What Is an ERP System?
ERP stands for enterprise resource planning. An ERP system refers to the management of a suite of software applications that are needed to run a business—which could include finance, human resources, supply chain, customer relationship management, or inventory management—in a single system.
But to really understand what an ERP system is, companies should seek understanding beyond a textbook definition. ERP systems vary widely in their capabilities due to how they’re built. Those differences, well, make all the difference in whether an ERP system is agile enough for the modern business landscape—and perhaps, make companies reconsider if they need a new class of systems.
For example, consider the history of the term ERP system: Starting in the 1960s, integrated software applications primarily focused on processes related to manufacturing, such as inventory control and production scheduling, and were known as materials requirements planning (MRP).
Then in the 1990s, research and advisory firm Gartner coined the term ERP to describe the growth of integrated applications focused on back-office operational systems, such as human resources and finance.
Since the 1990s, the meaning of ERP has continued to change. The term ERP II started to emerge as a way to describe the extended integration of add-on applications beyond core business operations. For example, integration with the data from a customer relationship management (CRM) system can help companies understand the financial impact of customer sales trends. But still, the term ERP was widely used to describe ERP II systems.
In the late 1990s, cloud computing entered the technology scene. Then ERP systems started a slow transition from systems managed on premise toward a cloud-based platform in the mid-2000s. Larger organizations were cautious about moving their on-premise ERP systems to the cloud, citing concerns that included security and data migration complexity. What's more, many of these companies had already made hefty investments in their on-premise ERP systems. Yet, at the same time, companies still were dealing with the limitations associated with managing an ERP system: accumulation of technical debt associated with maintaining costly hardware to host their ERP system, and a heavy reliance on IT to code and maintain new processes or develop workarounds for those processes in the event of changed business needs.
Now, it appears ERP is in the middle of another shift.
Here’s what Gartner® said in the report, “Predicts 2021: Time to Compose an ERP Strategy to Outpace Disruption”: “Demand for greater agility using multiple data and application sources is prompting enterprises to develop more integrated ERP capabilities, rather than follow a strict monolithic approach to application architecture.”
And, advice to businesses from the Gartner report: “Keep up with rapidly changing business requirements by adopting an ERP strategy that is more responsive and composable. They should renovate or replace critical legacy systems to accelerate the move to composable application experiences and reject any new monolithic solutions proposed by vendors or in-house developers.”1