Managing Director & Partner
Over the past decade, expectations that vendors such as Infor, Microsoft, Oracle, and SAP will end support for their traditional enterprise resource planning (ERP) solutions have been slowly pushing companies to adopt next-generation ERP. But the COVID-19 pandemic will accelerate this migration as digitalization and new ways of working become more critical to business. Indeed, it will be virtually impossible to use traditional ERP to manage the anticipated huge growth in e-commerce and the need for flexibility and speed.
The decisions that companies make today about their ERP systems will set their trajectory for years to come in terms of operational flexibility and resilience. As companies manage the transition to next-generation ERP with digital solutions and cloud features, they must mitigate risks by first addressing their most urgent business challenges and then preparing for a full transformation and a smooth transition of core ERP functionalities.
Critical Business Challenges
The deficiencies of traditional ERP landscapes are all too well known. These platforms contain a vast number of ERP applications with limited integration and interoperability. Heavy customization over time has increased ERP complexity and slowed deployment speeds. Moreover, business insights are difficult to tease out of the data. And integrating new acquisitions is enormously complex.
Despite these shortcomings, the size and pain of a move away from current landscapes have kept the status quo in place at many companies. But now several of the business challenges raised by COVID-19 are tipping the scales toward speedier adoption of next-generation ERP systems. Companies are particularly focused on the following:
Next-generation ERP platforms can help companies address all these business challenges. They give companies real-time transparency with respect to sales, inventory, production, and financials. Powerful data-driven analytics enables more agile decisions, such as adjustments to the supply chain to improve resilience. Robust e-commerce capabilities help companies better engage with online customers before and after a sale. And a lean ERP core and "cloud first" approach increase deployment speed.
Three ERP Time Horizons
As companies consider their ERP strategy, they need to frame it with three different time horizons in mind. First comes “the now”—the immediate priorities in the midst of the pandemic. These include protecting people and ensuring business continuity. COVID-19 will force many companies with diminished revenues to pause or slow down their ERP migrations in 2020. But when pausing it is important to pick a good stopping point to revalidate the business case in the face of the new reality and eventually restart the implementation. Companies should take the time now to refine their ERP strategies so they are ready to launch ahead of the pack.
Companies also need to frame a near-term ERP strategy that prepares them for the recovery. The near-term moves are mostly tactical improvements that allow a company to operate better in the current landscape by tackling certain challenges head on. The imperatives include the following:
Finally, companies need to frame a long-term ERP strategy to win in the new environment that emerges after the pandemic. Think about ways to cut out the complexity and rigidity that have developed in connection with highly customized traditional ERP systems. By embracing enhanced digital collaboration, simplified business processes, and real-time insight through the use of standardized reports, tables, and program configurations, a company can use the modular architecture of next-generation ERP systems to increase speed, quality, and productivity.
Putting an ERP migration on hold in the current environment is understandable, but a company should not wait too long if it believes the transition is vital for the business. There is pent up need to make the switch, both because vendor support will end later this decade and because the pandemic has brought new focus to digitalization. As a result, many companies might try to transform or migrate at the same time, which would create a resource crunch, drive up implementation costs, and elongate the implementation timeline.
That said, any ERP migration will tax resources. Business leaders need to keep four key considerations in mind to ensure success.
Organizational Commitment. As with so many enterprise-wide initiatives, success depends on strong buy-in from senior leaders and other key stakeholders. They need a clear vision of how the ERP-based transformation will improve the business, and they must lend continuous, visible support for the migration. Leaders and the business process owners must align on goals and agree on the progress metrics. It is also important to set guidelines for how the ERP implementation team and the business process owners will engage throughout the initiative, from design to go-live.
Modular Design. Ideally, the company will keep the new ERP core as close to standard functionality as possible. This allows the company to leverage modular, best-in-class innovations—on top of or outside of the ERP systems—for faster attainment of business benefits. A lean, modular ERP architecture is API-based, cloud-ready, and agile.
Planning and Execution Rigor. About 60% of ERP programs suffer delays, a major reason being that system integrators sometimes take a cookie-cutter approach to program management, using point-in-time information. What’s needed instead is a forward-looking, metrics-driven, and objective approach to program execution. The planning steps should include defining the change management process (for example, the escalation/resolution processes for change requests); creating governance mechanisms (compliance and progress tracking, for instance); identifying all cross-functional interdependencies; developing system testing scenarios before go-live (for example, by factoring in all process variations, exception scenarios, and edge cases); uncovering potential risks; and conducting a bottom-up planning exercise to build a robust implementation plan.
The Right Partner. Robust due diligence is critical when choosing a system integrator. Align with the partner on targets, metrics, and advanced-warning mechanisms that can alert the team if the implementation starts going off track. Build in-house ERP skills by training internal staff and selectively hiring experts.
Next-Generation ERP in Action
To get a better idea of how the new digital functionality in next-generation ERP could help mitigate COVID-19 issues, we took a close look at two business functions. In the first case, we looked at order-to-delivery management. (See Exhibit 1.)
In traditional ERP supply planning, poor visibility into the order management system means that companies often resolve order fulfillment issues slowly, which can delay delivery. Next-generation ERP can monitor the fulfillment status of all sales orders in real time and use a list of key characteristics to prioritize outstanding sales orders. Another challenge relates to rebate processing. In traditional ERP, rebate calculations often depend solely on customer invoices, which necessitates a time-consuming and error-prone process. Next-generation ERP can settle rebates immediately, without manual activities.
Next-generation ERP also offers better support for complex B2B agreements and contractual relationships by bundling product sales with projects, service offerings, subscriptions, and other information into one master agreement. The new systems also embed better support for international trade (which reduces financial risk) and can generate reliable customer delivery dates (for example, by using demand characteristics to allocate short supply), which improves customer satisfaction and avoids revenue loss.
In another case, we looked at how next-generation ERP could improve supply planning. (See Exhibit 2.) In traditional ERP, planning features are basic, with little ability to predict short-term demand. Next-generation ERP, by comparison, offers a real-time, omnichannel order management platform that identifies demand changes without lengthy batch processing.
Other challenges with traditional ERP include fragmented and manually intensive material requirement planning (MRP) processes, difficulty setting inventory targets across the supply chain, and overnight waits for inventory updates. Next-generation ERP addresses all these issues by providing a single MRP process (with a real-time dashboard) and live inventory management that enables simultaneous material movements.
ABOUT BOSTON CONSULTING GROUP
Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.
Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.
© Boston Consulting Group 2023. All rights reserved.
For information or permission to reprint, please contact BCG at firstname.lastname@example.org. To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com. Follow Boston Consulting Group on Facebook and X (formerly Twitter).