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ERP Systems: The Next Legacy Dinosaur?

By April 4, 2008Article

Enterprise customers are increasingly aware of the “deadweight tax” levied by ERP systems. This so-called tax accrues within the IT organization because ERP systems can’t keep pace as the business changes.
With corporate income tax, at least you know that a larger tax is a sign of larger revenue. With the ERP tax, there is no upside – Dr. Tom Redman, of Navesink Consulting Group and co-founder of the International Association for Information and Data Quality, states “Poor quality data costs the typical organization 20 percent of revenue.”
The real dollars are not the millions that you spent implementing your applications. Per Redman, “For every dollar it costs you to do work when the data you receive is perfect, it costs $10 to do that work when the data contains errors.”
The original intent of ERP systems was to streamline and simplify business processes. Instead of the promised business agility, they’ve created rigidity, uncertainty, risk, and a dizzying level of complexity.
“Complexity is death,” says Chuck Thacker, one of 16 technical fellows at Microsoft. “We are hanging on with our fingertips right now.”
The ERP tax accumulates from several sources:

  1. Silo mentality. A silo mentality increases complexity, and ensures duplication of efforts with different versions of the truth, which compromises the quality, reliability and accessibility of vital information.As Ken Jones, CEO of Accessible Technologies Inc. recalled, “Having to maintain and reconcile three databases was slowing production, especially in periods of strong growth and during peak season. Customer service was also hindered by the lack of system integration and an inflexible order configuration process.”
  2. Inability to predict future business needs. This vulnerability is especially true when implementing a new ERP system. Many companies tend to put in a system that closely resembles the older system it’s replacing, instead of visualizing future needs when defining the ERP “wish list” of features.
  3. Inability to change ERP system setup parameters. Usually hidden to all but the IT group, this factor still strikes across the system: from the internal accounting structures to the product IDs created after the first transaction is entered.
  4. ERP system complexity. It can easily take hundreds of people to extract data from multiple sources and then refine and reconcile it. Employees build elaborate spreadsheets, reports, and databases that need to be maintained, compounding the initial reporting expense over time.

“The Hackett Group estimates that the average $1 billion company maintains 48 financial programs, along with nearly three ERP systems,” according to CFO magazine. “So it’s little wonder,” says Randy Whitchurch, CFO at bar-code maker Zebra Technologies, that “if you’ve got a lot of far-flung locations on disparate accounting systems, [documenting controls is] a problem.”
In any sizeable company that has even a modest history of growth, this tax can be several million dollars per month.
If today’s businesses are drowning in ERP taxes and related issues, is there any hope in sight?
Some CTOs have hung their hopes on application portfolio management (APM) tools, to reduce application maintenance burdens by using detailed application metrics. But APM implementations require a six-figure financial investment and a major time investment, so it’s not the solution for everyone.
Achieving and maintaining accurate regulatory compliance is now everyone’s priority, thanks to Sarbanes-Oxley (SOX). Any compliance strategy worth its salt has to be based on consistent and manageable business processes and information. Companies need a “single version of the truth.”
SOX requires full transaction tracing, and each application handles that differently. Once again, another army of specialists need to find and reconcile all of the relevant data to avoid making inaccurate reports, adding to the ERP tax burden.
Subpar data quality compounds the ERP tax situation, and is not only due to inaccurate data, but also to customers being treated inconsistently across the organization. Most companies have between 10 percent and 60 percent of duplicate or inconsistent data in their systems, costing millions of dollars per month.
“With an ever-increasing amount of data coming from third parties and service providers, and more data sources than ever before, customer information quality is suffering,” according to Aaron Zomes, Founder and Chief Research Officer for the CDI Institute, an analyst firm.
A major U.S. bank had tens of terabytes of redundant and overlapping data following a series of acquisitions. By cleaning up the duplicate data and consolidating their enterprise data, the bank reduced storage by $30 million per year on a single project.
If companies review their IT spending, they quickly discover another ERP tax: multiple license fees and support contracts for the same applications, made worse by information silos. Technical differences among a range of applications also require the hiring of experts to implement and maintain the various applications.
“Each new application rollout has its unique integration challenges,” reports David C. Bloom, CIO of Safe Travel. “Costs and timelines are often poorly estimated, and the down-the-road costs rarely account for the ongoing maintenance efforts and reconciliation to ensure data integrity.”
Companies can and do spend millions of dollars to implement a service-oriented architecture (SOA) in an attempt to avoid these ERP tax pitfalls, or at least to lower their “tax bracket.” The goal of an SOA is to reduce development costs, share data among different systems, and enable business process change. The catch? Anything wrong with the original systems will carry over and be multiplied within the service-oriented architecture.
“You’re not buying an ERP system, you’re buying a new way of doing business,” warns Bloom. “Unless the whole company has agreed to continuous process changes, IT becomes the bad guy. I’ve seen multi-million dollar systems ripped out and rolled back to the old legacy system; simply because there was no buy-in from operations.”
The continuously changing business processes, data, and applications make it nearly impossible for a typical, inflexible ERP system to keep pace with what the business really needs.
The deadweight ERP tax is both real and substantial. The high taxes resulting from information silos, overlapping applications, poor quality data, and lack of business agility might outweigh the benefits of implementing an ERP system. Yet Forrester Research reports that this year, North American enterprises will invest most heavily (27 percent) in improving integration between applications, and ERP systems will remain the top major upgrade (40 percent).
Your customers may be unaware of the sizable ERP tax they’re paying, but they’ll know soon enough that the tax is a red flag of increasing ERP obsolescence. The bottom line is that an inability to change will eventually lead to extinction. Software vendors must work harder to deliver flexible systems that eliminate this “deadweight tax.”
Helene Abrams is an internationally recognized technology and business strategy expert. She is founder and president of eprentise ®, an Orlando, Fla.-based company that produces pioneering software to help businesses separate their data during a divestiture or consolidate their data for mergers and acquisitions. A graduate of Harvard University, Abrams founded Crystallize, now Applimation, after executive careers with Oracle, Deloitte & Touche and Ernst & Young, where she established a reputation for helping Fortune 1000 customers.

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