Too costly and too complex. In the minds of some small and mid-size enterprises (SMEs) that’s the problem with enterprise resource planning (ERP) applications. But a 2006 study shows that the benefits of ERP for SMEs can in some cases outweigh the costs. In fact, standardizing on the SAP platform can provide financial savings for an SME, providing a 35 percent return on investment (ROI) in just five years.
That’s a key point in the study, “The Total Economic Impact of Standardizing on the SAP Platform – Focus: Small to Mid-Sized Enterprise.” This study was commissioned by SAP from Forrester Consulting, and produced by Forrester project directors Jon Erickson and Shaheen Zojwalla.
“Based on information collected in interviews with five current small and mid-size SAP customers, Forrester found that organizations that have standardized can realize benefits in the form of savings from consolidation, improved efficiencies, and improved transparency and visibility,” it says.
The study yields three key findings about the impact of standardizing with SAP, starting with the noteworthy 35 percent five year ROI. The second finding is that SMEs using SAP can benefit via reduced technology costs, improved operations and other efficiencies. And the third finding is about costs. The study breaks out the incremental costs for licensing, maintenance, integration and so on, so SMEs can get an idea of where their money will go in an ERP project.
Forrester uses interviews and data from five SAP customers to create a composite SME for the study. That composite is a U.S.-based manufacturing company with approximately 1,000 employees, distribution centers across the globe, and $150 million in annual revenue. After risk-adjusting the total costs and benefits, Forrester finds that such a company could spend $5.8 million on SAP and could benefit by $7.8 million, a $2 million net savings.
Forrester followed a rigorous process and customized approach for its study. First, it used its trademarked Forrester Total Economic Impact (TEI) methodology, to evaluate costs and cost reduction, the value of increasing the effectiveness of business processes via technology, and the risk of doing so.
Then it followed a customized four-step approach. It interviewed SAP personnel to get an understanding of what they see as SAP’s value proposition for SMEs. Then it interviewed five SMES that are standardizing on SAP and constructed a financial model representative of those SAP customer interviews. Finally, it created a composite organization (characteristics outlined above), for which to analyze data.
The resulting study data illustrates the financial impact of moving from a distributed environment, where individual business units use their own platforms, to an environment where there is standardization around a single SAP platform. The goal, Forrester notes, is to provide SMEs a framework for evaluating such a transition.
For the study Forrester assumed several things about the composite organization. It was assumed to have five separate legacy systems for finance, inventory management, human resources and so on. It was also assumed that the systems were integrated so they could share information, a situation that created an ongoing development and maintenance challenge.
Also, it was assumed that the organization had several reasons to eliminate its siloed environment. Externally, a wave of acquisitions had increased its IT complexity, creating an even greater challenge managing multiple and diverse platforms. Internally, there was a change in IT management along with a mandate to reduce IT costs and improve IT efficiency. And finally, the organization wanted to be able to build its standards process across different technology areas. These characteristics are a typical situation for a growing SME.
Quantifiable ROI and benefits
But how does the 35 percent ROI after five years break down?
The study finds that 58 percent of the 35 percent ROI comes from savings in licensing fees. Since the organization only pays one set of fees to one vendor, the overall cost is reduced dramatically. “For the composite organization, the multiple licenses are assumed to cost approximately $300,000 per year each. For the five systems, the total savings is estimated to be approximately $1,500,000 per year,” the study says.
Another big improvement comes from headcount reduction. “Forrester assumes the organization can reduce its operations and support requirements for the consolidated environment as a result of consolidation of redundant systems,” it says. Within the ROI data, 26 percent of the overall 35 percent ROI came as a result of controlling the growth of staff or shifting staff to more value added activities. Many SMEs focus on controlling or cutting headcount as a means to keep costs under control.
While the outcomes show that the results may indeed justify the costs, the study also notes that not all SMEs will achieve similar results. Forrester states that the purpose of the study is to provide a framework for evaluating the potential financial impact of standardizing on a single platform, but warns SMEs to do thorough research before making an ERP decision. The study also notes the initial payback period for the cost of the implementation takes 2.8 years. That’s something that any SME should be aware of before making an ERP decision.
Better than break-even
The study found that the composite SME saves 8 percent in inventory costs. “The use of a single platform eliminates the need for integration between systems and data reconciliation. This streamlined data tracking allows the organization to carry less inventory, which in turn allows for more free cash for the business,” it says.
Benefits also come from training savings, improvements in revenue recognition and financial records, as well as a small savings in hardware costs. Here’s what the study had to say about revenue recognition: “Assuming that the company’s total annual revenue is $150,000,000, and that the on-time shipments are at 60 percent, a 25 percent improvement in on time shipping leads to a rate of 75 percent; an additional $22,500,000 in revenue is recognized on time, which, with a cost of capital of 10 percent, works out to $187,500 per year.” The ROI section concludes that the average time it takes for an organization to receive positive payback on their standardized platform investment was between 12 and 18 months.
Forrester notes that higher ROIs may be generated by SMEs with certain characteristics. Those include SMEs that can drive standardization quickly. They break down silos, enact business process change, and have a strong management directive or external catalyst, such as a merger.
They also include the presence of many different legacy systems at the start of the standardization project. That’s because when they go from siloed to standardized systems they receive benefits on higher economies of scale compared to those with a limited existing footprint.
Costs and cumulative savings
Of course, there are inherent incremental costs in creating a standardized environment, including licensing fees, up-front planning and implementation costs, ongoing support and maintenance costs, services fees and training costs. Forrester breaks down those costs into yearly increments, starting with an initial cost of $3.2 million for the composite SME. Tracking the costs and benefits over the years, the study shows how savings outweigh costs over time.
The conclusion of the Forrester study includes a statement that will sound like music to an SME’s ears: “Based on these findings, companies looking to standardize on a single platform can see the potential of significant IT and organizational benefits. Using the TEI framework, many companies may find the potential for a compelling business case to make such an investment.”