1. FOLLOWING THE MONEY TRAIL
Finance officers are often badly informed about their company’s biggest IT purchase – the ERP system.
Jacob Varghese Vaidyan (pictured) of Charteris puts this right.
Although enterprise resource planning systems are typically the single largest IT investment any
company makes, the business and financial implications of owning, maintaining or implementing
an ERP system are not always understood.
ERP systems are one of the most-used application in a company, alongside its email and
office applications. For most enterprises, ERP is also one of the cornerstones of their IT
strategy.
This article seeks to improve the understanding of ERP systems for senior finance
professionals by looking at these systems from the cost, benefits and business cycles points of
view.
Level of importance
Firstly, let’s try and answer the question: why is it important for the CFO or any senior finance
professional in a company to know about ERP?
In addition to looking at the more important issue of return on investment (ROI) or cost benefit, this question can be answered
by looking at three key roles a finance professional can play, and how they might benefit from an ERP system (note: some of
these roles may be overlapping):
q System user. A well-designed and implemented ERP system can give the finance team access to the general ledger, sales
and purchasing ledgers in an automated manner. Senior finance professionals may be users either of the ERP system itself or
the reports produced by the system.
q Financial control. The ERP system can provide a platform for managing costs and keeping track of budgets and variances.
This can be done either using standard reports and functionality available in the system or using some other reporting
system.
An ERP system also provides visibility and control of various transactions taking place across various departments
(depending on how extensive the ERP implementation or the interface with the other systems is).
Good checks and balances can be maintained on financial approvals and control using a well-configured system. The
accounting controls that can be put in place for general ledger, journals, receivables, inventory and purchasing functions
improve significantly with an ERP system.
q Financial planning. The key to good financial planning is availability and access to the right historic and current data. A good
ERP system can be a source of transactional and (with a data warehouse) historic data as well.
The planning, budgeting cycle and the closing of books can be undertaken much more efficiently with an ERP in place.
Although this can also be done using just a good financial and accounting system, the ERP system gives a much more holistic
perspective because of its interaction with other business functions.
Again, the improvements and automations in business processes, customer services and reductions in cost attributable to an
ERP system will directly impact the bottom line and hence this is an investment worth knowing about.
It is therefore extremely important that any phase of an ERP system be supported by a business case delivering well-defined
and measurable ROI.
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2. ERP lifecycle
An ERP system has a typical lifetime of about 10-15 years and goes through a series of upgrades/new releases to extend this
further. These are the steps involved in the lifecycle of a typical ERP system:
1. System evaluation. This is the phase in which an enterprise looks at its internal business processes and evaluates the
various ERP systems available on the market. System evaluation should be driven by a well-analysed business case. In cases
where the company is looking to bring about a lot of business process changes driven by the ERP system, this factor should
be considered while evaluating competing products. In some instances, this could lead to the company deciding to continue
with its existing systems and not go ahead with an ERP.
2. System implementation. All ERP product suites include their own implementation methodologies driven by the
vendor/partner’s defined best practices. These methodologies are aided by project management frameworks like PMI or
PRINCE2. This phase includes requirement gathering, configuration, modifications (or customisations), testing and rollout.
Implementations are faster when there are no major modifications involved. Any changes to or customisation of the standard
features and functionalities can add a lot of time and cost to the ERP implementation. This phase can last from anywhere
around two months to a few years, depending on the complexity of the implementation.
In addition, the amount of effort and cost involved in data migration from existing systems to the ERP would depend on the
data to be migrated and the systems the ERP software is replacing. Additional cost consideration also includes the interfaces
(or connections) that are needed with the existing software applications. Training and related change management for the
users in the organisation also requires a great deal of planning and communication exercises.
3. System upgrade. Most of the ERP vendors release newer versions of their product regularly. These releases include new
functionality, fixes on problems with previous versions and/or newer technology platforms. In some cases, organisations are
forced to upgrade because of lack of support for the previous version. Upgrades can be a pretty costly exercise and should not
be underestimated.
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ERP FEATURES
An ERP system is a collection of software components which integrates all the data and processes in an organisation into a
unified system. The key tenet of an ERP system is to provide a single version of the truth which is accessible to everyone
who needs to know about it across the organisation.
The various components or modules (the functionality and terminology can vary from one vendor to another) found in a
typical ERP system are:
q Financials – automates financial and management accounting, asset management, purchasing and selling. Also provides
support for compliance and financial reporting.
q Human resources (or human capital) management – automates core HR processes, recruitment, people management
and organisation management.
q Project management – manages project accounting (costing, billing, activity management, etc) and profitability analysis
for project-based organisations/functions.
q Operations (production/manufacturing) – automates procurement, logistics and manufacturing processes, including
lifecycle management for products and inventory.
An ERP system usually remains at the centre of any business IT ecosystem, but the presence of a multitude of other
applications – such as CRM, supply chain management and business intelligence – makes the system landscape complex
and much more costly to maintain.

3. 4. System maintenance. Most ERP systems require a dedicated team to support the users, maintain the applications –
applying service packs with corrections (or bug fixes) for the system errors – and taking backups of the system, etc. In
addition, most ERP vendors charge a retainer for ongoing support and fixes to their software; some may include a free
maintenance agreement.
The maintenance costs associated with an ERP system are much higher than for any other system because of the complexity
and scale of the systems and skill levels needed for the support staff.
Managing the financial implications
Let’s look in more detail at the financial impact of an ERP system on the key financial statements and ratios used in a
company’s annual report:
q Profit & loss (P&L) statement. The ERP implementation can provide direct benefits such as better planned and delivered
material, labour and other services, resulting in significant cost reductions. Also, better inventory management results in lower
storage and transportation costs.
Finally, better customer services and efficiencies derived from optimised and automated business processes and better
information could also result in significant improvements in the top line.
q Balance sheet. The fixed asset and asset valuation techniques (including depreciation methods) incorporated into standard
ERP systems provide a better and easily accessible balance sheet. Also, based on empirical research, an ERP system
provides tangible inventory-related benefit of 32% and improved valuations of receivables.
q Cashflow statement. The investing and financing cost components of a cashflow statement are impacted by the investments
made in the ERP system, while the maintenance and support costs are an ongoing operating cashflow component. The cash
spent is better tracked and controlled using the accounting, financial and banking modules of the ERP system.
q Financial ratios. As shown above, the effect of an ERP system on inventory and receivables is tangible; hence the financial
ratios whose impacts can be directly measured are the inventory turnover ratios and days receivables.
(There are a number of journals and books available that provide further information on existing evaluation of ERP benefits.
One good reference book on this topic is Maximizing your ERP System: A Practical Guide for Managers by Scott Hamilton.)
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KEY VENDORS
The major vendors in the ERP market include:
q SAP. This German major is Europe’s largest software enterprise and one of the pioneers of the ERP space. SAP’s
products – the first major one was R/3 followed by mySAP ERP – were originally focused on the Fortune 500 companies; it
is now actively targeting small and medium-sized companies.
q Oracle. The leader in the database management systems space, Oracle has increased its hold on the business
applications market through its Oracle e-business application suite, developed via a series of acquisitions including
PeopleSoft and Siebel.
q Microsoft. Microsoft has moved into the mid-market ERP space with its Dynamics suite of products, which includes the
ERP products AX, GP, NAV and SL, and CRM products.
q Infor. The largest private software company in the world, Infor’s major ERP offerings include Baan for discrete
manufacturing and Adage for process manufacturing.
q Sage Group. Focuses on business management software services for small and medium-sized businesses and is currently
building vertical market software (addressing the needs of specific industries or markets) through a series of acquisitions.

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Cost of an ERP system
Different stages of an ERP system will have different costs associated with them. The expenditure can be classified as follows:
q Licensing costs.
q Implementation costs.
q Hardware costs.
q Support costs.
q Training costs.
q Programme/project management costs.
q Customisation/development costs.
Since these costs can, over the years, mount up and also lead to many key business processes in the organisation being tied
to the ERP system, the switching costs associated with a complex ERP system are very high. This is one reason why the
business case has to be thorough and why the (existing or improved) business process match with the ERP system should be
given a lot of thought.
Conclusion
ERP systems, irrespective of the technology platforms or business models they support, are here to stay and will remain the
centre of any organisation’s IT platform. If they are implemented effectively, the tangible and intangible benefits made possible
by such a system and the resulting dependency of the organisation on it means it is vital that senior financial professionals
have a good understanding of an ERP system’s capabilities.
q Jacob Varghese Vaidyan is a senior consultant in the business consulting team at business and IT consultancy Charteris
plc. Email: jacob.vaidyan@charteris.com.
q If you would like more information about this article or any of the products or companies mentioned in the article, please
contact us at info@evaluationcentre.com.