What is ERP? Key features of top enterprise resource planning systems

Every organization manages people, purchases products and services, sells (or gives away) something and accounts for money. The way each activity is handled will vary, but every enterprise performs these basic functions. In most cases, it is more effective to handle these processes through an integrated software platform than through multiple applications never designed to work together. That's where enterprise resource planning (ERP) systems come in.

While ERPs were originally designed for manufacturing companies, they have expanded to service industries, higher education, hospitality, health care, financial services, and government. Each of industry has its own peculiarities. For example, government ERP uses Contract Lifecycle Management (CLM) rather than traditional purchasing and follows government accounting rules rather than GAAP. Banks have back-office settlement processes to reconcile checks, credit cards, debit cards, and other instruments.

ERP is software that standardizes, streamlines and integrates business processes across finance, human resources, procurement, distribution, and other departments. Typically, ERP systems operate on an integrated software platform using common data definitions operating on a single database.

In 1990, Gartner created the term ERP to describe the evolution of materials requirements planning (MRP) and manufacturing resource planning (MRP II) as they expanded beyond manufacturing into other parts of the enterprise, typically finance and HR.

ERP systems evolved rapidly during the 1990s in response to Y2K and the introduction of the Euro. Most enterprises viewed Y2K and the Euro as the cost of doing business, and ERPs provided as a cost-effective way to replace multiple, old systems with a standardized package that could also address these issues.

ERP systems improve enterprise efficiency and effectiveness by:

ERP improves business performance in several ways. Specifically:

The scale, scope, and functionality of ERP systems vary widely. However, most ERP software features the following characteristics:

ERP systems are typically categorized in tiers based on the size and complexity of enterprises served. ERP systems can be either proprietary or free and open source, though most open source ERPs are designed for small organizations or higher education and may offer little functionality beyond finance.

Typical tiers include:

Over the past few years, ERP vendors have created new systems designed specifically for the cloud. At the same time many longtime ERP vendors have created cloud versions of their software.

Cloud ERP is becoming increasingly popular, but all cloud ERPs do not operate in the same fashion. There are two major types:

For most enterprises, ERP as a service offers three advantages: The initial cost is lower, upgrades to new releases are easier, and reluctant executives cannot pressure the organization to write custom code for their organization.

For more on cloud ERP, see:

Choosing an ERP system is among the most challenging decisions facing IT leaders. In addition to the above tier criteria, there is a wide range of features and capabilities to consider. With any industry, it is important to pick an ERP vendor with industry experience. Educating a vendor about the nuances of a new industry is very time consuming.

To help you get a sense of the kinds of decisions that go into choosing an ERP system, check out “The best ERP systems: 10 enterprise resource planning tools compared,” with evaluations and user reviews of Acumatica Cloud ERP, Deltek ERP, Epicor ERP, Infor ERP, Microsoft Dynamics ERP, NetSuite ERP, Oracle E-Business Suite, Oracle JD Edwards EnterpriseOne ERP, Oracle Peoplesoft Financial Management and SAP ERP Solutions.

Most successful ERP implementations are led by an executive sponsor. This is the executive who will receive the majority of the program's benefits when the new system is operational. At a minimum, this executive should sponsor the business case, get approval to proceed, monitor progress, chair the steering committee, remove road blocks, and capture the benefits. With the exception of internal IT projects such as infrastructure refreshes or ITIL rollout, the CIO should NOT sponsor projects.

The CIO works closely with the executive sponsor to ensure adequate attention is paid to integration with existing systems, data migration, and infrastructure upgrades. The CIO should also advise the executive sponsor about the challenges encountered by all major programs and should help the executive sponsor select a firm specializing in ERP implementations. Such a firm should bring specialized business process knowledge and experience with the ERP selected. An implementation firm executive should become an advisor to the executive sponsor.

The executive sponsor should be advised by an organization change management executive as well. An ERP implementation will result in new business processes, roles, user interfaces, and job responsibilities. Organization change management can help every person in the enterprise understand the impact ERP will have on both the organization and on the individuals. In most cases, an organization change management firm, rather than an internal executive, provides this support.

Reporting to the program’s executive team should be a business project manager and an IT project manager. If the enterprise has engaged an ERP integration firm or an organization change management specialist, their project managers should be part of the core program management team.

See also: How to assemble a winning ERP team

Most ERP practitioners use some version of the steps below to structure their ERP implementation:

The first step is to get formal approval to spend money and direct staff to implement the ERP. The executive sponsor oversees the creation of any documentation required for approval. This document, usually called a business case, typically includes the following:

Once the business case is complete, the appropriate group of senior executives should authorize ERP implementation to proceed.

The high-level time line created for the business case must be refined into a more complete work plan. The following steps need to be completed:

This is the largest and most difficult phase. The major steps include:

Prior to the final cutover when the new system is in production, multiple activities have to be completed. These include:

Following ERP deployment, most organizations experience a dip in business performance as staff learn new roles, tools, business processes, and metrics. In addition, poorly cleansed data and infrastructure bottlenecks will cause disruption. All impose a workload bubble on the ERP deployment and support team.

For more on ERP implementation, see:

The four factors that are commonly underestimated during project planning include:

For more on ERP costs, see:

ERP projects fail for many of the same reasons that other projects fail. The most common cause is an ineffective executive sponsor who cannot command respect throughout the organization, is not interested in the project, or is distracted by other responsibilities. Other ways to fail include poorly defined program goals, weak project management, inadequate resources, and poor data cleanup.

There are several causes of failure that are closely tied to ERPs. Specifically:

Even groups who support the ERP can become disenchanted if the implementation team provides poor support or is perceived to be rude or unresponsive. Disenchanted supporters can become vicious critics when they feel they have been taken for granted and not offered appropriate support.