Lisa Schwarz | Senior Director of Global Product Marketing
July 30, 2023
When a business considers its first ERP, readiness is crucial in two dimensions. First, is the business at the right growth stage to benefit from what an ERP can offer to boost growth and profitability? And, if that’s the case, has it effectively prepared to take advantage of an ERP implementation?
ERP readiness assessments measure a company’s need for ERP and its capacity to support the system financially, technologically and culturally. Culture is important because ERP systems may substantially alter how companies operate and innovate in addition to requiring considerable investments. Some employees can adapt their skill sets, but others might not. ERP readiness assessments look at all those factors to help companies answer three key questions:
· What issues do we face today, and can an ERP system address them?
· Is an ERP system the right solution now?
· If an ERP system makes sense, are we ready to embrace the changes it brings?
What Is ERP Readiness?
ERP readiness assessments measure business operations to determine whether a company can implement a new ERP system and reap all its potential benefits. They go beyond technical or financial assessments to gauge whether ERP is, in fact, necessary to address the business’s challenges. They also measure whether a company’s people and processes can handle the many changes in workflows, communication and organizational structure that ERP systems typically entail.
A complete ERP readiness assessment should:
1. Identify processes for improvement and the post-implementation goals for the new processes.
2. Analyze a new ERP system’s hardware, software and infrastructure requirements, depending on whether it is cloud-based or on-premises, and whether it will require customization to adapt to organizational policies and workflows.
3. Determine whether existing data management practices, including security and backup, can support a new ERP system and, if not, what changes will be needed.
4. Gauge how teams will respond to the process and cultural changes ERP systems often bring and develop an appropriate change management plan.
5. Describe the financial, analytical, human and technical resources required to deploy, maintain and grow an ERP system.
6. Establish the risks of ERP implementation, such as costs, data loss and downtime, and weigh them against alternatives to ERP.
7. Include a financial assessment that calculates the return on investment (ROI) of ERP for the business — the benefits of investing in an ERP system versus its costs over time.
· ERP systems are powerful tools that can dramatically transform how companies think, act and grow, but not every company is prepared to deploy, manage and support them.
· ERP rollouts often result in significant changes to workflows, processes and technologies that require new skill sets, resources, management styles, organizational structures and corporate cultures.
· ERP readiness assessments help companies gauge whether an ERP system is the right solution for their challenges and whether they’re prepared for future changes.
· Companies should look for several signs that existing systems are inadequate and that an ERP system might help, including an inability to scale, poor communication, limited visibility into operations and outdated legacy technologies.
ERP Readiness Explained
Even under the best circumstances, many organizations suffer from ERP implementation challenges, primarily because ERP systems often bring about significant organizational change — and change is rarely easy. Beyond technological change, ERP systems can fundamentally alter how companies think and operate. But ERPs are a popular choice for growing businesses because once a business reaches a certain size, those shifts in operational structures and processes become necessary anyway.
Correctly-implemented ERP systems fuel growth, partly because they automate processes and workflows and partly because they facilitate the needed structural and cultural changes, driving improvement in everything from innovation to profit. However, businesses won’t realize any of these benefits when they are not ready for ERP.
With so much on the line, it’s important for companies to understand if a new ERP system is the right solution to their problems and, if so, whether now is the right time to implement it. That’s why it’s important for any company considering an ERP system to determine whether they’re fully prepared for the financial, organizational and cultural implications. ERP readiness
assessments answer whether a company’s people, processes, technology and finances are ready for such an important investment.
Such an assessment should be the first tangible ERP implementation step, before ERP vendors are evaluated or significant resources are applied to the project. In some cases, an ERP readiness assessment may also become the last step in the process, should companies determine they’re not yet ready to make that leap. ERP readiness assessments help companies avoid the potential pitfalls and considerable costs of a poor ERP implementation in instances when another solution might be more effective at the time.
Why Is ERP Readiness Important?
Whether it’s a new implementation or replacing a legacy system, an ERP system involves significant investments in time and resources. While ERP systems can drive tremendous innovation and growth even in case-study-worthy ERP implementations, those benefits won’t materialize if the system is executed poorly.
Successful ERP implementations often have several things in common: detailed budgeting, a clear implementation strategy, a thorough vendor evaluation process, effective and consistent communication, and comprehensive training. ERP readiness assessments mitigate the risk of failure by helping companies determine whether an ERP implementation is the right solution for them at that time. They do that by answering several key questions, including:
· What are the business challenges we expect an ERP system to solve?
· How will an ERP change existing business processes and technologies, and will our current employees embrace that change?
· What systems will become obsolete after an ERP implementation?
· Is our technology infrastructure ready to support an ERP system? If not, what changes will be necessary before implementation?
· What new human resources will we need to support a new ERP system?
· What is the total cost of ownership (TCO) for an ERP system over five years? What is the anticipated ROI over that period?
· How many ERP implementation phases will be required, how long will each take and how will it impact the organization during that time?
· What factors could delay or jeopardize the success of the implementation?
For companies considering replacing a legacy ERP system, questions also include:
· What are the challenges of the current ERP system?
· Can the current system be upgraded to address challenges? If so, what will be the total cost in time and resources to improve the current system?
· How might business growth and expansion affect the existing ERP platform?
In the end, the answers to all the above questions should come together to resolve the big overall question: Do we need an ERP system at this time, or is there a more efficient, cost-effective alternative?
Ready? Set! Get Your ERP Implementation Going
Set your business up for success by building a plan, establishing a team, and pinpointing KPIs for your ERP implementation.
ERP Readiness Assessment
In the 1970s, consulting firm McKinsey & Company developed a framework for organizational effectiveness that identified seven key components that provide the greatest opportunity for success when operating in balance with each other. Dubbed 7S, the principles have since provided a framework to help drive the coordination of nearly any corporate business initiative. When applied to an ERP project, 7S serves as an effective readiness assessment. Applying it, an organization can identify potential gaps in strategic alignment for an ERP implementation and address the issues before they have a chance to derail the deployment.
The 7S framework is divided into “hard” and “soft” components. The three hard components — strategy, structure, and systems — represent tangible elements often documented in most companies. The four soft components, on the other hand (style, staff, skills and shared values), are usually less clear. Visually speaking, consider the shared values component as the hub for the other six spokes, representing the importance of shared values as the foundation of company culture that should drive the other elements. Using 7S for an ERP readiness assessment aims to identify gaps where strategies for one component don’t align with those for the others. Let’s look at how each component applies to the goal of ERP effectiveness.
ERP implementations generally don’t succeed without clearly defined, measurable goals that are tied directly to business strategy. So, an ERP readiness assessment must first establish a framework for the scope of the ERP that reflects that overall business strategy. Tight alignment helps ensure buy-in from stakeholders, who better understand the “why” for the implementation. It also helps minimize user resistance to the implementation, which can lead to delays and low adoption rates. For example, a company strategy might emphasize customer service, while a goal of the ERP system is to automate processes. However, if the ERP implementation results in too much automation, it could create customer service issues. Understanding this possibility could help address concerns before they sidetrack the implementation.
ERP systems help companies improve operational discipline, but a certain degree of organizational structure must already be in place to reap those benefits. An ERP readiness assessment ensures that existing organizational structures are aligned with the changes in workflows, collaboration and decision-making that ERP systems often bring. A readiness assessment should evaluate the following aspects of organizational structure:
· Centralization: Centralizing data is a hallmark of ERP systems; it benefits organizations by providing better information for decision-making. But this doesn’t necessarily favor companies with centralized decision-making structures — ERP systems can be configured to support centralized or decentralized decision-making and should be consciously designed for one or the other.
· Specialization: Companies with higher degrees of specialized resources, such as business analysts or IT personnel, are often more prepared to support ERP system growth.
· Formalization: ERP systems help companies embed standardized processes into automated workflows. As a result, companies that already have documented, standardized work processes tend to find greater success with ERP implementations.
· Size: To some degree, larger organizations find ERP implementations easier because of the availability of a wider pool of diverse internal resources, particularly in IT. Smaller organizations, however, can use third-party resources to help with implementation.
· Hierarchy: Different levels of resources should have different levels of access to data in an ERP system. After all, junior managers don’t need the same level of access as department heads. Companies with defined hierarchies may find it easier to benefit from access controls in ERP systems.
· Span of control: Unlike hierarchies, which regulate access, span of control regulates who can modify systems. Companies with defined rules for span of control can better minimize ERP security issues.
Whether the technology is in place to support an implementation is a critical question for ERP readiness assessments, although cloud-based ERP implementations make technology support
easier than on-premises solutions. On-premises solutions require significant hardware, software and infrastructure investments, while cloud providers host and manage hardware and software as part of their subscription pricing. ERP readiness assessments should go beyond just technology evaluations, however. For example, is the company prepared for data migration, one of the most important components of an ERP implementation? Data migration involves identifying, cleaning and mapping large amounts of financial, employee, customer and inventory data, among other things. For an ERP implementation to succeed, companies need to assess their data quality to ensure that their new system won’t struggle to process improperly formatted data, which can lead to operational disruptions. Incomplete, incorrect, inconsistent or duplicate data can create serious issues with reporting, inventory tracking and customer service.
Paradoxically, one of the more interesting results of implementing a centralized ERP system is that it often leads to greatly improved decentralized thinking, because business units gain access to tools that generate better business insights and collaboration. This decentralized shift, however, creates changes in processes and corporate culture for which companies may not be fully prepared. In particular, managers may want to consider how the changes could impact their leadership styles. For example, leaders accustomed to having decisions flow through them may find their teams more eager to use new insights to drive decisions. As a result, managers will need to welcome feedback in the decision-making process. An ERP readiness assessment should determine whether company leadership is prepared to develop a new, more collaborative style after implementation.
Staff assessments, arguably the most important element of a readiness assessment, evaluate whether teams are culturally prepared to embrace an ERP implementation and their capacity to learn new ways of working. A readiness assessment should review three specific areas of staff preparedness:
· Flexibility: ERP systems require new skill sets and often lead to changes in organizational structure and job responsibilities that can be jarring for staff who struggle with change. That doesn’t mean workers can’t adapt; but a readiness assessment should carefully examine staff flexibility. Surveys are one way to do so, as well as checking performance reviews to assess strengths and weaknesses of those who will be impacted by the implementation plan.
· Education and training: An important way to help staff prepare for the cultural changes of an ERP implementation is to build a thorough training program to educate them on how to use the new system and how to embrace the change it brings. ERP implementations require training before, during and after implementation to ensure high adoption rates.
· Project management: ERP implementation success (opens in a new tab) hinges on selecting an effective project leader and team. In most cases, internal employees should lead the project, given their familiarity with the nuances of company operations and processes. An ERP readiness assessment should focus on building a cross-functional team possessing high collaboration skills and familiarity with large IT projects. The
project leader should have full executive support to make important decisions about how the project proceeds.
In addition to a willingness to embrace change, companies implementing an ERP also need teams with the right balance of skill sets to get the most out of the system. In addition to the management skills described in the “Style” and “Staff” passages, companies should assess the depth of their talent in two key areas:
· IT skills: Cloud ERP implementations make it possible to launch and support ERP systems without requiring armies of IT support, because cloud providers manage hardware and software for customers. But internal IT resources are still crucial. To determine ERP readiness, companies should evaluate their IT skills in cloud computing, database management, network security, systems integration and data analytics.
· User skills: ERP systems, particularly in the cloud, continue to offer simpler, more intuitive user experiences, but companies still need to be sure their end users will be comfortable using an ERP. An ERP readiness assessment should evaluate how familiar ERP users are with cloud technology. Users should also be familiar with company processes, feel comfortable in a collaborative environment and have strong data management skills. Where gaps are identified, companies should build strong training programs into the ERP implementation before, during and after the rollout.
In some organizations, the role of shared values in business success feels vague and disconnected from tangible objectives. But regarding ERP implementation, shared values can be critical to success. In the context of ERP, “shared values” refers to the degree to which stakeholders agree on the importance of the implementation to the company’s overall goals. Any perceived conflict between the impact of the ERP implementation and the company’s overall goals can foment confusion for the project team or ERP users, that can lead to resistance to the project. For example, if a company touts flexible business processes as a goal but its ERP implementation results in inflexible standardized, automated workflows, the disconnect could impact adoption rates.
An ERP readiness assessment can help ensure that goals remain aligned throughout an ERP implementation. Establishing a change management plan during the rollout can also help. Change management focuses on preparing employees for the adjustments in technologies, processes and culture that ERP systems often necessitate. Change management teams build a core communication strategy for the project, providing thorough and consistent messaging across the company about goals, timelines, delays and shifts in strategy.
Choosing project champions is another important way to align shared values with an ERP implementation. An overall project champion should be a high-level executive who is adept at managing teams and large-scale projects. Selecting project champions for key areas within the
implementation, such as IT, finance, human resources and sales, can also make a positive difference to system adoption.
ERP Needs Indicators
An ERP readiness assessment answers the question: “Do we have what it takes to implement an ERP system?” But there’s actually an important question to answer before a readiness assessment even starts: “Do we really need an ERP?” While every company is different, there are several common themes that indicate when a company is at the point where an ERP system will help overcome roadblocks and unlock growth opportunities.
Inability to Close More Deals
When companies outgrow their legacy systems for finance, supply chain management and customer relationship management, the result is often an inability to scale up the volume of sales deals. For example, if sales teams can’t get accurate visibility into inventory levels, they cannot commit to contracts for fear the company can’t deliver. ERP systems include sales, manufacturing, and logistics components that deliver real-time sales metrics and operations KPIs across the organization.
It’s impossible to monitor every activity at every company, but when organizations lose sight of decision-making processes or who accessed what data and when, it likely means existing operational systems are struggling. It makes it difficult to determine accountability across the organization and puts tremendous strain on managers, who often find themselves trying to track down where processes have broken, rather than spending time on more strategic projects. ERP systems automate processes to maintain greater operational discipline. They also use audit trails, for example, to ensure that companies have immediate knowledge about who accesses or makes changes within the system. ERP systems also allow companies to build access controls that assign different levels of access or modification to different organizational roles, which minimizes errors.
Poor Real-Time Reporting
One serious drawback of legacy operational systems for certain functions, such as finance, human resources, supply chain management or customer relationship management, is the inability to analyze data for decision-making thoroughly. When systems are disconnected and contain incomplete, inconsistent or redundant data, drawing firm conclusions about the state of the business becomes extremely challenging. For example, inaccurate or incomplete data can lead to erroneous information on inventory levels, which can delay order fulfillment. An inability to accurately understand inventory movement makes it difficult to understand which products are trending positively or negatively. Poor financial reporting can lead to missed opportunities to reduce costs. ERP systems provide real-time visibility into a centralized data warehouse for
accurate, actionable reports. The result is much greater insight for decision-making and more timely, accurate reporting.
Global expansion doesn’t necessarily require ERP systems — but they can help. For example, ERP systems can be configured to automate compliance with different laws and regulations concerning importing and exporting in each country, preventing costly shipment delays. The same is true for data privacy laws, which also vary by country. ERP systems can keep companies in compliance with international regulations, such as the General Data Privacy Regulation (GDPR) in Europe, which can have costly penalties for noncompliance. Thinking beyond compliance, Ambassador Foods, a U.S. importer of international foods, customized its ERP to simplify complex pricing strategies involving its customers, distributors and manufacturers.
Scaling Business Operations
Outdated systems with limited capacity often thwart an organization’s ability to scale operations. Legacy on-premises systems require significant investments in hardware and infrastructure to meet increasing demand for more users and processing power. Older systems often have limited functionality to handle complex financial transactions, including multicurrency payments. Older systems also tend to be more inflexible than recent cloud-based systems, often requiring companies to adapt processes to their limited capabilities. Legacy systems may also be difficult to integrate with newer technologies, creating data silos that result in inaccurate or incomplete reporting or compliance issues. ERP systems, particularly cloud-based offerings, allow companies to scale capacity and capabilities on demand to meet shifting business needs. Cloud-based ERP providers also upgrade their systems automatically to allow customers to adopt the latest features.
Existing Systems Lose Support
Eventually, all software reaches an end of life (EOL), when providers no longer offer technical support, patches or upgrades. Customers can continue using the software, but at their own risk and expense. When enterprise systems for customer relationship management, finance or manufacturing lose support, several risks increase, especially with on-premises software implementations. With more limited support, system performance will likely decrease while maintenance costs increase. Security and compliance risks are also exposed when customers lose access to expertise from providers. Companies can also expect to have difficulty integrating EOL systems with newer technologies. Cloud-based ERP systems make transitioning after EOL simpler and faster because they require very little, if any, hardware and infrastructure to implement.
Adding Manufacturing Types
As companies produce more complex products, existing systems may struggle to support the manufacturing pipeline. Most companies use three broad categories of manufacturing processes to build products:
· Make-to-stock, where the manufacturer decides the components of its products and builds them in advance of orders, based on demand forecasts.
· Make-to-order, where all orders are custom, often because of the complexity of the product, such as an airplane. Manufacturing begins when an order is received. As a result, product schedules often vary, based on individual orders, making it difficult to manage inventory levels, production schedules and lead times.
· Make-to-assemble, where manufacturers build parts before orders but assemble those parts based on specific orders.
ERP systems manage complexity by providing a centralized platform that tracks and manages the manufacturing process from raw materials to finished goods. ERP systems also provide more complete and integrated inventory management, quality control and cost management tools.
Mergers and Acquisitions
While it’s not entirely necessary that companies looking to be acquired have an ERP system, without one the due diligence process for the acquiring company usually is more fraught with risk. How trustworthy are the acquired company’s financial and inventory reports, for example, if it relies on disparate legacy systems with potentially inaccurate or incomplete data? An ERP system can add a degree of trust to the process, giving the acquiring company greater confidence in its decision. In addition, from an operational standpoint, unifying on a single ERP system post-acquisition is the best way to streamline operations and drive innovation by consolidating data and automating workflows, policies and processes.
Issues to Resolve for ERP Readiness
Once companies realize they need an ERP system, there’s still work to be done before they’re ready to implement one. For example, ERP systems don’t magically solve problems with inventory management. The underlying cause of the inventory management issues must be identified first, so that the ERP can be configured to address it. That’s just one of several issues companies should confront as part of their readiness assessments. Here’s a look at four:
Inventory management is a core component of many ERP deployments. But to take advantage of the technology, companies first must resolve issues around poor-quality inventory data and process optimization, which can have a ripple effect throughout the organization, with or without an ERP system. Inaccurate inventory counts can lead to overstocking or understocking/stockouts, making it difficult to build the accurate forecasting processes necessary for a successful ERP implementation. As part of an ERP readiness assessment, companies should audit inventory controls, levels, and processes to identify issues. With accurate data and processes, ERP systems provide increased inventory visibility to minimize errors and save money.
ERP systems are known for helping companies break down silos by providing real-time company insights that spur greater collaboration and better decision-making among departments. Unfortunately, they can’t overcome fundamental issues with organizational communication, such as a lack of clear business objectives or poorly defined roles and responsibilities. It’s particularly important to resolve communication issues before implementation because they can quickly derail an ERP project. When teams don’t understand the reasons for the implementation and the benefits, it will bring, the likelihood that they’ll resist the change increases. An ERP readiness assessment should include an audit of communication processes and tools to ensure that companies can convey the importance of the ERP implementation to all stakeholders, which will lead to greater adoption rates. A good change management plan can help, by using multiple channels — such as email, live meetings and newsletters — to share implementation goals, updates, timelines and milestones across all key stakeholders.
ERP systems can be a lifesaver when companies experience long sales cycles because of inconsistent processes and limited access to accurate data. Automated processes can help the sales process become faster and more efficient. Giving sales teams real-time access to accurate inventory, production and customer data allows them to respond quickly to customer questions and close deals. Sometimes, however, long sales cycles result from poor lead qualification, lack of sales processes or an ineffective sales team — any of which needs to be addressed before implementing an ERP system. Before implementation, companies should pinpoint inefficiencies by analyzing current sales processes, such as where customers often drop out of the sales process or where sales teams spend the most time. They can then streamline processes, improve communication, or align sales strategies before launching an ERP system.
Manual Entry Errors
For better or worse, humans make more errors than computers do. Consequently, the more humans involved in data entry, which is often the case when companies use multiple disconnected systems to manage their businesses, the greater the risk for costly errors. Beyond the consequences of making decisions based on inaccurate data, errors on inventory levels, billing and invoicing, production scheduling, financial reporting and payroll processing can significantly damage revenue and reputation. Automation is a key component of ERP systems, allowing companies to reduce manual intervention.
Free ERP Readiness Assessment Checklist
Implementing an ERP system involves a significant commitment of time and resources. But how can you be sure your company needs it right now? Or does your company have the skills — and the mindset — to make the implementation successful? Use our 20-question checklist to gauge whether an ERP system makes the most sense for your company today.