By Peter Adams, CEO of Lighthouse IS, Inc. and Jeff Osorio, Managing CFO Engine Room, Inc.
There are three primary processes integral to all businesses:
- Order to Cash
This process typically comprises the accepting and recording of a customer order, shipping, invoicing and collecting cash
- Procure to Pay
This process comprises the ordering of goods and materials, receiving goods and materials, inventory transactions (from raw material to work-in-process to finished goods), inventory valuation, matching receipts and invoices for goods received, payment for goods received and control over cash
- Record to Report
This process comprises the compilation and reporting of the financial results of the other two
How well a company does all three dictates its success. How well does your company manage them?
Enterprise Resource Planning (ERP)
An enterprise resource planning (ERP) system is an integrated suite of software programs (modules) that both facilitate and automate a firm’s business processes and transactions. While performing these functions, the system collects, processes and stores all the data associated with those processes and transactions.
The typical ERP system architecture centralizes all business data into master data files and integrates and synchronizes co-dependent functions. (You can read more about master data files here in a great post by Rick Koski, president of Lighthouse.)
An ERP system typically has many different modules or software functions that correspond to the many primary and secondary business processes of the firm. These modules are usually focused around order management, manufacturing and financial activities. In the same vein, some ERP system architectures are better suited to manufacturing, others to distribution and yet others to services firms.
So how do you move forward?
1. Pick the Right Team
While the decision to install or upgrade an ERP system may be prudent and should help manage these processes, the decision regarding who should lead the ERP project is not easy. Having finance lead the project is not always the best choice.
The problem created with this approach is that accounting and financial reporting are backward-looking functions. They record what has happened. They do not facilitate, automate or improve performance of core business processes proactively. Over-emphasizing and prioritizing finance’s pain-relief needs may miss critical requirements of the rest of the business. ERP is an operations system first and a financial system second, not the other way around.
Some common tells that your current ERP system implementation may have been a finance-centric project (and finance is blamed):
- The production or operations people hate the ERP system because it just doesn’t do what they need
- Driven by continued frustration with the current ERP implementation, the rest of the business has bought or built parallel tools
- There are expense overruns
- Executives are not able to get meaningful reports to help them manage the business
These symptoms can also hide manufacturing problems.
Manufacturing people are typically resourceful and quickly find workarounds to dysfunctional systems so they can accomplish their goals. The trap is that what may appear to be good customer delivery performance, for example, may be hiding horrendous inventory and cost variance problems underneath.
If you are still unsure about the consequences associated with an accounting-driven ERP installation, ask yourself which is more likely to create meaningful business outcomes in terms of revenue, profit, cash and corporate value:
- Automating the scorekeeping, or
- Improving and automating the order-to-cash and procure-to-pay processes
An ERP deployment cannot in any way be considered complete by only deploying accounting and financial reporting modules.
“Successful ERP deployments are about improving the playing of the game first, before improving the scorekeeping — not the other way around.”
Frankly, a company can buy all the enterprise software they want, but unless the company’s core business processes are optimized before they are automated, that software isn’t going to help a whole lot.
Case in point: Eduventures CEO Tony Friscia reports in “ERP Lessons from Rich People Who Stink at Golf” on a McKinsey Global Institute and London School of Economics study of 100 companies in the United States, France, the U.K. and Germany that came to these conclusions:
- Improving management practices (process improvements) increases company productivity by 8 percent
- Increasing the intensity of IT deployment (tools) increases company productivity 2 percent
- Doing both increases productivity 20 percent
You must fix your organization and processes before you automate. If you have inefficient business processes, all computer systems will report the same automated mess. Remember GIGO (garbage in, garbage out).
Recognize most contemporary ERP systems typically come with all the functionality necessary to run your business, so create a clear understanding of what it is you need to accomplish with your ERP. Define what processes need to be optimized, then automated to make the business generate cash.
Strongly consider bringing in an independent third-party expert to diagnose and fix these processes, then use them to implement the appropriate system modules. Bringing in an experienced, objective resource ensures current flawed processes are identified and corrected, not immortalized by automating them.
In our experience, 90 percent of the challenges with ERP deployment revolve around poor process optimization and ineffective module implementation.
3. Get Started
To optimize ROI from an ERP, whether implementing a new one or reimplementing one that isn’t delivering what it should, we suggest the following:
- Attack and optimize the core processes. Don’t reinvent the wheel. Force yourself to evaluate why your core processes are different before immortalizing them in custom systems implementations.
- Implement and optimize the core business process ERP modules you already have before tackling additions.
- Subsume spreadsheet financial processes into the system, minimizing (hopefully eliminating) the use of Excel files and coming closer to SOX ( Sarbanes-Oxley) compliance*.
In 2002, the United States Congress passed the Sarbanes-Oxley Act (SOX) to protect shareholders and the general public from accounting errors and fraudulent practices in enterprises, and to improve the accuracy of corporate disclosures.
- If you bring in an external resource, listen to the person you hire. You’re spending a lot of money for an expert guide.
“The trouble with computers, of course, is that they’re very sophisticated idiots. They do exactly what you tell them — at amazing speed.”
The Doctor, “Doctor Who”
In today’s challenging economy, there is more pressure than ever on small to mid-size firms from their banks, CPAs, investors and, if public, the SEC to produce accurate and timely financial reports. If not automated — and worse, if siloed — this task is painful and slow.
As this task falls on the shoulders of the firm’s accounting department, it is no surprise when the controller’s pleas (and possibly the auditor’s) become the loudest in the room, appealing for a new or improved ERP system to ease the pain. If you go forward, be patient, thorough and implement in the proper order — process optimization first, systems implementation second, scorekeeping third. Do this, and success is within your grasp.
About the Authors
Peter is the founder and CEO of Lighthouse IS, Inc. He launched the firm 35 years ago when, while working as a deployment specialist in the healthcare information systems arena, he realized the primary goal of his complex projects were not to make new IT technology work, but to make the client’s business wildly successful. It was then he conceived the Lighthouse approach to consulting, an approach which, while it maintains a strong component of IT, is dedicated to the primacy of achieving the client’s ultimate business objectives.
Peter graduated from the University of California, Santa Cruz with a degree in biology and chemistry, and from Oxford University’s Advanced Management Program (AMP). He is a sailor, a coxswain in the Coast Guard Auxiliary and a black belt martial arts instructor.
Jeff has been a CFO and C-suite financial executive for 20 years. He has extensive experience in dynamic, fast-paced, high growth entities from startups to $4 billion-in-revenue enterprises across multiple operationally oriented companies and industries, including Spectra-Physics Lasers, Silicon Graphic and Cypress Semiconductor. His background includes responsibility for manufacturing and sales entities in China, Japan, the Philippines and all across Europe. In his career, Jeff has raised $1 billion in venture capital, debt and government financing.
Jeff received his Bachelors of Science and MBA from the University of Santa Clara, where he now serves on the accounting advisory board for the Leavey School of Business and as an adjunct professor in the MBA program.
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