Benefits come with costs and risks

Updated: Jul 31 2006, 05:30am hrs
Businesses in all walks of life operate in tremendous competitive environments and their ability to respond effectively is improved by Enterprise Resource Planning (ERP) solutions. In the current era with the proliferation of the usage of IT, most organisations are using an ERP either their own homegrown software applications or a standard ERP application licensed from a software vendor. The debate generally is around standard ERP applications and their costs of implementation and maintenance. However, the standard applications bring in far more business benefits than homegrown ones, in the form of better business practices, tighter integration between business functions resulting in more current and online information for the managers for effective decision making.

Benefits, of course, come with costs and risks. Companies invest anywhere between 0.5 - 3% of their annual revenue in an ERP implementation which includes the hardware, networking/ communication, software applications, training and implementation, support and the opportunity costs of their key employees who spends many months in deploying it. The benefits far outweigh the costs in almost all ERP implementations and the implementation risks are very low. Some Indian organisations have deployed ERP to qualify to be a supplier for some of the international customers in industries like automotive and textiles.

The market for enterprise-level software applications in India continues to grow. As per IDC estimates, the 2006 ERP market is of the order of Rs 900 crore and is growing at CAGR of over 20%. The continued growth demonstrates there is reason to be optimistic about the payoffs firms are getting out of ERP. These systems definitely justify the investments and have turned into a competitive disadvantage for those who have not deployed them!

Over the last decade, it has become clear that organisations go through three distinct phases in their use of ERP systems: automation, consolidation and transformation. In the automation phase, different organisational divisions were automated fairly independently with some level of interfacing between them. Though the benefits of automation accrued to the individual divisions, islands of informations were created. In the consolidation phase, organisations implement more integrated and streamlined processes from either a single ERP, or multiple systems tightly integrated to each other.

A multitude of benefits accrue from reduction in costs of procurement, inventory carrying, labour, supply chain and logistics, sales and marketing and general and administrative overheads. These savings themselves generally pay back the investments made in ERP in 12-24 months time. The majority of the Indian organisations who have deployed ERP are at this level.

The real benefit to organisations comes when they use ERP to transform their business into a seamless extended-enterprise. The challenge to the Indian enterprise is to achieve this level of global, real-time integrated extended enterprise.

The technology is there, the applications are available and what is required is the commitment of managements.

The writer is managing director, SSA Global India