IT DECISIONS - ENTERPRISE RESOURCE PLANNING

[QQ]Enterprise resource planning is all about finding the philosopher’sard. If ERP systems can bring all the disparate aspects of business together, then finance directors will be first to reap the benefits – but it is also FDs who will have to get the systems right in the first place. stone of joined-up management. What could be more useful for planning and control than being able to integrate functions, re-use data through the business and collect reliable information based on common datasets – especially for FDs?[QQ] Tony Kelly, ERP business development director at Cap Gemini UK, says: “The FD is probably in a position to get more benefit from a fully integrated ERP system than most of the users, because the routes and architecture of most ERP packages are financial. The idea of integrating financial control of the business – including multiple sites and geographies – is essentially at the heart of the ERP transaction processing engine.”[QQ] But ERP has had a distinctly mixed press so far. While few deny the possible benefits, there are not many around who can claim to be reaping all of them. And ERP systems are said to be a great deal more complex to implement than their vendors, such as SAP, PeopleSoft, Baan and Oracle, suggest.[QQ] Add to that the fact that top-notch ERP professionals are as thin on the ground as eskimos in the Sahara, and you have a business solution with as many potential pitfalls as benefits.[QQ] Yet, despite these problems, the potential benefits are so great that more companies are likely to try ambitious ERP implementations in the future. And with major ERP software suppliers moving into the so-called “mid-market” – companies with turnover between £75m and £200m – it looks like more FDs will need to look closely at ERP.[QQ] While the FD has to much to gain from ERP, it is important to understand that the topic is one that percolates through the whole business. As a technology, ERP evolved out of MRP (materials requirements planning), which pulled together information systems for manufacturing, financials and order entry management. Not surprising, then, that the heartland of ERP use is still in manufacturing industries. But, increasingly, ERP will have something to offer service-based companies.[QQ] Indeed, the tentacles of ERP now spread, like a giant octopus, through much of a company, integrating functions such as financials, human resource management, product design, manufacturing planning, manufacturing process automation, logistics, sales and marketing automation, and customer order processing. In its transition from MRP to ERP, the technology has migrated from the back-office to the front office, and on into most parts of the company.[QQ] One implication of all this for the finance function is that it can stimulate new approaches to management accounting. For example, it can create an environment in which it is easier to use activity-based costing (ABC), which seeks to turn overheads into apportioned direct costs, because there is more information about the costs of performing parts of a manufacturing, administrative or other business process. For example, it is possible to calculate a cost per purchase and apportion that expense to each sale, rather than treating purchasing as an overhead.[QQ] In a company which has a multitude of different products, this unlocks the door to creating figures on true product profitability. And that, in turn, provides an opportunity for micro-management of a complex product range in order to fine-tune profitability.[QQ] Integrating this may – note may – deliver a key prize: better products and services delivered faster in response to real and forecast customer demand. All this can help to sharpen the customer focus of a traditional manufacturing company that is used to turning out its widgets in one-size-fits all and supplying from stock. ERP can draw management attention to meeting the individual needs of specific customers.[QQ] But, as an Ovum study on ERP notes, most companies using it do not meet this optimistic vision. “Only a few leading-edge users have a significant proportion of their resources and processes supported by a single ERP system. In addition, while ERP systems are good at handling every transaction within an enterprise, there is little support for corporate steering – for example, to help managers translate corporate objectives, such as earnings per share growth, into targets for departmental managers.”[QQ] As with any IT system, the starting point for successful ERP is to understand what it is for, and the benefits it is supposed to deliver. But this is more complex because ERP can take in many different parts of a company.[QQ] Laurent Lachal, a senior consultant at Ovum, says: “The FD needs to know how much the system will cost the company and how much he will gain from it. But what is also important from a financial point of view is to get the other departments of the company, which are going to use ERP, to understand their requirements, so that you know exactly why you need this system.”[QQ] Steve Billingham, the partner responsible for ERP services at Ernst & Young, acknowledges that not all companies reap full benefits from their investment. His firm conducted research with Cranfield University School of Management to gain a clearer view. “Our research showed that an awful lot of ERP implementations hadn’t been able to realise all the benefits they hoped for or that there was still unrealised benefits that could be obtained,” he says.[QQ] In some cases, ERP benefits remain unrealised because implementations were seen as quick fixes to solve the millennium bug problem. Faced with replacing, rather than updating, ancient systems, companies focused on getting a system operating rather than harvesting all the benefits. With the millennium bug under control, many FDs will want to revisit their system to see what new benefits they can deliver, Billingham argues.[QQ] In other instances, Billingham reckons benefits go unrealised because ERP implementations are supported by “flimsy” business cases. Partly, this is because of the intangible nature of ERP. “Where people are investing in something they can touch and feel, they can understand how to measure the benefits. When you are investing in a system that may change processes, that is a bit less tangible,” he says. His solution is a new consultancy service that aims to help companies achieve, extend and sustain ERP implementations.[QQ] But though it is important to have the downside of ERP clearly in view, there is no doubt it can deliver some very handsome benefits. Take the case of Hyder, a wide-ranging utilities business. It installed an ERP system in six business units, including its Welsh Water, waste management, central services and consultancy businesses. Using SAP R/3, Hyder has integrated financial accounting, control, projects, materials management, sales and distribution, which is a fairly typical mix of functions for a moderately ambitious ERP system.[QQ] Hyder especially wanted to centralise complex areas of payroll and human resource management across its companies. The old system worked through regional payroll offices, each semi-autonomous and responsible for a group of employees. It was not efficient and HR records were dispersed. Now Hyder has a central HR office, through which it manages all its payroll and pensions.[QQ] A key feature of the HR integration is organisation management. The system holds on-line versions of the structures of companies and departments in the group. There are also readily accessible personnel records, which include training details.[QQ] To cut out some of the paper chase, employees can now access a self-service system to update information topics such as overtime and expenses. Managers authorise these inputs before they are passed on to the central payroll system for calculation and payment. According to Julian Rabjohn, financial controller at Welsh Water, the company should recover its ERP investment within just three years.[QQ] Looking to the future, there may be another, unexpected pay-off from ERP for FDs – especially if knowledge management proves to be as important as some pundits suggest. “We are seeing the transition of the finance functions within organisations,” suggests Alastair McGill, marketing director at PeopleSoft UK. “The FD is now one of the most strategic people within the organisation. He could use knowledge within an ERP system to help identify and drive the company’s future.”[QQ] All that, and joined-up management, too, makes ERP look increasingly tempting.[QQ] [QQ] HOW THAMES TRAINS GOT ON THE RIGHT TRACK[QQ] Thames Trains decided it was on the wrong line with SAP R/3 enterprise resource planning software when it discovered the bill for upgrading to make the system Y2K complaint would be around £200,000.[QQ] Along with Thameslink – which shares the same software – Thames Trains, which runs 800 trains a day to 71 stations, decided to turn its back on ERP. Instead, the companies have installed financial software that has helped them obtain a raft of benefits that had seemed out of reach with ERP.[QQ] Bradlee Wyer, Thames Trains’ financial controller explains: “We wanted Windows-based software that allowed us to integrate into spreadsheets, so we could easily download and upload information.” The company chose Navision Financials’ general ledger, accounts payable and accounts receivable.[QQ] The system is being implemented in two phases. Phase one focused on a “seamless migration” from the old software. This phase has also improved the visibility of financial operating information, says Wyer. “For example, we can drill down and discover how much was spend on a stock item. We are no longer reliant on a depot to provide the information.”[QQ] Phase two is providing managers throughout the company with the ability to access financial information directly and drill down into their own costs. In the past, managers have had only top-level figures to look out.[QQ] With phase two operating, they will be able to find out, for example, how much was spent on different kinds of safety clothing.[QQ] Wyer says that by far the biggest benefit is “greater visibility. The flexibility of being able to drill down into costs is definitely an advantage.”[QQ] He is also pleased that the new system has removed some of the paper chase associated with authorising purchase orders. This can now be done on screen around the company. And the ability to drill down to individual requisitions improves accountability.[QQ] He says: “By having greater knowledge and visibility of the costs, people are becoming more informed of the financial aspects of day-to-day activities.[QQ] Therefore, we are focusing resources better. We maximise the use of that finite resource called money.”