Phase III ERP Benefits: The Art of the Formerly Impossible

Companies are progressing through three distinct phases of Enterprise Resource Planning (ERP) implementations, our research on ERP benefits shows. During the first two phases, companies look at ERP as a cost center or at best an opportunity to cut costs or routine business processes. Only a few have made it to Phase III, where the real money comes from improving operations.

The Bottom Line: Companies must go beyond streamlined back-office processes and capitalize on their full global potential by creating uniquely competitive business processes that were impossible without a newly consolidated ERP platform.

Phase I--Automation: ERP scattered all over your corporate landscape

In the rush to beat Year 2000 demands or the inability to get different business units to agree on common processes, many companies simply let each organization and even each country implement its own copy of the corporate ERP standard.

The Takeaway: The result was dozens or even hundreds of incompatible ERP instances.

Phase II--ERP consolidation: Just builds a back-office platform

In our recent ERP Benefits Realization survey, back-office cost savings from implementing shared services dominated the aggregate Return on Investment (ROI) received for these projects:

• 20% (of ROI) came from Information Technology (IT) savings, with 64% centralized in a shared services arrangement.
• 22% came from General and Administrative, with more than 70% centralizing Finance and Human Resources and 47% in Travel and Expense.
• 13% came from Procurement, which was the only operational business process implemented in a majority (54%). The harmonization of customer, supplier, and material information provides an ideal platform for strategic sourcing.
• 13% was categorized as “other” overhead categories.

Relegated to the bottom of the ROI numbers were operational business areas, the ones that actually generate revenue and value. As a portion of aggregate ROI for the projects, they were all in the single digits:

• 9% (of ROI) in inventory cost reductions
• 8% in other supply chain and logistics costs
• 8% in sales and marketing costs
• 7% in manufacturing costs

The Takeaway: 55% of the ROI in these major projects came out of overhead and a total of 68% was pure cost cutting. A great defense, but when will ERP be used on the offense?

Phase III--Transformation: Create new operational processes

Operational business processes offer about two-thirds of the potential benefits, yet our survey shows that they are only a third of the benefits reaped to date. It is time for companies with consolidated ERP to shift their attention to operations.

What formerly impossible, or at least difficult, strategies are companies evaluating here? Some examples include the following:

• Combining logistics across business units with neighboring facilities
• Combining distribution centers and Less Than Truckloads (LTLs) can fill trucks, reduce lanes, and eliminate unneeded facilities
• Dynamically sourcing product from different manufacturing and distribution facilities based on inventory and capacity
• Shared services for manufacturing--think of it as your own internal contract manufacturer
• Global order management, showing a single face to global customers across business lines
• Consolidating country-based sales, marketing, and distribution operations in geographies, such as Europe, which have high density and falling barriers to trade
• Coordinating procurement of key commodities across business units and geographies
• Creating supplier portals that consolidate the needs of each business unit and provide a way of deepening the partnership with the supplier

The Takeaway: What was once impossible to consider is now in reach with consolidated ERP.

Projects are incremental, restricting the scope of change

Unlike the massive ERP consolidation project, Phase III projects are highly focused on specific business process areas, which means:

• Fewer people are affected by each project, reducing retraining issues
• The ERP work is often to turn on or reconfigure functionality already owned, reducing the pressure to upgrade ERP
• Projects can be run in parallel, potentially generating benefits quicker

The downside is that an executive with clout has to convince business units to give up total control and cooperate with their peers.

Recommendations: To start tackling these formerly impossible projects, AMR Research recommends the following:

• Create a benefits realization framework to track and reward cross-business-unit collaboration.
• Identify the unique opportunities for your company. A good place to start is periodic face-to-face brainstorming meetings for business process experts across the company.
• Manage a portfolio of potential and active projects, understanding dependencies and which require new or upgraded ERP software.
• Don’t be content with cost cutting--look for opportunities that will change the way your company competes in the market, taking full advantage of your size and unique characteristics.

AMR Research originally published this article on 29 April 2004.