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Jen recently attended the annual HARDI conference, this time in Austin, Texas. As always, the HARDI team put on a great event with a ton of content relevant to conducting business in our industry. The focus this year was legacy. In 2018, we spent time discussing succession planning and the legacy generations can leave as businesses move forward.
This month we are revisiting a different type of legacy we hear about in our industry: the legacy enterprise resource planning (ERP) system. Based on Jen’s discussions with people at the meeting, many companies are considering a new ERP. Some are driven by the need for additional features, others are facing end-of-life announcements for their specific ERP and some are transitioning after being acquired. This is certainly not a new phenomenon but, as an industry topic, the discussion is heating up.
Every couple of years we take the time to remind you what you should take into consideration as you think about switching ERPs or upgrading your current system. Contrary to what each software provider’s salesforce might tell you, from what we see no system is heads above the rest within their class. The reality is that most conversions result in improvements, lost features and possibly some problems.
Often the problems come in two types: expected, where the situation was anticipated and a plan was developed to mitigate its impact; and unexpected, where the situation was not anticipated and the company must scramble like crazy to prevent a disaster.
Wouldn’t it be great if the FDA regulated the software companies? So along with their upbeat claims of, “58 percent of new users experienced improved operational efficiency, clear skin and some users even experience weight loss,” they also would be obligated to report, “Some new users experienced dizziness, disorientation, depression, rectal leakage and occasionally death. If you experience an end-of-month process lasting more than four hours, you should contact your tech support as it can be dangerous and result in permanent data loss.”
What You Need to Know
Before you leap into the abyss of a new ERP, see if you can make your current system do what you want. You don’t change ERPs for fun. They are expensive. They take a tremendous amount of effort and planning to implement. Typical wholesalers do not leverage the additional functionality that is available. They simply do the same things they did before — on a much more expensive platform. (We make this same recommendation about relationships, jobs, employees, customers and suppliers: Try to fix what is in place before you make a change.)
If you do decide to make that leap, create a list of the features you need your current ERP does not provide. You want a deep understanding of how the new ERP implements these features.
It is critically important to take the time to ensure your new system meets or exceeds your business needs and that you can bolt on additional tools to help you run your business. Here are some items to consider when choosing a new system:
1. Cost. Our rule of thumb for new ERP implementations has always been to take the quoted cost of software, installation and hardware combined and double it. Several unknowns go into the true cost of implementation:
• Lost productivity. Your team’s main function is to sell toilets or whatever. An ERP conversion is a major distraction from this main function. They will not only be required to help with the transition but time also will be consumed by training and attending to customer needs on a system they are not familiar with yet.
• Implementation snafus. This may result in products not being shipped on time, not priced according to the customer’s super-special pricing and other issues that will result in your company eating it.
• Lost business. In any major ERP conversion or upgrade, the probability of a problematic customer event is increased. In some cases, customer service might cause customers to suspend business with your company either temporarily or permanently. There will be costs associated with losing customers or with persuading them to come back.
• Additional software. Modifications or added software required because you missed some critical function performed by your old ERP.
2. The devil you know. You will be trading problems you know for problems you don’t know — with mature systems you know what to expect and how to fix things when they go bad. It’s certainly not that the old system is better; it’s that you have learned what must be done to accomplish your objectives. A shiny new ERP may be more refined but it would be naive to think there aren’t glitches or necessary operational changes lurking in the depths of the system also.
3. Get it in writing. Anything important, get it in writing. Any vendor who resists the extra work of codifying the details of your agreement will often resist the extra work you might think is included in the deal. Please understand, we’re not inferring there is an intent to mislead respective customers. Today’s ERP systems are quite complex with many moving parts. Even when both parties in the discussion have the most honorable intent, misunderstandings can occur.
4. Not all hosted systems are created equal. Dig into the details before you select a hosted solution. Many wholesalers are selecting this approach without fully understanding what it will mean to their business. Some questions to start the discussion:
• How are upgrades accomplished? Can each wholesaler select the timing of upgrades or is the entire hosted environment upgraded all at once? If the vendor schedules several upgrades per year, your business will be upgrading whether you are ready or not.
• Can we have custom modifications? We are not a fan of custom mods — until the ERP doesn’t support a function critical to your business.
• Is your company in a compartmentalized virtual environment or an environment with other wholesalers? Both approaches have pluses and minuses related to upgrades, security, access and performance. It is critical to understand how these topics relate to the operation of your business. Moving forward, wholesalers will need flexibility as they evolve to support their customers.
• Does the environment allow access to your data using common tools? So, the vendor advertises they use one of the latest data access approaches such as SQL, AWS, AZURE, etc. Your company wants to use a business intelligence (BI) tool written by a third party. If the architecture doesn’t allow the BI tool to access your data, you’re done. This closed architecture can limit your ability to implement all kinds of “bolt on” tools. You might not care today but you must take care not to limit your future.
5. APIs (application program interfaces) are the future. The best solutions for wholesalers and their customers are often created by combining data from many sources. A typical webstore might pull information from a product content database, the wholesaler’s ERP, a manufacturer’s ERP, sales tax computation provider, shipping cost provider and even a customer’s ERP.
Your ability to do these kinds of complex solutions will often be enabled through APIs. If your ERP limits your access to your data, you will be restricted to using only solutions provided by your ERP vendor. Also note a significant difference exists between the functionality of a promised API, a crappy API and a fully functional, delivered, documented API.
6. Not all features are created equal. Delving into the actual operation of mission-critical features is important. As an example, we think credit-card processing is in most wholesalers’ future. As customers purchase on a wholesaler’s webstore or make payments on their account using credit cards, it is important to consider the back-office processes required to support this.
One ERP we are familiar with requires four steps to accept a credit-card payment and update the customer’s account while another ERP requires 19 steps. It is important to know, upfront, how credit-card processing is handled by an ERP before acquiring it.
7. Get installation deliverables spelled out. While vendors are pretty good at understanding the needs and costs, each wholesaler is unique. That uniqueness may involve work by the vendor it considers to be billable. Spending time to clarify what is included and what is extra, in advance, can reduce disappointment for both parties. As a rule of thumb, unless the activity is described in your agreement, you should assume that you are going to be billed for it separately.
8. Get maintenance spelled out. We like well-defined maintenance deliverables and costs. Having them defined in writing prevents surprises going forward. Waiting until there is a problem often exposes differences in both parties’ understanding of the agreement that can occur even when both parties have tried to be clear.
• Upgrade. Are upgrades included or will there be balloon payments?
• Additional charges. When do they apply? How many support calls are included? If more are needed, how is it charged?
• Maintenance fees and licensing fees. What’s the difference? Can you continue to use the software if you are not paying maintenance costs?
• Price adjustments for support. Is there a cost-of-living-type limiter on the price increases that your vendor can make? Vendors need to be able to adjust their costs but buyers need protection against unreasonable adjustments.
• Watch the addendums. One industry acquaintance indicated that his vendor had “snuck in” a major change in the maintenance charges for all the ERP modules when he had licensed a new module. He indicated he wished he had read the agreement much more carefully.
9. Get end-of-life spelled out. One industry acquaintance was bemoaning the fact his ERP provider had announced an upcoming end-of-life event for his ERP. As we understand it, he can continue to use the system but all development and support are ending. He could live with the system as it exists; however, he is greatly concerned that a problem might bring his business to its knees if he can’t get normal support.
Unfortunately, it is not an ideal time in the business’ life to implement a new ERP, so it seems there are no good solutions. As wholesalers are reviewing the terms and conditions of the agreement, they often forget to get a prenup to protect themselves in this sort of situation. Be sure to include what will happen if your software provider is acquired.
10. Get source code. As part of the prenup, protect the ongoing operation of your business with some reasonable access to source code. To be realistic, after you sign the agreement and the software is installed, the software vendor holds most of the cards. Going forward, they pretty much define a level of support that you will experience, the development of new features and how long they will continue to support the product.
Open-source systems give your team a way to understand how the system operates and allow you to control your destiny if there are problems. One of our customers waited many months for a vendor to fix a simple problem that could have been fixed in short-order if they had access to the source code.
Some companies have proprietary, confidential source code that they do not publish. We understand this but think there should be a provision that the vendor will have source code in escrow and make it available if they go out of business, get acquired or they discontinue support of the product. You will probably pay escrow fees for this.
We think vendors should provide the source to licensed users one year before the scheduled end of support so they can prepare to support themselves if that is their desire. Vendors have a legitimate right to restrict your use of source code to support your ongoing business.
Try to avoid clauses threatening to void your warranty, impose punitive charges or legal action if you use the source code to adapt the programs to run your business. The vendor has a legitimate need and right to protect its intellectual property and expect absolute confidentiality in your use of their code.
It also has the right to charge for support if you muck things up. However, these “hold-the-user-hostage” type clauses may prevent you from hiring a programmer to fix problems or make changes when a vendor refuses to address your problem or schedules your project early in the next millennium.
11. Don’t degrade customer-facing activities. Look at the critical functions in your company and make sure the new ERP will perform those functions as well as or better than the old ERP. Specifically, we would look carefully at order entry. It is typically one of the most time-intensive and one of the most customer-observed activities in your business.
If your new system is slower or more difficult, you will have increased expenses and may anger your customers. Both are bad. It is critical that your customer-facing team be well-trained in the use of the new system’s order entry and, ideally, able to practice before being exposed to customers.
We are hoping we have convinced you to consider any change in your ERP seriously. Digging into the details before you sign is the best way to improving the odds that it will be a positive, long-term step for your business.