The Pros and Cons of an ERP Investment
Insights from the Accordion Roundtable...
The Pros and Cons of an ERP Investment
“We have 20 portfolio companies right now. We’ve done close to 15 ERP implementations. There hasn’t been one successful example. While some are better than others, they’re almost always over scope, over cost, and over time. And, they never result in the dream benefits promised.”
Such is private equity’s ERP dilemma.
There’s no question about its criticality to the efficiency and effectiveness of the finance team. ERP is the backbone of a company’s financial information system; when that backbone is broken, or when accuracy or access to data is threatened, so too is management’s ability to run day-to-day operations, to structure informed value creation initiatives, and to flag potential issues before they become big problems.
But, there’s also no question about its quicksand characteristics. Too often, fund sponsors invest in ERP systems just to watch the weight of implementation complexities drag the process down a resource-draining and benefit-evaporating hole of failure, fatigue, and diminishing returns.
“There’s got to be a better way – but, as it relates to ERP, we just haven’t found it yet.”
So, we gathered an intimate group of leading investors to discuss and dissect that better way over doughnuts and danishes at our most recent Accordion Breakfast Roundtable in midtown Manhattan.
What we learned is that PE has an ERP problem, full stop. That problem has multiple dimensions; something we’re calling “ERP’s 5 Deadly Ds.”
ERP’s 5 DEADLY Ds:
5. Dirty Data
“A company’s technology stack should have two different concepts. There’s transaction processing (TP) and Analytical Processing (AP). Your straightforward ERP system is the former, in that it’s generating accounts receivable, accounts payable, inventory, and managing fixed assets, etc. This is fundamentally different from AP systems. AP systems (here we mean BI or CPM) are about making informed, metric-supported decisions from consolidated data. They’re different systems for different use cases and they tend to be confused and co-mingled.”
When do you need one? When do you need the other? And when, as is more frequently the case, can their simultaneous use be effective and advantageous.
Let’s talk about the clear-cut cases: When there’s an issue closing the books, that’s the ERP play.
When you’re a manufacturing company and you need your factory floor tracking system to talk to your CRM system so that you can understand operational forecasting and supply chain
planning – that’s a system stitching, analytical play for which you need BI tools.
But then there are the (many) fewer clear-cut cases.
BI tools can be the system investment of choice for portfolio companies who have functioning – if not best of breed – ERP systems and are looking for a tool to help extract data that’s more actionable and digestible. Conversely, where the portfolio company is under first time institutional ownership, and is still running their TP off QuickBooks, BI tools can’t replace investment in a full-fledged ERP system. But, even in this scenario, BI has an undiscovered, supplementary role to play.
“As you’re transitioning from QuickBooks to ERP, you can simultaneously layer in a BI tool so that you can immediately start pulling in the operational data and insight you have hidden in QuickBooks, while you spend the next 4-8 months implementing the ERP. Here, BI can give you immediate and otherwise invisible insights.”
And it can give even more. BI can be a helpful diagnostic tool to determine the company’s unique and specific ERP needs.
“The BI tool you’re running can help inform your current state data gaps and future state data needs. Maybe you didn’t realize that labor costs were an issue, but now that your BI layer is making clear that they are, maybe you need an ERP system that can act as a manufacturing tool. Sometimes that BI visibility can give you that first foot in the door toward understanding what you should focus on in assessing ERP systems.”
“Not all ERP systems are created equal – and they needn’t be. What I need for portfolio company X may be very different from what I need for company Y. And for both, the answer is very rarely, the whole hog.”
So, let’s start with the how much question, because the devil is in the default “all” answer.
The fund sponsor is in a unique position. There’s the short-hold time to consider, which means any IT investment must have a quick and plausible path to near-term ROI. That would seem to limit the instinct to over invest.
At the same time, there are those scenarios, particularly with first time institutional ownership, where PE is underwriting the deal based on the efficiencies and enhancements gained from operational improvements. And for that reason, and because of the industry’s confusion between Big Data and More Data, there’s been a tendency to lean into the sales pitch.
“Relative to scale and scope, we’re always oversold. It all sounds great but every time we have gone full tilt, we haven’t used half the modules that we were told were critical.”
Which is why it’s critical to have a clear definition of business needs the system should address, a structured process, and an assessed reality of adjustability. As for the business needs, clearly defining the use case prior to assessing system options helps mitigate over-scoping, as does creating a structured process around the subsequent shopping.
“Once needs are defined, we send that out for an RFP process, in which vendors will come back to us with the cost to implement, time to implement, model that supports our needs, etc.”
But, in addition to the hard costs of scale and time, companies must also understand the spectrum of adjustability and its additional burden.
“You probably have a really lean finance team and they are tasked with completing their day jobs – harder under institutional management – and with overseeing a system implementation. That’s burdensome at best, and impossible to achieve, at worst.”
Which is why starting small and scaling from there is often the most prudent path.
“What do you need? You need a General Ledger that works and works well. If you must manually feed in some information today, that’s okay. Start there, get the core right. Get people to understand how it works and then you can add in the connectivity to the next module and the next module.”
And, beware. Beware first of what whole hog actually buys you:
“We recently had been working in a company that was carved out of a much bigger organization and they said, sign us up for the full ERP boat. They called us because it was eight months later, and they had all these odd modules running but they still couldn’t produce an opening balance sheet.”
And beware of what trouble over-customization gets you:
“The more you standardize, the better off you will be. When it’s more bespoke, it’s trickier.”
“We’re at a company now that’s the product of many different rolls ups and over the last several years, this company customized their system to fit their particular process needs. They’re looking to upgrade systems and realized that to retro-fit the information from the customized system into a new system will be a multi-year process given its bespoke nature.”
Taking your portfolio company’s processes and adapting them to fit an out-of-box workflow (as opposed to building tech to fit company-specific paradigms) is the safest way to ensure system transition – for upgrading or scaling – can be achieved seamlessly and painlessly.
“The most critical element to ensuring ERP/BI tool success is having the often-overlooked dialogue with management. And that dialogue should happen, and continue, through multiple phases of the process.”
There are three important rules for portfolio management engagement. First, it’s important to have the diligence dialogue, to assess and understand end-use goals and real business case needs. This conversation – or series of conversations with senior leaders and on-the-ground managers – will inform the shape of the ERP assessment.
“What’s the end goal here? Not only what do I want to see in terms of management reports and in what monthly or quarterly cadence? But, what’s the shared strategic vision for the business? What’s the 3 to 5-year plan? Will we be highly acquisitive in that time frame? These fundamental questions will better allow the business to back in to tangible ERP system needs.”
But buying is only half the battle. Buy-in is the other. Here, it’s critical to engage management in a contextual dialogue.
“When was the last time you sat down with management and explained the why. So many times, it’s management not understanding the system, or they may not see the value in the question you’re asking. You have to give them the context if you ever want to convert them into system end users, ambassadors, and advocates.”
And then it’s critical to have the do-it dialogue. This is the conversation that explains the criticality of the process to successful exit. It’s the, “we understand you have a full-time day job, but implementing this system well and training your people to get on board, is just as much a priority and requirement, if not more.”
Since this dialogue can be ill-received, some fund sponsors have found unique ways to encourage management to more effectively shepherd the process.
“We incentivize these type of projects with the C-Suite to make sure that milestones are met. When they personally feel it, they’re more likely to champion it and prioritize it.”
“We have a portfolio company that’s the result of a roll up of many divisions, and we underwrote significant savings from an ERP implementation. There’s been minimal progress and a significant investment has been made. It wasn’t resourced right—they tried to do a lot in-house. They recently hired consultants to bring in the expertise they needed.”
What’s the lesson? ERP is not a DIY job.
It requires the proficiency and expertise of those trained at the intersection of finance and technology, and who possess the business savvy to navigate the personnel politics and the EQ to convert the non-believers.
ERP implementations also benefit from battle scars- from the wisdom of experts, who, having gone through the process before, understand where the mines, red flag, and traps are.
And, it further benefits by having management who are not only champions and advocates, but stakeholders to the process along the way.
“We were brought in to support some changes in an ERP system where Finance had said, ‘we’re too busy; Tech you own this – this is your job.’ Because they did not actively participate in that initial setup, it didn’t go well, and they got angry at the tech team when it didn’t work. We said, ‘well how much time did you spend with them as they were implementing?’ And, of course, they said, ‘we didn’t.’ So, we came in and re-engaged the business.”
That re-engagement, however, can’t just come at the end. It can’t be a hand off; it needs to be a well-plotted mentorship and exchange.
“We’ve seen really well-done and thoughtful implementations, but their team did not have the appropriate support. They couldn’t pick up the new process to match the new technology in a cadence that was fast enough. And there really needs to be that proper balance. You need to know when you’re done with the implementation, you’re handing off to a capable team that understands how it works and how it should run.”
D5: Dirty Data
“You can’t put a tech Band-Aid on a data pig.”
Its’ the simplest lesson to teach and the hardest lesson to learn. EPP is not a cure-all for your data needs. If the data goes in dirty, no processing will wash it clean. Your tech is only as good as the data that informs it.
Now, BI can help. It can help flag incongruous data from disparate systems and can shine a light where entry data may be at the root of the issue or where needed data just doesn’t exist.
“We often have situations where maybe a couple of acquisitions were done before us and there were three different systems, a whole history of controllers, and no one at the top really knows what’s going on. If the data from all those three companies is a mess, then the data you put into any new system is just going to be the same way. So, you need to first assess your data. Here the BI tools can be useful. You can layer them on top to assess the holes, gaps, incomplete information.”
Whether it’s ERP, BI or any other financial information system acronym, its purchase and implementation is a BFD. Failure here not only threatens the health and reliability of a company’s financials, but it can tank an investment thesis that relies on enhancing operational efficiencies.
At Accordion we know the nuances of the technologies. We know when and where they can provide value and we know their implementation idiosyncrasies. We can convert ERP’s 5 Deadly Ds into something a little less lethal – and dare we say, something a little more successful.
Implementations needn’t be crime scenes. We can help….