In-Depth

Why ERP Does Matter

Companies that consolidate their ERP stacks and implement consistent data definitions can reduce operating costs by nearly 25 percent

• By Stephen Swoyer
• 08/16/2005

If it’s true that IT doesn’t matter, is the selection of an ERP vendor largely a moot point, too? To a large extent, yes, some IT pessimists say.

All’s not lost, however. According to business process consultancy the Hackett Group, companies that standardize on a single ERP system and implement consistent data and technology standards can reduce a subset of their operating costs by nearly one-quarter. Call it a common sense approach to doing ERP.

The Irrelevance of IT is a major theme in the work of technology pessimist Nicholas G. Carr, who—in books and several articles—has argued that the ubiquity of IT has also demythologized it: Organizations no longer embrace information systems for competitive advantage, i.e., as a means to differentiate themselves from their competitors. Instead, they do IT because it’s a competitive necessity. All large enterprises run ERP systems, for example, and for this reason some analysts argue that the selection of an ERP vendor is irrelevant.

The Hackett Group reached a similar conclusion about ERP last year, when it (in)famously argued that ERP vendor choice has more or less no bearing on a company’s financial performance.

For example, last year Hackett researchers said financial software from SAP, PeopleSoft, and Oracle was used at more than 80 percent of the organizations in its database, as well as at over 92 percent of all companies that achieve what Hackett describes as “world-class” performance levels in finance. But no single vendor was truly used more frequently than any other, researchers concluded, and all of the ERP vendors supported similar best practices in finance.

This time around, the Hackett has further refined that study. Now, researchers say, ERP as a technology does have a role to play in improving a company’s financial performance vis-à-vis the competition—provided the organization also embraces consistent data and technology standards. The incentive for doing so is sizeable: Companies can reduce the cost of their finance operations by up to 23 percent, Hackett researchers say.

Standardization can’t and shouldn’t be done in a piecemeal way, however. Hackett found that companies which take either of these approaches independently see little to no savings, and in some cases could even realize a slight increase in costs.

Data and technology consistency has been embraced at most world-class finance organizations, Hackett researchers note: These companies typically spend 31 percent less than their peers on finance, complete their monthly financial reporting cycles more quickly, and operate with about one-half the staff. World-class finance organizations have also embraced simplicity in other forms: Such companies rely on a single chart of accounts, use half the bank accounts of typical companies, and do fewer budget iterations, researchers say.

Drilling Down Into Savings

Hackett researchers assessed a range of process domains to try to identify areas in which business complexity could be significantly reduced. As a result, researchers identified two areas as more important than any others: the number of finance or ERP systems and the extent to which organizations adhere to data and technology standards on a consistent basis. By consistency, Hackett researchers include the use of standard hardware and peripheral software tools for finance along with the usage of common data definitions.

Piecemeal approaches to consistency don’t cut it, however: Researchers found that individually, reducing complexity in both areas had little impact on cost. Among companies that had not moved to a single common ERP system, the cost of finance actually rose slightly when they implemented standards.

Among companies that focused on both technology and data consistency, however, the median cost of finance was .99 percent of revenue—or 23 percent less than that of companies that did not meet either or both of these criteria. This amounts to $2.9 million in annual savings for a $1 billion company.

How prevalent is the trend toward common ERP underpinnings and consistent data definitions among world-class companies? Conclusively dominant, say Hackett researchers, who note that such organizations are 61 percent more likely than their peers to have a single ERP system, and 20 percent more likely to rely on common data definitions. As if that’s not enough, Hackett reports, such companies cut costs by another 21 percent, or $2.1 million/billion of annual revenue, over companies that focus on just these two elements.

“To [reduce complexity], companies need to begin by assessing the systems they’re using. How many are there? How standardized are they? Are differences being driven by real business need, or by some combination of happenstance and perhaps practices established before parts of the company were joined in a merger?” said Hackett Group finance practice leader Mark Krueger in a statement. “Careful planning and the consideration of options such as outsourcing and shared services are also critical, as is strong support from senior management. Finally, change management is a critical element. To keep people from backsliding, companies may need to go as far as shutting off old systems and processes as soon as the new ones are working.”

Related Article:

ERP Vendor Choice Unimportant, Study Finds
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