Robert Kugel's Analyst Perspectives

ERP systems not only collect information about transactions, they also automate processes. The latter includes managing the handoffs between roles and enabling electronic document creation and management associated with that. Indeed, it was the promise of improving process management and process execution that spurred companies to adopt ERP in the 1990s.

Yet despite ERP’s ability to streamline and improve execution, our research shows that not many companies use their systems to manage common end-to-end processes such as order to cash and procure to pay. Among companies with at least 1,000 employees, only half (51%) use order to cash and two-thirds (69%) utilize procure to pay. I suspect that even these findings may overstate the actual penetration since companies may have automated some but not all of their order-to-cash and purchase-to-pay volumes.

Such automation is surely worth implementing. Managing order to cash as a single process can enhance the efficiency of the sales, billing, shipping and revenue recognition processes. Properly structured, it can reduce errors and increase responsiveness to customer requirements, especially if a company integrates its ERP software with electronic data interchange (EDI) systems. The order-to-cash process can be continuously monitored to alert responsible parties of unusual transactions or suspicious activities (such as sudden “ship to” address changes). Indeed, it’s hard to understand why most midsize and larger companies don’t use order to cash since it can accelerate cash flow and revenue recognition.

Procure to pay is another seldom automated function. Often companies implement it to achieve greater control of and better visibility into spending, but there are other sources of value to be gained from this end-to-end process. Automating procure to pay can reduce administrative costs of acquiring small indirect-spend  items (things that are not included in the cost of sales) as well as help rationalize vendors to reduce the costs on these nonstrategic items. For the direct spend, it can be used to accelerate vendor payments. While it almost seems counterintuitive to want to accelerate accounts payable, unless there is a specific liquidity requirement, paying early to earn a discount gives a company far bigger return on its liquid assets than any other alternative at today’s minimal short-term interest rates.

When we look for reasons why a company doesn’t automate these processes more completely, one of the more likely is that only 10 percent of those with fewer than 10,000 employees and none with 10,000 or more find it easy to make changes to their ERP systems, while 41 percent say it’s difficult. I find that in general companies are reluctant to make fundamental changes to their ERP systems once they’ve been installed. Moreover, they often leave ERP system management to the IT department, whose mission is more concerned with a system’s efficiency, control and compliance (through access controls and process monitoring) than with improving business processes. Moreover, ERP is no longer cutting-edge technology and gets scant attention, both in the IT press and in the consciousness of business managers and finance departments. “If it ain’t broke, don’t fix it” is the order of the day. But not realizing its full potential is a large price to pay for this inertia.

I continue to see companies underutilizing the capabilities of their ERP systems. That may not change until ERP systems themselves become easier (and less expensive) to change and adapt to new process requirements. It’s possible that a new ERP architecture may facilitate changes, but a broader understanding of the value of end-to-end process management would certainly have a more immediate impact.

Regards,

Robert D. Kugel – SVP Research