much they liked the Solomon
solution. I had lunch with the CFO and several top managers in
spring of 2004 and they reported that “the system was not only
working fine, but it was actually faster, better and far easier
to use than the ERP product they had been burdened with.” The
total cost of the Solomon solution was less than $1 million;
about 2.5 month’s worth of support fees for the bloated ERP
solution they ditched.
Detailed
analysis of product features also support the premise that
mid-market solutions have arrived and are legitimate options. An
analysis of the most important 350 ERP and accounting system
features reveals that many of the new up and coming mid-market
challengers offer nearly as many features as do the traditional
ERP solutions. A summary of this review is available here:
http://www.asaresearch.com/articles/350table.htm.
Growing Trend
Over the
past few years, thousands of larger companies have ditched their
Tier 1 ERP solutions in favor of the new and improved mid-market
solutions. This massive shift away from the ERP solutions has
had an enormous impact on the ERP industry. For example,
These events
are clear signals that the traditional ERP solutions and their
delivery models have changed dramatically in recent years. In my
opinion, the ERP industry as we knew it ten years ago is dead.
Today any company purchasing a traditional Tier 1 ERP solution
for millions of dollars is probably doing so out of ignorance.
Consider the following analogy that is similar to today's ERP
dilemma - in 1989 we saw the less-expensive local area network
(LAN) solutions emerge to challenge and eventually over take
mainframe and mini-computer solutions. At that time, many
consultants and customers alike were denied the benefits of LANs
and they referred to them as “mere toys - not real solutions for
serious companies”. Eventually, LAN solutions significantly
eroded the market for mainframe and mini-computer solutions. And
why not, after all LANs were less expensive and more versatile.
Today, most companies in the world now rely on LAN solutions,
while mainframe and mini-computer solutions have been largely
relegated to mere back office servers which support LAN
architecture. I believe that the same type of transition is
happening today as less expensive and more versatile accounting
systems are displacing traditional Tier 1 ERP solutions. Many
ERP consultants deny this just like those consultants of fifteen
years ago denied the emergence of LANs – but their denials only
make them look like dinosaurs. There is too much clear evidence
suggesting that the ERP market is changing, and changing in the
direction of powerful new mid-market solutions..
ERP Complexity
A key reason
for the decline of ERP solutions has to do with the complexity
of these systems. Because these systems traditionally sold for
millions of dollars, developers of these systems were justified
in adding any and all desired features to the system in order to
win each sale. For example, XYZ Enterprise often promised ERP
developers a closed deal, but only if specific features were
added to the product. Because the dollars were high, the ERP
developer was happy to oblige. Over the years hundreds of such
features were added in the name of closing the deal. Over time
this approach to closing deals had serious repercussions.
Eventually these Tier 1 ERP solutions became bloatware solutions
– hindered by hundreds, if not thousands of useless features
that most companies do not use. The result is complexity that is
unparalleled.
Today’s
newer accounting systems have taken a different approach by
including only core accounting system features in the product,
along with an easy set of customization tools that allow the
users to customize the product to meet their own unique needs.
This approach has allowed these newer mid-market products to
offer cleaner solutions that are easier to implement, and easier
to use.
The Future of ERP Solutions
Most likely,
traditional ERP solutions won’t disappear completely. Just as
mainframe and mini-computer solutions found a niche where they
could play despite being overrun by leaner, meaner LAN
solutions, Tier 1 ERP Solutions will likely continue to carve
out niches as well. Pharmaceuticals, manufacturing, banking, and
telecommunications are all examples where ERP systems will
likely continue to flourish for years to come. However any
company evaluating an ERP solution today would be well advised
to compare that ERP solution to the new generation of ERP
killers such as Great Plains, SYSPRO, Axapta, Navision, and
others. To be fair, a small gap still exists between Tier 1
products and the high-end challengers – mostly in the area of
employee workflow and certain industry solutions – but this gap
is closing fast, and it is now too small to justify spending
millions of additional dollars on a Tier 1 solution.
Conclusion
The points
set forth in this article suggest that the ERP industry is in
turmoil as a wide array of new mid-market accounting systems
have stepped up to the plate to challenge the traditionally
dominant ERP products. Even history suggests that these events
are to be expected. For several decades, it has been a common
axiom in the computer industry that product pricing falls while
at the same time those products offer more power and greater
features. Computer prices have fallen dramatically even though
they are more powerful than ever. Printer prices have plunged,
yet printers perform much faster and with far better
resolutions. Monitors, routers, network cards, microchips, cell
phones, handhelds, cameras, and many other technological devices
are more affordable today than ever before. As discussed in this
article, the same axiom applies to the mid-market accounting
software arena as well. Some of today’s less-expensive
mid-market accounting systems now rival traditional ERP
solutions, and thus the cycle continues.
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END
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& Mid-Market Accounting Systems