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A company’s enterprise resource planning (ERP) system is one of the pillars of its record-keeping and process management architecture and is central to many of its critical functions. It is the heart of its accounting and financial record-keeping processes. In manufacturing and distribution, ERP manages inventory and some elements of logistics. Companies also may use it to handle core human resources record-keeping and to store product and customer master data. Often, companies bolt other functionality onto the core ERP system or extensively modify it to address limitations in the system. Because of the breadth of its functionality, those unfamiliar with the details of information technology may perceive ERP as a black box that controls just about everything. So it’s not surprising that when a company’s information technology becomes more of an issue than a solution, many assume that the ERP system needs replacing. This may or may not be true, so it’s important for a company to assess its existing ERP system in the context of its business requirements (as they are now and will be in the immediate future) and evaluate options for it.
A common scenario for a company to replace its ERP system is because the business has outgrown (or will soon outgrow) its capacity to handle transaction volumes. Replacement also becomes necessary when the system no long meets business requirements, as, for example, when it is too difficult to configure to specific requirements. This issue might have developed because the company’s business model has changed significantly since purchasing the system or because it had to adjust its go-to-market strategy, added a new product line, expanded geographically or made an acquisition. Another reason to change may be that for a company with an adequate on-premises ERP system migrating to the cloud can eliminate a substantial portion of work done by its IT staff, enabling the department to focus on more strategic efforts, reduce headcount or both. A shift to the cloud also may improve the performance of an ERP system, especially if it’s an on-premises system running on aging hardware and the organization does not have the resources to maintain the system well.
Then, too, there are less obvious reasons that necessitate replacement. ERP systems are inherently complex, as I have noted, because they cross multiple business functions in many types of business, each of which has its own requirements. Seemingly trivial elements, such as the particular sequencing of tasks in a process by an ERP system, may be irrelevant for many businesses but have a negative impact on some. For example, when customer orders are almost always infrequent, it doesn’t matter when in the sequencing of the sales order process the system records the use of credit to confirm that the order can go through. An order must be rejected if adding it to the customer’s outstanding balance will bring the account over its limit. However, if orders occur frequently, the ERP system must execute the credit check at the first step or customers routinely will exceed their credit limits. It’s easy to overlook a detail such as this in the software selection process and even in the initial implementation. If that happens, dealing with the credit limit may require software customization or a process workaround if the root cause is the application itself. However, replacing the existing ERP system often is necessary if there are multiple issues such as these and the overall impact of them is severe enough to be measured by a combination of monetary losses, wasted time, lax controls, an inability to measure performance or limited visibility of information and processes.
At the same time, replacing the ERP system may not be the most cost-effective solution to business issues. To gauge that aspect, an important first step is determining whether the process or data issues identified by users are the result of a poorly executed implementation. Midsize companies in particular don’t always get the most competent consultants to set up their software, especially if the consultant (or the individual running the project) is not familiar with the peculiarities of the company’s industry or its specific operating requirements. Checking in with user group members in a similar business is an easy way to confirm if the issue is systemic or simply a poor job of setting up the software. If, based on feedback from other users, the situation appears dire enough, it may be worthwhile to engage a new consultant to fix the mistakes of the first one.
In some instances a “bolt-on” application (that is, software designed for easy integration with another, specific application) may be the most cost-effective way of addressing existing shortcomings. This is especially true for companies using a cloud-based system. Most ERP systems have rich functionality for handling core tasks such as accounting, human resources and inventory management. Yet the package a company is using may not have sufficient functionality for a specific process needed to run the business. For example, companies (particularly growing midsize ones) may find that their human resources department needs software to automate recruiting and onboarding of employees and that these capabilities are absent or insufficient in their ERP package. In our benchmark research on workforce management almost half (45%) of companies said they need new applications to address the full range of their human resources management requirements. In other cases, functionality necessary to manage the business may be missing. Companies that have a recurring revenue or subscription business usually find that the ERP system falls short of their requirements for invoicing. Bolt-on applications usually replace spreadsheets, ensuring that data is captured and available in a single controlled system where it can be accessed in an extended process (such as order-to-cash). Replacing desktop spreadsheets can save considerable time by automating tasks and eliminating the need to re-enter data into one or more systems. Having accurate and controlled data makes reports and metrics more reliable. It saves the finance and accounting departments time by eliminating the need to perform periodic reconciliations to ensure the accuracy of the data. Of course, the challenge with any bolt-on is that it is one more piece of software that requires attention, and integration with the core ERP system can pose challenges, especially over the long run.
A company also may believe that it needs a new ERP system in order to consolidate data in a single system to facilitate analysis and reporting. In this instance, however, it may find that an operational data store, which integrates data from multiple sources for additional processing, will address all or most of its issues, especially if the company uses custom software or some niche application that supports its operations but is unavailable in an ERP system that otherwise meet its needs. A data store may prove to be a more practical choice because it’s much less costly and disruptive than replacing an otherwise well-functioning system. It also can provide flexibility in the longer term. As the company adds new applications, data from this new source can be fed into the operational data store. But be aware of challenges in setting up an operational data store or adding new system data feeds to it, using one usually requires an IT organization with the skills to maintain it over time.
Many companies are loath to replace an otherwise well-functioning ERP system because doing so is expensive and usually disruptive to operations. Also, implementing a new system almost always requires retraining and some adjustments in operating procedures. Our research on the Office of Finance finds that on average companies are keeping their ERP systems one year longer today than they did a decade ago. Deciding whether to replace an ERP system is not always straightforward. The process is made more difficult because today organizations have many more software and data options than they used to. Few companies have the expertise in-house that will enable them to decide the best course of action. There may even be vested interests within the organization that will prevent them from making the best choice. Finding a truly independent advisor that understands both information technology and the specific business requirements can be the best way to sort out the options and help make the difficult technology decisions.
Robert Kugel – SVP Research
When applying information technology to drive better business performance, companies and the systems integrators that assist them often underestimate the importance of organizing data management around processes. For example, companies that do not execute their quote-to-cash cycle as an end-to-end process often experience a related set of issues in their sales, marketing, operations, accounting and finance functions that stem from entering the same data into multiple systems. The inability to automate passing of data from one functional group to the next forces people to spend time re-entering data and leads to fragmented and disconnected data stores. The absence of a single authoritative data source also creates conflicts about whose numbers are “right.” Even when the actual figures recorded are identical, discrepancies can crop up because of issues in synchronization and data definition. Lacking an authoritative source, organizations may need to check for and resolve errors and inconsistencies between systems to ensure, for example, that what customers purchased was what they received and were billed for. The negative impact of this lack of automation is multiplied when transactions are complex or involve contracts for recurring services.
Our benchmark research shows that data fragmentation, consistency, availability, usability and timeliness are key issues for companies. The information management issues in process design and execution are similar to those at work for analytics. However, addressing them effectively requires a different approach than just creating a separate data store to be the “single version of the truth.” Careful consideration is required to determine the best method to manage data throughout a core business process, particularly when multiple applications are required to automate and support the execution of the process. Software application platforms offered by some vendors make it far easier to integrate niche software applications into processes in a way that may eliminate the need for an operational data store.
The information dimension is usually overlooked in designing business systems because data is viewed as a given, is not explicitly considered (“we’ll work out the details later”) or is considered only an afterthought. This may occur because the information dimension of systems engineering is treated as being of secondary importance to defining the best process and determining the required applications capabilities. But we think making data an afterthought is a mistake. Ventana Research uses a framework that explicitly calls out information (all forms of data) and technology (software, hardware and networks) as separate elements in addressing business issues, rather than lumping the two together as “technology.” Explicitly taking the data perspective into account provides a broad perspective that frames process and technology requirements. We assert that treating data as a core consideration can result in better process design and clarify the issues companies must consider to select the appropriate systems to support the people and process aspects of business operations.
Quote-to-cash is a useful example of where an end-to-end process requires more than just workflow to manage the handoffs as tasks are executed. In some simple cases, an ERP system can handle all of the details. In others, automating the process and data flows may require multiple systems (such as a CRM system for customer and account information, as well as systems for product configuration, contract management, billing and collection in addition to ERP. Some of the data assembled in a quote-to-cash transaction may have to be transferred to other operational systems to fulfill the transaction. To achieve best results, data must be staged and controlled from start to finish and there must be a single system of record. Deciding on what application (or applications) to use to manage the process and where to locate the system of record physically and logically depends on a company’s specific circumstances.
Engineering quote-to-cash end to end from both process and data flow perspectives can speed its completion (thereby improving customer responsiveness), remove unnecessary manual steps (generating efficiencies) and reduce or eliminate errors at every step (resulting in better customer service and lower costs).
Another example that benefits from a data-driven end-to-end process is requisition-to-pay. It may seem counterintuitive, but accelerating the payment of invoices can improve a company’s bottom line. With interest rates in much of the developed world at historic lows, the greatest return on available cash is taking advantage of early payment discounts. Yet few companies take advantage of these. One important reason why they don’t is deficiencies in the data and technology needed to make early payment practical. Starting the automated process at the point of initial requisition gives the treasury function better visibility into the amounts and timing of future outlays, making cash forecasting more certain. Greater certainty about the corporation’s cash position lowers the amount of cash it needs to hold to meet payment obligations while maintaining an adequate operating liquidity buffer to allow for forecasting errors and unanticipated needs. Companies that have limited visibility will be cautious about making payments and must maintain a larger, more conservative buffer stock of cash. Using automated systems to speed the processing of invoices by eliminating delays in handoffs is only one element needed to make early payment discount feasible. Timely access to accurate data to support processing invoices is necessary, as is data needed by an analytical application that supports the treasury function to handle the complexities of managing cash effectively.
The importance of timely access to reliable data is often overlooked, but it can be the key ingredient to improving the execution of core business and finance department functions. Engineering data and data management into the design of technology-driven processes must not be an afterthought; it must be integral to the decisions about what software is used and how processes are to be performed. Our research shows that data issues plague companies, and the larger the company, the bigger the problem may be. Effective data management is essential to improve corporate performance. We advise companies to review their current processes and take steps to modernize and automate any that are a drag on performance.
Robert Kugel – SVP Research