September 2009: A Note from Jeff Mack
The Bottom Line: Do ERP Best Practices = Award-Winning Company Performance?

We often disseminate information about best practices for a company involved in selecting and implementing an ERP business system. These words of advice are frequently rather academic in nature, as they are generally not linked with any real before and after examples. So it got me wondering about how - or whether - we can derive a real cause and effect between ERP system best practices and best-in-class company performance. And as I thought about this further, many questions came to mind.

• Do best-in-class companies adhere to best practices regarding their ERP systems?
• If so, is there a direct and traceable connection, or is it more of a feel good association?
• Is the ERP system implementation viewed as an event or a journey?
• What percentage of system functionality is actually being used?
• Do they opt for best-of-breed point-to-point solutions or a well integrated suite of products?
• Who’s the best person to place in charge of the ERP system?
• What impact do post go-live practices and decisions have versus pre go-live decisions?
• How do they view the practice of customizing their ERP software?
• What’s their strategy regarding upgrades and keeping their system current?
• How and when do they measure ROI?

As you can imagine, it would require an exhaustive study to connect all the dots and produce empirical data to answer these questions across all major industries. So I settled for the next best thing: I found an Aberdeen Group study entitled “ERP in Manufacturing 2009 - Expanding Beyond Traditional Boundaries.” This study solicited feedback from 435 North American manufacturers in a diverse set of industries. Since the manufacturers serve a strong cross section of industries, I am inclined to believe that the reported data is reasonably comparable for distributors, service industries, and several other industries not specifically targeted in this study.

Best-In-Class Performance
We should understand what Aberdeen defined as best-in-class so we have a meaningful yardstick by which to measure. These metrics are of course closely related to the manufacturing sector, but you can easily see how many of them would apply equally well to non-manufacturing environments. At the end of the day, there will still be a top 20% in any industry, a bottom 30%, and those 50%’ers stuck in the middle.

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The data contained in Table 1 should be a huge wake-up call, because it indicates that the top 20% are getting leaner and meaner, and thus stronger. The rest (average and laggard) are not keeping pace, which leads to the conclusion that the competitive advantage gap between the best-in-class and the others is growing larger.

How do the best-in-class do it? Do they have better visibility and communication across departments and functions? If so, is it due to different or better versions of software? Are best-in-class companies perhaps operating more current versions of their ERP systems than the rest of the companies surveyed? The reported data indicates that 62% of the best-in-class companies are running on the publisher’s latest available software release or one release back, compared to only 17% of the companies in the average or laggard classification able to make the same claim.

Telltale Traits
In addition to performance metrics shown in Table 1, Aberdeen analyzed 5 other key characteristics of the surveyed companies in an effort to further delineate the best-in-class from the rest. The 5 additional characteristics included process, organization, knowledge management, technology, and performance management.

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There were several notable highlights in the background that went into comprising the above table. The ability of a company to standardize processes and the degree to which they are standardized in their systems are fairly obvious indicators. With regard to the organization metric however, 88% of best-in-class companies feel that executive management support is critical throughout the entire life cycle (selection, implementation, upgrades, extensions, and continued investment) of an ERP system, rather than merely during the selection and initial implementation. I believe this fact alone is a huge differentiator.

Similarly, they also have a strong commitment to continued training for employees. As you might imagine, these metrics are in stark contrast to the companies outside the best-in-class category. Another organizational metric indicates that better ROI is obtained from the ERP system when assigned to line of business executives outside the IT department. That’s generally because these executives stand to gain the most from full system utilization and focused performance improvement.

ROI - What’s Possible?
Speaking of ROI and measurement of same, Aberdeen reports that best-in-class companies are way ahead of the game in this regard as well. They are 57% more likely to utilize ROI estimates to cost justify an ERP project. And here’s the big one, they are 163% more likely to continue measuring ROI even after it has been achieved. Do you get the impression that there’s a strong commitment to continuous improvement?

Typically when initial ROI is analyzed, the total acquisition costs are measured over the time required to recoup the investment. You can see below 5 unique measures that can be used to calculate the ROI. These sources for ROI are equally viable for best-in-class companies as all others; it just takes the others about twice as long to recoup their investment.

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Why do you suppose it takes the average and laggard companies twice as long to recoup their ERP system investments as the best-in-class companies? The chart below reveals that the best-in-class companies are much more aggressive than the rest of the companies in setting the ROI bar high.

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As you can see in the chart below, the act of setting the ROI bar higher than the rest pays off handsomely when it comes to realized ROI.

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We have examined enough data to get a clear picture indicating that best-in-class companies demonstrate best practices relative to their ERP systems, and that they derive more functionality, performance, and ROI from their systems.

Where’s the Elephant?
The obvious elephant in the room for me is which came first? The ERP system best practices or the best-in-class companies? In other words, does fanatical discipline and commitment relative to ERP system best practices lead an organization to achieve best-in-class status? Or does a best-in-class company simply exhibit similar champion-like execution and management relative to their ERP system, just as they would in any other element of their business?

This report does not attempt to answer the chicken or the egg question. However based upon my 20+ years of working with ERP systems, and what the report does reveal, there are some reasonable conclusions that can be drawn. In my belief, best-in-class companies exhibit the following characteristics with regard to their businesses, their ERP systems, and their other investment assets.

• They plan well in advance.
• They take the long term view.
• They systematize and integrate practices, processes, and procedures wherever possible.
• They establish objectives in advance and constantly measure against those objectives.
• They set the bar high, keep raising it whenever possible, and hold people accountable.
• They adapt to change rapidly and avoid getting boxed in a corner.
• They face tough challenges head on and make tough decisions quickly.
• They reinvest continuously in their systems and their people.
• They recognize the value technology can bring to their business and they aggressively use it to their maximum advantage.

Looking in the Mirror
We have examined several of the critical factors relative to the way best-in-class companies manage and utilize their ERP systems. But as you might expect, we have just scratched the surface in terms of the ERP system best practices exhibited by best-in-class companies. My hope is that some of what you've seen here may lead you to assess your own particular situation and the effect that your ERP decisions are having on your overall business performance so you can move the needle in the desired direction. I would love to know whether you agree with the preponderance of the Aberdeen data or you think it misses the mark in some way. And I invite you to download and read the full report (PDF, 8.4MB).

 

Best-in-class companies demonstrate best practices relative to their ERP systems and derive more functionality, performance, and ROI from their systems.