"Benchmarking ERP in SMB"

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"Made2Manage, a Consona ERP solution, provides manufacturers with easy-to-use, high-quality ERP software that improves operational efficiencies, customer satisfaction and financial performance while helping manage your business growth."
Source : M2M

Resources Related to Enterprise Resource Planning (ERP):

• ERP (Wikipedia)

Benchmarking ERP in SMB

Benchmarking Enterprise Resource Planning (ERP) is also known as: ERP Implementation Benchmarks, Process benchmarking, Procurement benchmarking, Benchmarking ERP Solution, Benchmark ERP Report, erp software, erp small business, erp software application, erp software comparison, erp software for small business, erp software package, erp software small business, erp software solutions, erp software systems, erp software vendors.

Executive Summary

From July through September 2006 Aberdeen surveyed a total of 454 small companies (those with revenues under $50 million) and found 14% have yet to invest in an Enterprise Resource Planning (ERP) solution. Small manufacturers and the ERP vendors that serve them have explored the concept of "ERP Light" for many years. However, the search for core ERP functionality not needed by small companies produces a relatively short list. While small companies desire less complexity, they also require most of the same basic functions needed by larger companies.

By definition small companies will have limited resources to devote to the implementation and maintenance of ERP. Fortunately, the price performance of ERP and the underlying infrastructure that supports it, including hardware, databases and technology infrastructure, has improved steadily and significantly over the past two decades. In addition, new delivery models such as Software as a Service (SaaS) provide lower risk alternatives to major capital expenditures associated with acquiring and maintaining hardware. Solutions that were once beyond the reach of small companies are now well within their grasp.

Key Business Value Findings

In spite of the relative "newness" of ERP implementations compared to other segments of the market, a surprising 9% indicated an ERP replacement strategy. While consolidation strategies drive the majority of this activity in other market segments smaller companies are much more likely to be driven to this course of action by the need for more functionality than is available in their current solution or by integration issues. While small companies are far less likely to be running multiple ERP packages as a result of mergers and acquisition or multiple business units making autonomous software selection decisions, running a single enterprise application is a luxury few companies enjoy today.

Although a good 43% of companies intend to stay exactly where they are today, there is significant upgrade activity planned as well. A full 72% of small companies are currently running 1 or more releases behind. This is actually a planned strategy for many of these companies. The most often cited reason amongst small companies is uncertainty over the quality of the new release (56%). This statistic is far more prevalent in these smaller companies in spite of the fact that although some are running ERP packages developed and sold by small "aspiring" ERP solution vendors, a lot of these companies are running many of the same ERP packages as their larger cousins. Aberdeen would contend this uncertainty over quality of releases correlates directly with the challenges of training in small companies.

Implications & Analysis

Small companies achieve first "go live" milestones quickly but benefits gained are decidedly "average." Aberdeen compared time to implement across small, medium and large companies. As might be expected, this time span grew with company size. A full 86% of small companies participating achieved this first "go live" milestone within the first year, as compared to 64% of mid-size companies and 47% of large companies. On the other end of the spectrum, none of the small company participants spent more than 2 years, but the same could not be said of mid-size (6%) and large (18%) enterprises.

While time to implement or dollars spent are both contributing factors, Aberdeen views the value that ERP brings to the business as the most important element of success. Metrics reported give some indication ERP is generally doing the job it was meant to do in small companies, performance improvements were decidedly average and fell far short of Best in Class.

While on average all companies use 27.6% of available ERP functionality, small companies use less - 25.7% and the average small company pays more per user in Total Cost of Ownership (TCO) based on software and services and cost per functionality used

Recommendations for Action

Aberdeen strongly recommends that small companies aggressively push beyond the limits of current implementations for added benefits and lower TCO. Where ERP has yet to be implemented, price performance of hardware and alternate delivery models such as SaaS are removing barriers of entry and making ERP well within the grasp of any company intent on establishing and maintaining a market presence or seeking a competitive edge.

• Set goals for your ERP implementation. Many fall short of Best in Class status because performance metrics are not established.
• Balance aligning business processes to software capabilities against aligning software capabilities to business processes to maximize benefit and allow your business to evolve
• Seek to automate previously manual-intensive and spreadsheet based processes. Expand your implementation to include all fundamental basics of your business.
• Don't fall into the trap of believing an ERP implementation is ever completely done

Table of Contents

• Executive Summary
  • Key Business Value Findings
  • Implications & Analysis
  • Recommendations for Action
• Chapter One: Issue at Hand
  • ERP Maturity
  • External Business Drivers
• Chapter Two: Key Business Value Findings
  • Upgrade Versus Replacement Versus Status Quo
  • Challenges and Responses
• Chapter Three: Implications & Analysis
  • Performance Results
  • Software Selection Criteria
    • Ease of Use and Functionality
    • Total Cost of Ownership
  • Costs Scale with Company Size
  • The Cost of Achieving Business Benefits
  • Software as a Service ' A New Twist to an Old Delivery Model.
• Chapter Four: Recommendations for Action
  • Laggard Steps to Success (including those companies yet to invest in ERP)
  • Industry Average Steps to Success
  • Best in Class Next Steps
• Featured Underwriters
• Appendix A: Research Methodology
• Appendix B: Related Aberdeen Research & Tools

Figures

• Figure 1: ERP Maturity in Small Companies
• Figure 2: Business Drivers Impacting ERP Strategies
• Figure 3: Actions Planned for the Next 12 months
• Figure 4: Motivation for replacement
• Figure 5: Planned Activity at Small Manufacturers
• Figure 6: Reasons to delay upgrading
• Figure 7: Challenges faced in implementing and maintaining ERP
• Figure 8: Responses to Challenges
• Figure 9: How do small companies measure success?
• Figure 10: Timeline to first "go-live" milestone
• Figure 11: Small Manufacturers: Better than average but not Best in Class
• Figure 12: Software Selection Criteria of SMB Companies

Tables

• Table 1: ERP Competitive Framework.
• Table 2: Adoption rates of ERP modules
• Table 3: Average Software and Services $'s by Company Size
• Table 4: Costs Per Utilization by Company Size
• Table 6: SaaS Enterprise Application Value Summary
• Table 7: Expected and Actual ROI (Return on Investment)
• Table 8: PACE Framework
• Table 9: Relationship between PACE and Competitive Framework
• Table 10: Competitive Framework

Chapter One: Issue at Hand

Key Takeaways

• Small manufacturers need most of the functionality required by larger companies but have less to spend
• Improved price performance and alternate delivery models provide small companies expanded opportunity to gain business benefit from ERP
• 34% of small companies either have no ERP or seriously outdated implementations

Many small manufacturers are gaining significant business benefits through the implementation of ERP (Enterprise Resource Planning) and a small number are even achieving Best in Class status. Yet most have a long way to go to achieve maximum value from their ERP implementations. While there is significant activity planned, too many seem content with less than optimal results.

Small manufacturers and the ERP vendors that serve them have explored the concept of "ERP Light" for many years. However, the search for core ERP functionality not needed by companies under $50 million in revenue produces a relatively short list. While small companies desire less complexity, they also require most of the same basic functions needed by larger companies.

ERP Maturity

Aberdeen defines small companies as those with annual revenues ranging under $50 million. Therefore, by definition these companies will have limited resources to devote to the implementation and maintenance of ERP. Fortunately, the price performance of ERP and the underlying infrastructure that supports it, including hardware, databases and technology infrastructure, has improved steadily and significantly over the past two decades.

Figure 1: ERP Maturity in Small Companies

In addition, new delivery models such as Software as a Service (SaaS) provide lower risk alternatives to major capital expenditures associated with acquiring and maintaining hardware. Solutions that were once beyond the reach of small companies are now well within their grasp.

However, in this market segment we still found a significant percentage (14%) of companies which have not yet implemented ERP or MRP. Over a third (35%) of small companies has implemented their ERP systems within the past 5 years. On the other end of the spectrum, we only found 20% with implementations over 10 years old as compared with 35% of mid-market companies and 56% of large manufacturers. Many of the 31% with implementations that are 5-10 years old selected and implemented these systems prior to the year 2000, at a time when the menu of options from ERP solution providers was far more limited than it is today, however aging implementations are not as prevalent as in larger companies. This is partially because many of these companies simply haven't been around that long. The small start-up today has a significant advantage over start-ups from 10 years ago. ERP systems are far more feature-rich and technology enabled and price performance of both hardware and software has risen dramatically.

In addition, Software as a Service (SaaS) is also gaining traction and providing small companies new options in how they license, pay for and implement ERP. From March through July of 2006 Aberdeen surveyed 631 companies to evaluate the current state of SaaS across multiple enterprise applications. ERP was not the first domain to establish a foothold in on-demand or hosted applications. Enterprise applications such as Supply Chain Management and CRM (Customer Relationship Management) jumped on the bandwagon first, but more recently integrated ERP solutions are being offered with this delivery model and providing more options to small companies in particular.

A full third of these small companies are still using their first ERP, indicated by the fact that the implementation replaced manual processes. In fact another third replaced homegrown or custom developed applications, which could also indicate this is their very first real ERP, confirming that many companies view ERP implementations like brain surgery. You don't do it unless the patient is dying. While companies 10 ' 20 years ago were typically making a 5-8 year decision, even small companies today are thinking longer term. Very small companies may simply be looking to automate their bookkeeping functions. This type of decision might have a short life expectancy, but once a company embarks on an ERP decision, few venture into an implementation with the expectation of doing it all over again in the foreseeable future.

Competitive Framework Key

The Aberdeen Competitive Framework defines enterprises as falling into one of  the three following levels of practices and performance:

• Laggards (30%) practices that are significantly behind the average of the industry
• Industry norm (50%) practices that represent the average or norm
• Best in class (20%) practices that are the best currently being employed and significantly superior to the industry norm

External Business Drivers

By and far operational factors such as the standardization and acceleration of manufacturing processes, reduction of costs and streamlining of processes have the greatest impact on the formulation of ERP strategies (Figure 2). In addition 43% of small company participants view the need to improve customer service as a key driver as well.

Figure 2: Business Drivers Impacting ERP Strategies

• Easier connection with external partners
• Requirements to improve customer service
• Standardization and acceleration of mfg processes
• Pressure to reduce operating costs
• Streamline order fulfillment processes
• Organic revenue growth
• Linking of global operations

Small companies today are not immune from the impact of globalization and a growing number (26%) are looking towards ERP as the vehicle to link global operations, although only 13% see the pressure to interoperate with external partners as a top pressure driving ERP decisions. Small companies feel less pressure to connect with external partners than their larger counterparts partially because their size may actually disqualify them as a viable partner. However, ignoring this potential business driver today can prove to be a factor that limits growth.

Surprisingly, organic growth is viewed by fewer companies as a driving factor impacting ERP decisions ' surprising because one would assume small companies aspire to be mid-size or large companies and we have seen the reluctance to replace ERP systems once implemented. Therefore small companies that do not intend to stay small would be well-advised to factor in growth plans when formulating ERP strategies

PACE Key For more detailed description see Appendix A

Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows:

• Pressures external forces that impact an organization's market position, competitiveness, or business operations
• Actions the strategic approaches that an organization takes in response to industry pressures
• Capabilities the business process competencies required to execute corporate strategy
• Enablers the key functionality of technology solutions required to support the organization's enabling business practices

Chapter Two:Key Business Value Findings

Key Takeaways

• Desire for added functionality, combined with integration issues, drive replacement strategies
• Many small companies "think small" in determining upgrade strategies
• Small companies are more likely to align business processes to software rather than customize software to existing business processes, yet this remains a delicate balancing act.

Given the need to streamline and accelerate manufacturing processes today, companies are faced with many decisions. Do they upgrade to the latest release of their current software, replace it or none of the above? What strategies must they consider for consolidation of ERPs or rationalization of disparate business applications?

Upgrade Versus Replacement Versus Status Quo

As we look at more specific planned actions, there are really only three general directions any company can take 'upgrade, replace or stay where they are.

Figure 3: Actions Planned for the Next 12 months

In spite of the relative "newness" of ERP implementations compared to other segments of the market, a surprising 9% indicated a replacement strategy of ERP at selected locations (see Figure 3). This is far more replacement activity than we have seen in recent years. In small companies this is far more likely to represent a full scale replacement strategy across the entire enterprise. A full 88% of small companies have a single ERP package implemented (not shown). So while consolidation strategies drive the majority of this activity in other market segments smaller companies are much more likely to be driven to this course of action by the need for more functionality than is available in their current solution (Figure 4).

Figure 4: Motivation for replacement

• More functionality required than available in vendor's latest release
• Unhappy with support from ERP vendor
• ERP vendor not keeping pace
• ERP Consolidation
• Outdated technology
• More functionality required than available in vendor's latest release
• Integration issues
• Our business is evolving
• Extensive customization prevents upgrading

In many cases this is due to the fact their business is evolving, often due to growth. However, in other instances, small companies have chosen a solution which might go by the name of "ERP" but is actually a set of financial modules which has expanded into inventory control and other functional areas, but does not have the full set of functionality required to gain visibility and control over their manufacturing operations. It may lack MRP (Material Requirements Planning), engineering change control of bills of materials or work order/shop floor control modules.

Integration issues are equally likely to motivate replacement strategies. While small companies are far less likely to be running multiple ERP packages as a result of mergers and acquisition or multiple business units making autonomous software selection decisions, running a single enterprise application is a luxury few companies enjoy today. A small companies evaluating ERP today, whether it represents its first implementation or a replacement, generally look for a single vendor solution. However, any ERP likely to be replaced is equally likely to have shared the stage with other applications deployed to fill functionality gaps in legacy MRP or ERP systems. Outdated technology only serves to make the integration of disparate business applications more difficult and can present a barrier to allowing businesses to evolve. All these factors work together to provide incentives for replacement.

Figure 5: Planned Activity at Small Manufacturers

Although a good 43% of companies intend to stay exactly where they are today, there is significant upgrade activity planned as well. A full 72% of small companies are currently running 1 or more releases behind.

This is actually a planned strategy for many of these companies. The most often cited reason amongst small companies is uncertainty over the quality of the new release (56%). This statistic is far more prevalent in these smaller companies in spite of the fact that although some are running ERP packages developed and sold by small "aspiring" ERP solution vendors, a lot of these companies are running many of the same ERP packages as their larger cousins. Aberdeen would contend this uncertainty over quality of releases correlates directly with the challenges of training in small companies. Although there have been many software upgrades released prematurely over the years, and just one bad experience can have lingering effects for many years, the problem does not necessarily lie with the quality of code. With change comes uncertainty and with uncertainty comes human error that can at times be mistaken for software error.

Figure 6: Reasons to delay upgrading

• Uncertainty over the quality of new releases
• Current release satisfies our needs
• Upgrade process is too long and hard we eventually "catch up"
• Not enough new features to warrant efforts
• Customizations make upgrading cost prohibitive
• Not interested in new features offered
• Not on maintenance

The second most often cited reason for not upgrading to the latest release was the contention that the current release satisfied the company's current business needs. This may indeed be true of small and simple businesses, but Aberdeen would caution these companies to not get too comfortable in their current state lest they miss opportunities for growth and improvement. As globalization reaches further down market and customers become more demanding, no company can afford to be content with status quo for too long.

Aberdeen has observed that companies of all sizes often view the upgrade process as too long and hard, prompting them to skip releases with the intent of eventually catching up. This is often combined with the feeling that there are not enough new features in the release to warrant efforts to upgrade, another reason cited for skipping versions.

Challenges and Responses

Small companies often face decisions around aligning their business processes and software capabilities. Top on the list of challenges is dealing with customizations, followed very closely by the challenge of redesigning business processes (Figure 7). These two are very closely related as companies face hard decisions. Should they adapt the business to the software and pay the price in managing change and risking sub-optimal operations? Or should they change the software to fit the business and pay the price in customization? These decisions have a subsequent direct impact on the on-going cost of upgrades and updates. All these factors together influence flexibility in adapting to changing business processes. Newer enabling technologies such as Service Oriented Architectures (SOA) can facilitate more flexibility, yet Aberdeen has observed that these technology factors are often overlooked in software selection. These technologies will be discussed further in Chapter Three.

Training was also seen as a barrier to success (39%), much more so than in larger companies. While all companies today tend to run lean, smaller companies rely on fewer people to do a broader spectrum of functions and in many cases there is not sufficient attention paid to training during initial implementation phases.

Figure 7: Challenges faced in implementing and maintaining ERP

• Lengthy or incomplete integrations
• High integration costs
• High maintenance costs
• Little flexibility in adapting to business processes
• Cost of upgrades/updates
• Training
• Redesigning business processes
• Customization related challenges

So how do small manufacturers respond? Our findings show these companies are more likely to align business processes to the software capabilities (Figure 8). However, our results also prove that these are seldom mutually exclusive choices, resulting in a delicate balancing act, although the goal of eliminating customizations tips the scale in favor of business process adaptation. In spite of the fact that small manufacturers tend to have "newer" ERP implementations than larger companies, a third are responding to challenges by deploying newer, more modern applications. We see this activity both in terms of replacement strategies, where in fact ERP is older and based on outdated technology and also in terms of extending ERP. Aberdeen has found extensions to ERP such as CRM (Customer Relationship Management), SCP and SCE (Supply Chain Planning and Execution) and others to be much more likely to be built on newer more open technologies which promote interoperability and reduce integration issues.

"We keep customization to a bare minimum. We have added a little subsystem for calculating commissions and done some reporting, but otherwise we've hardly changed anything." - Don Miller, IT Manager, parent company of Jamak Fabrication

Figure 8: Responses to Challenges

• Replace legacy apps with SOA enabled apps
• Wrapping existing applications with web services
• Move to standards based integration methodologies
• Use external consultants
• Deploying newer more modern applications
• Aligning software capabilities to business processes
• Aligning business processes to software capabilities
• Eliminating customizations

Small companies were more prone to using external consultants in order to provide training or compensate for the lack thereof. This fell within the top three responses of 35% on respondents in this segment, as compared to 25% of mid-market and 15% of large companies (not shown).

However, in spite of the obvious pain felt by customization and integration, less than one fifth of the small companies participating in our study responded to these challenges with technology innovations such as standards based integration methodologies, wrapping existing applications with web services or replacing legacy applications with SOA (Service Oriented Architecture) enabled applications.

Chapter Three: Implications & Analysis

Key Takeaways

• Small companies achieve first "go live" milestones quickly but benefits gained are decidedly "average"
• While on average all companies use 27.6% of available ERP functionality, small companies use 25.7%
• The average small company pays more per user in Total Cost of Ownership (TCO) based on software and services and cost per functionality used
• The key to benefits and lower TCO is to take fuller advantage of functionality offered

As shown in Table 1, survey respondents fell into one of three categories ' Laggard, Industry Average, or Best in Class based on their characteristics in four key categories: (1) process (what business value has been gained from the implementation of ERP); (2) organization (corporate focus/philosophy, level of collaboration among stakeholders); (3) knowledge (visibility across manufacturing and the order to- fulfillment process); and (4) technology (scope of ERP implementation and use of technology.)

In each of these categories, survey results show that the firms exhibiting best-in-class ERP characteristics also produce a more significant impact to top and bottom line results.

Table 1: ERP Competitive Framework

So how do small companies perform? What results are being achieved as a result of ERP implementations? Generally speaking our respondents had a hybrid approach to measuring success (Figure 9). Most individuals selected a combination of metrics that measured business value but combined these with some measurement of cost and time to gain those benefits. Streamlining business processes and the automation of manual processes were clearly the top measures of success, followed by visibility provided to the business. Only about a quarter of small companies rated ROI (Return on Investment) as a key factor in measuring success. In fact more small companies placed more emphasis on the cost of the software and services than the process cost savings produced, which demonstrates a certain level of short-sightedness more prevalent in small companies than in larger enterprises.

Figure 9: How do small companies measure success?

• Length of time for full implementation
• Length of time to initial "go live'
• Process cost savings produced
• ROI
• Cost of software and services
• Visibility it provides to my business
• Automation of manual processes
• Streamline business processes

Given that 24% of small companies chose the length of time to the first "go live" milestone as a key measure of ERP success, Aberdeen compared this metric across small, medium and large companies (Figure 10). As might be expected, this time span grew with company size. A full 86% of small companies participating achieved this milestone within the first year, as compared to 64% of mid-size companies and 47% of large companies. On the other end of the spectrum, none of the small company participants spent more than 2 years, but the same could not be said of midsize (6%) and large (18%) enterprises. While length of time to implement or dollars spent are both contributing factors, Aberdeen views the value that ERP brings to the business as the most important element of success. Metrics reported give some indication ERP is doing the job it was meant to do

"Our primary objective was a single instance of ERP and secondarily to enter data into the system only once. Through this approach we have actually improved visibility, reduced inventory by 15% and we shaved 5 days off our month end close" - Small injection molding manufacturer

Figure 10: Timeline to first "go-live" milestone

While we find that small companies perform better than average, generally speaking they are what Aberdeen considers Industry Average and definitely not Best in Class. However, Aberdeen did find Best in Class performers across the full spectrum of company size, proving that true value can be achieved from ERP by companies of any size, large, medium or small.

Figure 11: Small Manufacturers: Better than average but not Best in Class

• Reduction in inventory costs
• Reduction in manufacturing operational costs
• Reduction of administrative costs
• Improved complete and on-time shipments
• Improved manufacturing schedule
• compliance
• Length of time for full implementation
• Length of time to initial "go live'
• Process cost savings produced
• ROI
• Cost of software and services
• Visibility it provides to my business
• Automation of manual processes
• Streamline business processes

Software Selection Criteria

Given the critical function ERP plays in managing basic business functions, Aberdeen sought to determine the criteria small companies use in software selection (Figure 12). Functionality was by far the top selection criteria in ERP software decisions, followed by Total Cost of Ownership and Ease of Use. Yet variations on these themes are prevalent in small to mid-size companies.

Figure 12: Software Selection Criteria of SMB Companies

• Ease of Use
• Total Cost of ownership
• Functionality

Source: AberdeenGroup, August 2006

Standard Hardware, a small company that has established itself as a leading distributor of fasteners is currently in the process of upgrading to the latest version of it ERP application. Its starting point for decision-making was an old release of the product, which had been heavily customized. Its decision boiled down to either "upgrade and extend" its current ERP or replace it entirely. The company chose to upgrade and extend. According to Eric Mackie, CIO, "We did all the due diligence, but it wound up being a no-brainer. We're not proponents of the 'Best of Breed' concept. By going this route you exasperate the problem integrated ERP was meant to solve ' eliminating the islands of automation. We could eliminate many of the modifications because of new features in the current release and when you consider the true cost of starting over with a new implementation, the decision was an easy one."

"We did all the due diligence, but it wound up being a no-brainer. We're not proponents of the 'Best of Breed' concept. By going this route you exasperate the problem integrated ERP was meant to solve ' eliminating the islands of automation." - Eric Mackie, CIO, Standard Hardware

However, the tendency to purchase from a single source does not mean the incumbent ERP vendor has a lock on all further investments. Mountainside Medical is another small company and is actually still operating in start-up mode. So far all the extensions to ERP it has considered and implemented have been modules of its ERP, including SCP and SCE (Supply Chain Planning and Execution) and Quality Assurance. The company is actively considering further extending their implementation with a CRM (Customer Relationship Management) but indicated they were only "somewhat likely" to purchase it from their ERP vendor, even though it ERP vendor recently acquired a pure play a pure play CRM solution. "I used a 'Best of Breed' application at my previous employer and the original offering from our ERP vendor was not as powerful," said Pete Neidecker, Managing Partner, who indicated he would only consider purchasing CRM from his ERP vendor if it were "proven" and integrated.

Mountainside Medical understands the acquisition of a point solution by its ERP vendor does not mean the solution is "magically" integrated overnight and there are no guarantees that the acquiring vendor will continue to preserve the specific domain expertise and the level of investment in product innovation required to maintain "Best of Breed" status. The company is in "wait and see" mode until such time as its ERP vendor has integrated its recently acquired product.

Ease of Use and Functionality

Ease of use is the most subjective of these top three criteria and the most difficult to benchmark. The best measure of how easy a solution is to use is perhaps measured by how much use it gets. And therefore we look at these two criteria together. Are small companies making the most of the ERP?

While there is a generally accepted view that ERP is grossly underutilized in most manufacturers, this view is mostly speculative. As a result, Aberdeen's ERP in Manufacturing Benchmark Study sought to better quantify this perception by having participants select modules implemented from a set of 24 generic modules (see Table 2). In general small companies track respectably well against our Best in Class respondents in terms of the basics of ERP (those modules bolded in Table 3). However, they lag anywhere from several percentage point to significantly behind Best in Class in terms of more specialized or advanced capabilities.

"We heavily favor the purchase of modules versus extensions. If we do purchase an extension, it must be fully tested and supported." - John Long, AVP, W.S. Darley

Table 2: Adoption rates of ERP modules

Our findings showed the average manufacturing company used 10.51 modules of the generic set of 24, which represents an un-weighted average of 43.8%. This average dips in smaller companies to an average of 9.92 modules used, representing an un-weighted average of 41.3%

Recognizing that implementation of a module does not necessarily imply 100% of its functionality is used, Aberdeen further surveyed its participants to determine what percent of the functionality was used of the modules implemented. We found this to be about 63.1%. If we apply that weight to the un-weighted result, we find on average companies are using 27.6% of ERP. How does this compare for small companies? We found small companies using a slightly lower percentage (62.2%) of the functionality of the modules implemented, which results in a weighted average of 25.7%.

Total Cost of Ownership

Aberdeen's ERP in Manufacturing Study actually recognized three different elements of total cost associated with ERP implementations:

• Amount spent on software
• Amount spent of external services
• Internal costs

While internal costs are known to be a significant portion of total cost, a large percentage of respondents did not provide this answer and many who did provided a number which Aberdeen felt to be significantly lower than expectations. These facts and follow-up interviews led us to conclude that the majority of companies do not have a means to accurately measure these costs. Therefore, while we still believe this adds significantly to the total cost of implementation, Aberdeen chose not to include this element in the comparison.

Costs Scale with Company Size

One would naturally expect a correlation between size of the ERP deployment and costs. As the company grows, the number of users goes up, along with the total cost of software and services. Since volume discounts are standard fare in ERP pricing, one would expect the costs per user to go down as the number of users goes up. This expectation was proven to be true, as shown in Table 3. Also, as the number of users goes up, the expectation is that the total cost of software and service also rises, as was the case.

However, note that the total cost of software and services per user is not as linear a function. Small companies actually spend less per user than companies in the $50 to $100 million range in spite of paying more per user for the software, indicating less spent on accompanying services. This would tend to explain the high incidence of training challenges felt by small companies (refer back to Figure 7 in the previous chapter.) Given the limited budgets of small companies this appears to be one budgetary consideration that gets short-changed.

Table 3: Average Software and Services $'s by Company Size

But size of company and number of users doesn't necessarily tell the whole story. Aberdeen therefore set out to determine the cost per percentage point of functionality deployed by company size and saw a steady decline in the cost per percentage of functionality used as more and more functionality was deployed (Table 4). Once a threshold is reached and dues are paid, payback multiplies as ERP penetrates more broadly and deeply into an organization.

The key to improving TCO in terms of functionality is to continue to drive the use of ERP more broadly and deeply across the organization.

Table 4: Costs Per Utilization by Company Size

	Average of Modules Used	Average % of functionality Used	Weighted Average	Cost per user per percentage point of functionality used
Under $50 million	9.79	62.01%	25.29%	$314
$50 million to $100 million	10.31	61.52%	26.43%	$316
$100 million to $250 million	10.13	63.09%	26.64%	$241
$250 million to $500million	10.83	63.10%	28.48%	$154
$500 million to $1 billion	10.86	57.65%	26.08%	$139
Over $1billion	11.71	69.72%	34.01%	$53

The Cost of Achieving Business Benefits

As noted earlier, Aberdeen contends the success of an ERP implementation needs to be measured in terms of the business benefits derived. Therefore, for one final measure of Total Cost of Ownership, Aberdeen sought to measure the cost of each percentage point of improvement gained from the deployment of ERP implementations. While we found variations in performance levels, we found little variation across small to mid-size companies in terms of cost per average percentage point of improvement (Table 5).

Table 5: Cost of Performance Improvement by Vendor

	Small Companies (<$50m)	Mid-Size Companies ($50m-$1b)	Large Companies (>$1b)
Reduction in inventory costs	13.9%	14.5%	18.1%
Reduction in manufacturing operational costs	12.8%	12.8%	15.4%
Reduction of administrative costs	13.4%	16.4%	11.4%
Improved complete and on-time shipments	20.2%	21.0%	13.0%
Improved mfg schedule compliance	19.3%	17.3%	12.1%
Average	15.9%	16.4%	14.0%
Cost per % point of improvement	$389	$347	$130

We see from these results a variety of levels of achievement in terms of general improvement, and also a range of costs associated with each percentage point gained. However, what we do not see is a direct correlation between spending and benefits achieved.

Software as a Service ' A New Twist to an Old Delivery Model

An alternative delivery model has recently emerged on the enterprise application horizon that promises low cost of entry, shorter implementation times, lower risk and flexible access to functionality. Software as a Service (SaaS), also known as hosted or on-demand applications, has proven to be an effective alternative, particularly for small companies, to on-premise applications which are paid for upfront and installed on site. The concept is not new. "Time sharing" services were plentiful in the 1980's, but disappeared for the most part from the market as hardware became more affordable and operating systems became friendlier to small companies with little or no on site IT staff.

ERP solutions have been among the most recent offerings available through SaaS, and new enough on the scene that benchmark data is not readily available. However, Aberdeen conducted benchmark research from March ' July 2006 across 631 companies to evaluate the current state of SaaS in enterprise applications in general. These findings show that SaaS solutions reduce implementation barriers common to small companies and should therefore factor minimally into decisions being made today by those 14% of small companies (refer back to Figure 1) that might be embarking on their first ERP implementation.

Typical implementation and ROI times for a variety of different applications are presented in Table 5. This delivery model can be particularly enticing for small companies who have yet to invest in or develop their own IT staffs. Typically a single monthly fee includes ongoing application usage, maintenance and upgrades, support and access to hardware and database software.

"How do you motivate the team to look beyond the current implementation, to implement more functions and therefore bring more value? We are now bringing our ERP provider in as consultants to help us understand where we are and where we could be." - Don Miller, IT Manager, parent company of Jamak Fabrication

Table 6: SaaS Enterprise Application Value Summary

Application Area	Typical Implementation & ROI Times for SaaS
Customer Relationship Management	Implementation in less than 2 months ROI in less than 6 months
Supply Chain Management	Implementation in less than 3 months ROI in less than 1 year
Sourcing & Procurement	Implementation in less than 2 months ROI in less than 1 year
Financial Management	Implementation in less than 3 months ROI in less than 6 months
Product Lifecycle Management	Implementation in less than 6 months ROI in less than 1 year

 

Chapter Four: Recommendations for Action

Key Takeaways

• Improved hardware price performance and alternative delivery models such as SaaS (Software as a Service) make ERP within reach of any small company today
• Set goals for your ERP implementation. Many fall short of best-in-class status because performance metrics are not established.
• Standardize processes; automate and eliminate manual and spreadsheet intensive activities

Cost, revenue, profitability, and customer satisfaction benefits await all firms that are committed to optimizing their ERP implementations. But the expectations and achievements of ROI (Return on Investment) varies significantly with size of company. The length of time it takes to achieve significant returns scales directly with investment levels. However, Best in Class companies are more aggressive in their expectations and therefore deliver better results faster (see Table 6).

As a result Aberdeen strongly recommends that small companies aggressively push beyond the limits of current implementations for added benefits and lower TCO. Where ERP has yet to be implemented, price performance of hardware and alternate delivery models such as SaaS are removing barriers of entry and making ERP well within the grasp of any company intent on establishing and maintaining a market presence or seeking a competitive edge.

Table 7: Expected and Actual ROI (Return on Investment)

Laggard Steps to Success (including those companies yet to invest in ERP)

1. Establish specific goals for obtaining business benefits from ERP Many ERP implementations fall short of best-in-class status because performance metrics are not established. In many cases ERP is viewed as a necessary infrastructure and therefore companies place more emphasis on time to implement and cost than on specific business goals and objectives.
2. Seek to automate previously manual-intensive and spreadsheet based processes. Expand your implementation to include all fundamental basics of your business. ERP provides a solid foundation on which to run your business. The opportunity has never been greater for small companies to take advantage of its capabilities to automate manual processes and measure business performance. As milestones are completed, set timelines and objectives for next steps.
3. Measure performance against business goals Strive to achieve greater visibility across your manufacturing operations, streamline business processes in the order-to-fulfillment cycle, and make ERP your financial system of record. Being resource constrained is not an excuse to side-step the controls ERP can provide to your business. To the contrary, it provides even more incentive to take full advantage of the capabilities you have already purchased. Measure operational costs and schedule compliance internally and in shipments to customers. Measure the time to close your financial records, pay your vendors and collect accounts receivable.

Industry Average Steps to Success

1. Review current goals for obtaining business benefits; set the bar higher and seek new opportunities Don't be satisfied with current results based on milestone achievement to date. Once the basics have been implemented, look to take advantage of more functionality within currently implemented modules, and/or expand the implementation to include new modules for added breadth. Most ERP companies today will offer suite based pricing and licensing which puts resource constrained small companies in a better position to increase ROI with little or further expenditure on the software itself.
2. Support all critical stakeholders' visibility into current and accurate data Broaden and deepen ERP's reach across your organization with additional new users in order to provide visibility into financial, manufacturing and customer service operations.

Best in Class Next Steps

1. Standardize business processes Predictability and repeatability are key to achieving even higher goals in terms of finance, manufacturing and supply chain operations, as well as customer service. Pay careful attention to the balance between aligning business processes to software capabilities and aligning software to current business processes. Software must support the basic business needs but extensive customizations can hinder a business from evolving, particularly in small companies who typically little or no IT staff.
2. Eliminate paper- and spreadsheet-based workflows, and consider Web, e-mail, and mobile technology solutions. Outdated or lack of appropriate technology will breed error and inefficiency within a manufacturing organization. Don't be caught in the mode of "we have always done it this way." These technologies are within reach of all but the smallest or companies today. Once clear business and customer requirements are in place, consider leveraging or expanding existing technology investments. Don't fall into the trap of believing an ERP implementation is ever completely done. There will always be innovations technology advances to consider, and a healthy business is constantly evolving. Whether a company is trying to gradually move its ERP implementation from "Laggard" to "Industry Average," or "Industry Average" to "Best in Class," opportunities abound to take those next crucial steps.

Featured Underwriters

This research report was made possible, in part, with the financial support of our underwriters. These individuals and organizations share Aberdeen's vision of bringing fact based research to corporations worldwide at little or no cost. Underwriters have no editorial or research rights and the facts and analysis of this report remain an exclusive production and product of Aberdeen Group.

Suppliers in a range of industries face unforgiving customers, who demand on-time delivery, 100% order accuracy and unmatched quality. These requirements, combined with pressure to cut costs and perform financially, present suppliers with a stark choice: evolve or die.

This is the zero-tolerance world of Supply Chain Intensive Manufacturing (SCIM), with only one rule of survival: meet customer expectations - every time. How can manufacturers do that while lowering costs and increasing profits? By demanding more from people, processes and systems, and by continually enhancing capabilities through their ERP solution. CMS customers easily exploit our solution functionality, optimize resources, maximize efficiency, reduce costs and meet customer expectations.

For additional information on CMS Software:
45 Vogell Road, Suite 700, Richmond Hill, Ontario, Canada L4B 3P6
(888) 544-6315 or sales@cmssoftware.com
http://www.cmssoftware.com

For over 34 years HarrisData has been providing ERP software to mid-sized businesses. It is the only company that provides an "Omni-License" enabling its customers to realize benefits previously unavailable in the Software Industry. Proud to boast a 95% retention rate of its customers, HarrisData offers a complete enterprise suite that includes Financials, HRIS, Manufacturing Management, Manufacturing Execution Systems, Distribution, Supplier Relationship Management, and CRM. Its applications are provided in a state-of-the-art AJAX-driven, browser interface.

For additional information on HarrisData:
13555 Bishop's Court, Suite 300, Brookfield, WI, 53005-6277
(800) 225-0585 or mktg@harrisdata.com
http://www.harrisdata.com

Made2Manage Systems has a 20-year history of helping companies achieve and sustain productive operations, satisfied customers and profitable results through technology and services. Two leading products are enabling over 2,000 customers to continuously improve their business processes. The Made2Manage Enterprise Business System is a comprehensive software application for mixed-mode 'to-order' and 'to-stock' production that helps manufacturers integrate every aspect of their business around a single, enterprise- wide system. Intuitive ERP is a full-function integrated business system built with powerful new technology that grants users access to the advanced benefits of the world's first pure Microsoft .NET-managed code ERP software solution.

For additional information on Made2Manage Systems:
450 East 96th Street, Suite 300, Indianapolis, IN, 46240
(800) 626-0220 or info@made2manage.com
http://www.made2manage.com

Sage Software supports the needs, challenges and dreams of more than 2.6 million small and mid-sized business customers in North America through easy-to-use, scalable and customizable software and services. Our products support accounting, operations, customer relationship management, human resources, time tracking, merchant services and the specialized needs of accounting practices and the construction, distribution, manufacturing, nonprofit and real estate industries. Sage Software is a subsidiary of The Sage Group plc, a leading international supplier of accounting and business management software solutions and related products and services for small to mid-sized businesses. Formed in 1981, Sage was floated on the London Stock Exchange in 1989 and the Group now has 5.0 million customers and employs over 10,500 people worldwide.

For additional information on Sage:
56 Technology Drive, Irvine, CA 92618
(866) 881-7243
http://www.sagemas.com

(VAI) Vormittag Associates, Inc. is a leader in the mid-sized market for helping companies improve internal efficiencies and external responsiveness. As an IBM Premier Business Partner, VAI has positioned themselves at the forefront of enterprise management software technology. VAI is a leading developer of enterprise management software for the IBM iSeries. They offer a full suite of integrated applications that can be tailored to meet specific business requirements. "We make it our business to understand your business." is their commitment as well as the business strategy that has made them successful. They consistently deliver leading-edge hardware and software solutions for the wholesale distribution, manufacturing and retail industries.

For additional information on (VAI) Vormittag Associates, Inc.:
120 Cormac Street, Ronkonkoma, NY 11779
(800) 824-7776
http://www.vai.net

Appendix A: Research Methodology

Between July and Septembery 2006, AberdeenGroup with Manufacturing Business Technology examined ERP strategies, usage and implementation of 454 small enterprises in aerospace and defense (A&D), automotive, high-tech, industrial products, Consumer Products, Food and Beverage and other industries.

Responding manufacturing, supply chain, finance, sales and marketing and IT executives completed an online survey that included questions designed to determine the following:

• ROI expectations
• How do companies of various sizes (small, mid-size, large) approach the evaluation and implementation of ERP?
• What constitutes "success?"
• What is the tipping point for replacement or upgrade?

Aberdeen supplemented this online survey effort with telephone interviews with select survey respondents, gathering additional information. The full results of this study were published in the "Benchmarking ERP in Manufacturing" report. Further interviews were conducted for this report on consolidation strategies, experiences, and results.

The study aimed to identify emerging best practices for ERP and provide a framework by which readers could assess their own implementations.

Responding enterprises included the following:

• Job title/function: The research sample included respondents from the following functional areas: manufacturing (12%); business process management (11%), logistics/ supply chain (4%), IT (40%), sales & marketing (6%), finance (19%) and others. Job titles included managers (27%), directors (6%), C-level & VP (31%), CIO/IT Leaders (21%)
• Industry: The research sample included respondents predominantly from manufacturing industries: Industrial machinery manufacturers (30%), metals and metal products (115%), automotive (19%), High Tech (18%), CPG/Food & Beverage (12%) and aerospace and defense (11%) manufacturers, medical devices (11%). Other sectors responding included construction/engineering, and retail and distribution, chemicals and pharmaceuticals. Participants were allowed to select more than 1 industry.
• Geography: Study respondents were from North America (66%), Asia Pacific (12%), Europe (18%) South America (2%) and the Middle East and Africa (1%).
• Company size: 100% of respondents were from small businesses (annual revenues of $50 million or less). Note this represented 454 responses selected from a larger sample of approximately 1200 responses.

Solution providers recognized as sponsors of this report were solicited after the fact and had no substantive influence on the direction of the Benchmarking ERP in Small Manu facturers Report. Their sponsorship has made it possible for Aberdeen Group to make these findings available to readers at no charge.

Table 8: PACE Framework

Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows:

• Pressures external forces that impact an organization's market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive)
• Actions the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product/service strategy, target markets, financial strategy, go-to-market, and sales strategy)
• Capabilities the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products/services, ecosystem partners, financing)
• Enablers the key functionality of technology solutions required to support the organization's enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management)

Table 9: Relationship between PACE and Competitive Framework

PACE and Competitive Framework How They Interact

Aberdeen research indicates that companies that identify the most impactful pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute.

Table 10: Competitive Framework

Competitive Framework Key

The Aberdeen Competitive Framework defines enterprises as falling into one of the three following levels of FIELD SERVICES practices and performance:

• Laggards (30%) FIELD SERVICES practices that are significantly behind the average of the industry, and result in below average performance
• Industry norm (50%) FIELD SERVICES practices that represent the average or norm, and result in average industry performance.
• Best in class (20%) FIELD SERVICES practices that are the best currently being employed and significantly superior to the industry norm, and result in the top industry performance.

Appendix B: Related Aberdeen Research & Tools

Related Aberdeen research that forms a companion or reference to this report include:

• The Proliferation of Enterprise Applications (July 2006)
• ERP in the Mid-Market (September 2006)
• Benchmarking ERP in Manufacturing (August 2006)
• The On-Demand Supply Management Benchmark Report (June 2006)
• SAP, Oracle Users Seeking On-Demand SCM Alternatives; (May 2006)
• The On-Demand Tipping Point in Supply Chain Report (March 2006)
• Enterprise Strategies: The Total Cost of ERP Ownership (October, 2006)
• Software as a Service Buyers' Guide (August 2006)
  Information on these and any other Aberdeen publications can be found at www.Aberdeen.com.

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