When most executives think of ERP systems, they associate them with high costs. Their next thoughts are the risks involved in implementing new enterprise software, the potential of implementation failure, operational disruptions and a host of other things that make any rational person think long and hard before making such an investment.
When implemented effectively and correctly, ERP implementations can (and should) deliver cost savings. Business process reengineering typically yields costs savings ensuring a positive return on investment for your enterprise software initiative.
Despite the allure of best practices, industry configured solutions and other ERP vendor sales hype, most enterprise initiatives don’t adequately focus on business process reengineering. Instead, business process design work is more typically relegated to “just changing our business processes to however the software works.” This traditionally flawed approach is a surefire path to implementation cost overrun and lack of benefits realization.
Instead, here are five steps to find cost savings through your business process reengineering efforts as part of your ERP implementation:
Step 1: Understand business process reengineering in the context of ERP systems. Today’s ERP systems are extremely robust and flexible. Even the simplest business processes have multiple workflow options and criteria that must be defined. If, on the other hand, you start your project without a clear vision of how you would like your business processes to look, you will either a) see your implementation costs skyrocket as the meter runs on the expensive technical consultants while you try to figure out your business processes, or b) you’ll end up deferring to the technical consultants to decide for you, which isn’t typically what’s best for your organization.
Step 2: Don’t treat all business processes equally. Not all of your business processes will require extensive reengineering. Focus on the ones that create competitive differentiators and help you service your customers in a unique way that is hard for others to replicate. For these areas, spend time defining how the processes should look in the new system – at least to the extent that you can without having the technical and functional knowledge of how specific screens within the system will look. For areas that are not of competitive advantage for your organization (think accounts payable), it is perfectly okay to defer to adopting the system’s basic functionality.
Step 3: Define and quantify potential cost savings. Once you have mapped your to-be business processes, you must define where you think you could see cost savings and set cost improvement targets. A great place to begin is by looking at pain points of your current processes relative to the future state: those are typically hotbeds of inefficiency and potential cost reductions. Things like automation of manual processes, time spent looking for information in multiple systems and other current pain points will likely translate into potential efficiency gains. Take the time to quantify what those improvements may be and set benefits targets accordingly.
Step 4: Evaluate non-labor savings. In addition to labor-based gains that are often easier to see, be sure to also consider non-labor savings. For example, how much could you reduce inventory if you had better visibility into your supply chain and customer demand? How much could you reduce accounts receivable if you automated some of those processes? These non-labor cost savings are generally larger – and more tangible since most clients we work with don’t want to lay people off as a result of their ERP implementation – than labor-based benefits.
Step 5: Measure results and make incremental improvements. Few of your expected business benefits materialize if you fail to measure post-implementation results. Chances are that you will not achieve most of your expected cost savings right away. This is why you must understand how you compare to your targets and analyze the root causes of why you’re not yet achieving them. Common deterrents of cost savings include lack of employee understanding of the new processes and other basic issues that can be easily addressed through retraining and other means. Either way, ensure you are measuring, identifying root causes and implementing corrective action as part of your benefits realization efforts (learn more about ERP benefits realization best practices).
As you can see, even with as hefty of an investment as enterprise software is, you can truly find cost savings when you invest in the right software for your organization.