10 Jul Are your business processes killing your organisation?
Businesses compete within their industry in many different ways, but one area of competition often neglected is a business’s internal systems and processes. This area, usually facilitated by various technology and application layers, is seen as a back-office function and easily overlooked as non-core or an annoying overhead. This is particularly true for the small to medium business (SMB), which has further constraints in terms of capital and manpower. It seems to be the case regardless of industry – be it professional services, manufacturing, warehouse distribution, retail, or any other industry.
However, with a solid capability and a focus on internal processes, organisations can find advantages in many types of process improvement and giving the business the ability to scale effectively. Process improvements can pay massive dividends. For example, take a 1% efficiency gain in just one of your business’ top expenses. Compound that into perpetuity and you’ll see how quickly value can be generated.
Working in the enterprise application space for SMBs, we speak to all sorts of businesses. Unfortunately, conversations usually happen at a period of high growth, when business owners realise they will not be able to manage the company’s growth aspirations with their current system landscape and processes. This trigger-point is less than ideal, as it occurs at exactly the time when the organisation should be focusing on the new business at hand, rather than on the massive business transformations project required to take place when implementing an ERP system.
Over the years, I’ve noticed that the SMB market can be broken into four general market segments in terms of their recognition of internal systems and processes as a competitive driver. This is reflected by their readiness to implement an ERP system which allows them to gain efficiencies or meet growth aspirations.
Category One – The Non-Process Orientated
These are businesses that do not gravitate to processes for competitiveness. Instead, they have other orientations that they use to compete in their particular market segment – for example, sales, marketing, product or financial differentiators. This is not to say they do not have processes, it just means that they have preference to compete in other orientations, with processes and systems ranking lower.
Although these businesses could benefit greatly from an ERP platform, they simply do not see they have sufficient problems to warrant the effort and cost of such systems. Alternatively, the culture of the organisation may point in other directions with the team aligned in other areas. Even with some individuals wishing to make improvements, without the right culture and buy-in at all levels, such changes are doomed to failure.
Category Two – The Reactive Fixers
These business do have some process and system orientation and work on a combination of manual processes and a multitude of applications that have been procured over the company’s lifetime to create the inner workings of the organisation. They look to the marketplace to find spot solutions each time process issues arise. The result is a disparate set of applications with no integration. Errors, duplications and information lag between systems make reporting problematic and too time consuming and inaccurate to be used leading to decision makers falling back on making gut-instinct decisions.
These businesses realise that they have some pain-points, but reactively tackle their problems one by one, by looking to the software marketplace for best of breed point solutions. They include businesses that may not know what an ERP system is, think it’s for large enterprise or think that because each of their applications was hand-picked that they are running efficiently despite the lack of integration.
Category Three – The Overcommitted
The opposite to the non-process oriented (category one) are the organisations who choose to have a strong focus on process and have it as a core competency. These organisations have highly manual or custom-built applications or complicated integration between many systems. Often there is a core finance system procured by one of the main vendors like MYOB, XERO, SAGE or SAP coupled with bespoke systems developed and added on over many years. Alternatively, they may have a large administration team that has developed a very mature process that works but requires specialised processes and training to perform.
Businesses in the custom platform category are typically older SMB organisations (more than 15 years old) and sit in the upper mid-market. They have a dedicated in-house capability to maintain and develop their platform. Maintenance may often come at great expense to the business, but the business feels that there is enough value added to justify the expense. This is compounded by the sunk cost bias – decisions are tainted by the emotional investments you accumulate, and the more you invest in something the harder it becomes to abandon it.
Category Four – The ERP Friendly
These are the businesses that have already selected one of the many ERP system that are currently available to SMB’s and are now successfully running on a platform that will carry them into the future. Businesses that have selected an ERP can quickly take advantage of the best practice processes that come standard within its operation.
Competitive advantage is derived from extracting value from what the platform has to offer, and perhaps some further customisation in the 5% to 10% where the platform is not capable or weak.
No matter what category your business fits into, it’s never too late to assess whether improvement can be made by implementing an ERP system. The considerations for each category above are outlined below.
For Reactive Fixers
This category already accepts that they have problems and are already spending money on solutions, but is this the best allocation of capital? Most would accept that there are hidden costs in having a landscape of disparate systems. Questions they may want to ask themselves include: How much would they be willing to pay for perfect integration between their whole landscape? And what benefits are attained by such integration? Answers to these questions could shed light on whether an ERP system is worth the cost.
For the Overcommitted
As these businesses likely already run a very mature process, “If it ain’t broke, why fix it?”. This question is misleading with respect to business processes and system landscapes as it ignores the cost of running the system. Even a 100% watertight process may incur cost greater than the benefit it derives. Like most systems, a company’s administration obeys the law of diminishing returns – at a certain point, each dollar added yields less than a dollar in value. In an ideal situation, a company stops at the point where additional spend does not warrant the cost.
Businesses of this category have other problems in finding the balance point. They can’t simply scale back to the sweet-spot of value creation without breaking more than they bargained for. If they choose to move to an ERP system, there are risks to the business in moving all their complicated processes to a new system? Value will eventually be derived, but over a longer time-frame.
These risks need to be weighed and careful evaluation taken on how the vendor’s ERP product offering compares to the status quo, whether standardised business processes will work in their business, and / or what customisations would need to be developed. Importantly, decision makers need to check the ERP vendor’s successful reference customers who had similarly complicated mature business processes. With good references, decision makers can they get details around who the implementation partner was, what was the implementation time frame and key take-away advice from them. These are important considerations that need to be evaluated in both ERP platform and implementation partner. Even a four week difference in implementation time will have a significant hidden cost to the business attached to it.
For the Non-Process Oriented
This category can derive the most value in the shortest timeframe from an ERP system. Unfortunately, either they don’t think they have a problem, don’t care to address this area of their business, or don’t have the time or organisational culture to fix their processes.
And yet, this group can easily create a tangible case for an ERP by assessing a single area of inefficiency. Business owners do not need to give up their winning culture to derive value from ERP system adoption, but things will need to change as employees add to their daily activities. Further, it’s likely the organisation has hit the limits of diminishing returns from other areas of the business where they are already strong, and thus should look to their business processes from applications like ERP to get quick wins.
Typically, these changes only occur when there are changes at the executive level. A strong incoming ‘C’ level can drive the organisational change required for a successful implementation. The advice here would be to start with a business case and use it to build momentum. Call some ERP vendors or System Integrators who can show you what your business would look like running on their platform.
To gain true advantage from systems and processes, the aim is to develop a ‘best of breed’ platform that runs the entire business at a reasonable cost. What is the best allocation of capital (both human and financial) to out-compete rivals in your ‘system’ competence? Luckily, organisations do not need to reinvent the wheel, as there are a multitude of business applications to choose from that take advantage of the fact that businesses do a lot of the same processes in the same way.
Businesses do need to assess the effort (human capital) required to implement and maintain these applications, so comparing feature lists will only fill out part of the picture. The organisation may also be seduced by the attractiveness of point solutions that tackle their pain-points one at a time, ending up with a siloed application landscape with little or no integration. These decisions require great consideration – if done correctly, the platform need not be changed for an appreciable time. Barring a merger or divestment, industry standards suggest very low platform turnover.
This means that vendor selection is highly important when considering longevity and future competitiveness. Just because a platform competes well today does not mean it will do so in the future. We’ve observed that long-established vendors in the ERP game are more likely to compete well in perpetuity. Product roadmap and support should be a primary goal of vendor assessment, to avoid as much time as possible being spent in maintenance, patching, upgrades and hardware refreshes. That time saved with the right product and vendor can be spent on a continuous improvement cycle that adds value without ever moving backwards.
At the end of the day, each individual business has to analyse the costs of purchase and implementation, and compare it with net annual benefits to calculate ERP payback, or ROI. Finding the functionality that works best for your employees and empowers them to utilise all of the ERP features for better business is what will pay for your system. The additional process and system gains will provide another stream of competitive advantage.