"Enterprise Applications: The Cost of Keeping Current... Or Not"

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"In order to make the best use of your organisational resources, you need a comprehensive Enterprise Resource Planning (ERP) software solution that can act as an organisation-wide control centre. This 'control centre' will collect status information and progress reports from different divisions and make them available to other departments. Information is updated by the users in real-time and accessible at any time to anyone who needs it."
Source: Oracle

Resources Related to Enterprise Applications: The Cost of Keeping Current... Or Not:

• Enterprise Resource Planning (ERP) (Wikipedia)

Enterprise Applications: The Cost of Keeping Current... Or Not

Aberdeen's research over the past nine months points to the continued need for companies to reduce costs by cutting expenses. This is only accentuated by the current financial crisis and the fear it has created. The corollary to this in regards to Information Technology (IT) investments is to deliver more value. Companies that are able to take full advantage of their current stack of technology and applications, including innovations delivered by technology solution providers, are better positioned to drive more value to the enterprise. Yet many are prevented from taking full advantage of innovation by their own limited ability to provide planning, training, testing, re-customizations, and integration. This Analyst Insight investigates the effort associated with major and minor upgrades, as well as the cost of not keeping current. It explores the value added to the business and identifies alternative delivery models to traditional on-premise, self maintenance that can significantly reduce the time invested by internal resources while fostering standardization and adoption of best practices.

The Cost of Upgrading

The cost of keeping current is represented as both time and money. Much of the "money" side of the equation is typically sunk cost in terms of the cost of the software and services combined with maintenance dollars paid to the solution provider. The time and effort to upgrade is an investment necessary to gain value from money already spent on software, implementation, and maintenance. Companies all too often fall into the trap of circular logic. They can't spend the time therefore they don't get the value, but without the value, they can't justify the time.

The "Sunk" Cost of Software

Aberdeen collected data on enterprise application costs in its annual survey of over 1,400 companies benchmarking ERP in Manufacturing. While the topic was presented as specific to ERP and manufacturing, many of the questions asked were relevant to any industry and indeed a surprising 21% of survey respondents represented non-manufacturing sectors including financial institutions, services industries, wholesale, retail, and other sectors, indicating that many of these sectors look to manufacturing for ERP best practices. Data captured included ERP usage along with use of applications which surround ERP, including Customer Relationship Management (CRM), supply chain planning and execution, Business Intelligence (BI), and other applications traditionally considered as extensions to ERP. Companies are 1.3-times to 4.8-times as likely to have purchased these extensions from their ERP solution provider as from another Independent Software Vendor (ISV), and the predominance of these purchases were described as an ERP module versus a separate application. Therefore, many of the conclusions drawn from ERP can also be applied to these other enterprise applications.

Aberdeen gathered the costs of software license fees, service costs, and maintenance costs. Services costs are primarily paid for in implementation and consulting. Maintenance costs, which are recurring, fuel both technical support as well as product innovation. The average cost of maintenance paid each year will vary significantly based on the size of the implementation in terms of modules purchased (or the size of the suite of modules) as well as the number of users. This, along with the cost of the software and services to implement, is the "sunk" cost portion of the cost of keeping current.

"We've standardized our deployment of enterprise applications. With standardization and our strategy to have Oracle On Demand handle the technical tasks, my organization works with the business so that upgrades are really driven by the opportunities to streamline business processes and otherwise innovate in our business".
~ Jeremy Gill, VP of IT and
CIO, Michael Baker
Corporation

Table 1 displays the cost accrued over three years, as well as seven years. To get the sunk cost per year, we add the cost of the software and services to the maintenance over a period of time and then divide by the same period. Preliminary results from Aberdeen's 2009 Aberdeen Report show 3.3 years is the average period of time that companies budget between major upgrades. Most are unwilling to spend the time and effort any more frequently. Some will upgrade less frequently. Our data bears this out later on in this Analyst Insight, as we observe 31% haven't upgraded in the last three years.

Seven years is the current average age of an ERP implementation. The age of ERP implementations was captured directly from survey data and reflects a two year drop in age from 2007. While many companies have been threatening for years now to replace older applications or consolidate multiple applications inherited through acquisition or as a result of allowing divisions to make their own purchase decisions, we are finally seeing evidence that these actions are being taken on a significant scale. Reducing the number of applications, while initially painful, is one path to ultimately reducing costs.

Table 1: Average Sunk Costs by Company Size

While Table 1 details average costs of software, services, and maintenance, these by no means represent the Total Cost of Ownership (TCO) of enterprise applications. One of the common pitfalls in determining total costs is to ignore the internal and sometimes hidden cost of the employees involved in the initial implementation and the on-going care and feeding of these solutions. Aberdeen's January 2007 Realize the Returns from Enterprise Management Applications: Make the ROI Calculation Speak to the Financial Value of EMAs report made the distinction between external "hard" and internal "soft" costs. Hard costs are the first three elements noted above - the cost of software, services and ongoing maintenance - as these are paid for in hard currency. The "soft" costs are those paid in terms of salaries and benefits to internal employees, a large part of which are often viewed as a fixed cost.

berdeen found that approximately 73% of the total costs captured were represented by these internal costs, with little variability based on company size or competitive statusA. However, these were the costs which were the least likely to be considered in ROI calculations.

Shown in this context and given the hundreds of thousands to millions of dollars spent over the average life of an ERP implementation, it is important to look beyond the typical perspective of TCO and consider the Return on Investment (ROI) of the purchase as well as the recurring cost of maintenance. Taking advantage of product innovation by upgrading to newer releases is one way of ensuring that the maximum business value is derived.

The "Value-Add" of Upgrades

The additional cost beyond the sunk cost portion is the time and effort to actually implement the innovations delivered along with the upgrade. The number of man-weeks in Figure 1 is representative of the level of effort required of both major and minor upgrades. Many of these steps can be done in parallel, so these values don't necessarily indicate the total time span of the activity. A total of 41.3 man-weeks could be as short as a few weeks or even longer than 41 weeks, depending on the focus and dedication of effort and the man-power assigned.

When looking at these averaged numbers, it is important to note that not all upgrades are created equal and not every vendor defines major and minor upgrades in the same way. The bottom line is that there is considerable time and effort required in an ERP upgrade, major or minor, and the business must continue running in the meantime.

Consider Alternative Delivery Models

These numbers are also generally reflective of internal resources working on ERP implementations maintained on premises. In instances where the implementation is provided as a service or is managed externally in hosted environments, the time spent on upgrades is cut in half. This helps explain the growing interest in these alternative delivery models (23% of our survey pools will not even consider an on-premise ERP solution) and also offers an alternative approach. A company that cannot afford the time to upgrade might consider outsourcing as an alternative. Although outsourcing won't save the time spent on training users, it can significantly cut down on the time investment of internal resources.

Standardization can also be a benefit derived from involving expert third parties in both the initial implementation and the upgrade process. Standardization and acceleration of business processes has been one of the top two strategic actions of Best-in-Class companies for the past three years. Economies of scale and reliability are the result of using a standard, repeatable framework. Having to explain (and perhaps justify) exceptions to standards to an objective third party can serve as a catalyst for adopting best practices and limiting customizations which can later impede the upgrade process.

Case in Point

Founded in 1817 as Bank of Montreal, today BMO Financial Group is a highly diversified financial services provider offering clients a broad range of personal, commercial, corporate and institutional financial services across Canada and in the United States through BMO Bank of Montreal, BMO Nesbitt Burns, BMO Capital Markets and its Chicago-based subsidiary, Harris Bank. Its journey, through its use of the Oracle E-Business Suite On Demand, began with BMO Bank of Montreal, in September 2000, and has continued to scale over the past eight years through the addition of other Bank legal entities while continuing to incorporate Oracle E-Business Suite software release upgrades during conversions of these major entities. They currently have over 17,000 end users of self service applications (procurement and expense reporting).

"When we started in 2000 we began by standardizing business processes across the enterprise. The Oracle E-Business Suite modules were built on best practices business processes and we wanted to adopt these processes as we rolled out the applications to our business units. At the time we had over 42 different accounts payable systems, which was very costly to the bank. We started with BMO Bank of Montreal as our first major implementation and then brought in other major business entities over time. Each time we brought a new entity on, we took the opportunity to upgrade and stay current - Harris Bank in January 2002, Nesbitt Burns in 2004, and brought all business entities into Oracle Release 11.5.10 in September 2005. Through each of these Oracle Release Upgrades (5 of them) we have worked very closely with Oracle Consulting and Oracle On Demand as key implementation partners. Each of these upgrades were delivered on time, on budget and most importantly met our service window to our internal customers. One of the keys to our success was having the same resources from Oracle Consulting engaged with us through each of these release upgrades. This provided consistency throughout our journey and assisted in developing solutions around BMO's requirements," said Gary Keirstead, Senior Manager, e-Procurement Operations & Procurement Application Management of the North American Procurement Operations Group. "At one point we felt they were BMO employees"

The benefits from all those upgrades/system implementations speak for themselves. "Our cost per invoice has dropped from $9.80 CDN in 2002 to about $4.70 in 2008. BMO Financial Group is now on one centralized accounts payable application platform in North America. We continue to look at automation opportunities through electronic invoices, electronic purchase orders to drive our costs down. In June 2007, we implemented a third party software application, in Oracle On Demand, integrated with our Oracle E- Business Suite application. We adopted a centralized business model , enabling our ability to receive invoices from suppliers, scan them and send them via workflow to be approved by our business units across the enterprise. As a result we can monitor their progress and determine if the electronic invoice stays too long at any step.

After five upgrades, BMO decided to slow the upgrade process down. "As our footprint has grown significantly and the complexities of our applications have increased over these past eight years, the impact on our internal employees and business processes needs to be evaluated very carefully as we look to future Oracle release installs/upgrades. We cannot afford to move at the same pace of upgrade as we have done over the past number of years. We recognize we have to stay as current as we can, however, at the same time we must balance the potential change management impact on our overall internal customers and operational areas across BMO Financial Group of Companies."

The Cost of Not Upgrading

Over the course of the last three years, Aberdeen has collected data on the top ERP selection criteria. Not surprisingly, functionality, TCO, and ease of use have been the top three selection criteria for an ERP implementation (Figure 2). In both 2006 and 2007, survey respondents listed functionality as being most important when choosing an ERP, and TCO as second most important.

Fearing that many very important priorities were being de-emphasized by limiting selection to the top three, Aberdeen changed the way this data was collected this year, and instead, asked respondents to rate all selection criteria on a scale of importance from one to five. TCO still came out in the top three (Figure 3).

The focus on functionality, ease of use, and cost combine to make the desire and the need to wring the most value out of an ERP implementation all the more important. Much of this value is directly tied to the features and functionality delivered. Since ERP vendors invest heavily in innovation, not upgrading could mean running the risk of standing still while competitors move ahead. However, companies must always keep an eye on doing so for as low a cost as possible. Naturally, decisions are conflicted and a compromise must be made between getting the most out of ERP, and expending minimum effort for an upgrade lacking visible benefits. However, the longer companies delay, the more quickly fixes and possibly customizations get inserted into the mix, building more and bigger barriers to future upgrades. Over time, this increases the risk of ultimately reaching a point of no return, where the cost to upgrade exceeds the cost of reimplementation.

So Where Do Companies Stand?

When looking at the release status of ERP implementations, results are similar from year to year, with about a third on the latest release, a third working with an implementation one release behind, and the remaining third significantly (two or more releases) behind (Figure 4). Many companies, particularly manufacturers, are conservative. Even if they are pioneers in their own field, they are content to let others lead the way to new releases, so operating one release behind is a common strategy. However, falling behind by more than one release leaves too much innovation on the table. It can make an upgrade more difficult when the company finally decides to do so, and can strand firms on older technology that doesn't provide the level of interoperability that is becoming a hallmark of Best-in-Class companies today. The 2008 ERP in Manufacturing (June 2008) benchmark report found that 38% of respondents operate two or more releases behind the most current version of software available.

What Keeps Companies from Upgrading?

Why the delay? A couple of the top reasons preventing an ERP upgrade deal with the functionality available currently versus what is offered in new releases, and a couple deal with the effort involved in the upgrade process (Figure 5).

The top reason for delaying an ERP upgrade was the belief that the current release satisfies needs. There is significant risk in respondents making a mistake in thinking that an ERP implementation is ever "done." There are always more business benefits to be gained, and more individuals to be reached whose needs were previously unmet within the available features and functions. As new modules or new features are added, enterprises should revisit these prior perceived deficiencies and reassess their upgrade strategy. Survey results showed that, in an average company, 43% of employees have access to ERP. This is far higher than the number reported by pundits and other analyst firms. While Aberdeen's research community is more invested in ERP, even they are not exploiting ERP to its full potential within their organizations.

Where there are not enough new features to build a solid business case for an upgrade, the organization may not be sufficiently communicating its needs or the vendor may not be investing enough in innovation. In a world where research and development investments are generally budgeted as a percent of revenues, size matters. Small ERP vendors simply don't have the same level of resources to invest. However, size doesn't necessarily guarantee delivery of the "right" features, and since different companies have different priorities, even the largest of vendors can't satisfy everyone's top priorities. While many companies attempt to "go it alone" in terms of both implementation and upgrades, apart from the expertise the ERP solution provider brings, there is added value in working collaboratively. The more intimate the solution provider's involvement, the more the software developer feels the end user's pain and is more inclined and better equipped to work collaboratively on enhancement plans.

Yet because no software vendor can satisfy every customer's every need, this is why companies still have to deal with customizations- mucking around in the code- although to a lesser extent than in the past. This type of customization is one of the primary factors preventing companies from upgrading to new releases. Those stuck on older releases or legacy applications are missing the opportunity to take advantage of the more configurable offerings available today. New releases and new technologies allow much more configuration of applications without customization. On demand solutions typically avoid this type of situation by providing a common and standard environment. Responding to customer needs with product enhancements that avoid custom code is a win-win for both the solution provider as well as the customer.

Plans are Aggressive

Each year we see very significant plans for ERP upgrade and replacement, but if these plans really came to fruition, we would see more dramatic shifts in the number of companies on the latest available release as well as in the average age of ERP implementations.

As noted previously, the average maturity of ERP implementations went down from nine to seven years between 2007 and 2008, implying that some ERP replacements have occurred, although not to the level anticipated over the past three years. The intent to upgrade is there, but many companies are not following through.

What is the Business Value of Upgrading?

Given the sizable expenditure by companies on recurring maintenance fees, it pays to take advantage of available upgrades. Figure 7 shows the benefits perceived to be the top business values of upgrading an ERP implementation.

The top business value gained from an ERP upgrade was the support for business needs where features or functions were previously unavailable. This only underscores the need to re-evaluate many companies' perception that the current release satisfies their needs. Companies should look around to see if there are any constituents that were "left out" of the decisionmaking process for an ERP implementation because their needs were not previously met, rather than just looking at those who originally bought into the process. The concepts of Kaizen and continuous improvement teams were born in manufacturing companies, but they have expanded beyond the boundaries of manufacturing. Many companies have formed continuous improvement teams for the purpose of improving operational performance. The same concept can apply to an ERP implementation. Either a Kaizen blitz approach to attack particularly problematic areas or a simple look from the perspective of continuous improvement will keep a fresh eye on the implementation and potentially uncover additional opportunity for business benefits.

Aberdeen also measures a number of business variables that define the Best-in-Class. The most direct correlation to ROI involves reductions in inventory, operating costs, and administrative costs. Best-in-Class companies are able to reduce these metrics by 20%, 14%, and 15%, respectively. Assuming operating costs of just $1 million, these reductions represent hundreds of thousands of dollars in potential savings. When coupled with increased customer satisfaction from improved schedule compliance and improved complete and on-time shipments, additional value can be attributed indirectly back to the ERP implementation. In order to identify and achieve these added benefits, measurement is critical. Companies wishing to achieve higher ROI on their ERP implementation must establish a baseline and continue to measure critical operational performance indicators. As soon as a company considers their ERP implementation to be "complete", they run the risk of leaving potential cost savings and schedule improvements unclaimed.

Case in Point

The Church Pension Group serves clergy, lay workers, and their families, parishes, dioceses, and other Episcopal Church institutions by providing pensions and other benefits and services that will contribute to their lifetime economic, physical, emotional, and spiritual well-being. In the spring of 2003, CPG went live with the financial and human resources modules of the Oracle E-Business Suite in a hosted environment. Over the past six years they have upgraded the application four times, the operating system and the hardware once and the database twice. In addition, as an On Demand customer, they apply patch releases quarterly to fix known issues according to Oracle documented best practices.

What kind of consideration is made in justifying an upgrade? "Each new version has different features. One move was justified in that it 'fixed' some functionality we felt was not working properly. Another added new functionality that enabled our move towards a unified call center," said Martin Hossfeld, Vice President of Applications.

This was the payoff for a project to build a customer data hub, where CPG consolidated its customer data to provide for better data quality and access controls. "We have institutional and individual customers and have to serve them both. With a complete 360 degree view of the customer, it's possible to provide better service across the customer base. Call center utilization improved dramatically. Our latest upgrade provided added security through a data vault, preventing even developers from accessing certain data. HR [Human Resources] was very concerned that we prevent IT from seeing confidential employee information, and the latest release of the database help us to meet this requirement.

"The benefits are clear in spite of the fact that we can't necessarily assign a monetary value to them. We look for SIE - simplify, integrate, enhance when we consider upgrades. We need to hit at least two out of three in order to move forward."
~ Martin Hossfeld,
Vice President of IT and
Operations, Church Pension
Group

"These are all the 'good reasons' for upgrading," says Hossfeld, " Sometimes there is little choice but to upgrade because the version currently installed is no longer supported. We stayed on an old release of Discoverer for a long time because we were happy with it, liked the reporting and felt it was very stable, but Oracle told us we had overstayed our welcome on that version. But the benefits in upgrading (finally) also included an easy-to-use web-top version that made it easier for us to implement and support."

Key Takeaways and Recommended Actions

A healthy enterprise application implementation should continue to evolve long after the initial implementation as there will always be innovations and technology advances to consider. In order to maximize the business benefits from an implementation, companies should take note of the following:

• Set a baseline of metrics from which you can measure improvements, then measure, measure, measure. It is never too late to do this, even if you are well along on an implementation, or think you have completed it. Put a stake in the ground against which improvements can be measured. Aberdeen's Best-in-Class criteria can be used as a potential starting point, but companies should seek the metrics that will achieve the most value for their specific business.
• When considering an upgrade, look for constituents that were "left out" of the initial implementation because their needs were not previously met. Don't limit the involvement to those who originally bought into the implementation.
• Standardize. A standardized approach to implementation, customization and upgrades can significantly improve the maintainability of applications across the enterprise, reduce costs and increase the overall business value.
• Consider alternative delivery models of both software and services. Given the existing economic uncertainty, avoiding a capital purchase may allow improvement investments that might otherwise be impossible to justify. In instances where deployment is provided as a service, time spent on upgrades is cut in half.
• Seek assistance where appropriate- you don't have to go it alone. Your solution provider may have services to help. Where they do, involving them in your implementation and upgrade can be a winwin situation. They learn your real needs and you have more influence over future product development.
• Think ROI as well as TCO. Everyone is cost-conscious today, but looking beyond just the cost of the implementation to its potential business value can result in meaningful business benefits. Enterprise applications represent an enormous investment for any company but the results can far outweigh the cost.

For organizations that want to increase productivity, improve customer service, and reduce costs, the most effective and direct way to do so may well be to upgrade to take full advantage of the investment already paid for. During difficult times it may be tempting to postpone upgrades, treating them as discretionary or optional projects, when in fact they could very well provide a path to doing more with less. ROI becomes even more important in a down economy. The ultimate goal should be to make sunk costs work harder than they have ever worked before.

For more information on this or other research topics, please visit www.aberdeen.com.