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ENTERPRISE RESOURCE PLANNING (ERP) can be a blessing or a curse. Many companies find ERP systems help them make better-informed decisions. Others discover too late that their purchase has been based more on faith than good judgment, and run up tens or even hundreds of millions of dollars in extra costs and schedule delays.
How, then, can senior managers ensure that their companies build a sound business case for deploying ERP systems? And what can they do to guarantee that the promised benefits are not eclipsed by the costs of integration, process redesign, and training? One answer is to take a cost-based approach to the business case. Another is to be aware of common pitfalls.
Is ERP for us?
ERP systems (made by SAP, Baan, and PeopleSoft, among others) have received much attention for their potential to help companies make more effective decisions. The plaudits are often deserved. ERP can reduce the financial reporting, purchasing, and support expenses of management information systems (MIS), and lead to more timely analysis and reporting of sales, customer, and cost data. One large pharmaceutical company has used it to consolidate manufacturing support operations such as purchasing and vendor management; as a result, it employs fewer staff and has generated a return of more than 20 percent on its capital investments. One international biotechnology company expects its ERP system to help it save more than $10 million a year on financial reporting, purchasing, and MIS support.
But for all the talk of employee productivity gains and crossbusiness marketing opportunities waiting to be tapped, savings can prove elusive. Hard returns, such as reduced headcount resulting from streamlined operations, are simple to predict and control, but are only part of the picture. Soft returns, such as revenue or employee productivity gains, are neither easy to predict nor under a company's direct control. The problem is a common one in evaluating IT investments.*
In the case of ERP systems, the length of the payback period and the size of the investment needed- in terms of both cash and human resources - make it unwise to assess a project on anything but a hard-returns basis. This is not to suggest that an ERP system cannot help a company boost revenue, or that employees cannot...