ERP Software

These Enterprise Resource Planning (ERP) suites were created with the small to midsize enterprise (SME) market in mind. This designation is less an indicator of the actual size of an enterprise and more an indicator of its complexity. This distinction is important, given that an organization that isn't particularly complex may not have a sufficient need for a customized ERP suite. Typically, an SME would need to be involved in international commerce, have a complex supply chain, or simply be a large enough enterprise to require custom business solutions for an investment in ERP software to be worthwhile.

How Does ERP Software Work?

At its core, an ERP suite is modular software that handles the most basic financial aspects of running a business. Users can build outward from that base by adding additional modules to handle other specific business functions. These modules can include business functions such as supply chain management and business intelligence. It can also include materials resource management, which is a broad topic that can address fixed asset management, review point of sale performance, offer project management solutions, and even manage inventory through Just-In-Time strategies.

What differentiates ERP software from more basic accounting software is that an ERP suite provides a system that can be used to manage an entire enterprise instead of merely tracking its finances. Outside of convenience, users also benefit from all of these resources working cohesively through one base ERP suite thanks to the possibility of creating new processes or gaining a better holistic view of an organization that wouldn't be available under a series of unconnected software tools.

For example, while accounting software would only offer a basic framework limited to accounting processes, most ERP systems have more expansive options that allow for modules that integrate basic payroll functions into a broader human resources tool. An ERP suite can also add modules that would customize inventory software for an organization with unique distribution or logistical needs.

The More Complex an Entity, The Greater The Value of Customization

At first glance, generic single-use applications that only serve one specific part of an enterprise may seem sufficient. It may not be obvious on the surface but a one-size-fits-all application likely won't be effective for every type of enterprise. Payroll systems, for example, can have vastly different requirements across different types of businesses. A service organization will be more concerned with payroll software that is able to integrate billing and expense management, while a restaurant chain is going to be more concerned about recording employee tips and factoring in any related tax issues. Both of those types of enterprises will have needs that are far different from that of a construction company that has to account for contractors versus employees and even calculate different rates of pay for the same worker depending on what task he or she is performing that day.

Another area outside of payroll that can have a wide variance in needs is inventory. For example, an enterprise that focuses on manufacturing will need more than just spreadsheets tracking inventory; such a company would potentially need a barcode scanning system to track building components. Those needs are completely different from a seasonal business that would need an automated system able to manage production levels for high and low volume seasons.

Ultimately, the modular and highly customizable nature of ERP suites requires an SME to game plan for what they need from the suite long before contacting a vendor. To determine exactly what type of ERP suite is needed, an enterprise must do a top-down review of its processes and the way it does business. This includes contemplating every phase of business from development, to implementation, to manufacturing, to the sales and billing process all the way through customer support. An enterprise will need to consider how all of these phases work together and how it processes information between all of these phases. The process of an enterprise looking inward when reviewing its ERP needs will go far beyond the questions that are asked for standard financial software, which includes reviewing the number of servers needed and calculating the number of software licenses required. While those questions would still apply to an ERP suite an enterprise would need to go deeper and ask questions that will lead to a greater understanding of the way an enterprise operates.

A comprehensive understanding of the way an enterprise functions is important for designing an ERP suite for reasons other than utilizing the wide range of business systems ERP can offer. Because ERP modules all function together on the same framework it's possible for an enterprise to achieve increased integration between the different modules and the various parts of the business they represent. Because standard business software usually has one function, it's rare that it encourages integration with other software. For example, assume a food processing company receives a delivery of beef on a specific day of the week. The company has employees that specialize in processing the beef when it arrives. In this circumstance, an ERP platform's HR module might coordinate with the inventory module to make certain the correct employees are scheduled to work on the day the beef arrives. Traditional business software is unlikely to have this capability. In most cases, the software would be unable to work with each other and the potential for synergy between processes would be lost.

The example above is just one of the many possibilities that might arise. The potential for what an ERP system is capable of is limited only by the boundaries of the platform and an enterprise's understanding of the manner in which it conducts its business.

The Cloud and Its Effect on ERP Pricing

ERP software is not a new concept. First marketed decades ago, ERP has long been available but until recently was typically outside the budget of most SMEs. The reasoning is pretty simple; the computing power needed to operate these modules and allow them to run optimally can be intense. ERP suites often need multiple servers to function. Many require a server for each separate module. For instance, an SME might have separate servers for an HR module, one for the database backend, one for financials, etc. That's not to mention additional redundant servers for increased performance and backup. All of this hardware adds up quickly, often costing more than the ERP suite itself. It's no surprise that since the development there have been many enterprises unable to take advantage of an ERP system due to budget constraints.

Luckily for some SMEs, cloud-based computing has opened doors to ERP not seen before. Many vendors are using cloud-based computing to power their ERP's which they are deploying with a Software-as-a-Service (SaaS) model. The SaaS model allows a business to license software that is centrally hosted elsewhere. It allows them to save on the upfront hardware costs of hosting the software themselves, including server and network costs. With all servers operating on the cloud, an ERP system can offer a much lower cost and much higher scalability.

The higher scalability possible through the cloud can make an enormous difference for some businesses. For example, a retail business might have a module for online sales. During the holiday season, it's not uncommon for businesses to see large spikes in traffic. To accommodate that traffic without SaaS distribution would require the business to buy new servers for redundancy to handle the increase in traffic. That would involve a large hardware cost for a server that will no longer be necessary for much of the remaining year. That leaves the company with a tough choice: settle for spotty e-commerce during peak online buying, or spend more money on hardware that will only be needed a few weeks out of the year. Cloud-based ERP systems remove the need for that difficult choice. A company can simply pay for additional cloud-based servers for the busy holiday season and then dissolve those servers once they are no longer needed. This allows an enterprise to only pay for the server space they need and only when they need it.

One final benefit of SaaS deployment of an ERP suite is lowered licensing costs. When software is hosted on-site an enterprise must pay a setup fee as well as a dollar amount per licensed user. This amount per user is often between $1,000 and $5,000 and the license would last until there are significant changes made to the software. Cloud-based ERP systems often charge a nominal setup fee or waive it completely. What’s more, the monthly amount is usually between $90 and $500. In many instances, the subscription route of paying a lower monthly rate can be significantly cheaper than the traditional method of paying a larger lump sum per license.

There is one area in which an ERP system won’t save any money over traditional software, and that is when using a third party to handle software deployment. Most ERP vendors suggest or require an enterprise to deploy an ERP suite through a third-party partner. The third-party partner will manage the actual deployment of the ERP system which can take up to several months. This is more than simply installing software, as the third-party partner is responsible for in-depth work including coding middleware that connects the modules if they weren’t already coded prior to purchase. These third-party partners are also responsible for employee training and troubleshooting after deployment. While hiring a third-party partner may not be required it’s likely to be highly recommended by the vendor.

The bottom line is that an enterprise should take stock of the way it does business and evaluate its needs long before even contemplating an ERP system. There will likely be a third-party partner to guide an enterprise through the process and smooth out any issues, so the real work is for an enterprise to go into the relationship knowing exactly what it wants from an ERP system.