Why do I need an ERP system?
The answer to this question should not be looked for in theory but in economic calculations.
However, it is necessary, to be honest with yourself and calculate real numbers. Here approximate figures will not help to systematize the planning of resources of the enterprise.
Let’s start with the simple: what is ERP?
This abbreviation comes from Enterprise Resource Planning. In other words, it is a proven and effective way to optimize the company’s work, no matter what it does. It is based on balanced resource management, which is founded on a single model.
The beginning of the global popularity of ERP systems came in the first half of the 2000s. By that time, big business had already appreciated its benefits, and medium and small businesses began to inherit this successful experience. Gradually, ERP moved from manufacturing to services, to government, and many other industries. Due to this correlation of demand, developers began to upgrade the system, adding new modules and increasing the list of functions. Of course, the Internet helped them with this. Let’s see why so many companies need ERP.
“Plans are useless, planning is priceless,”
Dwight Eisenhauer, 34th President of the United States, Military and Political
Making the decision to implement ERP — first consider, then act
Since ERP systems have the main task of optimizing the company’s resources and costs, it should be implemented only after you have answered the question about the benefits which it brings. In other words, calculate thoroughly: how much the company’s profit will grow, or its expenses will decrease? How come that it happened? And how effective will it be in the long run? Accordingly, you have to measure everything carefully from the point of view of the company’s economy. However, before you start the calculations, let’s add specifics: let’s focus on the goals and objectives of the implementation. So, ERP in the organization is:
- management of all resources of the firm, instead of their separate blocks;
- creation of common internal communications for the company and a database with which all divisions will be able to work;
- proper planning of business processes;
- more effective management of financial flows;
- simplification and automation of document flow, optimization of data access;
- competent, clear, and transparent budgeting at all levels;
- effective control of remote units, employees;
- complete and reliable data that help manage production, personnel, and other departments of the company.
“The project manager must develop an integrated system for planning, controlling, monitoring and storing large amounts of information, as well as rapid decision-making,”
Rory Burke, author of the book about project management.
Now let’s talk about the economics of ERP for IT
The basic indicators used to assess the feasibility of implementing an ERP system in IT projects are the following:
- net present value of the project (or NPV);
- internal rate of return of the project (aka IRR);
- payback period of the project;
- calculation of discounted cash flows.
As mentioned above, the economic effect of implementing an ERP system should increase revenue and / or reduce costs. In the case of a company providing information technology services, the first indicator is quite difficult to accurately assess, but the second is just the one that can be calculated accurately.
For example, to properly assess the use of ERP in this case, it can and should be considered a decrease in labor costs, software and hardware, deficiencies and abuses, fines and penalties, audit services, and external technical support services.
In addition, it should be understood that the economic effect does not always accompany the introduction of a new technology, but depends on how this technology is used.
“Of all the things I’ve done in my life, I think the most important thing is managing the talented people who worked for us, directing them to the right goal,”
Walter Disney, founder of Walt Disney Productions, which became The Walt Disney Company’s multimedia empire.
