If your company is planning on significant growth in the future, finding and investing in a compatible Enterprise Resource Planning (ERP) system should be an early priority. An ERP system will provide a foundation for manageable and sustainable growth. As your company grows and prepares to go through an IPO, it is important to have the back-end functionality to comply with regulations and accurately track and forecast growth.
ERP Systems Defined
ERP software is an information system that integrates essential and diverse parts of a company’s organization, including finance, procurement, human resources, inventory, invoicing, and more. A company without an ERP system often employs different software to manage customers, accounting, and inventory. Because information is not generally accessible to those who may need it, information silos are created. These silos can threaten efficiency and transparency.
Without an ERP system, spreadsheets are often necessary to create reports or conduct analyses that require information from multiple departments. Creating reports by manually stitching together data from different systems is inefficient and introduces increased risk of human error. An ERP system solves this problem by creating a system that is used and shared by different business functions. Many ERP systems can also automatically create reports, thereby saving time and eliminating errors.
ERP systems allow you to conduct many aspects of your business from one consolidated platform. Below is a screenshot of what an ERP systems could look like. The first image shows the dashboard view for NetSuite.
In this dashboard you can see many of the different functionalities offered by ERP systems. The dashboard offers options for graphs, metrics, etc. Photo courtesy of Netsuite.com.
Deciding When to Invest in an ERP System
Opinions vary on the appropriate time to invest in an ERP system. Because most companies experience a few months of disruption when first implementing the software, timing should play a major factor in your decision. Plan for a few months to learn the new system and become proficient. Here are a few signs that your company may be ready to invest in its first ERP system:
- Different software for every process – This should be one of the earliest and most apparent signs in your organization. The biggest tell is typically the confusion and angst your employees experience as they try to decide where the source of truth is for each particular type of information. Having different software for every process will cause discrepancies and even occasional friction between different organizations (think accounting and sales). ERP solutions bring these different processes under one umbrella and help to unify the departments in your organization.
- Accounting is spending more and more time on manual processes – As a company continues to grow, financial reporting is going to be more complicated, important, and time-consuming. The numbers that end up in financial statements need to be accurate, so if your finance and accounting departments are doing most of their reporting by manually creating Excel spreadsheets, it might be time to consider an ERP system. Although powerful, manual spreadsheets are still prone to human error and building them can become overly time-consuming. ERP systems can help your team create financial statement reports faster and reduce or completely eliminate human error. If you continue to use manual reports for monthly close and other recurring reports, the reporting process will become too time-consuming and you will be forced to expand the resources of your finance team. Investing in an ERP system early makes scaling and growth more natural.
- Considering an IPO – As previously stated, increased growth means that financial statements will become increasingly important and complicated, especially as you approach an IPO. Preparing for and undergoing the required pre-IPO audits can be very complicated, as outlined in our article “Audit Prep for the Big Leagues,” and if your financial statements are not accurate beforehand this audit will require a large time investment from your finance team. Having accurate and audited financial statements is of paramount importance and an ERP system can help to generate trustworthy financial statements quicker than the finance department alone.
When considering when to implement, remember that this is an investment in the future. It will not be cheap and the transition process will not be quick, but it will make your business more efficient and scalable over time. Implementation speed is discussed in greater detail below.
Types of ERP Systems
Before selecting any particular ERP vendor, you need to understand and prioritize the functionalities you need from an ERP solution. Once you have established your needs and priorities then you can decide which system fits your situation. There is no one vendor or system that comprehensively meets the needs of all companies.
At a high level there are two basic types of ERP systems: on-premise and cloud-based. On-premise ERP systems are physically installed on your company’s hardware and are then managed by your IT staff. Cloud-based systems—normally manifesting in the form of Software as a Service (“SAAS”)—are not physically installed on your hardware and the information is maintained in the cloud. Cloud-based ERP systems do not take up any space in your system and you are able to access them like you would for any online application (think Google Docs and Facebook). This next section will analyze the pros and cons of on-premise vs. cloud-based ERP systems.
On-premise systems are, in the short-term, more expensive. These systems require a large up-front cost for implementation and ongoing investments for upgrades and product management. Additionally, if your company does not have a dedicated IT team you will likely need to form one. Even if you currently have an IT team it may require expansion to handle the time required to maintain the system and make sure it is running correctly.
Cloud-based systems have much lower initial costs because the contract is usually based on a pay-as-you-go model. Implementation is typically not as complex. The ERP provider handles the IT part of the project, therefore no expansion of the IT department is required. The pay-as-you-go model is excellent for cash flow projections, as you know exactly what you will pay. However, the costs associated with a cloud-based system may eventually exceed the up-front cost of an on-premise system; depending on the customization this could take around 4-6 years.
System Performance and Accessibility
On-premise systems have the advantage of absolute customizability at the outset. However, there are rare occasions when some upgrades can force the IT team to start the customization process anew because the customizations are tied to the current software. Companies in this situation will sometimes forgo upgrades altogether and use legacy systems to avoid the extra work of upgrading. Continual customization is also more difficult with on-premise systems because companies usually have to rely on the ERP provider to customize. If your company is not entirely sure what customization they are going to need before implementation you may want to consider a cloud-based system. On-premise systems are not naturally accessible when you are not on site. Although there are options to access the ERP system, these options can be cumbersome because on-premise systems are not necessarily designed to be easily accessible. These limitations are all compounded when the engineers who implement the new ERP system are no longer on site and the company finds itself using Excel reports or QuickBooks to fill gaps.
Cloud-based systems typically offer fewer customization options at implementation. Third-party software integration with cloud-based systems is simple, but these integrations usually require an extra investment. Cloud-based ERP systems are upgraded by the provider automatically so the most recent version is always being used. One advantage of cloud-based systems is that your team can create customizations without the help of the vendor. Additionally, any customizations developed by you or by the ERP vendor on your behalf will carry forward and will not require IT to spend extra time going through the customization process. But, despite these conveniences, the customization options are lacking when directly compared with those of an on-premise system. In terms of accessibility, cloud-based systems can be accessed anywhere you have an internet connection, and many major vendors have an application that can be installed on a smart phone.
On-premise systems have a longer implementation period than cloud-based systems; however, this duration of this implementation period varies widely depending on the size of your company, the chosen software and the level of customization. Since the implementation period is long, the time that your organization will experience major disruption also increases.
Cloud-based systems will not generally take as long to implement (typically less than a year). The average disruption length is much shorter than with an on-premise system, which allows workers to learn the system faster and minimize disruption.
In this regard, cloud-based systems have a clear advantage. Faster implementation will result in smaller disruption to the company.
As technology develops we see a concurrent development among customers’ preferred products. Ten years ago, on-premise systems were uncontested in their market-share dominance in the ERP software market. Over the last decade, there has been a significant shift with a mass migration towards cloud-based ERP systems.
According to Panorama’s 2018 Report on ERP systems, 85% of respondents selected cloud-based or SaaS systems. This figure represents a massive shift towards cloud-based systems. To explain this change, Panorama cites both consumer interest in these systems and vendors pushing clients towards cloud-based systems.
There are many ERP systems available and there are multiple systems that could fit the needs of any particular company. It is important that you understand the differences between cloud-based and on-premise systems and use this information when choosing a particular vendor. Be sure that when you start to implement an ERP system you are ready to fully commit. One of the common reasons for an ERP implementation failure is that the company never fully moves over to the new system.
In the context of an IPO, deciding when to implement and which vendor to select becomes even more important. Once you have selected an ERP vendor, changing is difficult. Take the time to do the research and choose the vendor that fits your needs.
- Finances Online, “Top 15 ERP Software Systems: Comparison Top Solutions Market”
- Panorama Consulting Solutions, “2018 ERP Report”
- EY, “Cloud ERP—Myth or Future?”