Small and Medium Enterprises and ERP Systems

Introduction

Enterprise Resource Planning (ERP) Systems have been around for more than four decades now, during each decade the ERP system needs and feature continued to evolve and become more user friendly and widely used by majority of enterprises.

On one side ERP systems continue to evolve and on other side the business needs continued to change we moved from industrialization economy to information economy and from information economy to entrepreneurs’ economy.

Entrepreneurs’ economy means it’s an era where generation x and generation y; who  want to work more independently and have their own businesses are taking entrepreneurial path of becoming entrepreneurs’ coming up with their own businesses.

This is leading to flourishing of small and medium business enterprises. These enterprises open a big window opportunity for simple and effective enterprise resource planning systems.

SME Defined

SME stands for Small and Medium Enterprise. The definition varies country by country based on every countries economic status. For Singapore SME’s before April 2011 were termed as companies that have net fixed assets of more than SGD 15 million in manufacturing area and for non-manufacturing companies with employee base of less 200 staff.

From April 2011 the definition is changed and updated to be companies that have annual sales turnover of not more than SGD 100 million or have employee base of less than 200 staff.

If we look at SME’s definition for other countries then it varies based on what suites as SME for the respective country. Although the deciding criteria remains number of staff, annual sales, net asset investment in most cases the absolute numbers differ per country. For some countries SMEs are further broken up in definition as small enterprise and medium enterprise.

Why ERP systems for SME’s

Enterprise resource planning systems have been around for more than 4 decades. In past four decades ERP systems have evolved a lot and so does the vendors offering ERP solutions evolved. From several vendors the market share came down to handful which acquired several other smaller vendors to be the vendor of choice. The big 3 names are SAP, Oracle and Microsoft.

Most of the MNCs and Big size companies have already implemented ERP solution from one of the top 3 vendors. This is leading to saturation of further implementation of ERP systems and it turns to more upgrades and managing the customer accounts.

A study of market share shows that SAP, Oracle and Microsoft are leading in market share of up to 53% in year 2010 while the remaining 47% is shared by other smaller ERP vendors. This leads to the need of firstly evolving ERP systems that fit small and medium enterprises by efficiency (simpler and faster to use) and effectiveness (low cost and scalable).

The other solid reason for ERP vendors to move in the direction of SMEs is due to the fact of growing number of SMEs. Millennium decade is the decade when Generation X are reaching their late 30’s and early 40’s leading towards becoming entrepreneurs while Generation Y phasing in and having the need to work independently leading to initiate their own businesses.

The Enterprise profile statistics report of Singapore (published on 10^th July 2009 by Singapore Department of Statistics) based on data of year 2003 to 2007 shows that Singapore has 160000 enterprises and 99% of these enterprises are small & medium enterprises (SMEs). Only 1% of enterprises are non-SMEs (large size businesses). These SMEs value added to Singapore economy between year 2003 to 2007 have increased up to 49% and theses SMEs are employing 60% of workers in the country. This shows that at least up to 49% of Singapore businesses have potential for ERP vendors to deliver meaningful solutions to.

Above statistics is just for Singapore and if this is checked worldwide then in opens up a huge market space which ERP vendors can target to deliver meaningful solutions. Given that number of SMEs will continue to grow ERP vendors are targeting to capture the market share of SMEs.

For ERP vendors there is also another plus point of entering this market and that is related to mergers, acquisitions and disentanglements. The fast changing pace of business changes lead to faster and faster acquiring, merging and disentangling of business divisions by various enterprises. In doing so if ERP vendors have suitable solutions they would be able to help transform these businesses much more smoothly and hence keep the market share growing and their customers satisfied.

ERP Systems Implementation Barriers for SME’s

ERP systems are by their nature wide ranged covering various business processes in an enterprise. As ERP systems integrate various business processes and automate them, they are seen as complex in nature. For ERP systems to be implemented and used by SMEs the biggest barriers are following.

Costs

Cost of ERP Systems from initiation to whole life cycle management is number one barrier for implementing ERP systems in SME’s

1. Small and Medium enterprises are generally cash poor with low information technology budget and spending power.
2. Generally an ERP project implementation has lot of one time implementation costs in the area of Consultants, Project Mgmt, Software Licenses, Hardware – Hosting and PCs, and User Trainings.
3. Additionally the ongoing maintenance and support costs of good ERP systems are very high for small and medium enterprises.

Time

ERP systems require a long time for implementation and changes. Time is number 2 barrier in ERP Systems implementations. Generally full implementation of ERP systems could take from 6 month to 1.5 years depending on size and complexity of enterprise and customization and integrations requested. Small and Medium Enterprises does not have so much of time to get the ERP systems implemented. Also more the time and complexity it leads to more costs which is already number one barrier for ERP systems implementation.

People (Resources)

ERP systems implementation requires various skilled resources to correctly and smoothly implement the solution. From SMEs it requires skilled business resources that know the business process very well and able to spend time with the project time during entire project life cycle. SMEs are generally small in size and its resources are multi hated (play multiple roles) leading to no or very little time to spend on ERP systems projects. This is one of the key barriers which can lead unsuccessful ERP systems implementation.

User Trainings and System Friendliness

ERP systems are wide and complex in nature and generally have too many screens, options and features. This means users need to be well trained and continued to be trained for effective use of ERP systems. SMEs being small in size have less number of users to be trained but the same users could have multiple hats leading them learn and remember several options, steps, features to successfully use ERP system. This leads to information overload and user resistance. Additionally SMEs being small in size also have faster staff change rate as very often staff joined in will learn and leave for working in bigger size organisation. This leads to continuous need for trainings of new staff.

Business Process Management

For effective configuration and installation of ERP systems, business processes of the enterprise must be well documented, maintained and owned. For SMEs the business process management is most of the time not formally documented and maintained. This leads to ERP systems configuration and implementation barrier. It also leads to higher costs of firstly documenting business processes for the enterprise and then applying the same for ERP systems implementation.

IT Department and IT Infrastructure

ERP systems require robust infrastructure and IT supporting department to be able to implement ERP solution. In SMEs IT department is generally very very lean or nonexistent. Also the IT Infrastructure for hosting and support of applications is nonexistent leading to hiring of outside service provider resources which leads to higher IT costs and as vendor resource may not have all SME IT systems knowledge could lead to unsuccessful ERP systems implementation. The barrier even continues post implementation during ERP systems upgrades and maintenance.

Strategies to Overcome Implementation Barriers

ERP Systems Implementation barriers for SMEs are Costs, Time, People, User Trainings, System Friendliness, Business Process Management, IT Department and IT Infrastructure. For overcoming these barriers ERP vendors have to come up with ERP systems that are optimized for following areas,

1. User Friendly System with e-learning training options for self-learning
2. Optimized system features, options and steps to meet the core business needs only. So only must have features enabled, rest disabled/removed to reduce usage complexity. This would lead to lesser time for training and system knowledge acquisition by enterprise staff.
3. Well documented business process management overview specific to industry segment with link to system functions/configurations which will help enterprise to see the end to end business process overview and how changes would impact configurations. This would help in reducing amount of time to be spent by enterprise staff on business process management. Also in many case SMEs could easily see the end to end process and choose to go with out of the box setup.
4. Pre-defined and success proof ERP Systems project implementation methodology that would reduce the time required at each step of the project and hence increasing the speed of implementation and reducing the costs of implementation.
5. Software offering where IT hosting, system maintenance and support is take care by ERP vendor itself. This would lead to internet based ERP solutions that would be readily available and can be easily accessed using standard web browser (thin client). This would address SME’s need as they generally don’t have IT department or have very very lean IT department and infrastructure. This would save huge IT investment costs of ERP Systems implementation. By managing the ERP Systems IT Infrastructure and Support, ERP vendors can offer ERP systems with lower costs of ownership to SMEs.

ERP Vendors have to come up with product offerings for SMEs that help address the implementation barriers. The products offered must be,

Internet hosted

• Save Client Implementation and Maintenance Costs
• Can be accessed using standard web browser (thin client)
• Use standard internet protocols and messages for communication and data exchange

Out of the box

• Standard Industry best practice business processes used in the tool
• Pre-configured for businesses to allow them to start using within days
• Configurable flexibility for businesses that want some parts to be configured

Low Cost

• Installation is ERP vendor hosted and managed means no IT Infrastructure costs to SMEs
• Pay for Use based on number of users subscribed in every month and functionality/modules they use

Above can be achieved using Software as a Service (SaaS) technology concept and ERP vendors are starting to offer products and services using SaaS technology.

Conclusion

ERP vendors are well aware of the growing number of entrepreneurs and SMEs. They also know the opportunity and growth potential in this area. ERP vendors like SAP, Oracle and Microsoft have come up with solutions that could fit SMEs. As the opportunity is seen by all IT vendors there is a lot of competition and new entrants in ERP Systems for SMEs.

For more SMEs to adopt ERP Systems its essential that ERP Systems are internet hosted, out of the box and low cost. The need and use of ERP Systems will continue to increase for SMEs till the time the systems are low cost and faster to implement and easy to use meeting SMEs’ needs. The challenge for ERP Systems effective implementation and use in SMEs still remains in below areas.

Lift and Shift

ERP Vendors have to continue to think and come up with plug and play ERP Systems. By plug and play its meant lift and shift of ERP Systems. SMEs are often acquired by other larger SMEs or larger enterprises and for such cases ERP systems and data used by SMEs should be easy to lift and shift or easily portable to other enterprise’ ERP System.

Mobility

ERP vendors also have think about SME solution to be compatible and light enough to access from mobile devices and tablets. Given the growing power of mobile devices and growing use of tablets for business this is an essential must to be brought in place.