When accounting software programs begin to feel a little small for growing businesses, is it time they move to an ERP?
Enterprise resource planning (ERP) companies are winning over business owners by showing how one single database can be used to manage and help automate multiple parts of the business.
What happens when you get too big for your accounting software? Once a company evolves from a small business into the maturity of a mid-market enterprise, the trusty old accounting program can start to feel a little small.
The trigger may be running a business in multiple locations or countries, the depth of reporting required, or the need for a platform to sustain long-term growth, says Craig Stanmore, chief executive of Enspira Financial, an advisory accounting firm that specialises in supporting small to mid-size clients.
At some point the business owner will need to sit down with the chief financial officer and have that talk: “It’s time to think about ERP”.
This acronym, which stands for enterprise resource planning, can strike fear in the heart of a CFO because, by its very nature, it is a big undertaking. ERP is a term that describes a software suite of modules that run several functions within a company. The modules can include multi-entity accounting, order tracking, advanced inventory and warehouse management, project management, e-commerce and more.
Definitions of ERP by vendors such as NetSuite and SAP suggest the term emerged in the 1960s from the world of manufacturing. Making things can be incredibly complex – building a bicycle, for example, involves myriad materials, kits and parts. Manufacturers need a way to track the inputs required to make a product, the number and type of products they create, the quantity and type of products a customer orders, and whether those customers have paid their invoices.
You can track all of these things with spreadsheets or different applications but it quickly becomes confusing; errors creep in, which can cost a business time and money. The errors can become so large – a critical cashflow shortage, for instance – that it can wind up the company.
Hence the birth of the ERP, a single database that tracks all these things in one place.
Managing the business with ERP
There is an industry push to rename ERP as a business management system (BMS). This is a more accurate description, given that many different industries such as professional services and retail also like the idea of one app to rule all functions.
Previously, ERPs were thought of as expensive, complex systems that took too long to install. Views from clients gathered this year by research firm Gartner show that potential customers feel overwhelmed by the complexity of what’s on offer and how it fits their needs. Those who had taken the leap into ERP reported that the implementation ran over time, over budget and their staff had trouble making it all work. However, the big ERP players are working to change all that.
Xero Australia’s managing director, Trent Innes, says modern-day ERP systems are more focused on the user, costs have reduced, and systems are easier to get up and running.
“Traditionally, most ERP systems were monolithic models and quite antiquated. They tried to be everything to everyone, but modern-day ERP systems now give you the chance to choose the application that’s best suited to you,” he says.
“The barrier to entry is also a lot lower. Historically, ERP systems required large upfront investment in infrastructure and implementation, whereas now they’re just different applications. The cost to deploy is much lower, as they’re mostly subscription based and you only pay for what you need.”
Taking ERPs online
Just as accounting software downloaded to your desktop is giving way to accounting software in your browser, ERPs are also moving online. In the process they are becoming easier to set up, easier to operate and cheaper to buy. This makes ERPs attractive not just to large enterprises, but to mid-size and even small businesses.
This is good news for business owners.
One big advantage of an online (or cloud) ERP is that you don’t need to buy a server to run it. Whether you have one office or offices in different states or countries, staff can log in and immediately access the software.
As with small business accounting software, the shift to online is shaking up the established order. Germany-headquartered SAP has long dominated the ERP market, the bulk of which runs on servers in companies’ offices. (This is often referred to as on-premise ERP, as opposed to online.)
SAP’s competitors are Microsoft, Oracle and Infor. At their heels are a host of smaller second- and third-tier ERP companies, some that cater to specific industries.
In the past five years, SAP’s lead has been shrinking, while the number of customers relying on second- and third-tier vendors has been growing, says the 2016 Report on ERP Systems and Enterprise Software by consultancy Panorama Business Solutions. In addition, cloud ERP installations more than doubled from 11 per cent to 27 per cent in the past year.
Oracle bought NetSuite in November for US$9.3 billion, boosting its online horizons. SAP has slowly been developing SAP Business ByDesign, to challenge this merge. Meanwhile, Microsoft sells Microsoft Dynamics Online, a cloud ERP that will replace its on-premise software Great Plains.
The remarkable thing about these cloud versions is that the software companies are selling them to businesses of all sizes.
SAP’s on-premise ERPs are commonly found running airports and government departments. Yet SAP markets its Business ByDesign as “ERP for mid-market companies”, with licences starting at just 10 users. Installation can cost less than A$30,000, says Stuart O’Neill, head of business for SAP Hybris Australia and New Zealand.
“Cloud-based ERPs are bringing down the cost per user and bringing huge amounts of capability to the user base. It’s democratising access to ERP,” he says. Business ByDesign, says O’Neill, is used by 1300 companies globally – 40 of them in Australia and New Zealand – ranging in size from five users to 2000 users.
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