ERP Systems Being Used by More Industries with Greater Customization
Not unexpectedly, manufacturers continue to be the biggest users of Enterprise Resource Planning (ERP) software as reported in the 2018 ERP Report (PDF; registration required). What is surprising is how the use of ERP is spreading to many other sectors including professional services, IT, retail, and financial services.
The findings are contained in Panorama Consulting’s 10th annual survey of the ERP field.
The report parallels what I am seeing as an ERP attorney who negotiates and drafts ERP software contracts for businesses that are acquiring an ERP system. When I first began working on ERP contracts a decade ago, nearly every client was a manufacturer; now, the types of businesses doing a deal with an ERP developer or vendor is much wider as are the reasons why they feel ERP will improve their business processes.
For example, as engineering firms take on a growing responsibility for managing the design and construction of large infrastructure projects for governments not just in the U.S., Canada and Europe but also with multinational funding organizations such as The World Bank in developing nations, there is a growing need for ERP systems to backstop and support complicated projects.
The distribution among industries using ERP systems in 2018 is interesting:
Manufacturing – 43%
Retail & Distribution – 11%
Finance, Insurance, Realty – 11%
Information Technology – 10%
Professional Services – 6%
Six other industries combined – 19%
Moreover, another interesting phenomenon in the 2018 report is the growing number of ERP systems that are being customized. While this is being seen more in larger corporations owing to the cost and time needed to do specialized coding before the system can be installed, nevertheless a growing number of companies are tailoring at least a portion of their ERP system to the specific needs of the business:
2018 2017
Extreme customization (Over 50% of code modified) 8% 0%
Significant customization (26%-50% of code modified) 17% 4%
Some customization (11%-25% of code modified) 33% 20%
No customization 11% 12%
As a result of this customization, except for very large businesses with revenue approaches one billion dollars, the cost of an ERP system can exceed four percent of annual revenue. This varies somewhat depending on the type of ERP installation, and the amount of attention paid to Business Process Management and organizational change.
The Panorama report notes that when a business is budgeting for an ERP implementation, executives need to account for total costs and not just the license and service agreement. For instance, there also are internal costs such as the time employees will spend on the project and hiring any new employees as a result of the new business process.
ERP contracts and implementation agreements are complicated already and, usually, one-sided in favor of the developer or vendor. As more systems are being bought with a significant amount of customization, it becomes increasingly important for a company to have an ERP attorney negotiate the terms of the deal.
Dealing successfully with implementation agreements, statements of work, deliverable deadlines, and work product acceptance criteria is critical to the success of an ERP software implementation. What I’ve found as an ERP attorney is that the more customization built into a system the greater the need to reframe the vendor’s standard contract template. It has to include safeguards that will maximize the success of the implementation project and ensures that the contract can be used to manage the vendor’s performance over the life of the installation.
The study is worth reading for any executive considering acquiring an ERP software system because it provides “the perceptions and individual experiences of over 200 respondents who lived to tell about their ERP implementations,” according to Eric Kimberling, Panorama’s managing partner, in an introduction to the report. “Often the ERP universe revolves around specifications and coding, which can be very different from what customers believe based on what they hear, see and experience firsthand.”