MODERN ERP: ERP Planning and Package Selection
Chapter 5: ERP Planning and Package Selection
Objectives
Understand the various entities and documents required for proper project governance.
Be aware of cost components that comprise the Total Cost of Ownership (TCO) for ERP.
Distinguish between "best in class" and "best of breed" ERP implementations.
Know the steps involved in ERP package selection.
Be aware of various tips for negotiating with the ERP vendor and system integrator.
Organizational Readiness for ERP
Organizational readiness assessment: A formal evaluation of a company's preparedness for ERP implementation.
Assessment questions include:
Is now the right time for change?
What is the current level of business standardization?
What is the level of C-suite support?
Is the company culture open to change?
Is the company financially ready?
Project Governance
Project governance ensures projects run smoothly, on budget, and on time.
Before project commencement, project roles and responsibilities must be set, and governance documents compiled.
Key roles and documents for ERP project governance include:
Steering committee
Project manager
Project team
Project charter
Scope statement
Steering Committee
The highest decision-making authority for the project, determining its ultimate success or failure.
Typically small for efficient high-level decision-making.
Led by the executive sponsor.
Sets the tone and vision for project success.
Develops a realistic scope.
Communicates with and empowers the project team.
Is most accountable for the project and team success.
Needs to be aware of Project Portfolio Management (PPM) to prioritize projects and realistically staff them with qualified individuals.
Should meet regularly to make important decisions.
ERP Project Manager (PM)
Has the lead role in planning, executing, monitoring, controlling, and closing the project.
Key Responsibilities:
Making timely, effective decisions at the project level.
Communicating decisions both up and downstream.
Reviewing team members’ qualifications and submitting names to the steering committee for approval.
Motivating, inspiring, counseling, and facilitating individuals to take responsibility for project goals.
Delivering the project on time and within budget.
Presenting the status of the project to the steering committee at its regular meetings.
Information the PM presents to the Steering Committee includes:
Project metrics (effort vs. cost vs. time).
Top 10 risks to the project, action items to mitigate these risks, and owners of each action item.
A project roadmap (overview of upcoming milestones on a timeline).
Financial status (actual spend-to-date and estimated remaining spend compared to budget).
Summary of actions/decisions needed from the steering committee.
Achievements since the last meeting.
Any proposed changes to scope (with justification and impact).
Project Team
Plays a critical role in ERP project success, as they are deeply involved in the daily implementation.
Core team typically includes:
Subject Matter Experts (SMEs): Highly respected employees with extensive domain knowledge in their functional area.
Technical people.
Site champions.
Highly capable employees, often referred to as the “best and brightest.”
The size of the core team depends on the organization's size and project scope.
Participation generally requires a 100 ext{%} time commitment from team members.
Questions to consider when building the project team:
Does this person understand multiple parts of the business or just their own domain?
Does this person express a willingness to embrace organizational and business process change, or are they resistant?
Will this person influence others positively?
Does this person work well with others?
Project Charter
A governance document for the deployment and completion of the ERP project.
Details include:
Project mission and objectives.
Business case and budget information.
A description of how the project will be organized and conducted.
Differentiation of roles and responsibilities for internal versus external resources.
Signed by the executive sponsor, authorizing project commencement and funding.
Scope Statement
Details what is and is not included in the ERP project to establish crystal-clear boundaries.
Scope creep: The expansion of the project’s original boundaries, a major reason ERP projects exceed their schedule and budget.
Change control: The process of managing and controlling changes to project scope.
ERP Business Case
Outlines the justification for ERP, including costs, expected benefits, and anticipated Return on Investment (ROI).
Steps to create a business case:
Determine the business case rationales.
Estimate the potential benefits of the ERP investment.
Estimate the potential costs of the ERP investment.
Estimate the potential ROI.
Business Case Rationales
High-level reasons why an organization needs to implement an ERP system.
Three types of rationales:
Technology rationale: E.g., obsolete systems.
Strategic rationale: E.g., Mergers and Acquisitions (M&A).
Business process rationale: E.g., decrease inventory levels.
ERP Benefits
Benefits for the business case need to be quantified whenever possible.
Key Performance Indicators (KPIs): Measurable values used to determine how effectively a company is attaining its target business objectives (e.g., inventory turnover, capacity utilization).
KPIs provide the detail behind the business process rationale.
The capital investment window for an ERP project is typically 5 years.
ERP Costs (Total Cost of Ownership - TCO)
TCO components include:
Software licenses
Database licenses
Third-party software licenses
Hardware and IT infrastructure
Implementation costs
Maintenance and support costs (also known as Application Management Services).
Some costs are one-time, while others are recurring.
Software License Costs
Factors influencing ERP system price:
Number of employees using the system.
Vendor tier being deployed.
Number of modules purchased.
Licensing Models:
Perpetual licensing model: Vendor grants indefinite access to software upon payment of an upfront licensing fee.
Named user licensing (per-seat licensing): Company identifies the total number of individual users and pays a license fee for each.
Heavy user licensing: For those using more system functionality, charged a higher fee.
Casual user licensing: For those who just view reports or run occasional queries, charged a lower fee.
Concurrent user licensing: Allows an unlimited number of named users and accounts but limits the number of simultaneously active users.
Subscription-based licensing model: Used by cloud vendors, granting customers access to software for a specific period for a recurring fee (monthly/yearly). Licenses are renewed regularly.
Database License Cost
ERP vendors specify the required database type.
Some vendors, particularly cloud vendors, bundle the database cost with the software license cost.
Database vendors often use a tiered pricing model with three or more levels.
Third-Party Software License Costs
Third-party software (often called "bolt-ons") offers additional features or logic to solve specific business needs (e.g., EDI, bar codes).
ERP vendors partner with third parties for these solutions.
Third-party software must seamlessly integrate with the ERP system.
Hardware and IT Infrastructure Costs
For on-premise ERP systems: Requires investment in IT infrastructure components:
Hardware (servers, routers, backup and storage, desktops, laptops, tablets, printers)
Failover solutions
Network connectivity
Power
Security
For hosted ERP systems (by vendor or third party): IT infrastructure costs are typically included in the monthly subscription fee.
Implementation Costs
One of the highest-cost components of the TCO.
Functional and technical consultants (system integrators) are expensive.
Cost of internal resources also needs to be estimated.
Full-Time Equivalents (FTEs): A measure of how many employees a project requires, assuming all employees work a full work week.
Maintenance and Support Costs (Application Management Services - AMS)
AMS: Post-go-live maintenance and support.
Includes: Functional and technical support, installing updates and patches, application monitoring, and backup and recovery.
Cost ranges from 18 ext{%} to 25 ext{%} of the initial software license cost.
Example NetSuite Support Levels:
Basic: Provided with subscription, includes 24/7 support for "severity 1/critical" concerns, online support for defects and critical issues, access to NetSuite Support User Group.
Premium: Toll-free technical center access for non-critical issues with priority queuing, prioritized online case responses, weekend support, advice/assistance with use/configuration, early notification of new releases.
Advanced Customer Support: Hands-on product guidance, configuration support, continuous optimization, development education, release guidance and testing, performance assessment and monitoring, dedicated support team for all questions.
ERP Selection Committee
Charged with selecting the ERP system; the final decision is made by the steering committee.
Led by the ERP project manager and executive sponsor, and includes subject matter experts.
Should be small to ensure efficient decision-making.
Goal: Choose an ERP system that best meets the company’s requirements from available choices.
Requirements Gathering
A process where the selection team determines all the functional criteria the company needs and wants from the ERP system.
Functional requirements depend on which business processes are in scope.
Many companies use a series of workshops to gather requirements.
Requirements document: The result of requirements gathering, detailing all business requirements for a new system (e.g., for Purchasing: purchase requisitions, requests for quotes, purchase orders, vendor performance tracking, specific reports).
Market Survey
Determines which vendors’ systems might be contenders.
Vendors can be identified through: Websites, industry magazines, trade exhibits, customers, suppliers, and business partners.
Request for Information (RFI)
Sent to potential vendors to prequalify them and shorten the list to a manageable number (typically 3-4 vendors).
RFI questions might include:
Is your ERP software written in a commercially available development language that is still being enhanced and supported?
What is the cost for the first and subsequent years’ maintenance for your software?
What is the typical implementation timeframe for a company of our size?
How is your software different from others available for our industry?
Request for Proposal (RFP)
Sent to short-listed vendors so they can indicate what specific requirements their solution meets; can contain several hundred requirements.
Outlines due dates for vendor responses, the selection and award process, and the estimated award date.
The ERP selection committee examines each vendor response to determine if the software should still be considered.
Best in Class vs. Best of Breed
Best in Class / Family Suite: Combining core functions of the enterprise into a single, integrated ERP software suite.
Best of Breed: Implementing some modules from a niche vendor and integrating these modules with modules from the main ERP vendor.
Middleware: Software that facilitates sharing data and business logic across systems, but requires IT expertise to set up and maintain.
Pros and Cons:
Best of Breed Pros:
Very strong functionality in certain areas due to vendor specialization.
Customer protected from dramatic price increases from one vendor.
May cost less than purchasing all modules from one ERP vendor.
More opportunity for differentiation from competitors.
Best of Breed Cons:
Requires multiple package selection processes.
IT infrastructure requires more attention due to different maintenance needs and upgrade schedules.
Training can become disjointed across departments.
Potential for integration issues; integration with core ERP takes time and consumes resources.
Best in Class Pros:
Full process integration, single database of records, and standardized technology across the enterprise.
Single system implementation with a single vendor.
Single user interface eases training.
Possibly more control over TCO because buying from only one vendor.
Best in Class Cons:
Single vendor may not adequately address all the customer’s requirements.
More customization may be needed, as a single suite may not be the best fit in every area.
Tied to one vendor for support and maintenance.
Vendor viability may pose a risk.
Demo Days
When vendors must demonstrate their capabilities and show how their software works.
Allows the committee to verify vendors’ self-reported information.
Selection committee should provide a script to each vendor beforehand, dictating what the demo should cover.
Vendors should focus on “must-haves” first, then “nice-to-haves” and “bells and whistles.”
Companies should ensure vendors have not added any customization to their demo software.
Rules for Demo Days:
Agree on an agenda and stick to it.
Give each vendor demo scripts reflecting typical workflows in the company.
First confirm the “must-haves,” then the “nice-to-haves,” and lastly the “bells and whistles.”
Require that the selection team be on time and attend the same sessions for each software vendor.
Assess the vendor culture if the vendor is also being considered as the system integrator.
Evaluate the ERP software based on requirements as opposed to the vendor’s slick performance; do not be swayed by sales pitches or flashy appearances.
Designate a timekeeper to ensure sessions stay on schedule; leave enough time for a post-demo Q&A session.
Use a weighted score sheet for ranking the packages.
Weighted Score Sheet
Used to assist in making an objective decision by assigning a weight to each requirement or set of requirements deemed important in the package selection process.
All committee members must agree on the relative importance (weights) of the requirements.
Each team member scores, and the committee head compiles responses.
Example Criteria Categories: Functional (e.g., manufacturing, human resources, sales & distribution, financials, purchasing), Technical (e.g., ease of use, customizability, compatibility, scalability, configurability, integration with third-party apps), Commercial (e.g., vendor commitment to R&D, product commonality in industry, support/maintenance costs, software license costs), System Integrator (e.g., understanding of culture, business, implementation cost, methodology, processes).
Fit/Gap Analysis
The methodology companies use to compare their business process requirements with what an ERP system offers.
“Fits”: Where the ERP system matches the company’s required functionality and process design needs.
“Gaps”: Where there is a mismatch between the company’s required functionality and process design needs.
More gaps indicate more difficulty in implementing and using a specific ERP system.
Major gaps need to be uncovered during package selection.
Reference Checks
Organizations should always obtain references from customers of the ERP vendors.
A good reference should be a company comparable in size and in the same industry.
The committee should also seek out additional references for a more objective viewpoint.
Pertinent Questions to Ask of References:
What problems have you had with the software or the vendor?
Are you happy with maintenance and support?
How often does the vendor come out with updates and upgrades?
Would you choose the software all over again? Why or why not?
In what area of your company did you achieve the most benefit from the software?
Request for Quote (RFQ)
After painstaking and impartial analysis of all collected information, an RFQ is issued.
Solicits the financial conditions of the proposed solution, including initial licensing costs for the number of users, annual maintenance costs, and payment terms.
The price of ERP software is highly negotiable; there are multiple ways to negotiate down the software cost.
Tips for Negotiating the Best ERP Deal
Use your leverage while you still have it: A company has the most negotiating power before signing the deal. The vendor’s first price quote is only the starting point.
Keep shopping around: Also negotiate with the runner-up to maintain pressure on the finalist vendor.
Don’t overbuy: Unless modules support the scope and list of requirements, do not purchase them.
Use your name as a bargaining chip: If a customer is a brand name or a well-known company, the vendor may want to use them as a reference. Use this fact to negotiate.
Make the deal sustainable: Ensure the deal covers potential issues like acquisitions, which will add more users. Know the potential additional license fees.
Negotiate the deal at quarter or year-end: Vendors are more apt to give discounts when their reported financial results are on the line.
System Integrator Selection
Critical factors for selection:
Level of knowledge the system integrator has with both the specific ERP package being implemented and with the company’s industry.
Project management methodology.
The system integrator’s culture.
Composition of the system integrator team.
It’s essential to determine responsibilities of the system integrator, hourly rates, invoicing procedures, and how billing issues are resolved.
ERP Implementation Tasks Matrix (Example Shared Responsibilities): Many tasks, such as IT infrastructure preparation (on-premise), project planning and execution, configuration, customization, cleansing data, data migration, organizational change management (OCM), and testing, often involve shared responsibilities between the customer and the consultant. For example, IT infrastructure preparation for on-premise might be primarily the customer's responsibility, while configuration and customization are often shared with the consultant, and OCM is typically a core customer responsibility supported by the consultant.