They are the IT backbone of companies and government agencies around the world.
They help run manufacturing, finance, materials planning, warehousing, HR, sales, procurement, analytics, customer service and more critical operations. If you placed an order with a company today, one of them probably helped make it all happen. If you made a call on your mobile phone, one of them was somehow involved, whether from the billing, networking or application perspective.
They’re enterprise IT systems and applications—commonly referred to as ERP systems (for enterprise resource planning)—and they’re a huge part of information technology and global business, past and present. The question is, are they part of its future too?
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Not everyone is so sure. Although ERP solutions generate hundreds of billions in revenue each year, driven by the products and services of industry giants such as Microsoft, Oracle and SAP, cloud-based IT capabilities and software-as-a-service (SaaS) business offerings are increasingly attractive alternatives from both a cost and a flexibility perspective. Related solutions, such as platform-as-a-service and infrastructure-as-a-service, promise to make enterprise-grade, global business and IT capabilities available in an on-demand, scalable, “pay-by-the-drink” model.
But to paraphrase Mark Twain, the reports of the imminent death of ERP are not only greatly exaggerated—they’re flat out wrong.
Of course, a big enterprise systems implementation often looks very little like it did 20 years ago—but that can be a good thing, whether you’re an ERP customer or a vendor. Most likely, the scope of such a system no longer extends from one end of a corporation to another; today’s cloud technologies and on-demand services have made IT systems more flexible and modular. But that’s a good thing too.
Consistent, tailored, secure
An enterprise IT system’s raison d’être is much the same as it has been for many years: to provide support for a consistent global operating model, both by making business processes more consistent and tailored to a company’s unique needs, and by assuring more effective data security and integrity.
|Although SaaS platforms are appealing to many smaller startups today, larger and more established companies must figure out how to integrate technology innovations like cloud models into a core foundation of enterprisewide, secure IT systems. This kind of hybrid model—ERP at the core, with cloud-based innovation and on-demand services at the edges—can give large, global organizations the best of both worlds. But that kind of model for delivering business services must be planned and managed with care.
Unlike some other older technologies, large enterprise systems have not endured just because of inertia or because companies are stuck with them, like a sports team forced to keep an underperforming star with a long-term contract. There are at least three good reasons why so many companies still pursue some form of ERP system implementation, and why they continue to upgrade the system they have, growing and adapting it to their needs.
1. A universal operating model
The most important goal behind enterprise systems is to create what we can call a “universal operating model” for the business. To serve customers effectively, to run back-office functions efficiently and to manage the business consistently, a company needs to get all parts of its disparate, global organization on the same operating model—to have all parts of the business operating on the same cost structure, for example, or recording profit and loss in an identical way.
A big part of putting standardized processes and control structures in place is getting all business units, offices and locations on a consolidated software stack, using the same data fields, metrics and reporting mechanisms.
While some ERP implementations have pushed organizations toward standardization in a heavy-handed way, without sufficient attention to workforce performance issues and organizational change, the alternative was to let homegrown systems develop without regard to consistency and integration. That proliferation of systems was expensive because manual checks and workarounds were then necessary, and it ultimately undercut the effectiveness of the business by introducing redundancies and inconsistencies in how work was performed.
With a consistent operating model in place, companies can also support business growth faster and more predictably. Case in point: premium drinks giant Diageo, which about a decade ago, was seeking to establish a consistent operating model on the heels of two major acquisitions. The company recognized the need for a global supply chain, shared services for back-office functions, and a single-instance ERP system to provide the platform to enable that common model.
A manufacturing company took a similar approach to support its aggressive acquisition strategy. With a standardized operating model in place, driven by a global ERP system, the company has been able to reap the value of its acquisitions faster and get the expanded company performing consistently across its new footprint better than many of its rivals.
Ultimately, having the enterprise systems and standard processes in place removes a great deal of the uncertainty that occurs when one company buys another. All change is hard, to be sure. But change is easier when you know what you’re changing to.
A second reason for pursuing some form of ERP system implementation is closely related to the first. As organizations look to standardize their operating model, they simultaneously look to simplify their IT environment, especially their suite of enterprise applications. That move delivers significant cost reductions because the business operates more efficiently with a “single version of the truth.” Instead of getting conflicting data from different systems and applications, a company gets consistent, timely information from all of its applications.
A global ERP system is not the only path toward simplification, but it is among the most effective. Numerous large companies around the world are leveraging that approach to improve operating efficiency and service to customers. UK-based financial services company Lloyds Banking Group, for example, has engaged in a major simplification and standardization program focused on its global operations.
|One US-based supplier of electricity and natural gas undertook an initiative to simplify and consolidate its financial and supply chain processes. The solution included standardized business processes and the consolidation of all of the company’s business units onto one integrated Oracle enterprise system, establishing a single transactional system for financial accounting data.
These consolidation programs have great potential to simplify a company’s processes by eliminating nonstandard customizations that lack a supporting business case, and then developing a common, standardized set of processes and metrics that address a company’s business requirements across its assets. Simplified processes can improve the efficiency of workflows and the quality of information. An entire global company can access a common base of information, reporting and analytics that is continuously available, supporting better planning, management and decision making.
3. Security, integration, data management
An additional advantage of an ERP environment has to do with how data is managed, integrated and secured. In many ways, a company is its data—customer data, performance data, employee data, market data.
As that data continues to multiply by terabytes each year, managing it for effective decision making and proper compliance is becoming a stiff challenge. Although cloud and SaaS solutions have their place, they also have the potential to create a more chaotic, less reliable and less secure data environment if not properly integrated.
|Master data management in an environment of multiple cloud providers is still in its early days. Many organizations have security concerns: Can they be assured of the same level of data security from SaaS as they are used to in traditional ERP systems? Many companies are comfortable with having a limited set of customer data in the cloud—names, perhaps, or other demographic data not readily associated with a particular identity. But how comfortable will they be also associating financial or credit information with that identity? There are also concerns about compliance. Because of these unknowns, so-called “on-premise” ERP systems remain a viable, continuing part of the IT equation.
A hybrid model
Clearly, today’s ERP providers must evolve to accommodate the cloud-driven, on-demand models that have forever altered the landscape of systems and business solutions. In fact, they are already doing just that. From a customer’s perspective, the big issue is how to take advantage of the considerable benefits cloud/SaaS offers from a cost and flexibility perspective, while preserving the benefits of traditional big systems.
A number of leading companies are evolving their IT environment toward a hybrid model combining the best features of traditional enterprise systems with the newer, on-demand services.
Take mobile technology provider Qualcomm, which has found a way to combine its global ERP system with local systems in various geographies that can support specific jurisdictional and country requirements. As the company’s IT executives looked at the countries Qualcomm operated in, they decided it would be too expensive and take too long to extend its full enterprise system into those locations.
How is Qualcomm achieving the right balance between global consistency and local relevance? By using NetSuite OneWorld—a rapidly deployed, on-demand system for business management and financial consolidation—and then ensuring that, from a process standpoint, the data and performance environment integrates properly with its existing ERP backbone.
Rather than abandoning its existing systems environment or attempting to replicate it solely with a suite of cloud-based, on-demand services, Qualcomm is supplementing its enterprise systems environment with agile and less expensive business solutions for particular needs. This strategy—now commonly referred to as a “two-tier” ERP implementation—seeks to avoid the downside risk of forcing a single big-system solution across an entire business.
Other companies are enriching their core ERP systems with SaaS offerings in areas such as sales and business intelligence. The on-demand solutions provide sales teams with valuable, timely functionality while still letting the company leverage its big-system capability to drive consistent account planning and execution.
|These hybrid models hold great promise for faster delivery of IT solutions that can meet a company’s specific industry and geographic requirements. At the same time, it is important to remember that it’s the core ERP system that is ultimately enabling the interoperability of the ultimate solution—something that may be easy to overlook, given all the attention devoted to cloud-based, on-demand models.
Without that interoperability, an organization risks creating an impossibly complex and unreliable data environment with overlapping, redundant functionality, especially when business-unit leads bypass their own IT shop to go directly to a cloud provider for their short-term processing needs. A two-tier model is a way to maintain closer control and governance while still giving different locations and parts of the business the cost-effective flexibility they need to achieve their urgent goals.
To be sure, as the business world increasingly embraces cloud models, the big ERP providers are not standing still. They are making adjustments not only to integrate with SaaS offerings but to compete against them as well.
Oracle, for example, has made a number of recent strategic moves in the cloud software and services space. In terms of IT functionality, Oracle Cloud Services delivers software, support, hosting and applications management on a managed service basis for a predictable, monthly cost. In terms of specific business functions, Oracle CRM On Demand provides software-as-a-service for sales, service and marketing functions. Most recently, the company announced its new Oracle Public Cloud offerings, which will enable customers to use the Web to access Oracle applications or write custom applications via the cloud.
SAP, too, offers on-demand solutions for end-to-end business management, and for such functions as supplier management, sales and business intelligence. At the same time, the company supports other providers that offer SAP-based solutions in the cloud.
Microsoft offers a connector that enables deployments between Microsoft Dynamics AX and SAP Business Suite. This connector enables IT organizations to use Microsoft Dynamics AX across subsidiaries, divisions or branches to facilitate cost-effective business process integration and easily connect with SAP installations at corporate headquarters.
Other players in the IT ecosystem are deeply involved in developing hybrid solutions. For example, one leading integrator acts as a solution partner for SAP Business ByDesign—an on-demand business management solution that can be leveraged by large enterprises as well as small and midsized businesses—and has created an industry add-on for the chemicals industry
Customers of traditional big systems have usually been big companies. But on-demand models can offer significant business functionality at price points appealing to smaller companies too. Other innovations are becoming available as integrators work with ERP and cloud providers to offer specific industry solutions. Public-service agencies, for example, will continue to struggle with cost issues even as their need for big and agile systems increases.
|One current option helps meet that need with a single ERP solution that offers HR, payroll and finance functionality to multiple agencies on a cloud-based platform. Under this multi-agency model, organizations share a common application and technical architecture, and operate according to a single business model, even as they remain separate business units. This arrangement allows for both efficient operations maintenance and the flexibility to meet agency-specific needs.
In other cases, cloud providers are offering pay-as-you-go access to ERP functionality. Cloud computing provider Amazon Web Services, for example, now offers on-demand access to solutions from several ERP providers.
Alliances, partnerships and acquisitions are likely to proliferate in both the on-premise and on-demand systems marketplace. Powerhouse SaaS provider Salesforce.com, a leading player in the on-demand CRM space, has established partnerships with Infor, the world’s third-largest ERP vendor, as well as Workday, rapidly becoming a major player in the HR management on-demand marketplace. Meanwhile, SAP has recently acquired SuccessFactors, a provider of cloud-based human resource management applications. And to extend its public cloud offering, Oracle has acquired RightNow, an SaaS customer service/CRM application vendor.
All in all, it’s a complicated but also exciting IT systems world out there, with companies sometimes competing, and other times cooperating, to deliver more flexible and cost-effective solutions.
Integration and acceleration
The cookbook for IT solutions, however, always seems to involve adding two parts complexity for every part simplicity, and the evolving recipe for big systems is no exception. As cloud-based services enable companies and government agencies to more directly engage with business services and IT functionality on demand, the question of who is holding everything together becomes ever harder to answer. Traditionally, of course, this has been the CIO’s job. Today’s IT executive, once considered to be a technology provider, is now much more of a service orchestrator.
Put another way: In the new, hybrid ERP environment we have just described, who’s in charge? A business today may well have, running simultaneously, a core ERP system; a variety of cloud environments or services managed by an external vendor, including that ERP provider; some other cloud components being run internally; and, perhaps, a sprinkling of other legacy systems.
Adopting a services approach to IT management, including the integration of cloud and ERP services, can be a daunting task to many internal IT shops. Managing the end-to-end performance of this far-flung IT environment, with its complex array of moving parts, is often beyond the capacity of the company using IT services, and of most of the individual service providers as well.
All this helps to explain one trend currently on the rise: using an integrator or trusted broker to manage the complexity of the cloud environment and provide end-to-end visibility and service assurance. Service providers will rely on these integrators or brokers to reassure their customers, while the customers themselves will seek out these brokers to manage the internal and external provisioning of computing resources in a hybrid, on-premise and on-demand model.
Such a brokerage can act in at least two ways. One is working in a consulting capacity, helping the client create a managed umbrella over broader ERP and on-demand environments. The other is acting as a managed services provider, assuming responsibility for overseeing both the internal and external computing platforms, taking on the associated risks and offering end-to-end service management capabilities.
This holistic or managed services approach to IT integration enables companies to treat their IT resources as just that—a pool of resources. It no longer matters to a company where those services are housed or sourced, or whether they deliver broad enterprise functionality or cloud-based, on-demand capabilities for a specific function. The managed service enables common processes for acquiring, managing, billing and supporting IT functionality.
With that kind of fungibility of services, integration options provide a new level of flexibility that goes beyond the ability to access servers in data centers. Companies and their CIOs now can focus on envisioning the services they need, whenever they need them, at a variable cost.
Another important innovation: a move toward industry accelerators for hybrid ERP-cloud solutions. Although every company has its own unique processes and IT configurations, best practices within any particular industry can, in fact, be identified and then used to accelerate an ERP implementation as well as the other SaaS or cloud extensions that are appropriate for how companies in a particular industry operate. The result can be a system that meets a company’s needs, quickly and more cost effectively.
This approach was taken recently by Newcrest Mining, Australia’s largest gold producer and one of the world’s leading gold mining companies. As the company grew, it found that its existing business processes, systems and data were fragmented and outdated. A new IT program—the Newcrest Enterprise System Strategy (NESS)—was put in place to make the company’s systems more efficient and supportive of the business. Newcrest leveraged leading industry practices and templates from a resources-specific, preconfigured vendor-provided solution, which helped to accelerate the design and rollout of the overall SAP implementation.
The solution, delivered faster than a typical implementation of that scope, has established a standard set of enterprise processes and systems across Newcrest’s mining and corporate sites. It has improved visibility of the company’s operations and given its executives the standardized data and information they need to fine-tune their business strategy and make better operational decisions.
Competition and innovation are driving big changes in big systems. The future looks to be one where on-premise ERP systems will continue to play a vital role, even as the larger environment becomes more modular, offering a plug-and-play ability to incorporate local or other varieties of business functions into a core system. Excellence is being driven within the individual links of an overall chain of business functionality.
The challenge that remains, however, is in putting all the links together in such a way that the solution is both strong and flexible.
The best path forward for most companies will not be an either/or one. Enterprises want a common, global operating model, and the best way to achieve that is still with an on-premise, core ERP system. But as companies move into local markets, serve new customers and innovate within a particular business function, they will also want to harness the power of on-demand solutions and accelerators for their industry circumstances and goals. Effective integration and management will remain the most important keys to success.
For further reading
“Agile IT: Reinventing the enterprise,” Outlook, June 2010
“A new era of innovation: Cloud and the future of business,” Outlook Point of View, September 2011
“Accenture Technology Vision 2012,” Accenture, January 2012
About the author
Gavin Michael, Accenture’s chief technology innovation officer, leads the company’s work in innovation and technology alliances, as well as Accenture Technology Labs. He has more than 20 years’ experience in technology leadership in the financial services industry, especially in driving major business change. Mr. Michael is based in San Francisco.
Jim Astorian is the global managing director of Accenture’s Oracle group, overseeing a team of 50,000 professionals around the world. Based in Frankfurt, Mr. Astorian is also the managing director of Accenture’s Technology Product and Offering Development group, responsible for strategy definition, development and commercialization in that area.
Mark Willford is the global managing director of Accenture’s SAP group, overseeing a team of more than 36,000 professionals worldwide. With more than 22 years of experience in SAP, he has led some of the largest, most complex implementations in the world. He is based in Chicago.