When all is said and done, companies are generally satisfied with their new software, but their experiences are hardly a ringing endorsement for enterprise resource planning (ERP) endeavors. Among the 246 firms that completed an ERP installation within the past year, implementation exceeded budget 56 percent of the time and only 46 percent were completed on schedule or earlier, according to data from Panorama Consulting Solutions.
“The scope and complexity of ERP implementations makes forecasting treacherous,” says Zinovy Radovilsky, Ph.D., interim chair and professor of management for the College of Business and Economics at California State University, East Bay. “While cost overruns can’t be eliminated, they can be managed with the right tools and tactics.”
Smart Business spoke with Radovilsky about avoiding delays and budget overruns when tackling ERP projects.
Why do ERP projects often exceed budget?
An inexperienced project manager and a lack of historical data for enterprise-level software initiatives often result in inadequate cost estimates for items like these:
• Employee training — The most underestimated expense, since employees have to learn a brand new system.
• Integration and testing — Connecting ERP to other software programs is costly.
• Customization — Increases initial programming and configuration costs, as well as the price tag for future upgrades and fixes.
• Data conversion — Including the cost of migrating existing data to the new system.
• Data warehousing upgrades — Often needed to support daily operations post-ERP.
• Consulting fees — When something goes wrong, consulting costs run wild.
Don’t underestimate the impact of large-scale implementations on productivity. Activate one module or function at a time instead of taking a big bang approach, and offer short doses of virtual training and online tools to keep productivity high while employees get up to speed. When people can’t do their jobs the old way and haven’t yet mastered the new way, they panic, and the business goes into spasms.
What are some simple steps to keep ERP projects on budget?
First, select a qualified project manager who has extensive experience with ERP implementation and updates. Next, incorporate risk management into the budgeting process by considering every possible problem and starting with a rough order of magnitude (ROM) budget followed by a more accurate, and typically higher cost, budget estimate and finally, a definitive estimate.
Involve key managers and stakeholders in the budgeting process to ensure the estimates aren’t biased. Then, update the budget as the project progresses, using an earned value (EV) analysis approach that compares cost data to a baseline, to track your performance. Prevent misfires and crashes by conducting comprehensive load testing — using testing software and real users — before the system goes live. Finally, resist the urge to customize every little feature. Instead, choose an ERP system that supports your current business processes or use the standard functionality.
How can executives ensure the financial performance of ERP projects?
Keep employees energized by communicating a clear vision for where the system will be after the initial phase and at various intervals down the road by sharing project updates. Be realistic in setting goals and estimating how much change your organization can absorb, because a major software initiative requires stamina and commitment.
Use a software tool to collect actual data, and then periodically review project milestones, budgets, resource allocation and time/materials bookings to spot opportunities to boost ROI or reduce costs. A software tool is the only way to know exactly where you are in the project, how much time and money you’ve spent, and to forecast the cost and timeline for the entire project.
Remember, you can’t eliminate cost overruns, but they can be managed with the right tools and leadership.