5 ERP

Selection
Best Practices
An overview of
integrated ERP software

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An overview of integrated ERP software

The purpose of enterprise resource planning (ERP) software is to unify a
company’s various business functions into a common data processing
environment; all in one place.

The software is intended to operate as a central planning and execution hub,

with finance and accounting functions integrated throughout. For example, from a
manufacturing planning perspective, companies rely on ERP to balance supply and
demand using sophisticated algorithms for material requirements planning (MRP),
master production scheduling (MPS), and capacity requirements planning (CRP)
functions. From an operational perspective, ERP systems typically support core
functions, including: sales, order entry, inventory management, shop floor control,
and purchasing. Finance functions are often fully integrated, meaning that customer
credit, accounts payable, accounts receivable, and associated general ledger posting
transactions, are all triggered by applicable business processes.

In effect, ERP systems are intended to control and streamline mission-critical

business operations and decision-making processes. Selecting a well-suited system
is not trivial. A well-informed decision should include consideration of how well the
system suits various functionality, cost and benefit, usability, and IT support needs
across short and long-term time horizons.

This whitepaper breaks down five best-practices to

evaluating ERP and making appropriate selection
decisions, as follows:

Best-Practice #1: Complete an internal business requirements assessment

Best-Practice #2: Craft an appropriate and fair selection process

Best-Practice #3: Establish governance and change management foundations

Best-Practice #4: Negotiate contracts for the long-term

Best-Practice #5: When evaluating cloud software, consider the idiosyncrasies

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Best-practice #1: Before selection,

complete a comprehensive internal
business requirements assessment
Before starting an ERP evaluation project, it is important to define the business
requirements for an ERP. These provide a company with a baseline set of standards
to evaluate vendors and the solutions they offer. The following are common
components of a business requirements assessment:

1. Long-term horizon needs. With an anticipated 10-plus year lifespan, companies

should work to define future changes that have a high probability of occurring,
particularly those that have serious system functionality implications. Common
examples include those that relate to corporate structures, geographic locations,
business models, technological architecture, and user needs.

2. Top-floor to shop-floor, back-office to front-office needs. ERP provides an

opportunity to integrate many business functions into a common transactional,
planning, and accounting application. In an effort to build an integration
roadmap, it often makes sense to discover enterprise-wide needs – including
those that may initially appear to be out-of-scope.

3. Map “to be” requirements. Leaders typically view ERP implementation projects
as opportunities to transform their businesses through significant process change
efforts. At the time that needs are defined, it is important to define the process and
data flows that are to become the standard in a future ERP environment. Mapping
“to be” process flows calls for a certain expertise in integrated best-practice process
flows, and how to incorporate those flows into a company’s work environment.

4. User requirements. End-user adoption is a critical long-term ERP success factor.

A key element is system user-friendliness, which includes: navigation structures,
system-based help functions, search capabilities, consistency of user-interfaces,
interoperability with other applications, performance, and accessibility.

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5. I T architecture needs: Oftentimes, ERP is part of a broader applications

architecture. Companies should map how the various pieces connect to one-
another. A documented applications architecture should include the interface
methods, data elements, transaction volumes, and transfer frequencies.

6. E RP project roadmap and budget: An ERP implementation project is complex,

disruptive, and expensive. Companies should project a time-phased plan that plots
the system modules, extensions, and technical interfaces, as well as the resource
requirements (budgets and people). A plan should also account for internal capacity
and capability constraints. Generally, companies should plan to commit key-users to
a project for between 50% and 75% of their working time.

7. Implementation readiness, change management, and project governance:

In many cases, an organization can undertake certain pre-implementation
foundational projects to prepare itself for the project. Common examples include
cleansing and structuring master data, building the project teams, backfilling core
team members, reengineering business processes, and undergoing fundamental
ERP concept training.

8. Total cost of ownership (TCO) and return-on-investment (ROI) analyses.

Through a requirements assessment process, a company generally defines
business improvement benefits, human resources capacity changes, and project-
related costs. Many of these items have a financial impact that can be used as
inputs to an initial project investment analysis. As the project progresses though
selection and implementation, the team can track actual performance against its
forecasted and budgeted targets

An ERP is a long-term commitment so it is important to project what business problems

you may encounter in the future, early on in the process. Once your company has
decided what business processes they need to succeed, then they can start considering
software products.

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Best-practice #2: Craft an appropriate

and fair selection process
When evaluating an ERP, companies should design a process that gives them an
Ensuring
Ensuringaafair fairand
and opportunity to look closely at the elements that are important to them. Common
equitable process
equitable process areas of evaluation include: functionality, cost, support and supportability,
isiscritical.
critical.Internal
Internal development path, vendor solvency, IT architecture, and system usability. Whatever
and
andexternal
externalbiases
biases evaluation criteria are decided upon, a company should craft an appropriate and fair
introduce risks
introduce risks process. The following should be considered when building a selection plan:
that
thatdecisions
decisionswill will
be improperly
be improperly
1. Balanced, well-rounded due-diligence: Companies have access to a variety of
influenced.
influenced.
methods to evaluate vendors and their software offerings, including: paid research,
reference site visits, requests-for-proposals (RFPs), and software demonstrations.
Each method offers certain benefits, and also has certain limitations. When crafting
a selection plan, it is important that an overall due diligence approach mitigates
weaknesses inherent in each of its component methods.

2. Evaluation criteria and decision-making process: Before engaging

prospective vendors, a company should clearly define its decision-making criteria.
This includes both quantitative dimensions (e.g. cost and feature/function-fit)
and qualitative dimensions (e.g. user interface layout preferences). A well-crafted
evaluation scorecard should provide a means to effectively catalog, prioritize, and
rate each vendor and solution according to the various criteria.

3. Mutual disclosure and communications: Software buyers need confidence that

a proposed solution meets their needs, and software sellers need information to
prove that their solutions are (or are not) the right-fit. To encourage full and frank
disclosure, all parties should execute a mutual non-disclosure agreement. To help
vendors learn the requirements, buyers should consider disclosing the results of
their business assessments and making their key users available for interviews.
Also, to drive the project plan, software buyers should consider disclosing the
structure of their selection projects as well as the key decision-making criteria.

4. Procedural fairness. Ensuring a fair and equitable process is critical. External

biases introduce risks that decisions will be improperly influenced. A company
should take steps to minimize the impact of extraneous factors, and reinforce
reliance on a defined criteria and robust evaluation methodology.

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Members of a steering
committee or core
team who have
insufficient experience
with integrated ERP
systems can potentially
compromise the
effectiveness of an
ERP evaluation. In such
cases, fundamental
ERP concepts training
Ensuring a fair and
should be considered.
equitable process
is critical. Internal
and external biases
introduce risks
that decisions will
be improperly
influenced.
6 5 ERP Selection Best Practices
Best-practice #3: Establish project
governance and change management
foundations
A company needs a strong governance model to effectively manage a project
with broad cross-functional impacts. The following includes an overview of
key considerations for building high-performance teams, effectively managing
organizational change, and establishing an appropriate knowledge-base:
1. Empower the project teams. The project teams – including the Executive
Steering Committee, Core Team, and Project Management – should be governed by
predefined roles and responsibilities. The Executive Steering Committee, for example,
should be charged with decision-making and overall strategic project direction. The
Core Team should be responsible for actively participating in the various discovery,
evaluation, and validation sessions. And, Project Management should be responsible
for driving the project plan and, generally, undertaking the business analyses that
are inputs into the decision-making processes.
2.Identify a project champion. A project champion typically sits on the Executive
Steering Committee, and is responsible for ensuring continued project support
at all levels of the organization. When faced with a dip in project enthusiasm,
conflicting business priorities, or other roadblocks, a project champion takes steps
to reestablish and affirm organizational commitment.
3.Plan for active organizational change management. An organization will
encounter resistance at various points in a project. Resistance is a critical
implementation risk factor, and should be actively managed. Companies should
prepare an organizational change management plan that sets out tactics designed
to actively manage resistance, promote sustained project support, and build a
foundation for successful adoption.
4. Establish an appropriate knowledge-base. Members of a steering committee
or core team who have insufficient experience with integrated ERP systems can
potentially compromise the effectiveness of an ERP evaluation. In such cases,
fundamental ERP concepts training should be considered. Sample training course
topics can include best-practices for cross-functional business processing, master
data structures, integrated planning (including MRP), integrated financial accounting,
automation tools, and business analysis fundamentals.
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Best-practice #4: Negotiate to lower

your TCO and drive a successful
implementation
Companies should ensure that the ERP contracts adequately support their business
For perpetually interests over the long-term. The following summarizes the key contract documents
licensed software that companies will likely encounter:
annual support fees
generally range 1. Software contracts: ERP software contracts are generally structured either as
between
Ensuring 16% andand
a fair perpetual license agreements or as subscription agreements. The former typically
22% of software
equitable process applies to on-premise software that is managed onsite or with a hosting company.
license prices.
is critical. Internal In exchange for a one-time license fee,1 a company acquires a perpetual right to use
and external biases the software. Under a subscription agreement, a company pays a recurring fee in
introduce risks exchange for a right to rent software delivered as a service. This latter scenario is
that decisions will more typical of cloud-based software, where the vendor (or its partner) manages
be improperly software installation, maintenance, and availability.
influenced.
2. Maintenance and support contracts: For perpetually licensed software,
organizations typically subscribe to recurring maintenance and support services
that entitle them to help-desk support, bug fixes, product updates, and version
upgrades. Annual support fees generally range between 16% and 22% of software
license prices.2 fIn the case of subscription agreements, standard maintenance and
support services are usually baked into the recurring subscription fee (some offer
higher support levels in exchange for an incremental fee).

3. I mplementation services contracts. The services arrangements are typically

governed by a master services agreement and statement(s) of work. These
contracts define the various parties’ rights, responsibilities, and obligations with
respect to implementation. When reviewing the contracts, companies should make
sure that the proposed methodologies, deliverables, and division of responsibilities
establish a framework for project success.

1
Excluding financing or payment term arrangements.
2
Some vendors link support fees to list price, while others link the rate to negotiated price.

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Best-practice #5: When evaluating

cloud-based software, consider the
idiosyncrasies
Companies are increasingly including cloud-based ERP solutions in their evaluation
For Ensuring
companies a fair and projects. When doing so, it is important to consider factors that are idiosyncratic to
thatequitable
are subject to
process cloud, including:
regulatory standards
is critical. Internal
thatand
dictate procedural
external biases 1. The pros and cons of SaaS tenancy models. Software-as-a-service (SaaS) is
validations
introduce (e.g. ITAR,
risks offered as single-tenant or multi-tenant. The former refers to an arrangement under
21 CFR
that part 810), will
decisions which a customer gets its own instance of the software provisioned on cloud
unplanned system
be improperly infrastructure. The latter refers to multiple companies sharing a common instance
changes could create
influenced. of software, separated by virtual walls.
compliance issues.
There are pros and cons to each, and it important to understand which model is
being proposed. Single-tenant SaaS solutions typically offer customers control
over the deployment of software updates and patches. A major benefit is an ability
to assure the quality of software updates (through testing) before release to a
production environment. In multi-tenant SaaS environments, vendors manage a
single instance of the software, creating economies of scale that should result in 1)
more cost-effective solutions, and 2) more rapid innovation cycles. However, many
(but not all) multi-tenant SaaS software systems push out mandatory software
updates. For companies that are subject to regulatory standards that dictate
procedural validations (e.g. ITAR, 21 CFR part 810), unplanned system changes could
create compliance issues.

2. Reviewing privacy, security, and performance service-levels. There is little

substitute for one’s own due-diligence. Companies would be well-advised to assess
vendor redundancy practices, security policies, and uptime service-levels.)..

3. N egotiating contractual concessions to protect data. Standard form SaaS

subscription contracts generally provide the vendors with broad discretion in how
they store, process, and protect their customers’ data. Before trusting a vendor
with mission-critical business processing and sensitive data, companies should
determine whether the contractual rights and obligations are sufficient. For
actionable SaaS contract negotiation tips, please download our free whitepaper:
SaaS Contract Negotiations: Best-Practices to Protect your Company’s Data.

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Conclusion: A checklist to build a foundation for ERP

selection success
Before starting (or continuing) a project, put your company in a position to answer “yes” to the
following questions.

1. We have defined our business requirements for ERP, including:

“To be” integrated business process flows and data structures a

Project roadmap and budget a
Applications architecture a
Software support and implementation service needs a
2. We have crafted an appropriate selection process, including:

An evaluation method that offers appropriately balanced due-diligence a

A foundation for effective communication and discovery a
Promotion of a fair and equitable process a
3. We have established strong governance and change management models, including:

Empowerment of the project teams and identification of project champion a

Implementation of an organizational change management plan a
Establishment of an appropriate knowledge-base a
4. We are prepared to protect our long-term interests, including

Structuring appropriate deal terms through ERP contract negotiations a

5. We are prepared to asses factors idiosyncratic to cloud-based software, including:

The pros and cons of the various provisioning and SaaS tenancy models a
Security, privacy, and system performance a
Contractual terms and conditions that impact data management a

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About Pemeco Consulting

Pemeco Consulting is an independent, vendor neutral, consulting and advisory
firm that specializes in projects relating to enterprise software and business
operations. Its primary practice areas include: business requirements
assessments, ERP selection, ERP implementation project management,
implementation optimization, and enterprise software contract negotiations.
Since 1978, Pemeco has served more than 600 private-sector businesses and
public-sector organizations worldwide. Pemeco’s people, methodologies, and
expertise are distinguishing characteristics, and are the key drivers of the firm’s
success. The firm typically serves companies with complex organizational,
process, and system needs.

Contact our consulting team today and learn how

we can help you ensure your project’s success
(866)282-5899 | (647)499-8161 | business@pemeco.com

10 5 ERP Selection Best Practices