Good ERP relies on simplicity and standards, says study

In a report to be issued publicly at the end of July, researchers at the Hackett Group found that companies end up paying more when they fail to maintain a straightforward approach with human resources and financial software systems, both of which are considered part of ERP.

Specifically, the researchers said that businesses building too much complexity into those types of systems spend 30 per cent more per employee on finance operations, and 18 per cent more per worker on human resources, compared with companies that have simple strategies. The research group said its findings were based on interviews with more than 2,000 companies.

Companies that work with a smaller number of ERP vendors and reduce the amount of customisation in their projects reap greater value from the applications, the Hackett Group said.

The research firm added that companies using the so-called best-of-breed approach in their ERP plans will struggle to keep costs down, as that approach leads a company to use a different vendor for each function. Businesses that engage in deep application customisation may also struggle with costs.

"You have to simplify the applications portfolio and also look inside the software at how you can simplify there to truly reduce overhead," said David Hebert, an analyst at the Atlanta-based Hackett Group. "With customisation, companies have been adding quite a bit, and sometimes not even tracking their work, which can make [ERP] very difficult to support and especially hard to upgrade."

According to Hebert, even those customers using only a couple of ERP vendors have to keep a close eye on software pricing and internal customisation, as some of the all-encompassing "enterprise suites" offered by companies such as Oracle and SAP are very complex. Many companies also end up running different versions of the same products made by such vendors, which presents another challenge in keeping costs down, Hebert said.

The Hackett Group's research contradicts the popular notion that utilising so-called on-demand software, or hosted applications, offers an immediate method of reducing cost and complexity. While some hosted tools - web-based applications administered by an outside vendor - help simplify certain functions, hosted providers typically don't provide comprehensive ERP service. So going with hosted providers often means the customer will end up using more vendors, which in turn makes overall enterprise resource planning harder to manage, according to the report.

"What's more important than adopting hosted applications is driving to a more standardised, simplified (ERP) model overall; if you can drive that through on demand, it can work," Hebert said. "To reduce costs, it's crucial to cut down on the number of variables that you have to manage, and bringing on demand into the picture still tends to add more complexity from that standpoint."

Hebert said that one hallmark of the companies able to successfully reduce ERP costs while still meeting internal goals is that those companies have business leaders who understand the issues at play in installing and maintaining the applications. The analyst said that chief information officers must communicate openly with other executives about the impact of changing business processes as their ERP projects develop over time.

"CIOs are constantly faced with business leaders who truly believe that their particular group or unit is different and has unique requirements, and who will resist standardisation efforts, fearing they will lose their competitive edge," he said. "IT leaders need to hold the line, sell the value of standardisation and simplification, and at the same time be aware of situations where a valid business cases exist to support customisation."