ERP for Small Business: Do they Really Need An ERP System? Myth Debunked
All of them are discussing about the ERP system for small and large sized enterprises, but now one is ever concluded that, Do small businesses really need an ERP systems? Here we have finally debunked the myth about ERP system for small and large sized enterprises
Small businesses face the some of the same business challenges as medium and larger companies, including pressure from competitors; global economic volatility; the need to attract and retain new customers; and the need to reduce expenses and increase profitability.
Small organizations also have additional constraints, including limited access to financial resources; higher day-to-day operational costs; and difficulties in hiring highly qualified (and therefore expensive) personnel. These factors can impede growth and complicate business processes.
ERP for Small Businesses: Myths, Misunderstandings, and Challenges
When it comes to ERP for small businesses, there’s no shortage of misunderstandings and myths — as well as very real challenges and dangers. I summarize some of what you need to know below:
Myths and Misunderstandings
Myth #1: ERP systems are too sophisticated, and are really only for medium and large companies.
This used to be true, about 10 to 15 years ago. Now, ERP vendors have adapted their products and even designed brand new applications specifically to meet the needs of small business.
They have reduced the level of complexity for users, and the variety of offerings on the market is really quite extensive.
On the other hand, many small companies have “raised their game” (in the sense that they often compete in the same markets as bigger companies) and now require functionality similar to that which is available to their larger rivals (but on a smaller scale, of course).
Myth #2: Small businesses do not need ERP: everything can be successfully managed and tracked manually by using relatively simple tools such as Excel or basic accounting systems.
A business may be relatively small, but that doesn’t mean that the number of transactions it performs daily is trivial. Furthermore, there is a huge difference between “simple” and “ERPbased” approaches to doing business.
A centralized data repository, one-time data entry, instant data availability for analysis, and imbedded best business practices: all these technological advantages can and should be demanded by smaller-sized businesses, no matter what industry they are working in.
Modern customers also expect the same high level of service and support from small businesses that they receive from large businesses, and ERP systems can also help a lot there.
Myth #3: Hardware and the associated infrastructure are prohibitively expensive.
In the past, personal computers were not always powerful enough to run ERP systems. This is no longer true. Similarly, network bandwidth is available today to a much greater extent.
New technologies have transformed ERP systems into software that any user’s computer is capable of running simultaneously with other office applications. Furthermore, software as a service (SaaS) does not require any special hardware purchase or installation beyond an Internet connection.
Challenges and Dangers
The total cost of an ERP package is difficult to calculate.
This depends heavily on the software selected, and differs from one package to another. The purchase of an ERP system requires certain efforts in terms of a company’s financial and strategic planning.
In addition to relatively high cost, the cost structure for an ERP system is often a complex and confusing subject for unsuspecting purchasers, as it consists of many separate items and usually cannot be easily grasped as a whole.
It must be noted that the SaaS-based ERP deployment approach has dramatically turned the cost and payments model into an easier-to-understand and more user-friendly model.
ERP implementation can result in significant changes to your existing business processes.
All ERP implementation projects generate many changes in all aspects of a business.
At the same time, most small companies feel they need to change their management principles and styles once they have reached a certain level of growth: the goal is to become a company with professional management, an internal hierarchy, and formal back-office procedures.
Not all companies succeed in this transition from a “friendship club” to a structured business machine. However, this point in a company’s life cycle can be an advantageous opportunity in its own right, and is an extremely important step along with ERP system implementation.
Selecting software can be difficult for small businesses.
This is especially true if almost no one at your company is experienced in ERP selection, implementation, and exploitation.
And while there is a large volume of information on the Internet, real-life examples of competitors and peer companies, and advertisements galore from software vendors, the ultimate decision must be based strictly on your own vision and strategy.
Another component of this challenge is that ERP-related strategic decisions are usually made only once, and must be well thought out and reasonable, as the system should be capable of helping run your business for at least 7 to 10 years.
Take the Quiz: “Do I Really Need an ERP System?”
To help you understand whether an ERP system is required to help you run your business, we created the following quiz, which contains some of the most important questions a company should answer when thinking about buying an ERP system.
For each answer, you will receive a number of points. At the end of the quiz, add your points to calculate your final score.
- How much duplicate work do you do on a daily basis? (e.g., entering received payments in both the accounting system and spreadsheet software)
a. 0 to 30 percent of my work (0 points)
b. 31 to 60 percent of my work (5 points)
c. 61 percent or more (10 points)
2. How many different systems/programs do you use every day? (including office tools and interfaces with other systems)
a. 1 to 3 systems/applications (0 points)
b. 4 or 5 systems/applications (5 points)
c. More than 5 systems/applications (10 points)
3. What are the chances you can recover information from a computer that cannot be used anymore?
a. No chance. If I lose a computer, the information is lost. (10 points)
b. It might be possible. We sometimes back up data on CD/DVD or external hard drives. (5 points)
c. No problem. We have a server and we do regular backups of all important information. (0 points)
4. How easily can you exchange information between employees?
a. We send files by e-mail, but we often lose track of different versions or cannot find the files. (10 points)
b. We share drives and try to be organized. (5 points)
c. We have an e-mail and file server and we all use it. (0 points)
5. How easily can you follow what’s going on in your company? (this refers mainly to inventory, sales, purchasing, and accounting)
a. We try to gather data from everyone, but we have to cobble the information together. (10 points)
b. My employees send me reports and we try to keep track of what we do. (5 points)
c. We have very well defined workflows and work procedures. (0 points)
6. How do you keep track of sales orders and invoices?
a. We use a system provided by a partner, spreadsheets, or an accounting system, or a combination of all three methods. (10 points)
b. We have software in place, but still need a second tool, especially for reporting. (5 points)
c. Everything goes into one system. (0 points)
7. How do you track inventory?
a. On paper and in spreadsheets. (10 points)
b. We use spreadsheets in conjunction with old software which is not very reliable. (5 points)
c. We already have a software system that is suited to our needs. (0 points)
8. How do you think your company growth will affect all the processes above?
a. No effect. Our business will not become much more complex. (0 points)
b. Somewhat. Things are going to change, but not dramatically. (5 points)
c. Drastically. We definitely need to review our business processes soon. (10 points)
9. How many people are using a computer in your company?
a. 1 to 10 people. (0 points)
b. 11 to 50 people. (5 points)
c. More than 50 people. (10 points)
10. What are your future plans for your company?
a. We intend to grow rapidly and aggressively approach new markets and customers. (10 points)
b. We will grow, but slowly. (5 points)
c. We’re fine and do not intend to change much. (0 points)
Here’s how you should interpret your answers:
0 to 25 points:
You are not planning for much company growth, or you already have an ERP system in place, and you are pretty well organized. In both cases, there is no real need for a new ERP solution: you’re doing very well with what you have right now.
26 to 50 points:
You are planning for some growth in the future, or you have an old system or package of tools that are quite efficient. Even though an integrated solution might help you in your daily tasks, the investment required probably outweighs the benefits.
51 to 75 points:
The solutions or tools you are using are either obsolete or lack the complexity required by your business processes. Although they may be useable, you should start looking to implement an ERP product in the near future.
76 to 100 points:
You need an ERP system and you need it badly. Still, this does not mean you have to buy the first product you see that meets your needs. It is vital that you conduct a best-practice ERP selection process.
Caveat: Any business thinking of ERP must have reached a certain level of maturity before seriously considering ERP implementation.
For the purposes of this guide, we define business maturity as follows:
- Your business has a long-term business plan, and midand short-term strategies for business development. It has time-framed goals, and a clear understanding of how to achieve them.
- Top management or business owners consider business processes improvements as a vitally important potential benefit of the ERP implementation project.
- Top management or business owners recognize the benefits of data centralization and one-time data entry principles.
- Business processes are well defined and, ideally, described in written form. At a minimum, the business processes description task should be a component of plans for the near future.
10-Step Vendor Selection Process
The following is a simple, 10-step ERP selection process which can be tailored to fit any industry, sector or niche.
It covers all the considerations one must keep in mind while purchasing a solution like an ERP platform, which will keep paying towards itself for the next decade or more. It’s recommended that the management as well as employees be involved in the decision making process.
Too often the IT is the only department shouldering the responsibility even though it doesn’t make much use of the ERP.
Research ERP Market
- Understand basic ERP functions
- Choose between cloud and on premise options
Priorities Business Requirements
- Identify Problems to solve
- List out ideal capabilities required
Make the case to Management
- Pitch them the inefficiencies
- Promote ERP benefits
Build a shortlist of Vendors
- Determine the systems that serve your industry, satisfy high level requirements and fit your budget, giving priority to a close requirements match
Educate Shortlisted Vendors
- Let the vendors know exactly what end results you are pushing to realize and your other potential candidates
Evaluate Live Demos
- Let vendors know the features you wish to see, invite the right people to evaluate the demo and score each vendor who demonstrates products.
Score Vendors Cumulatively
- Score the shortlisted vendors, eliminating those who do not fit. Score them on the basis of function fit, budget fit and ease of use.
Gather & Compare Price Quotes
- Take care to provide vendors with all relevant information, ensure that the quotes are complete including miscellaneous expenses.
Verify References
- Ask front runners for at least three viable references you can contact. Ensure that you discuss highs as well as lows (disadvantages) with these references.
Review Software License Agreement
- Ask for industry standard discounts and ensure that you can purchase licenses for full as well as part time employees
Conclusion
Given the nature of ERP systems, choosing the vendor is a business critical decision. Significant time, thought and research should be spent on making this decision. It is imperative that the business needs be considered, even ahead of the budget which is a purely fiscal constraint.
If an ERP solution is not capable of being adopted almost organically by the majority of the company, it can cost a company dearly in botched deployment and delays. An ERP platform capable of covering most of the basic requirements of the business coupled with a user friendly interface is the right answer.
Introducing a modular based ERP system overtime is often the best solutions for smaller companies, as they can priorities their needs and spread the investment over time. It also facilitates staff to familiarize themselves with each new element of the ERP rather than trying to cope with a big bang solution.
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