Curt Finch wrote an article under precisely the same title. You will find it posted here. In the article, he covers the following aspects as “factors” for consideration:
- Local or cloud
- Vendor analysis
We would like to take a look at these factors from another point of view.
Finch writes, “As businesses grow, they may acquire other companies or split into multiple divisions or have greater degrees of separation between the various parts of the company. A good ERP [Enterprise Resource Planning] system provides the tools necessary to manage a diverse, and continually diversifying, business.” We really have no disagreement with this, although we would suggest that anyone shopping for a new or replacement ERP system consider the likelihood of leveraging the software to business advantage—read: profitability—before spending money on versatility for the sake of versatility.
Local or cloud
Writer Curt Finch sums this section up by saying, “[I]t is important to select an ERP that offers the option [on-premises or cloud] your business needs.” Of course, this goes without saying. But, here again, we like to remind ERP “shoppers” and buyers that the decision to buy a replacement ERP system should not be made in a vacuum as a “technology” decision or, perhaps worse, a purely “functional” decision based on a “requirements list”—which is, too frequently, little more than a wish-list from some parts of the organization.
The decision of local versus cloud should be based on the business advantages or disadvantages of each. These calculations should be based on estimates and projections considering three key factors:
- Changes in Throughput (i.e., revenues less only truly variable costs)
- Changes in Investment (including inventories)
- Changes in Operating Expenses
It is likely that an on-premises ERP will increase Investment more, while a cloud-based ERP will have a more dramatic impact on Operating Expenses. But the real question should begin with: What advantages will one choice over the other have on our ability to increase Throughput significantly while minimizing Investment and holding the line on Operating Expenses?
If your firm starts with that question, you will be more likely to make a wise decision.
“If keeping up with your industry’s changes is like hitting a moving target, you need an ERP system that is designed from the ground up to allow in-house customization and configuration,” Finch opines. We would agree to some degree.
However, we have seen companies of all different sizes undertake customizations that probably should never have been done at all. For this reason, we would first ask the question whether a customization should be required at all.
Not long ago, we worked with a company that insisted that they needed a fully-custom sales order entry screen to support all of their “unique” (every company thinks they are entirely unique, apparently) requirements in customer service and sales operations. After listening to what they wanted to accomplish, we suggest that they stick with the out-of-the-box sales order entry screens with just a couple of easy-to-manage modifications. This suggestion, however, was roundly rejected by the firm.
After spending very nearly $100,000 in development of their fully-custom order entry system with still not all of the features they thought they needed in-place and working, they reconsidered their decision. Upon reconsideration, they decided to abandon their fully-custom order entry application and implement the out-of-the-box standard order entry screens with minor modifications.
Our recommendation to our clients is to consider any expenditure on customizations on the basis of the three metrics mentioned above—and, most importantly, in this priority order:
- Will the customizations or modifications help us increase Throughput?
- Will the customizations or modifications help us reduce Investment elsewhere in our enterprise?
- Will the customizations or modifications help us slash Operating Expenses—or, at least, hold the line on Operating Expenses—while supporting significant increases in Throughput?
If your management team will answer these questions honestly, chances are you will make wise decisions in this arena. It is most important that the matter of reductions in Operating Expenses be limited to real reductions—not “rules of thumb” or “savings” that will not be made real through layoffs or other hard changes.
We will continue this review in Part Two of this series.
Please leave your comments and questions below.