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ERP consolidation can cut IT costs, but a broader business case is necessary

Companies are looking to ERP consolidation in this recession, including SAP instance consolidation, but successful projects need to be driven by more than IT cost savings.

ERP consolidation projects can cut ERP IT operations costs by more than a quarter, but they can't be justified by IT cost savings alone, according to analysts.

The projects don't simply involve combining databases; they must be driven by changes in business processes that the consolidated software can better execute.

"It's a business transformation project," said Bill Swanton, vice president, industrial products at Boston-based AMR Research. "It comes down to making it a business-led project that has the clout and the governance. The system is a catalyst."

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Over the years, many companies have implemented ERP software piecemeal on a site-by-site, country-by-country or business-unit-by-business-unit basis. They may have opened up new, global business units over the years or acquired new systems through mergers and acquisitions.

But companies get to a point where they realize that they're no longer a whole bunch of regional businesses and want to take advantage of being a global company by having shared processes and presenting one face to the customer, Swanton said. Having one, global instance of the software that runs those processes is a way to accomplish that.

Historically, bandwidth availability and high telecommunication and enterprise database costs limited companies from running a single, global ERP instance. Those are no longer obstacles, according to Ray Wang, vice president and principal analyst at Cambridge, Mass.-based Forrester Research.

Amidst the current recession, interest in ERP instance consolidation projects has remained steady, Swanton said. Many companies are framing the projects as a way to increase revenue in the next few years without adding more people. Single or consolidated instances give way to more efficient business processes such as decreased error rates and better order fulfillment, he said, and can help people reach and cover more territory.

In particular, SAP shops are looking at the projects because their environments are so complex, according to Wang. Aerospace and defense, consumer product goods and banking -- sectors that have gone through mergers and acquisitions within the last 10 years -- are showing the most interest.

How to justify an ERP consolidation project

Instance consolidation projects demand that companies standardize business processes worldwide. Strategic drivers include process-centric initiatives, a desire for more integrated analytics with which to make business decisions, infrastructure upgrades -- such as changing from Unix to Linux or the adoption of coding standards .NET or Java -- and mergers and acquisitions, according to Forrester.

For this reason, certain factors favor consolidated ERP instances. Common customers, suppliers, materials and multiple manufacturing and distribution locations for the same product in the supply chain lend themselves to being managed by a single instance of software, according to Swanton.

In turn, companies that have a history of acquisitions and are changing from a national to a global line of business organization and don't have shared services are good candidates. Those that lack visibility in their supply chains and have disparate accounting practices globally also lend themselves to single-instance ERP, according to AMR.

But businesses in which customers and suppliers differ by unit aren't always suitable for consolidation. AMR says that these companies need more flexibility in the way a system runs from unit to unit.

Companies have to understand what they're using SAP software instances for, Wang said, because any overlaps are areas in which the consolidation opportunities lie.

"You really want to get a good level of business planning in place," he said. "You also want to make sure that you are really using this as an opportunity to change how agile your business can be and how lean it can be."

Pitfalls of ERP consolidation

Instance consolidation provides ERP IT operation cost savings averaging 25%, according to AMR Research, which surveyed 60 companies in various stages of consolidation.

However, the cost savings don't come quickly.

Projects typically require reimplementation of ERP, which costs about $10 million per $1 billion of company revenue, Swanton said. Most companies add more functions or modules, upgrade to the latest version of the software, or convert products from another ERP vendor, he said. Additional costs will be incurred for new licenses, implementation fees, training, change management and hardware.

This all means that the return on investment for the project is about five years, Swanton said.

There are also risks to consider, Wang said, such as the difficulty of agreeing on standard business processes, the time and cost needed to customize the system or implement third-party functionality, and vendor complacency because of lack of competition.

Single-instance may not be the only way to go. Many companies make the mistake of planning a single-instance project only to find that they need two or three instances in case of downtime because they need their systems to run 24/7, Wang said.

"Contrary to many companies' expectations, these are large, complicated projects involving significant business process change and risk," according to AMR's report. "The reward, however, can be much more than the original project cost in personnel and inventory savings each year, producing a step change in corporate performance."

It's the governance, stupid

Companies should look to their governance structure as the primary factor in determining whether a single ERP instance or a handful of instances will result in ROI, or whether it's a better business strategy to stick with multiple instances.

Instance consolidation requires a centralized or cooperative governance model in which the decisions come from the top down. Organizations with a more cooperative governance structure, common in the public sector, may be well suited to instance consolidation, according to Forrester.

Once the company is committed to the project, Swanton advises forming a global process team. This process must involve key participants from every organization so that they will act as champions of the project, he said. Most companies use consulting firms to facilitate the process and defuse infighting.

For instance, he said, the key governance vehicle in one project was a global process team made up of upper midlevel managers from around the world and IT leads for specific processes. These teams met for weeks at a time, face to face, to work out the new business processes.

"By the end of the exercise, they all had strong ownership of the new processes and went back to their organizations to sell them," according to Swanton's report. "The dissenting managers were squeezed into compliance between the CEO at the top and their own top lieutenants telling them there was no reason that it wouldn't work."

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