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Te High Cost ofChange for ERPWhat Does It Costto Keep Up to Date?

A report prepared byCFO Research Services incollaboration with Agresso


2/11 cfo publishing corp. March 1

Quantifying the 2cost of change

Keeping pace with 3business changes

Cost and complexity 4Level of effort 6

Balancing complexity 7and valueSponsors perspective 8

Contents


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Te High Cost of Change for ERP

About this report

We collected 157 responses from senior finance execu-tives, representing primarily midsize companies acrossthe United States, in a wide range of industries:

Annual revenueLess than $100 million 3%

$100 million to $250 million 26%

$250 million to $500 million 22%

$500 million to $1 billion 16%

$1 billion+ 34%

TitleChief financial officer 28%

Director of finance 20%

Controller 17%

VP of finance 17%

EVP or SVP of finance 10%

Treasurer 3%

Other 6%

IndustryWholesale/Retail trade 13%

Financial services/Real estate/ Insurance 8%

Business/Professional services 8%

Chemicals/Energy/Utilities 8%

Health care 7%

Auto/Industrial/Manufacturing 7%

Architecture/Engineering/Construction 6%

Transportation/Warehousing 6%

Education 6%

Pharmaceuticals/Biotechnology/ Life sciences 5%

Media/Entertainment/Travel/Leisure 4%

IT services 4%

Hardware/Software/Networking 4%

Food/Beverages/Consumer packaged goods 4%

Aerospace/Defense 4%

Government/Public sector/Nonprofit 3%

Other 3%

Note: Percentages may not total 100%, due to rounding.

Quantifying thecost of change

Businesses of all sizes and in all industries are findingit diffi cult and costly to continue to update and modifyenterprise resource planning (ERP) systems after theyhave been installed. Te initial investment to acquireand implement an ERP system is substantial. But evenafter the system is up and running, the costs continueto mount as the business evolves, requiring the ERPsystem to evolve as well to keep pace.

As time goes on, the business processes and compo-nents for which a company customized its ERP systemat implementation are not necessarily the sameprocesses and components it needs to track today

Companies grow and change, acquiring new businesslines and divesting themselves of others. Tey opennew facilities or consolidate operations, add partnersor outsource functions, centralize or decentralize theback offi ce. Reporting requirements increase as regulatory bodies heighten oversight and as companiesexpand across borders. In short, businesses changeand as they do, so do managements informationneeds.

Te question isnt whether a typical ERP solutionsupports change, but rather, at what cost? How quicklycan adjustments be made, and what stresses do suchchanges place on the organization? o examine thesequestions, CFO Research Services, in collaborationwith Agresso, surveyed senior finance executivesabout their companies experiences in modifyingtheir existing ERP systems. Focusing primarily onmidsize companiesthose with $100 million to$1 billion in annual revenueswe gathered infor-mation on the continuing costs, time, and effortrequired to maintain, modify, and update ERP systemspost-implementation.

Te qet t wete tyERP t t e, t

te, t wt t?

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What Does It Cost to Keep Up to Date?

Keeping pace withbusiness changes

How much does it cost to keep an ERP system up todate? According to our survey respondents, the answeris: a lot. Te cost of ERP does not end with implemen-tation. Tis research program documents the time andeffort many companies are expending on post-imple-mentation modifications in order to adapt their ERPsystems to their business needs. Above and beyond theinitial cost of implementation, companies are spendingconsiderable amounts to customize the product totheir businesses, add modules and functionality,rewrite applications, modify outputs, improve systemperformance, update the technology, and, in general,upgrade the system so that it keeps pace with changes

in the business.

Te initial cost of ERP itself is substantial. We first askedsenior finance executives to estimate their companiesinitial outlay to acquire and implement ERP systems.Nine out of ten respondents (92%) spent a minimumof $250,000 for the license, service, and first yearsmaintenance on their current ERP system; half of therespondents spent more than $1 million. Te actualcost to the company of getting the ERP system up andrunning is even higher; these estimates do not includethe internal costs for implementing the system, such asfor project planning and management, user training,and I support.

But most companies also are paying to adapt their ERPsystems to their businesses. We found that one of thebiggest drivers of change for companies is the need tocustomize their ERP systems to their business processes.Eight out of ten respondents (80%) report that theircompanies have customized their ERP systems eithermoderately or extensively in order to adapt the productto the companys unique business requirements.

We also found that the need to customize ERP systems

to individual business requirements adds to the ongoingcost of maintaining the system. In an open-responsequestion, many finance executives commented on thediffi culty of applying technology upgrades to a systemthat has been customized. In one instance, the directorof finance for a company in the biotechnology industryadvises, Limit the amount of customization to theactual system code, [as customization] then requiressubstantially more complexity and cost in the futurewhen any modifications or upgrades are required.

Te cost of ERP, then, does not end with the installa-tionwhen evaluating ERP systems, companies needto look well beyond their sticker price. Many compa-niesof all sizes and in all industriesfind it both diffi -

cult and costly to continue to update their ERP systemsto support change after they have installed them. Oursurvey reveals the extent of the costs required each yearto continue to maintain and modify ERP systems.

We evt ERP ytem,

me eed t k we

eyd te tke e.

Many of the ongoing modifications to ERP systems

are needed to allow the system to keep pace withchanges in the business. We asked finance executiveswhat kinds of changes their companies had made totheir ERP systems since installation. Tree-quartersof the respondents (76%) report that they have addedmodules or functionality to their ERP systems toenhance their utility. Te next most common types ofchanges are modifications made to integrate or consol-idate different systems and applications (67%), followedby rewriting existing ERP applications (61%).

Some respondents companies have undertaken evenmore extensive changes to their installed systems.One-third of the respondents (33%) say theircompanies have reconfigured their entire ERPsystem, entailing system-wide modification, while17% report that their companies have reimplementedtheir existing ERP systems, as the changes requiredwere so extensive that the system vendors had tomodify and reinstall the systems.

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20 %

36% 33 %

26 %

25 %19%

26 %

18%24%

15 %14%

10 %

14 % 7 % 14%

0%

20%

40%

60%

80%

100%

Less than $100,000 $100,000-$250,000 $250,000-$500,000

$500,000-$1,000,000 Greater than $1,000,000

$475,500 $424,750 $339,250 $1.24M

Figure 1. Many midsize companies spend more than$1 million a year to continue to modify and updatetheir ERP systems.In your own estimation, what are the ongoing annual costs ofmaintaining and modifying your ERP system?

Estimatedweightedaverage:

Ongoing Annual Costs

Total:

Annual internal cost formodifying ERP system(e.g., salaries for IT,finance, user training, etc.)

Percentage of respondentsNote: Percentages may not total 100%, due to rounding.

Annual external cost formodifying ERP system(e.g., paid to third-partyIT vendors or contractors)

Annual maintenanceand support fee

Cost and complexity

Changes such as these come at a cost. o gauge the levelof that cost, we asked finance executives to estimate

how much their companies spent each year to modifytheir ERP systems post-implementation. Respondentsprovided estimates for three different components ofthe total annual cost of maintaining and updating ERPsystems:

Ite t how much of its own resources(salaries for I, finance, user training, projectmanagement, etc.) a company expends eachyear on maintaining, updating, and modifyingERP

Exte tthe annual cost of third-party

services (I vendors, contractors, etc.) employedto help a company adapt its ERP system

Mtee d t ee paid annuallyto the application vendor

Responses show that a typical company in our surveymay spend an average of more than $1.2 million eachyear to maintain, modify, and update its ERP system. (SeeFigure 1.) For each of the three components, 20-30% of

respondents estimate annual costs at more than $500,000per year. Over half of the respondents estimate internacosts alone at between $100,000 and $500,000 each yearMore than 40% of respondents estimate costs of between$100,000 and $500,000 separately for external costs andfor maintenance and support fees.

Calculating weighted averages for each component1 showsthat the annual combined cost for internal and externalresources needed to make changes to the ERP system canbe nearly twice the amount of annual maintenance andsupport fees a company pays. Survey responses indicatethat the largest cost component is for internal resources

Surveyed companies on average spend an estimated$475,500 annually on internal resources, compared withan average of $339,250 spent externally. Respondentsreport an estimated weighted average annual cost o$424,750 for maintenance and support fees.

We then asked finance executives to tell us what kindsof changes in their businesses called for different levelsof change to their ERP systems: substantial, moderateand minor ERP modifications. Finance executivesreplies indicate that new or changed business processesrequire extensive ERP modifications more often thanother factors. (See Figure 2.) Slightly more than 60% ofrespondents say that their companies have made eithermoderate or substantial changes to their ERP systemsin order to adapt them to changes in business processesAlmost half (49%) of respondents indicate that changesin financial management policies and practicesforexample, a change in accounting methodswere respon-sible for moderate or substantial modifications to theirERP systems.

Other factorsreorganization, mergers and acquisitionsand meeting regulatory requirementsalso promptedERP modifications at some level for 70-80% of respon-

dents. Tese types of changes in a company may necessi-tate business and financial management changes as wellTese responses show that finance executives recognizethe need to continue to modify ERP systems to keepthem on pace with many different kinds of changes to thebusiness.

1We multiplied the midpoint of the ranges shown in Figure 1 by the percentageof respondents selecting that range and totaled the results. For the purpose ofestimation, we assumed a cost of $50,000 for the lowest range and a cost of$1.5 million for the highest range.



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In a separate question, we asked what kinds of changeswere being made to different elements of ERP systems.We found that every aspect of ERP was subject to somelevel of modification. (See Figure 3.) Certain elementssuch as user permissions, security, and controls, orthe structure of the information model itselfoftenrequire only minor modification. Other aspects ofERP relating more directly to end user requirementssuch as business processes (the structured steps forexecuting business activities), and reporting andanalytical requirementsare subject to more-exten-sive modifications more often.

We see, then, that the continuing need to adaptERP systems to business changes is often a highlycomplex undertaking. ERP modifications can be

major, moderate, or minor, but they are ubiquitous.Even relatively minor business changes can compelalteration in many different dimensions of an ERPsystem. Te result is the need to manage projectsinvolving a multitude of interrelated moving parts.

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21 %

13 %11%

7%11%

40%36%

28%31%

27%

33 %

37 %

43%

33%

42%

7%

14%

19%

30 %

20 %

0%

10 %

20 %

30 %

40%

50% 61% 49%

39% 38% 38%

Figure 2. A range of changes in the business underlie a continuing need to adapt ERP systems,but new or changed business processes drive companies to make more-extensive modificationsthan do other factors.What level of modification have the following factors required your company to make in its ERP system since its installation?

New or changed

business processes

Financial management-

driven change (e.g.,change in accountingmethods)

Company reorganization/

restructuring

Mergers or acquisitions Regulatory requirements

Percentage of all respondentsNote: Percentages may not total 100%, due to rounding.

Combined Moderate/Substantial:

Required substantial modification to ERP system Required moderate modification to ERP system

Required minor modification to ERP system Dont know/NA

17 %

13 %

13 %

22%

18 %

32 %

38 %

40 %

42%

48%

42%

37 %

28%

32 %

28 %

1

18%

0% 20% 40% 60% 80%

Figure 3. All elements of the ERP system are subject to solevel of modification.What level of modification has your company made in each of the followin

dimensions of its ERP system since its installation?


Business processes

Reporting/analyticalrequirements

Business rulesand/or algorithms

Structure of theinformation model

User permissions,security, and controls

Substantialmodification

Moderatemodification

Minormodification

Dontknow/



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Level of effort

Te complexity of changing an ERP system isreflected in the level of effort needed to accom-

plish those changes. Survey results show that, inmany cases, companies ERP change initiatives fallshort. Our survey shows that ERP change projectsfrequently fai l to be completed on schedule, with 41%of respondents saying that modifications took longerthan planned to complete. (See Figure 4.) Projectcost is cited second most frequently as a source ofdissatisfaction.We asked survey respondents to estimate the level ofeffort, measured in person-days, typically requiredfor their companies to make each of the threelevels of change to their ERP systemssubstan-

tial, moderate, and minor changes. We found thatmaking even minor modifications could consumeseveral person-days worth of resources, while majorefforts may take three working months or even moreto complete.

Table 1. Estimated level of effort to modifyERP systems (in person-days)

Quartiles To makesubstantialmodifications

To makemoderatemodifications

To makeminormodifications

25% 16.5person-days

7person-days

3person-days

50% (median) 60person-days

20person-days

7person-days

75% 190person-days

90person-days

25person-days

As shown in able 1, half of the respondents whoprovided time estimates say that making substan-tial modifications takes 60 person-days (approxi-mately three working months) or more of effort.Respondents in the upper quartile put the effort to

make substantial modifications at a minimum of 190person-days.

Half of all respondents say that moderate modifica-tions take more than 20 person-days (approximatelyone working month) of effort. Even the effort tomake minor modifications is not inconsequential.Half of the respondents say that minor modificationsrequire more than 7 person-days; only a third of therespondents think that they can complete minormodifications with less than a full weeks worth (5person-days) of effort.

I my e, me ERP

e ttve t.

1 6 %

1 7 %

1 7 %

25 %

4 1 %

65 %

6 1 %

69 %

66 %

4 9 %

20 %

22 %

14 %

8 %

10 %

0 % 20 % 40% 60 % 80 % 1 0 0 %

igure 4. The time to complete change projects, and the costnvolved, are the two largest sources of dissatisfaction.ow satisfied have you been with the overall implementation of modifications

o your ERP system?


Duration of project(completed on time)

Cost of project (completedwithin budget)

External workingtionships (with contracted

services or vendors)

Business or operatingresults from the change

(performed as designed)

Internal workingrelationships (between

usiness units or functions)

Worse than expected As expected Better than expected



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Balancing complexityand value

When deciding whether to change their companiesERP systems, finance executives must weigh the cost,complexity, and diffi culty of modifying these systemsagainst the business benefits their companies wouldrealize from the change. When asked to select themajor obstacles to modifying ERP systems, 57% offinance executives in our survey cite the complexityof making these changes, and 52% select the cost ofchange. (See Figure 5.) Many respondents also citeother challengesdisruption of operational and finan-cial processes (41%), diffi culties in coordinating amongfinance, I, and business managers (39%), and diffi cultyin demonstrating the business case for change (39%).

Tis diffi culty in making ERP system change easily,cost effectively, and within a reasonable time is shapingbusiness process decisionsand not for the better. Inan open-response question, we asked finance executivesto tell us, in their own words, the best ways to reduceor control the cost of change to ERP systems. Muchof the advice given is typical of most technologychange efforts: plan better, execute better, managebetter, and involve end users earlier and more often.

However, a number of finance executives offer adifferent perspective. Tese executives indicate thatthe cost and complexity entailed by changes to acustomized ERP application can be prohibitive. Fromthis perspective, the less customization you do, thebetter off you are. A treasurer in the chemicals/energyindustry comments on the level of complexity thatcustomization requires: [You must] have a full-blownstrategic plan for installing ERPmapping everycurrent business process to how that process would beconducted within the ERP system.

Complexity and customization beget cost and increaserisk. Some companies choose to adapt their busi-

ness processes to take better advantage of the built-incapabilities and strengths of the ERP solution they areimplementing, rather than undertaking the complexprocess of adapting the ERP system to their businessprocesses. A director of finance writes, Our policyis that we will not make custom modifications to thesoftware; we will modify the business process if neces-sary or create an offl ine procedure. Similarly, a CFOfrom the manufacturing industry advises, Change your processes to best practices and follow shrink-

wrapped solutions. A controller from the manufac-turing industy states simply, You need to implement[an ERP system that is] as plain vanilla as possible.

In evaluating the costs and benefits of an ERP solu-tion, however, finance executives should be able todetermine whether a plain vanilla solution is actu-ally the optimal solution for their business. In tryingtimes, management often intensifies its focus on theeffi ciency and cost of business processes. Particularlywhen economic and financial circumstances seem tochange daily, the ease with which a company can adaptits information capabilities to changing circumstancescould make a difference in how well it meets chal-lenging performance targets and positions itself for thenext growth period. Finance executives emphasize theimportance of considering the tradeoffs they may have

to make among many critical business requirementswhen they evaluate the costs and benefits of ERP:flexibility, scope, effi ciency, and the resources requiredto keep the system on pace with a rapidly changingbusiness environment.

8%

29%

39 %

39 %

41%

52 %

0% 2 0% 4 0%

Figure 5. Complexity and cost are the two primarychallenges to successfully modifying ERP systems.In your experience, which of the following factors have been majorobstacles to successfully modifying your companys ERP system?

Percentage of respondentsNote: Respondents were asked to select all that a

Complexity of ERP modification

Cost of ERP modification

Disruption of operational andfinancial processes

Difficulty in managing ERPprojects among finance, IT, and

line of business managers

Difficulty in demonstrating thebusiness case for change

Projected risk tied to technologyand current systems

Other



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Te VIA ArchitectureAdvantage

Agresso is a $500M+ mid-market enterprise resourceplanning (ERP) company and one of the top fiveproviders of ERP solutions for professional servicesand public sector organizations. Agresso offers auniquely integrated data/process/delivery architec-ture called VIA that is designed specifically forBusinesses Living IN Change (BLINC) and thathas built Agressos reputation as Te ERP MarketsDefinition of Agility. VIA allows an unlimitedamount of ongoing, post-implementation changeswhile forgoing the external I costs and intervention that this research program shows arety pical ly required to modify most installed systems.

Agresso is differentat the fundamental architec-ture level. Its unique VIA architecture is targetedto dynamic mid-market public sector and profes-sional service organizations. VIA is a reverse-engi-neered (data out versus data in) architecture thatis capturing the interest and attention of both tech-nical and non-technical C-level executives due to itschange capabilities. VIA offers a critical businesssupport that has been lacking for decades in moderntechnology solutions: t-implementation agility;the ability for business users to quickly and cost-effectively make unlimited changes to their businessoperations AFER the Agresso solution is installed.

Te implications of the VIA advantage are apparentnot only to CIOs, but to CEOs, COOs, and CFOsas well. Bottom-line watchers fully understand thenegative financial implications of continuallyhaving to swap out technology platforms withother solutions, whereas an Agresso purchase deci-sion insulates the buyer organization from havingto continually pay for the latest architecturalplatform. Agresso absorbs the newest technolo-gies, as easily as it absorbed mainframe plat-

forms some 25 years agoand absorbs SOA today.

Making fast corrections, additions, or movementsto cost centersbe they related to people, infra-structure, or service/solution-specificis incred-ibly easy with Agresso VIA. Te graphical drag

and drop action and tree structures, which are soeveryday familiar to more than a decade of busi-ness software users, provide direct access to VIAsdata, business processes, and delivery (reporting/

analytics). Net/net: functional management cancompletely bypass the need for I intervention tocreate new divisions; collapse, expand, or appendworkgroups; experiment with the results and thenimmediately expedite and implement those changes.

Tese cost center changes completely and automati-cally incorporate the business processes that accom-pany the data. Preferred, customized, or any otherorganizational uniqueness baked into establishedworkflows moves in lockstep with the reorganized ortransferred data. A change made by business managersin any one of those areas flows intelligently and

immediately to the changed cost structurewhilepreserving the trailing history for audit purposes.

Te repeated cycle of cost and time savings withchange management empowerment at the busi-ness management/user level directly hits thebottom line positively AND frees up those criticallyimportant I resources for larger hardware ornetworking planning and requirements. High-impact, margin-increasing business changecapabilities are a key differentiator of the AgressoVIA platform. In simplest terms, everydaybusiness managers become true business leaders.

Conclusion

Tis CFO research program comes to a clear conclu-sion: the cost of change is high for many of thecurrently installed ERP solutions. Agresso offersthe midsize organization a compelling alternativelow-cost change at an installation cost that frequentlypays completely for itself in two years. Organiza-tional leaders will be well served by understanding

the very real differences of low-cost, fast-performingbusiness change supported by Agressos VIA archi-tectural platform.

AGRESSOFor Businesses Living IN Change (BLINC)

8 March cfo publishing corp.

Sponsors Perspective


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Te High Cost of Change for ERP: What Does It Cost to

Keep Up to Date?is published by CFO Publishing Corp.,253 Summer Street, Boston, MA 02210. Please directinquiries to Jane Coulter at 617-345-9700, ext. 211, [email protected].

Agresso funded the research and publication of ourfindings. At CFO Research Services, David Owensdirected the research and wrote the report.

CFO Research Services is the sponsored research groupwithin CFO Publishing Corp., which produces CFOmagazine in the United States and Europe.CFO Publishing is part of Te Economist Group.

March 2009

Copyright 2009 CFO Publishing Corp., which is solely

responsible for its content. All rights reserved. No partof this report may be reproduced, stored in a retrievalsystem, or transmitted in any form, by any means,without written permission.

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