Why Businesses Can’t Avoid ERP Modernization Any Longer

This is the first in a series of three articles exploring the topic of ERP modernization. This content originally appeared on CIO.com and has been republished with permission.  

Electric lights were invented in the 1870s and power-generation stations were in operation by the early 1880s. Yet by 1900, less than 5% of factory equipment operated on electric motors. Broad adoption wouldn’t come until the 1920s, nearly 50 years after the technology was introduced.

The reason for the long delay had more to do with psychology than technology. Factory owners didn’t see a compelling advantage to electrifying assembly lines that at the time were powered by steam engines tethered to long overhead serpentine leather belts connected to production machinery. It wasn’t until they reimagined factory designs unencumbered by the limitations of centralized power that change happened and productivity soared to record levels. 

“In the old factories, the steam engine set the pace. In the new factories, workers could do so,” wrote the BBC.

The story is a distant mirror of the challenges confronting today’s users of enterprise resource planning (ERP), a complex software system rooted in manufacturing that is present in nearly every large enterprise. Businesses broadly adopted ERP in the 1990s and 2000s to realize efficiencies by gaining better insight into their business operations. But now those legacy deployments are slowing their transition to the “digital-first” business strategies that nine in 10 organizations say they’ve adopted or plan to adopt.

From Process to Progress

ERP is about process efficiency, not business transformation. In an environment in which change is occurring faster than ever due to globalization, regulation, evolving customer preferences, technology, and other factors, rigid legacy systems and technical debt hold businesses back from achieving their potential. 

Consider “as-a-service” delivery. The trend that started in software has expanded to nearly all corners of the economy, including vehicles, industrial equipment, and appliances. The shared cloud as-a-service market is expected to grow 21% annually to more than $800 billion by 2025, according to IDC. 

Shifting to a subscription model impacts nearly every part of a business, including accounting, inventory management, channel relations, and sales force compensation. Many legacy ERP systems are simply not up to the task. Brittle, purpose-built architectures are not designed to accommodate the sudden emergence of new revenue sources, cost accounting practices, and legal entities.

Compliance is another challenge. Some businesses are subject to hundreds of regulations at the local, state, and federal levels, and the rules change all the time. New SEC regulations are in the pipeline that will require businesses to provide data on things like compliance training, workforce diversity improvement, sustainable sourcing, and emissions reduction. Much of this data has never been captured before and legacy, on-premises ERP systems need to be upgraded and tested every time a new rule comes into play. 

“Rigid legacy systems and technical debt hold businesses back,” says Ernesto Boada, interim CIO at Workday. “IT cannot unlock the data the business needs to make decisions quickly with those systems.”

The Cost of Inaction

Inflexible applications and limited IT resources thwart rapid decision-making and lengthen implementation times. However, many business leaders see ERP modernization as a complex and expensive task that doesn’t justify the necessary investment. Like factory owners at the turn of the 20th century, they can't see past the limitations of their current processes and infrastructure to envision the untapped potential that exists in doing things differently.

“The ERP system is by many considered the spine of any organization, and spinal surgery is a costly and complex affair,” says Bo Lykkegaard, associate vice president, European software research at IDC. “However, the urgency of getting better business insights, greater business agility, and higher employee productivity is driving organizations of all sizes to modernize their ERP.”

But ERP modernization is not about simply putting “new” technology on top of the old way of doing things. Game-changing innovations happen when organizations bring technology to bear in ways that empower them to build something entirely original. With artificial intelligence automating tasks that once required humans, modern ERP can transform manually intensive roles like accounting and financial analysis into strategic ones, enabling people to shift their focus from processing paper to more meaningful tasks like developing skills and improving customer satisfaction. 

“Success happens when organizations bring technologies and business processes together to innovate instead of taking a cost-driven approach to ERP modernization,” Boada says.

Business Is Knowledge

Today’s most successful businesses run on information. Intangible assets such as intellectual property comprised about 17% of the average company’s value in 1975. Today it’s 90%. Modern, cloud-based ERP supports digital transformation by making information available immediately to all who need it in a collaborative and interconnected system that’s tuned to respond rapidly to change.

That means planning and decision-making can move from scheduled scenarios based on data processed in batches to real-time, enterprise-wide, continuous forecasting that encompasses finance, operations, human resources, and external data. Periodic reports on workforce training, development, and performance can be replaced with ongoing employee engagement and well-being analysis that 85% of executives now say is crucial to delivering the best customer experience. 

Modern ERP enhances organizational agility by providing process automation, frameworks, and change management support that not only makes organizations more adaptable to change but better able to attract talent in a severely skills-challenged environment. It helps keep organizations focused on the customer by freeing workers from routine back-office tasks that erode morale while continually monitoring employee satisfaction and engagement through integrated surveys. 

A modern system helps streamline back-end business processes, match supply and demand, and enable access to critical data for everyone who needs it. It can tie into industry-specific systems to give an organization a more complete picture of its business. Low-code/no-code tools let customers build on top of existing functionality or create new capabilities as conditions change without requiring core applications to be modified or taken offline. Customizations unleash innovation rather than locking organizations into a particular vendor and software release.

The Cloud as Catalyst

Fewer than half (41%) of ERP, CRM, and other line-of-business applications are now in the cloud, but the shift from on-premises environments is expected to accelerate, with another 36% planning to migrate these mission-critical applications within the next three years. A successful migration to a modern ERP system will require CIOs and business leaders to be in lockstep, aligning the migration journey with desired business outcomes. To deliver, IT leaders should think in terms of platforms that enable rapid delivery of business capabilities on a trusted, secure data core that supports frequent change.

“When CIOs and other business leaders partner on ERP modernization, they have the chance to shift from ‘as-is’ to ‘to-be’ thinking,” Boada says. 

It’s time to cast aside the steam engines and move the tools of business to the front lines. Don’t wait 50 years to do it. 

In the next article in this series, posting August 15, we explore what the path to a modern ERP environment looks like. To learn more about how CIOs are tackling core modernization efforts, check out CIO.com for additional resources.