If your ERP system were a member of staff, would you hire them

2021-04-20

If you are a business owner who is considering deploying a business management software system, working out what kind of return you can expect on your investment is obviously an extremely important consideration. There are several ways you can think about this. One interesting perspective on investments in ERP is to compare them to other types of expenditures you can make to grow your business. An example is to compare the cost of implementing an ERP system with the cost of hiring an employee. 

In other words: if your ERP system were an employee, how much value would they deliver to your company? Would you hire them?

So why compare an ERP system to a member of staff? From my perspective as a business owner and founder, the role and functions of an ERP system may overlap with the role expectations of certain staff.  Like ERP systems, certain employees are responsible for maintaining records, improving organizational productivity and helping to enforce standard work procedures, not to mention supporting team members to improve their work performance and meet KPI targets and many more!

Not only that, the yearly cost of running an ERP system (50,000-100,000 USD for a company with yearly revenue of >40M USD) is often similar to the yearly cost of hiring a competent knowledge worker. (I am not including the cost of implementing ERP in this calculation as I treat that as a separate cost for employing consultants to design and deploy a business management solution for your company.)

So assuming the same cost for hiring a new member of staff and running an ERP system, we can assess the performance of an ERP system similarly to the way you might evaluate the contribution of one of your staff. Let’s imagine an employee that could help you achieve the following:

Increase the productivity of the team.

Imagine a staff member that could ensure your entire team is ever more productive and efficient in their daily work. ERP systems are able to automate the transfer of business data between departments and reduce the volume of manual work, so they can often pay for themselves in saved time costs alone in the long term. Savings in man-hour costs that are possible with system automation are often equivalent to work that would need to be performed by multiple full time staff. What is more, because ERP systems automate a lot of menial tasks, they allow employees to focus more time on creative, value creating initiatives, whether they are based in finance, purchasing, logistics or any other departments.

Ensure correct behaviors among team members.

What if you could hire someone that was able to ensure team members perform work tasks according to standard operating procedures consistently and systematically? ERP systems can support this goal more easily than even the most conscientious of team managers. Did you forget to fill the vendor bank details on a purchase request? Sorry, you can’t submit that form because that is a mandatory field in the system. Is the profit margin on that sales estimate to low? Sorry, you can’t print that out because it needs to be approved through the system by your line manager first.

The often-arduous task of ensuring compliance with company operation procedures can be largely delegated to your ERP system, which can enforce these procedures effortlessly and automatically through system based roles and permissions.

Empowering employees to perform better.

An employee that can help motivate and empower other team members to perform at their maximum potential is one that any business owner would value highly. People might not think of an ERP system as a driver of high employee motivation, but consider this: robust ERP systems feature dashboards that display progress towards achieving certain KPIs for each of their users. Sales can immediately see how close they are to reaching their sales targets. Purchasing staff can immediately see how well they are controlling costs. Finance staff can instantly check the health of company cash flow and the status of AR/AP.

Immediately retrievable data provides instant feedback to staff on how much progress is being made, which can be a powerful reminder and incentive to ensure work is performed to the expected standard. Convenient access to data also allows staff, especially management, to make better decisions about how to plan their work and achieve their goals.

KPIs for your ERP System as well as your staff

Now I realize that the comparison between employees and ERP systems is far from perfect! ERP solutions will never be an adequate substitute for the creativity and adaptability of smart, experienced knowledge workers. But in the same way that we can set role expectations for employees, so too can be measure the success of ERP systems compared with the level of investment we make in them.

As with their employees, executives should also set specific KPIs for their ERP system. For example, what would you think about an employee that could achieve the following:

  1. Reduce inventory levels through improved planning and control.
  2. Significantly improve production efficiency and minimize shortages and interruptions. 
  3. Reduce materials cost by enforcing improved procurement and payment protocols.
  4. Reduce labor cost through better allocation of staff and reduced overtime.
  5. Increase sales revenue, driven by better-managed customer relationships.
  6. Increase gross margin percentage.
  7. Reduce administrative costs.Reduce regulatory compliance costs.
  8. …and more

I think we can all agree: any member of your team that was able to achieve all of the above would be a star employee in any company! Not only that, you would probably have to compensate them quite generously to make sure they stick around…

Bottom Line

ERP systems are a business management tool and resource that can actuallybe treated quite similarly to a company employee from the executive’s point of view. As with individual staff, business heads should set concrete performance goals and role expectations for their ERP system. 

And above all, business owners need to make sure investment levels are sufficient to ensure the continuous success and high performance of this business management resource.