Enterprise IT Consultant Views on Technologies and Trends

Feb 28 2011   1:13AM GMT

ERP Consolidation – Look before you leap

Sasirekha R Profile: Sasirekha R

Factors to consider for ERP Consolidation

Typically companies have multiple ERP systems due to various reasons including the organization structure, mergers and acquisitions as well as localized Strategic fitness. It is estimated that less than 10% of companies implemented ERP as a single system the first time itself.

As early as 2003, SAP recommended that it is time to move to a single instance.  CIOs were asked to forget the multiple systems their companies use, rip them out, and replace them with one ERP system-with one data store-that serves the entire company, no matter how diversified or geographically spread out it is. The trend for ERP consolidation is still a valid one as seen in many companies across domains. To quote Gartner, “Decentralized Solutions have Higher TCO”.

Compelling Reasons for Single Instance

  • Regulatory compliance (like Sarbanes-Oxley Act) requires that financial reports have a verifiable audit trail. With a single instance, all of a company’s financial data will live in one application and will originate from one source, eliminating consolidation errors and greatly reducing the time it takes to close the books.
  • Having a single data source could also create new revenue opportunities and cut costs. Companies would be able to run reports that show cross-promotion opportunities, places where they could reuse equipment or leverage purchasing power.
  • Companies spend on single-instance of a module (say order management) is around 50% of the amount spent in case for multiple instances.
  • A single instance is now more realistic than it was in the past. Storage is much cheaper than it was five years ago and, thanks to the evolution of the Internet, connecting, even across oceans, is no longer a significant problem.

Is it Doable?

According to AMR Research, instance consolidation provides ERP IT operation cost savings averaging 25%. AMR also predicts that it costs about $7 million to $12 million for every billion of revenue, and that projects will still take from one to three years. But experts, analysts, consultants and CIOs all agree: Single instance is finally doable. 

Other Benefits of Single Instance System

1. Standardization in master data (customers, suppliers, materials etc.) is more easily maintained in a single instance.

2. Financial reporting will be less time consuming in single system compared to doing it across separate environments.

3. Maintenance of Basic environment (tech and DBA) and subsequent upgrades are relatively less expensive and less difficult compared to managing across multiple environments

4. Less Total Cost of Ownership – Multiple ERP instances and multiple data stores require multiple support teams. Each best-of-breed point application also has to have its own support group, user training and, in most cases, hardware.

5. With standardized master data and single operating environment, finally your data becomes your most valuable asset. Without standardized master data, the strategic reporting will not be effective, as there is no single view on the products / services as well as customers and suppliers.

Issues with arriving at a single instance system

AMR points out that during Consolidation, most companies add more functions or modules, upgrade to the latest version of the software, or convert products from another ERP vendor – adding to the cost as well as complexity (of the consolidation project). Additional costs will be incurred for new licenses, implementation fees, training, change management and hardware. According to Swanton of AMR, this all means that the return on investment for the project is about five years.

After consolidation, the risk you run is, if the system is unavailable, no one can work, but this
should be less of a problem, if it is well maintained and supported.

One of the major problems with single instance is the inability to adapt the applications to ever evolving business requirements and advances in technologies in real time so that true business value is consistently derived from a single instance implementation.

Web Services, the Alternative

Proponents of the single-instance approach, everyone from CIOs to vendors, recognize that what they’re gaining in integration they are sacrificing in functionality.

Web services could allow CIOs who have invested in best-of-breed solutions to integrate their standalone systems without either shelling out millions for single instance or tying their company’s future to a single vendor.

Another reason why some Companies are banking on Web services rather than choosing a single-instance option is that Web services would allow them to connect with business partners regardless of the partners’ ERP system.

Running Multiple Applications per Server (Hardware Consolidation only)

With Virtualization becoming a norm, reasonable cost benefits can be achieved by resorting to Hardware Consolidation only.

  • It is generally safe to run multiple instances of the same application on one OS image (e.g. multiple instances of Oracle, or multiple instances of SAP)
  • It is often safe to combine application servers and database servers onto a common server – example: SAP and Oracle; Oracle Financials and Oracle Database.

Typical Factors to be considered while deciding on consolidation:

  • Does the ERP support the languages you require on one instance?
  • Will there been certain times when the system will be required for backup or offline processing that may affect the availability in other time zones?
  • How will the system be supported – will you require 24/7 support in many languages?
  • Volume of processing to determine if one instance will be sufficient.
  • Are the long term business aims to have common processes in the major functions, e.g. finance, sales, purchasing? The point to be wary of is how many processes have to change to achieve this.
  • What is the commonality in customers, materials, vendors? If there isn’t any and unlikely to be any, then you have to question the requirement for a single instance (and all that implies for common processes and really forcing some business segments into a common environment)
  • Phased implementations may be better for a single instance, but the problem there is that timescales tend to be much longer; the business goals, management and software tend to change over time,
  • The other issue for a single instance going forward may be in the level of flexibility. If you have to update the software or a process, what is the effort required across the company? How many people have to be consulted before a change can be made; how many people would have to be notified or trained etc; what would the downtime implications be for the company?
  • If it is a global company, then time zones can cause issues in windows to run various activities.
  • Communication Vs Standardization becomes the issue – having separate instances of ERP will make communication between systems more complex. However, having the same instance will require some standardization (part numbering for example) that needs to be adopted across all users, which also can be difficult.
  • Although a multiple system implementation offers maximum innovation, it is also the most expensive and difficult to maintain and support. The multiple models cannot be successfully supported from a single centralized support group.
  • The economics of supporting and enhancing ERP will be better in a single model implementation.
  • If you have multiple instances you may find that providing financial summary data between the instances are difficult if the structure of the ledgers, trading partners, etc are not the same.

Conclusion

Consolidation of computing systems reduces administration overhead, allows better utilization of computing resources, saves physical space, and reduces the burden of asset management.

Cost savings alone cannot be business case for ERP Consolidation. Business Process Standardization, Strategic reporting across the enterprise, Effective use as Data as an asset etc. alone can justify a consolidation project that it is expensive as well as risky – and also the one that eats up the time of experts from other innovative projects.

Consolidation requires careful planning, new strategies, and the right tools – and top management support to invest in a long term project.

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