© 2001 TechRepublic, Inc.
During my 12 years as a consultant on ERP
implementations, some of my corporate clients have made some great decisions,
while others succumb to pitfalls that derail their projects. Here are some of my
impressions of how the big players sell ERP to potential customers and how
businesses typically select a particular vendor.
The economics of ERP software
To understand ERP vendors' sales tactics, you must consider the economics of
scale that drive many of these companies. Big players such as Oracle, SAP, and
PeopleSoft have invested hundreds of millions of dollars to develop ERP
applications. For these firms, the cost of burning a CD copy of the software is
marginal. In other words, any contract for an out-of-box implementation of their
products is basically pure profit.
With so much at stake, ERP vendors often go to elaborate ends to court potential
customers. This strategy often includes flying potential clients to the vendor
site, using stretch limos, and providing luxurious accommodations and mealsall
part of the company pitch on the merits of their ERP solution.
A vendor once brought me an entire box of Cuban cigars and asked me to give them
to a potential client I was representing. When I told the vendor rep that the
client did not smoke, he insisted that I keep the cigars anyway. Because I am an
industry consultant, I have had offers to fly to vendor sites (first class, of
course) just so that the companies could show me their latest offerings.
What to expect with the sales pitch
At the most basic level, all ERP products serve identical functions in managing
business processes. So to make a sale, ERP vendors need to establish a
significant difference between their product and the competition.
I've found that many ERP vendors make outrageous claims about the superiority of
their products. Some software vendors offer million-dollar money-back guarantees
if their software fails to perform at least twice as fast as the competition,
while other vendors tout their products' robust functionality and ease of use.
In addition to software licenses, ERP vendors will try to sell you additional
consulting and technical support. Your final project quote may include several
thousand hours of programming and consulting services. Remember that vendors
commonly charge a premium for consulting servicesyou may find cheaper talent on
the open market.
The politics of a successful ERP
Any initiative on the scale of an ERP implementation should be reviewed by a
client evaluation team. But when building this team, many companies
underestimate the ultimate impact of an ERP solution on their business.
Successful companies appoint representatives at the highest levels within each
business area to their evaluation teams. CEOs must make it clear to all
participants that choosing the right ERP product is critical to the whole
I have seen VPs who do not fully understand the critical nature of an ERP
decision send subordinate managers to evaluation meetings. This type of
delegation defeats the purpose of the evaluation team, and companies that allow
VPs to shirk their responsibilities often become mired in "analysis paralysis"
and never reach consensus on product selection.
An ERP evaluation team commonly consists of senior IT management, along with
selected senior representatives from each area of the business. This team is
charged with evaluating the relative merits of potential ERP vendors and
selecting the one that best meets the business needs of their enterprise.
Here's fair warning: From the outset, IT managers often find themselves at odds
with line-of-business management representatives. A VP from accounting might
find a certain product's functionality highly desirable, but IT managers may
recognize some serious technical issues that need to be addressed. IT
managersmost of whom have only a vague familiarity with the nuances of various
business functional areasare charged with weighing the technical resource
issues with the desires of individual VPs, and that can create friction.
As a general rule, a successful ERP evaluation team has a well-defined
hierarchical structure. A senior vice president is placed in charge of the
effort to eliminate infighting between the different functional areas and the IT
department. This senior vice president's job is to give appropriate weight to
all team members' issues and choose a tool based solely upon objective and
Factors to watch for during the
Unfortunately, real-world choices for ERP solutions often are based on
nonquantifiable factors. Some companies may choose a particular ERP vendor
solely because it dominates the marketplace in its vertical market space.
Obviously, that shouldn't be the primary consideration. Here are the key points
IT managers should consider during the evaluation process:
Plan for cost overruns
As a general rule, the human resources expense for an ERP implementation is
three to four times the original cost of the software package. For example, an
ERP solution costing $4 million should require an HR budget in the range of $12
million to $16 million. ERP vendors often make more money selling consulting
services than they do from the sale of their software. The company that is
implementing the ERP solution would not want to pay an hourly rate to the vendor
for consulting services. Instead, the goal is to write the contract to make the
vendor accept a fixed price for all implementation costs.
The temptation to customize the ERP
The typical management complaint, "I don't want to change our business
processes," is very dangerous. I've seen how improper customization of ERP
solutions on initial implementation can cost a company many millions of dollars
when it comes time to upgrade its ERP software. Functional managers must
understand the expense associated with customizing ERP solutions, and VPs must
be willing to change the way that they do business to conform to a noncustomized
Identify the areas of competitive
My advice throughout this series of reports is consistent on the topic of
competitive advantagean ERP solution should not touch any existing systems or
practices that give the company a clear advantage over its competitors. It would
be lunacy for a company that relies on its shipping and billing systems for a
competitive advantage to choose an off-the-shelf ERP solution to manage those
critical business processes.
Companies should evaluate each of their business needs and carefully judge how
important each one of the ERP areas is in terms of its ability to compete in the
marketplace. Your ERP solution should include areas that offer a clear,
An ERP solution should be customized only when the customer will gain a clear,
competitive advantage. Otherwise, the customer is better off changing the way
that they do business to accommodate the packaged solution.
Determining the scope of the ERP
Most ERP vendors separate their functional business areas into modules, which
are priced separately. An ERP vendor may offer an accounting module, human
resources module, and a manufacturing module, and it's up to an evaluation team
to find the best fit for its organization. IT managers should remember that
since most companies do not purchase all available modules, IT must build
bridges between whatever you did not buy.
The big picture
Although I have described some challenges of working with ERP vendors, I believe
that ERP ultimately does have value for the enterprise through the integration
of various business practices. The system itself doesn't have a problem with
diverse platforms; it just creates a headache when you need to make changes.
After company takeovers or downsizing initiatives, many IT managers are faced
with heterogeneous systems that run on different hardware platforms, use
different network protocols, or have different database structures. A global ERP
solution is so appealing because it ends the nightmare of building bridges
between such disparate systems. That alone makes the sometime-frustrating
process of dealing with vendors and internal clients well worth the effort.