Is a full ERP overkill for an SMB?

ERP systems for SME/SMBs – when is it overkill?

Is a full ERP overkill for an SME/SMB (small medium enterprise/small medium business)? Sam Graham, author of several books on the subject of ERP implementations, shares his thoughts.

Katie Griffin, our Director of Business Development at Spire, connected with Sam online. Sam kindly shared his thoughts on affordable ERP systems and how Spire is a great option for businesses to consider. Sam took time out of his busy author and influencer schedule to play around with a free trial of Spire.

“I really enjoyed playing with the software. I’m looking at it through the eyes of the companies that I have worked with before. I have to say that it’s a nice surprise to see just how much functionality there is in Spire.” ~Sam Graham

ERP systems for SME/SMBs – by Sam Graham

Several years ago, I implemented an upper Tier 2 ERP system at a manufacturing company. They were moving up from manual systems running on spreadsheets, backed up by a basic accounting system. Even before they went live, they were excited about the advantages it would give them. Aside from their primary business, they had a tiny offshoot that made products that complemented their main product range. The unit employed about six people and had a similar number of raw materials and end products.

With the primary business ready to go live, someone decided it would be a good idea to implement the system at this tiny company. To be fair, there was some logic behind this decision, as all of their accounting was done for them by the main business. That meant their exposure to the new system would be just inventory control, sales order processing, purchase order processing, work order processing and costing. Stripping out the things they didn’t need would be a challenge, as running the complete system would have suffocated them (the leading company also ran MRP, WIP tracking and Engineering Change Control, for example), but things got worse.

The client decided that, because it was such a small business unit and their manufacturing processes were so simple, implementing the system would be quick and easy. They originally planned for one day to do the necessary training, with another one day for go-live hand-holding. Luckily, they were persuaded that the time needed for training in how to raise a work order for a small quantity of items didn’t differ noticeably from the time required for training in how to submit a work order for a large quantity of items. Therefore, along with a ruthless cull of unneeded functionality, we managed to get them up and running. However, the users probably never thanked us for it because it was still overkill for what they needed.

Implementing an upper Tier 2 ERP system in a 6-person company is going to the extreme. Companies regularly implement systems that are far too big and far too complex for their needs. This happens for many reasons, but 3 in particular stand out:

  • One is that a senior manager has arrived from a much larger company. They have experienced ‘Megasoft’ working successfully and believe that if it works well for a large company, it must work well for a small one.
  • A second is that it was what we call a ‘vanity purchase.’ Companies like telling their customers and suppliers that they have bought ‘Supersoftware.’ Perhaps believing that using a system that big organizations use will turn them into a big organization too. A ‘rite of passage’ almost.
  • The third common reason is that the selection and implementation team wants a big name on their resumes/CVs so that they can then move on to better-paid jobs in larger organizations.

To put this into perspective, a number of years ago, a particular organization doing $5 billion in revenue every year implemented a Tier 2 system. A few years later, having grown, they considered moving to a Tier 1 system. When they reviewed those against their existing Tier 2, they decided to stick with that, and they have continued to grow. One reason it works for them is that, although they are a large outfit, they are a collection of different business units that operate autonomously, and because they share a chart of accounts structure, it’s easy to consolidate financial performance at a General Ledger level.

Consider the following

When choosing an ERP system, one must be conscious of future requirements. If the plan is for the company to grow considerably over the next 5 to 10 years (doubling in size or more), it will be necessary to choose a system that allows for and supports that growth. However, understanding that there is an actual price to pay when selecting a system that is oversized is important.

The first of these is the procurement cost. Whether you go for a Cloud solution or an on-premise system, a Tier 1 will cost you more than a Tier 2, which will cost you more than a Tier 3. That’s not to say that the more extensive systems aren’t worth the cost; it’s just that if you buy them, you can be paying for functionality you don’t need and will be spending a lot.

Closely allied to procurement cost is the annual maintenance cost. The maintenance fee guarantees you support if you run into problems with the system and ensures that you get regular updates and enhancements to the software. But it’s not cheap: for example, SAP, at the time of writing this blog, is charging 21% per year, and that means that if you keep your system for ten years, you will have paid over three times the purchase price for it. And that must be a good argument for minimizing your system procurement costs.

The next thing to consider is implementation costs. As systems get bigger, they get more complex. Complex systems need more setup, configuration, and training, which all add to the cost. Complex systems are also more challenging to understand. At the most basic level, that means that if someone drops a pebble in the system, it’s harder to know where the ripples will go. Fewer people will know the potential impact if even a simple change is made. That makes it harder for people to accept the new system because if they need help understanding how it works, they are less likely to trust what it tells them.

A final factor to consider is time. A complex system will take longer to implement. Even if you still need to do an ROI calculation, you probably want to get the system running as soon as possible. That may be because you plan to use it to solve business problems (excessive delivery lead times, high costs, etc) or support for your existing systems is being withdrawn. Regardless, you’ll want to avoid long implementation times. They encourage project scope creep, promote over-dependency on the consultants and can lead to the ERP implementation being seen as a journey rather than a destination, with constantly reset target go-live dates.

Conclusion

So, is a full ERP overkill for an SME/SMB? If you are Boeing, Johnson & Johnson or Volkswagen, you may need a Tier 1 system. But if you are an SME/SMB, there is a good chance you don’t. For most companies, selecting a system that allows for implementation in a timely manner and at an affordable rate is a much better option.

Before you waste time, money, and energy implementing the wrong system, you should discuss your options with an expert and take a look at Spire Systems. Great software at an affordable price. 

Sam Graham

Author of 4 books on the subject of ERP, Implementation of ERP 
ERP Observer & Blog
**Top ERP Voice on LinkedI

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