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Assessing ERP upgrades in the 21st century

Brian Sommer Profile picture for user brianssommer March 5, 2020
The pressure to upgrade is real. How well prepared are you? Here is your checklist and clues.

question and answer

Are those cloud ERP upgrades worthwhile? Some might be while others are still trying to be relevant. Vendors and implementers want your firm to make these upgrades, warts and all. Here are the critical questions for which you'll need answers.

The upgrade battleground

Few ERP vendors see a lot of upgrade activity to newer versions of their products. Here are some reasons:

  • The new solution requires the customer to pay for virtually the same functionality all over again – and for what?
  • Many customers have perpetual licenses for the old code and have paid maintenance for decades. Wasn't that maintenance supposed to fund new product development and enhancements as part of the contract?
  • Implementing the new solution is expensive and exposes the company to new risks. What CEO wants to be on the cover of the Wall Street Journal explaining why customer orders can't be processed due to an avoidable ERP upgrade?
  • The new software also requires additional software subscriptions and services. Some 'new' private cloud solutions might require virtual machine software, integration maintenance services, new database licenses, application software maintenance services, hyperscaler tuning services, etc. All of these extras harm the software upgrade/replacement economics.
  • The ROI is not there – the incremental benefits are a fraction of the additional costs.
  • The customer has lots of application software modifications, customizations, integrations, reports, etc. with the old ERP product that must be reworked in the new solution.
  • The timing is terrible.
  • The upgrade would conflict with other business or IT initiatives.

In the upgrade world, I see a few kinds of confused ERP buyers. Many are sitting tight as they either don't want the business disruption or risk that comes with significant upgrades. Some want something different than the status quo, except they don't know what it is. Some say they want a new digitally transformed future and are hoping an ERP vendor will have that solution. Some are being pushed hard to upgrade from vendors and implementers.

Of those looking to upgrade, why are they considering this? Is it the vendor's cutover deadline (note: SAP recently pushed their drop-dead date back)? Are over-eager integrators pushing the upgrade? Whatever the reason, the energy around these plans may be misplaced. Instead of just blindly deciding to go with your old ERP vendor's update, it's time to think about what's best for the company.

The right question

Software users often ask the wrong question. Instead of asking how and when to upgrade the current products, they should first ask what our firm's digital strategy is and then determine what ERP strategy aligns with that.  Going the other way,  i.e., implementing a new ERP before knowing your future digital transformation plans, could lead to expensive disappointments and a need to reimplement the ERP again once that direction is established.

Integrators add to the problem as they promote presumptive statements. They 'presume' every company wants a "journey", "transformation", "platform," or "digital transformation". Some go so far as to presume you'll want a "journey to a digital transformation platform." That presumption may not be valid. What many of these sales pitches fail to address is the destination that a customer's business needs or wants. If you know where you're going, you might take a different route, use different technologies, those pitched by the integrator.

Three case examples

A major utility company launched an "ERP modernization" project, sent an RFI to consultants to help with an upgrade of their 21-year-old ERP software. The team didn't appreciate that their employer had shifted from coal-fired generation plants and sold off several business lines. Today, the firm is a smaller, solar, and wind-farm energy producer with an ERP that was heavily customized for a bigger, obsolete, coal-fired world.

What this company needed was:

  • A way to ring-fence their ERP.
  • Connect the ERP to a modern solution targeted to their new businesses (e.g., preventative maintenance for wind power generators).
  • To move their old ERP maintenance to a third-party.

In another situation, a significant manufacturer wanted to have killer Factory of the Future capabilities. Relying on the visionary, forward-looking statements of some of their incumbent ERP vendors, they assumed these ERP vendors had this functionality and that these capabilities were native to the new solutions. Those new capabilities only exist on paper. Integrators would be needed to integrate these solutions, add new vertical analytics, add new workflow and exception handling, etc. In essence, these ERP vendors only provide a platform, not a real solution. The client was supremely bummed at discovering this during their selection effort. Their selection project only took a little time and money to complete but saved the firm a small fortune. Their CIO believes they avoided a $150-200 million mistake.

In one other situation, a prominent manufacturer has shrunken in size. Divestitures have resulted in fewer lines of business to support and smaller transaction volumes. Today, they may no longer need to upgrade their old ERP. Instead, they need a more cost-effective ERP solution for their smaller sized firm. If they retain any of the old ERP functionality, it would be at a global shared service level for front/back-office functions. At the same time, a division/plant ERP solution would be used at their production facilities. In other words, they are better served by adopting a two-tier ERP strategy.

All these cases illustrate that changing business needs and strategies may warrant changes in ERP strategy. Anytime a material upgrade is up for consideration, smart software buyers re-examine their business and ERP strategies.

So, before you get wound up to upgrade, stop, take a breath, and ask the right question first: Where is our business going, and how should we transform? The ERP decisions will flow from this and not vice versa.

The change timing

Some firms have grown attached to their old ERP. Like a broken in old pair of shoes, it's comfortable and familiar. Unfortunately, those shoes could be really scuffed up, have holes in the soles, etc. It might be your favorite pair of shoes but you will need to get a new pair in time. Like shoes, ERP systems weren't meant to last a lifetime, and you need to decide what's a useful life for your software.

Many firms have been using the same ERP solution for 10+ years, and a large number of ERP users are in the 20-year timeframe. If your firm has used the same solution for almost 20 years, is it time to look at other options before you lock into another 20-year deal?

Software buyers today must ask: Is the ERP vendor (and implementer) that got us through the last 20 years, the same firm that can deliver mega-value for the next 20? How do you answer this?

Material change of control and their upgrade implications

Before you accept your current ERP vendors' cloud upgrades, ask yourself, "Did the vendor materially change since our initial purchase?" If the vendor used to be a strategic partner, but now acts in a more transactional manner, is it time for a change? Do you want to do business for a decade or more with a supplier that only wants access to your bank account?

Check if your current ERP vendor has undergone a material change of control. For more on a material change of control, see this Diginomica piece. New owners may take ERP innovation in different directions or may curtail needed innovation investments. Some ownership changes, like the appearance of private equity firms or activist shareholders, can radically alter one's relationship with an ERP firm. In the last decade, we've seen a number of these changes and their effect on ERP product lines and management.

Other ERP changes

Beyond these material change of control issues, other significant ERP vendor changes may make you re-consider a new and substantial ERP upgrade. For example,

  • Is the vendor more litigious?
  • Has the vendor started to use more confusing and more lengthy contracts that make your compliance and annual fees tougher to forecast?
  • Has the vendor decided to grow more via acquisition than via its development efforts?
  • Has the vendor transitioned from an innovation firm to a financial concern?

Buyers need to evaluate the vendor's track record in using the increased scale it acquired over these years to reduce its costs.

  • Are economies of scale being passed along to customers? 
  • Is this vendor still trying to bill ever higher price increases, often more than the annual inflation rate or GDP growth rate?
  • If your ERP costs aren't going down, is it because your vendor doesn't use open source components, is inefficient, or is just greedy?

None of these are excellent long-term partner characteristics.

The upgraded solution?

Some proposed upgraded solutions have less functionality than their older, on-premises predecessor products. Initially, many upgraded ERP solutions only offered refreshed back-office applications. The shop floor, vertical, and other modules were months or years away. We also saw significant delays in the introduction of multi-tenant versions of these upgraded solutions.

In some situations, vendors didn't alter the data model for their solutions. A key consideration in this was to make migrations to the new solution easier. However, for vendors that have acquired other solutions over the years, there may not be one data model or one piece of code to complete a function. The static nature of old data models should be a big clue that these upgraded solutions will not contain new functionality to support radically new processes, new kinds of data, new process workflows, etc. The upgrade might have the tools to help with advanced capabilities, but only if someone other than the vendor creates them.

The one thing that did get an upgrade by most ERP providers was the underlying technology stack or platform. Sure, some firms introduced single-tenant platforms well before a multi-tenant one was available. But, the new architectures often handled integrations with all manner of applications and data stores well.

Integrators weren't concerned that partial/incomplete solutions were coming out. They wanted to get their people staffed on projects even if these deals weren't necessarily based on robust, modern technology. Sadly, many implementers focused on the technical aspects of these upgrades and didn't do much to radically re-invent business processes or reimagine the nature of vertical solutions. Some of that delay might be due to the immaturity of the platforms, especially those that vendors kept away from third parties for extension or customization activities. The consequence of this is the continued immaturity of some solutions that make the economics unsupportable.

Software vendors didn't let a lack of product capabilities stop their marketing efforts. Their messaging was all about providing a platform for future digital capabilities not delivering radical new capabilities today. For more on this, see this 2018 Diginomica story. Providing a storage place for big data is not the same as providing a complete, reimagined digital solution. It's not transformation – it's just storage with some tools.

The key question is simply: Is this a real, complete digital transformation solution or some partial set of capabilities?

The money

Costs and benefits come into the picture. Smart ERP decision-makers ensure they develop a solid 10-year business case to assess the reasonableness of an upgrade adequately. That can be tough to do as many vendors will only lock-in pricing, and price increases for 3-5 years. Your economic calculations go out the window when renewal fees suddenly spike at a renewal.

Why ten years? If you have been with your current ERP for ten or more years, why would you think a newer solution will have a shorter useful life? Would you switch ERP's again when the first three-year renewal comes up? Negotiate ten years of costs before committing to a significant upgrade.

But can you price out a ten-year cost of ownership? It's hard to do as vendors might:

  • Charge for storage of scanned images (like T&E receipts, employee photos, etc.).
  • Want to bill you for each document and document line item in the system.
  • Bill you when moving to a different hyperscaler.
  • Bill you when you integrate the software to other vendor's solutions.
  • Slip new terms, prices, and other conditions in embedded URLs and further release upgrade instructions.
  • Charge materially more for additional users than the original contract charged for them.
  • Refuse to reduce costs when your firm contracts.
  • Charge for every single component of their solution, its platform, all of its microservices, etc.
  • Not disclose all of the components you'll need to subscribe to until after you're under contract.

Compounding the economic challenges are the implementation costs and follow-on services costs. Recent proposal reviews have identified a considerable variation of add-on services that these upgrades might trigger. Some of these fees are only for the initial implementation, and others occur at subsequent updates or throughout the subscription. Pure play multi-tenant cloud applications may have fewer of these while private cloud, single-tenant, hosted or on-premises upgrades may require a number of these. For example, you might not need a virtual machine software license, a relational database license, DBMS tuning services, etc. if you select a multi-tenant product that runs on the vendor's data center.

Your key question is: How can we proceed with this upgrade if we don't know the full costs and can't accurately forecast our costs over the useful life of the solution?

How your CEO sees this decision

CIOs or IT leaders are putting a lot at risk if they don't handle this upgrade decision well. Great CIOs will be prepared and will have:

  • Done a significant amount of research on many different ERP and non-ERP options. Great complementary solutions such as Uptake, Aera Technologyor Noodle.AI are out there. Have you fully explored the art of the possible?
  • Designed radically re-engineered or reimagined processes and, after these have been created, have different ERP vendors demonstrate how they do or do not support these.
  • Conducted extensive reviews of software and services proposals to understand costs over the next ten years fully.
  • Made a thorough review of the project risks and planned how the company mitigates identified risks.
  • Correctly understood how this effort ties into the company's long-term strategic objectives.
  • Created a bulletproof presentation book for the executive committee/board of directors.

In the end, the CIO must address this fundamental question: "Who decided this is THE path that the company must undertake and NOW?"

Bottom line

Today's ERP upgrades aren't a collection of technical patches with a little bit of new functionality thrown in for good measure. Today's updates involve a significant commitment to the ERP vendor. You might be signing up for another 10-20-year deal. These upgrades could be highly disruptive to your firm if the implementation goes awry or if critical business functionality is missing. These decisions, specifically, do you use your old vendor's upgrade or seek true elsewhere, are not immaterial. These decisions have consequences.

When you strip away the hype and pressure from software vendors and implementers, an upgrade decision should be something your firm makes with hard data, robust economics, and alignment with the company's business and strategic plans. It also needs to be highly defensible. Anything less could be a career killer.

Ask the right questions and get the correct answers. That's what your firm deserves and what CEOs demand. 

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