What is an ERP?

What is an ERP? Enterprise Resource Planning?

As with any buzzword, you might find varying opinions about what an ERP system truly is. Some people call it an accounting/financial system. Why? Because you can’t implement an ERP without a finance module. Some refer to it as an order management system. The main reason? Because it is used primarily in product-centric industries. Finally, if you ask an ERP vendor, they might claim that it’s the ultimate software you will ever need to run your enterprise. But how true are these claims? Or interpretations? Is an ERP system really that capable? Are there any limitations?

While it is true that an ERP system can run the majority of business processes for several industries, ERP is not always the best choice in every scenario. Based on the experience of our management team of implementing ERP software for various industries for the past 20 years, this is how we define it:



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a Management Information System

A modern ERP enables managers and executives with appropriate real-time information and data they need to make key decisions on the devices of their convenience. An average small business employee wears more than five hats. The founders or owners might carry the rest of the responsibilities on their shoulders. Since owners are typically the longest-serving employees, they have the most tribal knowledge in their heads. As they grow and hire more managers, the owners and managers will have limited information available to them. Why? Due to added responsibilities and limited bandwidth. As well as the filtering that middle management might do (intentionally or unintentionally) because of the fear of getting penalized.

This would limit their ability to make key decisions. And often, their decisions will have high failure rates. Because of this experience, owners and managers become highly risk-averse and don’t want to consider any ideas that may be outside of their comfort zone. A modern ERP system provides an integrated view of the organization. On managers’ fingertips, that will help them tap into opportunities with confidence.

A “Buy-vs-Build” decision

An ERP is meant to be a packaged product that you buy. So you don’t have to build it yourself. Unless you plan to run your business manually, you will require business software to host your processes. Such as Finance/Accounting, Sales/Marketing, HR, and Operations. Most small businesses might start with a basic accounting system such as Quickbooks or Xero. Or a small CRM such as Zoho or Hubspot. The other technical-savvy businesses may have in-house developers who might write a system on their own.

While developers may have differing opinions here, if you ask a sponsor who has prior experience funding a software development project, they would define it in three terms. Difficult, expensive, and risky. Your least risky option would be to find off-the-shelf, already-built software. That is most commonly used in your industry or micro-industry. While not always possible, as each business has some uniqueness to them, you may want to assess the closest option. The option that may be available for your micro-industry. And how much customization it might require.

From the perspective of manufacturing or operations management, this is also the same-old “buy-vs-build” concept. A topic that management schools have been coaching for decades. And with which operations leaders are intimately familiar. When you buy an ERP, you make a conscious choice to buy an already-built product as opposed to building it on your own.

To illustrate it further, making a decision to implement an ERP is like buying an iPhone. You buy it because you appreciate the way iPhone works. Customizing it to make it look like your old Nokia would not be a smart choice. In fact, it may turn out to be difficult, expensive, and risky.

single source of truth for the entire organization

An ERP eliminates departmental and functional silos and provides unifying access to information across the enterprise without conflicts or duplication. While the concept of a single source of truth has been prevalent in various contexts, the true essence is rarely understood, let alone implemented–in an enterprise. If you are not familiar with this concept, the best way to compare this would be with our human brains. Imagine if each of our body parts had its own tiny “brains” that were known. And available only to that body part–and the kind of problems it would create.

An average business uses more than 10 systems (or “brains”), such as a payroll system. An accounting system. A reporting system. Ignoring all other “brains,” such as millions of spreadsheets sitting on each employee’s desktop. Or the real brains of your key employees. This problem of multiple “brains” causes several issues: 1) duplication of efforts. 2) slowed processing. 3) slowed onboarding of new resources. 4) added costs of maintaining each system. 5) lack of control. An ERP system provides the very same glue that our human brains do. And helps us organize information in such a way that there is no second or conflicting source of truth.

the most strategic investment without fail

An ERP always turns out to be a strategic investment for most businesses as it is a key enabler for most other forms of investments, such as human resources or IP. If you ask a successful business owner or an executive, they will all have differing views on what they consider a strategic investment. Some will argue that it’s the key employees that make or break the company. Others might say that it’s the product, idea, opportunity, or brand. However, in our view, it is the culture that attracts key employees to the company who execute. And deliver great ideas, creating captivating customer experiences, and helping strengthen the brand.

The key ingredients of culture typically consist of how clearly the roles and responsibilities are defined for employees. How easy their life is. And how fairly they are measured and rewarded for their work. To enable this culture, everyone in an organization needs to have access to the right amount of information. And traceability so that they can see a clear path to success for them, helping you create the culture that will be your differentiator. This is why an ERP is typically a more strategic investment than most of your other investments.

a journey

While there are industry-specific ERP options out there that could provide an immediate ROI to a business, an ERP journey is never finished with the implementation. In fact, managers with experience implementing several ERPs in their organizations suggest that the ERP journey typically starts with a successful installation. To understand this, think of an ERP as modular components available to construct different buildings that may be relevant in various situations, for instance, a house.

Pre-built modular components are likely to provide an immediate ROI as you don’t have to invest your time and resources in reinventing the wheel. Also, once the basic structure is erected, you will be able to assess your needs better in what else you could do with this house. Finally, once you own a house, you will have a better understanding of your needs. And appreciation will grow as well.

With time, as with houses or cars, ERPs are always getting updated with superior capabilities and technologies. So once you install an ERP, you are setting yourself up for a very exciting and rewarding journey. A journey that enriches as time passes and as your experience grows using it. Be open-minded with an ERP project. And treat it like a journey as opposed to a trip.

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