Why exploring the roots of ERP is key to understanding its future – Part 1

We’re now entering arguably the most fascinating era for business since the steam engine accelerated the Industrial Revolution.

Rapid, combinatorial, advances in science and technology give rise to ground-breaking new technologies that proliferate more rapidly. Mobile apps, IoT, blockchain, mixed reality, 5G and artificial intelligence are all ready for prime time. These, in turn, are challenging industrial-era economic assumptions and leading to new services, new business models, new experiences and even how societies organise and are governed.

In such times of flux, it is good pause and think about what will be discarded, what will endure and what will improve – otherwise we risk misdirecting our efforts and resources in pursuit of short-lived fads. I was working with ERP systems in the mid-1990s and vividly remember contemplating a career change in 1999 at the height of the dot-com boom, because ERP seemed to be passé, heading for irrelevance and the trash can. This was until organisations realised that ecommerce businesses still had to manage inventories, orders, cash flows and people, and produce a trusted set of accounts.

ERP survived, albeit significantly changed in both scope and approach and, today, you’d be hard pressed to find an organisation of any substance that doesn’t have an ERP system sustaining the heartbeat of its business. But, that said, we find ourselves in another wave of change that will have a significant impact on how we “do ERP” so I thought it apt to explore the history of ERP and chart its evolution to where we are today; defining a new era in the Experience Economy.

ERP’s roots stretch all the way back to the 1960s and the pioneering work of Joseph Orlicky, an IBM researcher, who first came up with the idea of material requirements planning (MRP) at about the same time as the first departmental computers were beginning to emerge. Initially MRP concerned itself only with inventory requirements planning (driven by calculating and netting quantities of inventory via a bill of materials) and didn’t consider manufacturing capacity. The subsequent development of MRP2 in the early 1980s (by Oliver Wight, enabled by more powerful and cheaper computers) allowed organisations to start considering manufacturing capacity, making use of routings in addition to bills of materials.

From these early beginnings, more and more capability was added to MRP2, expanding its ambit beyond manufacturing to incorporate maintenance, quality, finance and accounting and leading Gartner to coin the term “Enterprise Resource Planning” (ERP) in 1990.

In the 1990s, ERP vendors like SAP got a boost from two distinct developments in the market. The first was the Business Process Reengineering (BPR) movement. In 1990 Michael Hammer kicked off the BPR explosion with a seminal article “Reengineering Work: Don’t Automate, Obliterate” published in the Harvard Business Review. Books followed from the likes of Hammer, James Champy and Thomas Davenport and the consulting industry embraced and accelerated the concept.

Companies quickly came to realise that to deliver efficient and effective business processes they needed integrated business systems. ERP was the answer, given that it combined many different, previously disparate, business functions into a comprehensive data model on top of a single database. Towards the end of the decade widespread adoption of ERP was further accelerated by Y2K fears in the years immediately preceding the turn of the century – companies with poorly documented legacy systems saw ERP implementations as way to de-risk the business and ensure business continuity.

 

How has ERP evolved and what are its challenges?

At the height of the dot-com boom, which began in the mid-1990s, many commentators declared ERP to be dead and buried as attention turned to ecommerce (and often flaky business models). This was short-lived as the fundamental tenets of ERP remained valid; organisations still had to manage inventories and manufacturing, pay their bills, manage their debtors and report via a profit and loss (P&L) and balance sheet. If anything, the wave of globalisation spawned by ecommerce made ERP a critical business capability.

In the last two decades it’s not just ERP systems themselves that have evolved but also the approach taken to their implementation. For example, from functional richness to usability; from on-premise to outsourced/ cloud deployment models; from thinking of ERP as an IT project to realising that it is really a business transformation project.

An ERP system is essentially the core of a modern business. It is often referred to as a system of record because, ultimately, any business activity which impacts the economic value of the business is affected by and recorded in the ERP system. Whether that is the acquisition, productive use, maintenance and depreciation of a business asset, the sale of a product or service to a customer, obligations on future cash flows created by contracts and purchase orders, or inventory dispositions and manufacturing costs – all of these need to be processed efficiently, recorded, analysed and tracked in order to manage business performance, ensure good governance and meet statutory requirements. This is the job of ERP.

Arguably the biggest challenge of an ERP system, when the full scope is considered, is that it touches every facet of the business and is thus a complex change management project. Where many ERP projects have stumbled and continue to stumble is when they are treated as IT projects and are not driven and owned by the business people who create and consume the data and processes instantiated in the ERP system. This is exacerbated when change management is underplayed.

In the last twenty years or so, ERP systems packed on more and more functionality as business requirements grew. To a large extent this “bloating” of ERP was driven by the constraints of the underlying hardware and networking technologies – requiring multiple indices and aggregates to wrest a decent level of performance from the system. Also, it was often easier and more cost-effective to build a function into ERP than to integrate and maintain an external system.

That said, we also saw new classes of more focused software grow up around the ERP core, for example customer relationship management (CRM), warehouse and transport management and supply chain optimisation systems to name but a few. In today’s digital economy much has changed since ERP was first conceived three decades ago, not least of which is the emergence of in-memory computing. This has enabled SAP to completely redesign ERP architecture; transactional and analytical capabilities now coexist on a single set of data (something unattainable in the previous disk-based era) with the added advantage that machine learning routines can be directly embedded in business processes for much higher levels of automation and user productivity.

Improvements in network performance, industry standards and integration technologies also mean that today, in pursuit of rapid innovation, it often makes more sense to develop applications focused on specific business domains or challenges, and to consume these as cloud-based services (SaaS). However, this then raises the spectre of complexity, integration challenges and redundancy, and ensuring a single version of the truth on which to govern and guide the enterprise to greater success.

This challenge becomes even greater when we start thinking about the hybrid landscapes most organisations are dealing with where they have ever-growing cloud deployments as well as their on-premise estate. In this regard, one of the things that will endure is a focus on business processes and integration. The potential of new technologies and applications can only be fully realised when they are tightly integrated into seamless, end-to-end processes. A deep understanding of how business processes work, beyond company and industry boundaries, remains a key differentiator for a company like SAP.

Whilst ERP remains a foundation (at SAP we refer to it as the Digital Core) the reality is that today all of us live in the digital, experience economy. This implies two things; data is everywhere and is a strategic asset and experiences can be fuelled by data and measured in the moment. If all of this is integrated then an organisation can continually innovate and adjust operations based on deep, accurate, timely insights in order to deliver amazing experiences.

 

The Subscription Economy – everything as a service

 ERP was born at the tail end of the Industrial Revolution at a time when the focus was still very much on the “product” – hence ERP was a logical progression from earlier MRP and MRP2. Supply chains were geared towards a “sell once” paradigm where ownership of whatever had been manufactured passed to the consumer or asset operator.

This is now changing; IoT enables the servitisation of assets – instead of buying an air-conditioning unit I can now contract for the services of filtering, heating, cooling and moving air. Nowhere is this shift from ownership of assets to consumption of services writ larger than in the IT industry where the growth rates of Amazon Web Services, Microsoft Azure, Google Cloud Platform and SAP Cloud solutions testify to a rapid shift.

This move to subscription-based services will again change ERP. The fundamentals won’t change (the things that provide services still need to be built and maintained and accounted for) but new requirements for higher volumes of smaller transactions, real-time tracking and analysis of usage to ensure optimal deployments and more flexible billing systems are just a few of the new demands that will be placed on ERP. But arguably the biggest requirement will be to blend ERP data (which tells us what is happening) with experience data (which tells us how those services are being received).

In Part 2 I will look at what this blend of data looks like and how it is defining the next era of business – the Experience Economy