(9 minutes to read)
Every year, hundreds of businesses contact Software Advice to find the best enterprise resource planning (ERP) software to fit their needs. These interactions with prospective buyers provide us with considerable insight into the broader ERP software market and the trends that occur within it.
We recently analyzed a random sample of these interactions to better understand the factors that influence ERP software buyers’ purchasing decisions And the biggest ERP software buyer trends. These findings will help guide the decisions of other buyers in the market for such a solution.
Key Findings
- Two-thirds of buyers do not currently use an ERP system, and 44 percent rely on a combination of disparate systems to execute ERP processes.
- Fifty-nine percent of buyers cite the need to improve the integration of data between different business processes as a top reason for seeking an ERP system.
- Forty-seven percent of all buyers cite the need to improve their customer relationship management (CRM) database as a reason for wanting to purchase an ERP system.
- Among buyers currently using ERP systems, 24 percent cite lack of support and 19 percent cite cost as their primary reasons for wanting to switch to a new system.
- Twenty-seven percent of buyers who do not currently use an ERP system cite company growth as their reason for wanting to implement one.
Introduction
As a business grows, it inevitably reaches the point where its current information technology (IT) infrastructure—or lack thereof—can no longer handle the scope of operations. When it reaches that critical mass, one of the first moves a firm makes is to overhaul its ERP system (or whatever processes it follows to perform essential ERP functions).
As one of the most important components of an IT ecosystem, ERP aids with and monitors all of a business’s critical operations: sales, accounting, human resources, supply chain management, customer relationship management (CRM) and so on.
Picking the right ERP system is rarely an easy decision. Such solutions are an expensive investment, with lifetime costs typically ranging from tens of thousands to millions of dollars, depending on the size of the organization. And from data migration to system customization to employee training, the process of fully implementing these systems can take anywhere from a few months to a several years to complete.
Businesses must also consider how much they need to customize their ERP system to fit their needs: Some degree of customization is typically necessary in order for the system to adequately handle daily operations. But with greater customization comes higher costs and (typically) a longer implementation schedule, and it can present headaches when it comes time to update the system down the road.
With these considerations in mind, we set out to better understand the perspectives of prospective buyers and the challenges they face when making the jump to a new ERP system.
Two-Thirds of Buyers Are Making Their First Foray Into ERP
When asked about their current ERP methods, only one-third of prospective buyers in our sample say they currently use a commercial ERP system. In other words, the businesses of most of these buyers are at the critical point where a system that is fundamentally new and different is required.
Prospective Buyers’ Current Methods
For current ERP users, the process of data migration, customization and training can be extremely time-consuming. In fact, it may actually be more difficult for a firm with an ERP system already in place to switch to a new one than for another firm to implement an ERP system for the first time.
“[First-time buyers] don’t have the problems that a lot of companies with existing ERP systems have, which include the baggage or the set ways that come along with having a system already in place. That can create a lot of risk and challenge,” says Eric Kimberling, founder and managing partner of Panorama Consulting, a firm that advises organizations on ERP implementation.
At the same time, many software vendors offer in-house implementation and consulting services, as prospective buyers—regardless of their experience with ERP—often need the reassurance of assistance throughout the implementation process. Buyers have reason to worry, after all: ERP implementation failure is a very real thing that can cripple even large corporations.
Perhaps the most infamous example of this is the Hershey Company’s botched ERP implementation in 1999, which prevented $100 million worth of candy from being delivered to stores in the weeks before Halloween. When news of the debacle broke to investors, the Fortune 500 company’s stock dropped by 8 percent in a single day.
However, ERP implementation failure is very rarely the fault of the software itself—typically, it is the result of the buyer being overly optimistic with the timeline and budget estimates laid out by the vendor. And vendors, in turn, may lowball these estimates in their desire to make a sale.
Kimberling says this is a difficult problem to solve, and that both clients and vendors can be at fault for a failed implementation. “The biggest thing [prospective buyers] can do is manage expectations better up front,” he says.
Kimberling also notes that prospective buyers should be fully aware of what their and the vendor’s responsibilities will be during the implementation process. Many ERP implementation failures occur because the buyer doesn’t realize that the vendor isn’t going to handle certain critical aspects of the implementation, such as data scrubbing and migration.
Fifty-Nine Percent of Buyers Want to Improve Integration
Nearly half (44 percent) of prospective buyers use multiple disparate systems (see chart above) to handle all ERP processes—typically, a combination of QuickBooks, Excel and basic project management software. This often results in time-consuming, duplicate data entry.
“QuickBooks works. But if we can have a system where we don’t have to tell the accounting department every time we make a transaction, that would obviously save us a lot of time,” says one prospective buyer, an operations manager for an industrial parts manufacturing company.
Improving integration between business processes is the fundamental purpose of ERP, so it is unsurprising that 59 percent of all prospective buyers cite this as a top reason for wanting a new system.
Top Reasons for Software Purchases
While integration is slightly more of a motivating factor for non-ERP users (61 percent), it is telling that 54 percent of current ERP users are also dissatisfied with their systems’ integration capabilities.
“There are so many gaps in our organization that tie back to our [current system]. Everything is a separate package,” says one prospective buyer, a quality assurance manager at a manufacturing company.
Though accounting, sales, manufacturing and supply chain management have long been the core elements of ERP, CRM has become an increasingly vital component of these platforms. Indeed, 47 percent of all prospective buyers in our sample specifically request either greater integration with an existing CRM database, or an entirely new CRM application with greater functionality as part of their new ERP system.
For current ERP users, the problems they have are sometimes not even with the software itself, but rather, with its price tag: nearly one-fifth of current ERP users say rising costs are a main reason for wanting to switch systems.
Current ERP Users Fed Up With Growing Costs, Lack of Support
Drilling deeper into the responses of buyers who cite rising costs as a reason for wanting to deploy a new ERP, we find that the frustration is largely due to increasing annual support and maintenance fees. This is despite the fact that they have a perpetual license for their system—meaning they have paid a one-time fee for the license to use the software in perpetuity.
Perpetual license fees generally do not cover support, which is billed separately. Thus, these businesses are faced with either paying more each year for the same support service, or jeopardizing their entire system if they do not pay and something goes wrong.
“They’re just beating me up. Their latest quote for an annual contract just went up 10 percent,” says one prospective buyer, the IT manager of a beverage distribution company.
Others realize they have bitten off more than they can chew, and have a system that is simply too complex for their needs.
“[Our ERP] has been working pretty well for us, but I think we’re on the smaller edge of who that product is designed and priced for,” says one prospective buyer, the CEO of an employee training company.
In the past few years, more ERP vendors have begun offering subscription-based “Software-as-a-Service” (SaaS) contracts, in which users pay a monthly or annual fee for access to the software, as an alternative to perpetual licenses. The software is typically hosted on the vendor’s servers and accessed by users via the Internet. Kimberling thinks this trend will only become more prevalent.
“The market is demanding it: With demand that great, something is going to give at some point,” he says. “The bad news is [SaaS products] have an ongoing, recurring annual cost that never goes away, but what’s included in that is everything. There are no upgrades; there is no real maintenance you have to do on the system—it’s all embedded in the cost of the subscription.”
Most Buyers Want to Deploy an ERP System Within Six Months
For larger enterprises and organizations, just choosing the right ERP can take up to a year or more. With smaller businesses, however, there appears to be a greater sense of urgency—or perhaps it is flexibility, due to being less encumbered by entrenched businesses processes.
Our sample, composed primarily of small to midsize businesses (SMBs), is relatively eager to pull the trigger on deploying a new ERP: 77 percent want to do so within six months.
Prospective Buyers’ Time Frames for Implementation
Demographics
Eighty-seven percent of the prospective buyers in our sample are SMBs (defined here as those with annual revenues of $100 million or less). The most represented industry sectors in our sample are manufacturing, logistics, heavy industry and high tech.
Conclusions
ERP software vendors have traditionally targeted large enterprises, but greater offerings have emerged for SMBs in recent years. More vendors now offer Web-based ERP systems at lower rates, and reduced server costs and subscription pricing models have no doubt made ERP software more accessible than ever to smaller businesses.
Given the life cycle of an ERP system—often 10 years or more—vendors would be wise to target small but growing businesses by marketing affordable systems that can scale with them. Those smaller businesses could be an even bigger source of revenue as they mature and their needs become more complex.
For prospective buyers, the task of selecting and implementing a new ERP system can be daunting. When selecting a solution, buyers should take into account not only their current needs, but what their needs will be five or 10 years down the road, as well as whether they’ll be able to integrate existing and future data in the new system.
Buyers should also weigh the benefits and drawbacks of different pricing models, and ensure they have a clear understanding of what the total cost of ownership will be depending on which path they take. Finally, they need to consider how well-equipped their IT department is to handle such a massive undertaking, and should seek outside consulting and implementation services if they are unable to do it in-house.
The detailed methodology for this report can be found here.
If you have comments or would like to obtain access to any of the charts above, please contact forrest@softwareadvice.com.
