Does your ERP support innovation?

ERP STRATEGY

Patrik Nilsson
23.03.2020

It is no longer news that the rapid development and increasing maturity of technology in recent years have impacted all industries and redefined how business is made. However, many companies are still struggling with how to make use of this new technology, be it to innovate new products, create new business models, generate new revenue streams, ensure operational efficiency or simply just keep up with competition. This article deals with what should be (but isn’t always) considered an important part of the foundation, or the core, of a digital business, namely the Enterprise Resource Planning (ERP) system. Without this “digital core” in place, innovation efforts tend to become more cumbersome and eventually risk becoming futile. Regardless of how mature your digital core is today, a proper ERP strategy is always a key component of your organization’s strategic plans to be able support the business tomorrow.

 

ERP is the digital core of an enterprise and is key for innovation

The term ERP was first coined by Gartner in 1990, but early advents of ERP systems began already in the 1960’s. At the time, ERP systems was merely a tool used for managing inventory but has since evolved and become the heart of the enterprise IT for companies of all sizes. The major benefit of ERP systems is its ability to streamline operations and consolidate data from multiple sources across the organization. To maximize these benefits, it is common for companies to incorporate a significant part of its operations across business functions such as sales, purchasing, finance and accounting, demand planning, inventory management, and manufacturing in the ERP system. As such, the ERP today constitutes an important part of the company’s digital core. Hence for companies who wants to drive innovation and revenue from their digitalization agenda, it should come as no surprise that any effort made will most likely involve the ERP system.

Having an ERP system, or a digital core, that supports innovation is therefore key in today’s fast-changing business environment, however data indicates that this might not be the reality for many organizations. According to research firm Radar, a remarkable 53% of all Nordic organizations believe that their current ERP system does not support innovation, and 20% consider that their ERP system does not support key business processes in a satisfying way. So, why is this the case?

Organizations tend to underestimate ERP’s importance for driving a digital agenda

Firstly, decision-makers are often hesitant about ERP modernization, fearing interruptions and disturbances in the day-to-day business, as well as long implementation projects consuming significant financial and human resources which ultimately may not bring any business value. In fact, their resistance is not without cause, given that the average ERP implementation project takes 2.5 times longer than originally estimated according to Radar. Instead, many organizations continue to run their ERP on old technology, on which they spend a lot of effort trying to re-develop to adapt to changing business circumstances. As a result, these organizations fail to leverage new technological advancements that could provide more agility to their back-end operations, and thus be better equipped to execute new digital initiatives successfully. As an example, the ongoing transformation within the automotive industry, in which OEM’s increasingly are looking to shift to a “direct-to-consumer” business model, is posing a significant challenge as it drives requirements on new capabilities in the ERP system. Therefore, OEM’s that run old, rigid ERP systems tailored for the traditional wholesale model often find the best alternative to be to start fresh and pilot this new business model through standalone business units equipped with new, modern ERP systems.

Secondly, many organizations tend to interpret the concept of digitalization, especially innovation through digitalization, as creating a new digital experience for its customers. Whether that is correct or not, the natural consequence is that companies tend to focus too much on front-end systems such as apps, web shops, and CRM tools, while forgetting about the linkage to back-end operational systems, i.e. the ERP. As a simple example, a retailer should only display products to a customer on its website if it is available (accurate inventory) and can be delivered within a reasonable timeframe to the correct location (efficient supply chain), which requires front-end experience and back-end operations to be interconnected. Hence, although front-end systems are critical for a good digital customer experience, the back-end operational systems remain key for a successful digital business, providing the foundation for both efficient operations and a good customer experience.

A new paradigm of ERP

The fact that this is a challenge for businesses is evident, and research firm Forrester is even talking about a new paradigm of ERP systems. Instead of the term ERP, they are using the term Digital Operations Platform (DOP) to capture this new concept, meaning that DOP’s addresses the issue of rigid back-end systems not up to speed with agility found in front-end, customer facing systems. In essence, DOP’s can be viewed as more advanced, “next generation” ERP’s, however three key characteristics differentiate true DOP’s from traditional ERP systems. Firstly, DOP’s are adaptive to fast-changing business needs, levering new technological advancements such as cloud-based delivery models, microservice-based architectures, and low/no code platforms allowing for increased agility, “evergreen” technology, and business led development. Secondly, DOP’s leverage AI to increase efficiency and enable product innovation, for example automation of routine tasks (efficiency), and making products smarter (innovation). Lastly, DOP’s offer the user multiple new ways of interacting with the system, through new capabilities such as gesture-based, mixed reality, and voice enabled touchpoints.

Where to go from here?

It is apparent that failing to understand the importance of the operational back-end systems when pursuing innovative digitalization initiatives, will ultimately hinder true success and cause company operations to suffer from inefficiencies, manual process steps, lack of control, master data issues, and lack of scalability, and in the end lead to increased costs. Whether referring to them as ERP’s or DOP’s, these systems are the core of a digital business, and the foundation for both efficient operations and a good digital customer experience. However, it is not only about replacing or implementing a new technology and expect that to solve all problems. Such initiatives must be thoroughly planned, based on and aligned with the business visons, strategy and needs, together with a clear understanding of the actual benefits it will bring.

At Knowit Insight, we are helping our clients navigate through these challenges and have developed a proven methodology and framework to set a business-driven ERP strategy. If you want to know more don’t hesitate to contact us!

Contact: Patrik Nilsson, Senior Manager within IT Strategy at Knowit Insight 

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