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Why ERP vendors don’t gouge you up front

· 3AG blog,erp

Traditional ERP vendors may bleed client organizations dry in the long run but they never do so in the early stages of adoption and implementation—because they don’t have to. They will more than make it up in backend maintenance and service.

Most people are now familiar with the Software-as-a-Service (SaaS) business model. SaaS allows subscribers to aquire services on a monthly basis instead of as single, one-time license purchases. There are many benefits for SaaS subscribers: Initial costs are low or zero, there are minimal or no installation requirements, and SaaS is generally scalable and easy to use. Regardless of industry or specific SaaS offering, these are the core features that make it such an appealing and effective service model.

Implicit in the contract between SaaS vendors and end users is the understanding that SaaS companies will continue providing quality products and service, including regular updates, to the companies who need them. Any SaaS service worth its salt will improve the longer it is used; this is what make SaaS so powerful. If this contract is broken, if the service does not become more effective month after month, users can simply cancel their services without early cancellation fees or other fines. It’s in SaaS vendors’ best interests to ensure that what they’re selling remains worth buying.

Traditional ERP vendors operate similarly to SaaS providers in key ways—with one crucial exception. Purchasing an ERP system costs a lot of money up front. Long before our current concept of SaaS existed, ERP vendors were extracting regular payments from their clients in the form of maintenance fees—but after having been paid the enormous adoption fee they’re (in)famous for. This essential difference keeps the power of this business relationship firmly in ERP vendors’ corner—which is not good news for organizations looking to ERP to either simplify processes or reduce costs.

Maintenance fees account for approximately 50% of ERP vendor revenue. This is a stunning figure, in part because a significant component of ERP vendor revenue comes from third-party system integrators. Despite earning license fees for their products and outsourcing installation and management to other companies, ERP vendors rake in the money on every deal they sign and maintain. What tends to be sold as a single cost to businesses like yours ends up being a strong double revenue stream for ERP vendors.

Aside from working with a SaaS-native ERP vendor (and there are many out there), how can companies make sure they don’t buy a product they’ll regret for years to come? To answer this, we must first consider how these sneaky and generally unending maintenance fees become an issue in the first place.

Why companies pay so much in ERP maintenance

Maintenance charges aren’t a complete scam; occasionally, there are legitimate reasons for them, which may include:

  1. support (a term so broad and vague, it can encompass any number of expensive add-ons, new services, etc.)
  2. training (to use the one-time ERP system that was meant to “solve everything” immediately, for example)
  3. <standard corporate-speak euphemism, the specifics of which are defined by industry; in Marketing circles, “Delivering outcomes” is one of the worst offenders>
  4. software upgrades
  5. changes to business processes, such as redesign

Of the above, one could argue that only software upgrades and business process changes are really legitimate. And even software upgrades are questionable, as they can slow down or irreparably damage your existing ERP implementation.

Changes to existing business processes, on the other hand, comprise a legitimate expense you should be prepared for. An ERP codifies existing business processes, which means that if these processes are changed, you need to update your digital version of them as well; not doing so can cause data misalignment, which can cause serious production or revenue harm during crucial moments such as inventory or high-volume work periods.

Should an ERP implementation be so fragile that 50% of what you pay for it goes towards changing your existing business processes? Of course not. Yet, one survey discovered approximately half of all companies required moderate to substantial changes to their ERP post-installation to update business processes, analytics, business rules, business model structure, and user permissions; these alterations required 20-60 person-days of work each time.

Significant changes to an organization (like acquisitions) obviously require significant effort. Integrations of old data systems can also take time—but weeks, not months. Changes that improve business processes and/or reporting quality should also be encouraged. However, if such changes are so disruptive their costs outweigh their benefits, there is a problem.

Your ERP should be designed to easily adapt to changes in your business. In fact, your ERP should be able to advise you—without prompting—on how to tighten your business processes. If your phone can remind you to walk more or provide better route instruction when you’re driving, something as complex as an ERP can and should provide the sophisticated technology solution your business deserves.

original cinderella
Cinderella’s stepsisters and ERP maintenance

The original, gory version of the Cinderella story involved the heroine’s stepsisters maiming themselves trying to make the glass slipper fit: One cuts off her big toe and the other cuts off her heal. Both attempts are messy—and unsuccessful. In this simile, ERP vendors sell glass slippers that don’t fit anyone. And they charge extra to perform all necessary footwear repairs.

Obfuscation at the selling and early implementation stage translates into higher profitability for ERP vendors. Convincing clients how easy ERP implementation will be at the front end of the project makes everyone feel good. Unfortunately, there are almost always later friendly conversations that conclude with end users handing over more money that they didn’t anticipate spending.

Generally, one of two scenarios play out: Businesses are invited to translate its processes into the ERP, which requires time and effort around writing custom code for the project; this costs extra money. Alternatively, businesses may transform current business processes to conform to the ERP vendor’s standard processes; this also means pouring more money into the project. In both cases, initial implementation looks simple, straightforward, and complete; in reality, it almost never is any of these things.

Organizations may modify business processes to match ERP vendors’ standard out-of-the-box processes because managing such changes in-house is complex and awkward. However, if your ERP requires a major software upgrade, actually installing it might undo or nullify such custom changes. As a result, the most commonly recommended approach for ERP integration is that organizations change their business process to match ERP vendors’ solution.

If your company decides to adopt an ERP to extract more value from current systems, you have to be willing to give up corporate flexibility—never a good idea, but an especially risky one in our current economic climate. Because ERP software is so complicated, not making this concession means you’ll pay a fortune for customizations—both now and in the future.

Death of a salesman
Avoiding this trap

This scenario is common but not unavoidable; you have more options than you may realize. ERP adoption just needs to be approached more thoughtfully than ERP vendors might like. Making the switch to an ERP just to tighten up business processes is not necessary; in fact, we highly recommend organizations improve business processes before considering an ERP at all.

Your ERP vendor may tell you you’ll miss out on all the best features of their offering—like shiny new reporting capabilities and a “single source of truth” for your data—if you tidy up businesses processes first. Poppycock.

Data centralization and reporting really are, and should remain, independent of your ERP. Reporting and data centralization can be managed much better through a well-designed data warehouse. Plus, centralizing your data systems provides immediate central access coupled with the flexibility to migrate legacy data systems at your own pace (if ever). Data warehousing keeps primary control of your organizational data where it belongs—in your hands.

ERPs should only be one part of a diverse data management program

ERP vendors make a fortune on maintenance work, most of which supports their bottom lines rather than your business. The choices offered most customers are limited: Either conform to the vendor’s standard system or pay a fortune on customization and still risk having that customization fall apart in the next maintenance software release.

Before making the jump to an ERP, consider whether you really need one right now; worry about if you’ll ever need one later. Starting today, begin to tighten organizational business processes and when you’ve made all such improvements, reassess. You may find you don’t need that ERP after all—a discovery best made before signing on the dotted line.

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