Choosing the right ERP solution

SMBs opting for an ERP package are offered a myriad of options. Should you develop a solution in-house or opt for a global provider?

SMBs have lower IT budgets than their enterprise cousins, yet in Asia-Pacific where the region is largely made up of small and mid-size businesses (SMBs), they typically spend more per capita on IT.

It is therefore understandable that they would want to stretch their IT dollars. In the cost-benefit tradeoff, they sometimes favor cost, preferring cheaper alternatives when selecting an ERP (enterprise resource planning) solution. However, they should not forget the benefits part of the equation when it comes to ERP.

SMBs--as with any other company--have several options: in-house development, third-party custom solutions, local ERP vendors, global mid-market providers and global top-tier vendors. Let's consider the strengths and weaknesses of each.

Custom solutions
Although custom solutions--whether developed in-house or built by third parties--are likely to have better fit with the company's immediate needs, there is no defined upgrade path. There is also the risk of automating current sub-optimal processes rather than adopting best practices. Such solutions are less future-proof because they may not be built on open architectures. When SMBs want to integrate outward-facing applications, such as CRM (customer relationship management) or SCM (supply chain management), with ERP, they may face problems. Integration can be a major cost multiplier in the future.

Local ERP vendors
Local vendors tend to be more nimble and are often focused on SMBs. However, without a global market and revenue base, many of them have viability issues. Any constraint in revenue will limit their R&D ability. Further, their products may be built on old technology, which will come back to haunt users. That said, there are some financially- and technologically-strong local vendors, and SMBs should consider them. When assessing a local vendor, ask yourself:
• Does the vendor have a growing business? Is it profitable; does it have adequate funding?
• Does it sell only on the price platform or does it also articulate a technology vision?

Ask for references and check them, especially the vendor's experience on promise versus delivery on features, service and support, implementation time and cost as well as its application to your industry in your country.

If you do decide to select a vendor even though you have concerns about its viability, prepare a contingency plan in the eventuality of the operations folding up. This should include escrow clauses and training your own personnel on the software so they can continue to maintain it.

Global mid-market vendors
Many of the global mid-market specialists have emerged weaker from the economic downturn over the past few years and this has led to a flurry of acquisitions and mergers in this segment. Further, most of them have limited presence in Asia Pacific. Prospective buyers should carefully consider their commitment to the market before investing in their solutions. Many set up agencies at low capital cost to minimize their investment in Asia while trying out the market. This makes it easy to withdraw from Asia if they are unsuccessful.

Global top-tier vendors
Global tier-one vendors have aggressively entered the mid-market. One reason was to cast a wider net when faced with the economic slowdown of the last few years. Most have similar approaches to the market: Offering stripped-down versions of their enterprise products with fewer customization options. They bundle software, service and sometimes hardware into one offering at a fixed price. They also evolve templated implementation methodologies to cut time. These mid-market offerings are sold and implemented by channel partners.

Despite their marketing efforts, they have not been able to change their image of being suitable only for large organizations. They are on the learning curve to get their pricing, product, partnerships and marketing right.

Though viability is not an issue with these vendors, users should be asking the following questions:
• What is available for the fixed price? Will it suffice for the needs of your organization? Will you need significant customization? If so, what will it cost you? Is the initial offer a “bait-and-switch” tactic?
• How competent and experienced is the channel partner who will implement the solution for you?
• What is the commitment of the software vendor to the SMB market? What is its vision for this segment? What percentage of revenue are they forecasting from this segment?
• Does it have R&D and market development expenditure going into servicing this segment?
• Does the software vendor have any commitment to remedy the problems arising from faulty performance of the software or poor implementation by the channel partner?
• Does bundled pricing suit me or will negotiating each of the components separately be better?

Cost is usually a concern when dealing with global tier-one vendors. However, with careful planning and smart negotiation, it should be possible to reduce license fees. Avoid creating "shelfware"--carefully assess your exact needs for the next six to 12 months and only pay for the modules you need. Also, take only as many user licenses as you will actually require. Sometimes, due to vendor pressure, SMBs end up buying more licenses and more modules than needed. Make sure you have price protection built into the contract for more modules and licenses in future. Also, realize that your deal is as important for the vendor as their solution is for you. Otherwise they would not be sitting across the table talking to you. Take a decision that meets your needs best.

Pranav Kumar is research director for Enterprise Application Software, Gartner Asia Pacific.