ERP Breaks Barriers

Enterprise resource planning (ERP), a software application that started within the manufacturing sector, has crossed industry lines to benefit business in all arenas. Now more than ever there is an increased need for a comprehensive system that is capable of managing all aspects of the enterprise. This includes finance and accounting, supply chain, and customer management -- as well as operations, project management and product development. All of these components will produce a consistent, single version of the truth on which companies can measure themselves.

Management uses data within the application to operate the business on a day-to-day basis. ERP helps to break down barriers between departments within a company and bring various pockets of the organization together -- such as sales, production, finance, human resources, purchasing and shipping -- to unify access to the up-to-date information that is needed to operate smoothly and in a more predictive fashion.

AMR Research's recent ERP spending study indicates that ERP budgets are anticipated to grow 13.7% in 2007, with nearly half of the companies surveyed expecting to spend more than $10 million on ERP-related activities. To compare this with past performance, in 2006 ERP represented 32% of the total application budget and on average was expected to grow by 11.9%.

Another indicator that ERP is increasingly strategic to businesses is the rising percentage of employees within each company who are licensed users. More business processes and information are now supported and managed by the ERP system. Buyers are recognizing the need to invest in better information systems, and capital is readily available in most markets.

Today's spending is being driven by a much healthier mix of new customers, consolidation projects, add-on applications and deployment to additional users. The ERP business itself also has spread across a much wider set of vertical industries beyond manufacturing (health care, retail, financial services, public sector and professional services), company sizes (the lower end of the mid-market) and geographic markets (China in particular). This variety tends to cushion the ERP market from the kind of boom-and-bust cycles that characterize less-mature software segments.

Market Shifts Toward Globalization

Enterprise application deployment trends function as strong indicators of the prevailing management philosophy and organizational structure. In the 1980s most corporations encouraged increased entrepreneurship and developed highly distributed and autonomous organizations. As a result, individual divisions and geographic entities tended to buy their own business systems and send a monthly report to corporate headquarters.

Today, most management teams are concerned about globalization and increased competition. They need to run a tightly integrated organization, which has led to shared services operations for many functions and a strong desire for standardized business processes and real-time global visibility.

There is the underlying need to break down the internal barriers to this visibility and integration. In many cases, the ERP system is being used as a catalyst to drive this organizational change and standardization of best practices, resulting in investment in either new systems or upgrades to take advantage of new functionality.

While many manufacturers have implemented financials, order management, inventory and procurement, they are just now deploying production.

According to AMR Research survey data, production is expected to garner the largest share of the ERP investment in 2007. Firms at all levels of the market -- from billion-dollar-plus multinationals to the small- to mid-size businesses (SMBs) at the lower end of the mid-market -- are faced with increasing pressures that globalization has put on manufacturing, including the following drivers and characteristics:

• More product variants
• Shorter new-product-development and launch timeframes
• Regulatory compliance
• Cost reduction
• Better short-term demand visibility
• More dynamic supply networks

Migrating Beyond Manufacturing

Production has migrated from being a vertically integrated component of the supply chain to being a complex network of suppliers, co-packers and outsourced manufacturers. Best-in-class companies are endlessly assessing the health and efficiency of these networks to best connect the dots and deliver to their customers a compliant, quality and profitable product.

The transition of these supply networks has unearthed several technology gaps for companies of all sizes. These gaps range from IT structures that are dominated by disintegrated point solutions that cannot be scaled or aptly integrated to simply outdated technologies that are not feature rich to support the new demands of the business.

Beyond the manufacturing sector, services-centric industries have seen ERP expand beyond the back office. Although financial applications have traditionally been the systems deployed to "manage the books," drivers such as compliance visibility, performance management and efficiency improvement have led to more strategic deployment of not only financial applications, but also of other ERP components. These include human capital management, procurement, order management and enterprise performance management.

At the higher end of the market, many companies are responding to this transition and working to instill transparency in their global business. They are migrating from highly decentralized structures to much more centralized organizations with standardized IT structures to obtain better visibility into distributed operations and enforce common business processes.

The majority of these firms see their ERP system as the most effective vehicle to drive the organizational change, process, and data standardization and employee education that this kind of transfor-mation requires.

For others, it is a matter of upgrading to take advantage of new functionality. For example, 75% of the AMR Research survey respondents planned to upgrade at least every five years. The most popular frequency reported was every two to three years. Within this group, new functionality tends to be the most important driver for upgrades, with updated technology and improved architecture close behind.

Factors Driving ERP Implementations

Several companies with less than $250 million in annual revenues are still operating without an ERP strategy or deployment, and 31% of the respondents in this grouping indicated that in 2007 they will evaluate an ERP application for the first time. SMBs, while smaller and seemingly less complex than their larger counterparts, have similar expectations about features and functions expected from technology investments. Reliance on outdated technology that simply does not scale with the current business needs is one driver of the ERP investment.

Another major driver is cost containment. Many smaller organizations use cost as the reason for not implementing ERP; yet everything they do in the financial and administrative arena can be done more efficiently and cost-effectively with an integrated and predictable view of their operations.

Other firms in this segment are making long-overdue IT investments -- not only out of competitive necessity, but also as the result of new management structures that are more technologically savvy than their predecessors. These individuals realize that siloed spreadsheets, IT investments from 20 years past and rogue point solutions need to be synthesized into an integrated application.

This application should not only be capable of supporting the needs of the business, but also be capable of handling predefined processes and workflows that can help improve productivity, efficiency and the bottom line as the business scales accordingly.

Judy Sweeney, senior vice president of research at AMR Research Inc., is focused on mid-market ERP and lean manufacturing. She is based in Boston.

Simon Jacobson, research analyst at AMR Research Inc., is responsible for coverage of manufacturing operations. He is based in Boston.