Enterprise resource planning (ERP) companies are winning over business owners by showing how one single database can be used to manage and help automate multiple parts of the business.
What happens when you get too big for your accounting software
? Once a company evolves from a small business into the maturity of a mid-market enterprise, the trusty old accounting program can start to feel a little small.
The trigger may be running a business in multiple locations or countries, the depth of reporting required, or the need for a platform to sustain long-term growth, says Craig Stanmore, chief executive of Enspira Financial, an advisory accounting firm that specialises in supporting small to mid-size clients.
At some point the business owner will need to sit down with the chief financial officer and have that talk: “It’s time to think about ERP”.
This acronym, which stands for enterprise resource planning, can strike fear in the heart of a CFO because, by its very nature, it is a big undertaking. ERP is a term that describes a software suite of modules that run several functions within a company. The modules can include multi-entity accounting, order tracking, advanced inventory and warehouse management, project management, e-commerce and more.
Definitions of ERP by vendors such as NetSuite and SAP suggest the term emerged in the 1960s from the world of manufacturing. Making things can be incredibly complex – building a bicycle, for example, involves myriad materials, kits and parts. Manufacturers need a way to track the inputs required to make a product, the number and type of products they create, the quantity and type of products a customer orders, and whether those customers have paid their invoices.
You can track all of these things with spreadsheets or different applications but it quickly becomes confusing; errors creep in, which can cost a business time and money. The errors can become so large – a critical cashflow shortage, for instance – that it can wind up the company.
Hence the birth of the ERP, a single database that tracks all these things in one place.
Managing the business with ERP
There is an industry push to rename ERP as a business management system (BMS). This is a more accurate description, given that many different industries such as professional services and retail also like the idea of one app to rule all functions.
Previously, ERPs were thought of as expensive, complex systems that took too long to install. Views from clients gathered this year by research firm Gartner show that potential customers feel overwhelmed by the complexity of what’s on offer and how it fits their needs. Those who had taken the leap into ERP reported that the implementation ran over time, over budget and their staff had trouble making it all work. However, the big ERP players are working to change all that.
Xero Australia’s managing director, Trent Innes, says modern-day ERP systems are more focused on the user, costs have reduced, and systems are easier to get up and running.
“Traditionally, most ERP systems were monolithic models and quite antiquated. They tried to be everything to everyone, but modern-day ERP systems now give you the chance to choose the application that’s best suited to you,” he says.
“The barrier to entry is also a lot lower. Historically, ERP systems required large upfront investment in infrastructure and implementation, whereas now they’re just different applications. The cost to deploy is much lower, as they’re mostly subscription based and you only pay for what you need.”
Taking ERPs online
Just as accounting software downloaded to your desktop is giving way to accounting software in your browser, ERPs are also moving online. In the process they are becoming easier to set up, easier to operate and cheaper to buy. This makes ERPs attractive not just to large enterprises, but to mid-size and even small businesses.
This is good news for business owners.
One big advantage of an online (or cloud) ERP is that you don’t need to buy a server to run it. Whether you have one office or offices in different states or countries, staff can log in and immediately access the software.
As with small business accounting software, the shift to online is shaking up the established order. Germany-headquartered SAP has long dominated the ERP market, the bulk of which runs on servers in companies’ offices. (This is often referred to as on-premise ERP, as opposed to online.)
SAP’s competitors are Microsoft, Oracle and Infor. At their heels are a host of smaller second- and third-tier ERP companies, some that cater to specific industries.
In the past five years, SAP’s lead has been shrinking, while the number of customers relying on second- and third-tier vendors has been growing, says the 2016 Report on ERP Systems and Enterprise Software by consultancy Panorama Business Solutions. In addition, cloud ERP installations more than doubled from 11 per cent to 27 per cent in the past year.
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Oracle bought NetSuite in November for US$9.3 billion, boosting its online horizons. SAP has slowly been developing SAP Business ByDesign, to challenge this merge. Meanwhile, Microsoft sells Microsoft Dynamics Online, a cloud ERP that will replace its on-premise software Great Plains.
The remarkable thing about these cloud versions is that the software companies are selling them to businesses of all sizes.
SAP’s on-premise ERPs are commonly found running airports and government departments. Yet SAP markets its Business ByDesign as “ERP for mid-market companies”, with licences starting at just 10 users. Installation can cost less than A$30,000, says Stuart O’Neill, head of business for SAP Hybris Australia and New Zealand.
“Cloud-based ERPs are bringing down the cost per user and bringing huge amounts of capability to the user base. It’s democratising access to ERP,” he says. Business ByDesign, says O’Neill, is used by 1300 companies globally – 40 of them in Australia and New Zealand – ranging in size from five users to 2000 users.
NetSuite, the longest-running cloud ERP, has more than 40,000 customers globally. In April, it announced a rapid implementation program called SuiteSuccess that aims to install NetSuite in 100 days. The program includes a library of best-practice processes developed for eight industries, which customers can use to replace their existing methods.
NetSuite claims the program can slash the time needed to install the software and, consequently, the cost. The company has used SuiteSuccess to sell and roll out the ERP to 300 customers and had only four customers that wanted significant changes, says Jim McGeever, Oracle NetSuite Global Business Unit executive vice president.
Cloud accounting crossover
In Australia, MYOB has rebadged a cloud ERP called Acumatica as MYOB Advanced. MYOB localised Advanced for GST, and added a local payroll and HR module called MYOB People.
However, the company’s most interesting ERP move is its decision to add bank feeds through MYOB BankLink, just like MYOB AccountRight.
Automated bank feeds have made a huge difference to small businesses by shrinking the time taken to reconcile bank accounts. ERP companies have focused instead on streamlining processes between departments or modules, rather than automating accounting.
MYOB’s team initially thought bank feeds wouldn’t be of interest to its ERP customers, says Andrew Birch, MYOB chief operating officer and former general manager of industry solutions. It turned out that Advanced customers did like it.
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One retailer that made 200 deposits a day to its bank account used to take several hours a day to enter debtors and reconcile payments. Bank feeds eliminated most of that work, saving the company 10 hours of labour a week.
The online software revolution has not only brought ERP to smaller businesses. Xero is betting larger businesses will be able to hang onto their SME accounting software longer by connecting to a library of compatible apps. Xero refers to the apps as add-ons, but these app ecosystems are common to all cloud accounting software.
MYOB says that many of the innovations in cloud accounting will be welcomed in ERP. In addition, those innovations will be hard to give up for companies thinking about upgrading.
“As businesses grow, they really don’t want to spend A$50,000 minimum or even a few hundred thousand dollars on a big ERP suite. That’s a horrible place to play,” Xero chief executive Rod Drury said on stage at Xerocon in Brisbane in 2016. “We think the commodity general ledger will suit larger and larger businesses. They’ll invest in add-ons that just suit their line of business.”
With ERP systems getting ever easier and more affordable to use, the sector is poised for growth.
Kogan’s move to SAP
When e-commerce company Kogan
moved from using cloud accounting system Xero to SAP in August 2015, it was another step in a decade of finding the most appropriate software to run the business.
Kogan chief financial officer and minority shareholder, David Shafer, says the business started out in 2006 using Excel spreadsheets, before moving to MYOB. It then moved to Xero and an inventory app called Unleashed. Unleashed managed all inventory and transactions – several thousand a week – and rolled each day’s transactions into a single entry in Xero. Kogan used the Xero-Unleashed combination to push through more than AU$100 million of stock a year.
As the business grew, Shafer says he was using several spreadsheets to keep track of data outside of Xero and to carry out more complex reporting. He figured that an ERP would reduce the need for spreadsheets and the number of apps required to run the business by moving inventory, warehousing, finance and reporting to one database.
He considered several ERPs, including NetSuite and Microsoft, before deciding on SAP Business One, an on-premise system. “It required the least amount of customisation for what we wanted to do,” Shafer says.
Although it’s an on-premise system, Kogan’s SAP software is hosted externally by Amazon Web Services, which uses virtual servers to run large applications from its Sydney datacentre.
Due to the nature of e-commerce, it wasn’t possible to run a comparable pilot. Instead, Shafer engaged a systems integrator to customise the software. However, when the day came to cut over to the new system, errors in the code changed the orders sent out to customers.
The e-commerce company received complaints that it was delivering the wrong products, including people receiving larger televisions than they had paid for.
Shafer quickly hired a small team of SAP experts, who started over and recoded the software to work properly. The implementation, says Shafer, has been a success and has increased the efficiency of inventory management and delivery.
Kogan’s turnover after making the transition to SAP was A$200 million, which shows that sizeable companies are making the change and reaping the benefits.
Bank feeds work their magic
JCurve Solutions, a NetSuite partner that sells a small business edition called JCurve ERP, is trialling bank feeds from Belgian-based ERP Fast Forward and a finance broker in Australia, hoping it will help speed up bank reconciliation for customers.
Unlike bank feeds in SME accounting software that match transactions, the ERP bank feeds being trialled are a little more sophisticated.
For instance, if a company buys a printer from office and stationery retailer Officeworks on a corporate credit card or by invoice, the bank feed will import the transaction and try to match it with an existing purchase order or bill. If nothing in the record exists, the ERP system will by default create a journal entry, a payment to a bill, a payment to an invoice or a credit to a customer.
If a bill is created, the ERP can also create a purchase order against it. NetSuite displays the recommended transaction in an approval screen, with highlighted exceptions for the user to adjust.
“The efficiencies from bank feeds are in payment processing rather than bank reconciliation,” says Peter Choo, product strategy manager at JCurve.
JCurve is trialling bank feed-powered payment processing with four customers: two distributors and two online retailers. Choo expects the B2B distributors to benefit as much as the retailers, even though the latter process hundreds more transactions a day.
“If you were spending four to eight hours per week reconciling those statements against payments manually, payment processing would bring it down to possibly less than an hour,” Choo says.
Sholto Macpherson is an accounting software analyst and consultant. He publishes at Digital First.
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