How to choose an ERP system?

Replacing your company's ERP system is a once every ten years or more project. Given the magnitude of the decision, what are the steps you can take to maximise your chance of success?

Peter Bell is the COO of Alliance Contracting. Alliance's business is mining and civil construction. With mining, there's a huge investment in capital with a relatively small client base and few transactions.

However, the value of those transactions is significant. The civil construction business is more complex with many clients. Clients and staff are distributed over a large area with a lot of the work focussed in the Pilbara region of north-western Australia. The business has grown from $36m to $75m over the last two years with even greater growth expected in the coming year. There are about 140 staff at the moment with the intent to expand to about 200 on the back expected new business.

Many companies like Alliance run the business as two entities - one that does the work and another that rents the assets to the other entity. Alliance doesn't work like that which makes it more difficult to account for the use of equipment. "You have to do that in-house. And that requires something called notional rates for the charging the use of the gear for recovery" explains Bell.

Until recently, Alliance was using an off-the-shelf accounting system. "We were finding that it was becoming difficult to track machines against particular types of activities" explains Bell. "When costs blew out it became difficult to pinpoint what exact area it was in. That was causing us concerns."

"The other thing was that our clients we asking us, in tender documents, how we could cut costs. We needed to have an open book of accounts so we could show them, as a job was progressing, how we were going to improve cost efficiency. that's very difficult to measure if you can't assign that back to particular activities".

Bell's challenges were two-fold. He needed to have greater visibility of what was happening in the business and his customers were demanding to know not only how costs were being attributed to job but how those costs could be reduced.

In addition to the old accounting system, Alliance relied on spreadsheets that were created by different business units that were decentralised. "What we were finding was a great deal of inconsistency of information across sites. Turnover was climbing and there was a time when we needed an enterprise-wide format" says Bell.

"The key points were that the information wasn't centralised so there was a lot of duplication. For example, with timesheets, the guys would write their timesheet on a sheet of paper that was summarised to another form by a supervisor. This would be sent to a clerk who would enter it onto a spreadsheet. This would come to head office and it would be entered into the accounting system. That kind of duplication lead to inherent transpositional errors" explains Bell.

In addition, the budgeting module of the old product was limited and there was no easy way to measure activities - a key part of how Alliance needed to work with its growing list of major clients. Staff, especially younger people, expected more modern systems and this was becoming an issue as staff expected better technology. Also, as the business is growing, Alliance's confidence that its old system would deal with increasing transactional volumes was not high.

Alliance knew that they needed to look for a more sophisticated, reliable and extensible business system. The process soy choosing a new solution began with the management team. The business's leadership discussed a budget and then looked at the functional areas of the business. "We looked at projects, accounting, plant maintenance, human resources and document management. We process mapped as much of that as possible and that gave us a diagrammatic view of how our business works" explains Bell.

Having established a baseline for Appliance's operations, a Request for Information process was initiated with suppliers that described the business at a high level. This produced a list of potential vendors. Alliance then used an external consultant to match the process mapping with the vendor responses to narrow down a list of potential candidates. This produced a list of six possible solutions.

"From there we nutted those out to three. There were high level requirements and then more detailed ones. Of the three, we asked for a proposal that was designed to meet the more detailed requirements" explains Bell. The consultant used a specific methodology that matched the requirements and potential solutions so that each potential vendor could be objectively assessed.

This process reduced the three candidates to two vendors who were then asked to do a more detailed presentation, an indication of their availability for a project commencement date and some reference sites.
One of the decisions Alliance needed to make was whether to host the system themselves or outsource. Alliance chose to have the solution remotely hosted. "We don't see IT as a core competency. We see it as a direct cost. It's an overhead. Rather than buy a big server that we can grow into, when you remotely host you can incrementally grow" says Bell. "The reliability of the hosting was a lot stronger than our head office. And the cost - it's very difficult to finance server equipment. Banks don't like to finance it because of the obsolescence and software is basically an intangible. It became a working capital issue as we'd have to find thousands of dollars for our own servers".

Anyone who has deployed an ERP system would know that the costs essentially fall into three categories. There are the cost of the actual software, the annual maintenance and the implementation cost. "The software is generally fixed but the implementation cost is only estimated. From the experience we've had is that vendors may go in with a lighter implementation cost to get the business but by the end of the project the implementation budget has blown out but that got them the job in the first instance" says Bell. This lead Alliance to not choosing the lowest cost but the quote they believed more accurately reflected the expectation of the cost. "A realistic implementation plan was critical" says Bell. "If one implantation cost is much higher than another then it's probably because it's a lot more realistic".

A key part of Alliance's success with this project was the level of engagement they had within the business. During the demonstration phase of the vendor selection process, Bell ensured that staff from right across the business were involved. "Each functional manager and a handful of end users attended each demonstration. We wanted to make sure that it was a unanimous, everyone on board, decision. The last thing I wanted was a change management headache" says Bell. Alliance ensured that someone involved in getting data into the system was at every demonstration - not just management who looked at reports.
Alliance also put together a series of scenarios that vendors were to demonstrate so that Alliance could be assured that the system they chose fulfilled basic business requirements.

By ensuring that requirements were clear and there was broad engagement across the business Alliance was able to make a decision that was unanimous in the executive suite. The board was able see had been taken through a rigourous process with broad consultation.

This was last published in August 2011

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