16 Nov 2016
With cloud software making advanced accounting and business management systems more affordable for SMEs, can smaller firms really benefit from a full blown ERP system? Chartered Management Accountant and ERP Consultant, Paul Driscoll, reflects on his own experiences of implementing ERP into smaller firms.
The early days.
My personal journey started in the late seventies as a trainee accountant in a large Midlands based automotive company, where the business was monitored and controlled through paper based systems and procedures. Departments of clerks and ‘comptometer’ operators compiled and analysed the data in order to facilitate decision making, and financial ledgers were maintained on Burroughs accounting machines.
We had an O&M (Organisation and Management) department that designed every form down to how many copies were required, how they were completed, and where each copy was then sent. Welcome to manual ERP (Enterprise Resource Planning)!
Fast forward to the mid-eighties when as Finance Director for a Gloucestershire based group of manufacturing subsidiaries of a large multi-national, I was involved in the implementation and testing of a (mainframe) computer system that would replace all those paper based systems and procedures. The project led us to replace most of our paper based records with computer based records, and that system went on to become a digital ERP system called EFACS.
Traditional ERP software.
Large firms quickly saw the benefits of new systems such as EFACS which enabled collaborative working, leading to faster information flows, quicker and better analysis, and better management decisions.
In the early and mid-nineties I helped a number of firms implement large scale ERP systems. The common feature of these implementations is that they were large, complex, and of course, expensive. The main challenges I faced back then are still commonplace today:
- Identifying the business processes– there was usually a procedures manual sitting on a shelf somewhere (normally in the quality manager’s office), but the actual processes often reflected just a passing resemblance to the written procedures and the senior managers turned a blind eye to this as long as it didn’t cause them too much grief;
- The silo mentality– paper based systems allowed a degree of distance, both physical and time, between the various functions within an enterprise, to the point that they could start to believe that their function was the most important, sometimes at the expense of the enterprise as a whole; the immediacy of an electronic system was at once both a rude awakening and very threatening (and I would add that our own function, finance, was often that most guilty of this silo mentality);
- Customisation– expensive changes to the software, with equally expensive ‘re-application fees’ every time there was an upgrade to the system deterred many firms from having the system they really wanted, and instead encouraged them to take what they were given and adapt their business processes with ‘workarounds’.
Same problems, fewer solutions.
In 2005 I was asked by a small firm turning over around £2m per annum in the West Midlands whether there was a better way of controlling their business. They were using an off-the-shelf accounting system and supplementing their business processes with a range of spreadsheets and a lengthy paper trail.
The problems were very familiar: duplication of entry, slow and unreliable data, too much money tied up in stock and customer debt, and chaotic assembly process, so hitting customer delivery promises was generally achieved by quoting long lead times … all the things that a decent electronic ERP system is designed to address.
The most obvious solution for a business facing these problems is to introduce new software, but in an enterprise turning over just £2m and with net profits of around 5%, there was little prospect of a positive ROI for an expensive ERP system.
ERP for small businesses.
I guess we should not be surprised to find that once an enterprise moves beyond very few people, where everyone knows what’s going on, they have all the same issues as a large enterprise, albeit there are fewer zeros on the financials at the end of the year. As expected, the ‘affordable’ end of the market is still not an attractive enough target for the traditional ERP software providers – the main barrier for smaller businesses is cost.
This lead myself and colleagues to form Hudman and develop an ERP solution designed specifically for small and medium sized enterprises. There have subsequently been other entrants to this market place, some like Bright Pearl or Exact, specialising in particular market sectors like retail and distribution, and jobbing shops respectively.
There is also a proliferation of ‘bolt-on’ applications for the more established accounting systems such as Sage and more recently Xero, and when bolted together these can provide much of the functionality of a full ERP solution, however, this leads to further issues as there is often still a need to supplement ‘gaps’ in functionality with manual processes.
I have personally had both good and bad experiences with these bolt-on solutions, the biggest issue coming when one-or-other software application is upgraded and no longer ‘talks’ to the other as it previously did. Without trying very hard I can think of several firms who are running old and unsupported versions of their accounting software because their bolt-on stock or order processing solution is not compatible with the latest version of their accounts software.
Bolting on to an existing accounting system might seem like a less expensive and less painful way of getting full ERP, and there is a whole industry sector of IT consultancy firms out there to help you to achieve this … at a cost … but personal experience urges caution, particularly if your enterprise is growing and evolving.
Making ERP work for smaller businesses.
So in answer the question ‘Is there a place for ERP in small firms?’ I would have to conclude that every business enterprise with more than just a few individuals involved already has some form of ERP, indeed, even a ‘one-man-band’ could be argued to have a form of ERP in his or her head.
So the real question is whether a computer based version of ERP is appropriate for any given enterprise. Many software providers are too quick to suggest a ‘feature led’ approach to implementation (‘our system does XYZ’) rather than looking at a ‘process led’ approach. The key to getting ERP systems to work in any business is for the implementer to understand why the business needs ERP.
I think the answer lies in whether collaborative working, both internally and within the supply chain, faster information flows, quicker and better analysis, and better management decisions, would be beneficial to that enterprise. If the answer is yes then I would suggest the following steps are taken:
- Identify and clearly set out the business processes– this in itself might reveal some quick productivity gains, but at the very least will provide a basis for discussion with prospective ERP providers which might better ensure the enterprise gets the system it really needs;
- Address the silo mentality– a clear understanding by each individual of their place in the enterprise and how what they do, or do not do, impacts upon those around them might again bring about improvements in productivity and better working relationships, but also will go a long way to alleviating resistance of change and the often heard ”but we’ve always done it this way so why do we need to change!?”;
- Customisation– as ever find a solution which fits the business processes, but also be aware of possible changes (particularly in a growing enterprise) so be sure the solution has the flexibility to grow and evolve with the enterprise, because the new breed of SaaS solutions do not generally penalise you for getting the solution you really want.
The role of accountants, advisers and managers will offer challenges over the coming years, where technology is driving change at an ever-increasing pace. There is a place for ERP in smaller businesses, but the key is to understand why the business needs it – a difficult question that sometimes business managers themselves may not be able to answer.
Paul Driscoll is a qualified Chartered Management Accountant with a practice established for 25 years specialising in manufacturing and construction clients, a director of over a dozen companies, and board level adviser to many others.
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