Technically, “ERP” stands for enterprise resource planning. That said, given its importance to the CFO, to the efficiency and effectiveness of the finance team, and to the health of a company’s broader financial systems, it should really stand for “Everyone’s Reporting Partner.” But, if we’re being honest, as it relates to its potential value versus its actual use and cost, perhaps a more accurate name would be, “Everyone’s Reporting Problem.”
Before we get into the weeds on collective ERP problems, (and yes, they do exist), let’s take a few steps back. An ERP system enables a company to use a suite of integrated applications to manage the business and automate back-office functions. In that capacity, ERPs are the backbone of a companies’ financial information systems.
That backbone is broken: studies suggest more than 60% of ERP implementations fail. And that’s a real problem, because when used to their potential, ERP systems track, integrate, and analyze critical financial and corporate performance data. Moreover, an ERP system’s automated interface enables faster and more efficient reporting and consolidating on a monthly basis.
CFOs, therefore, can’t afford the astonishingly high rate of ERP implementation problems. And, private equity-backed CFOs, in particular, really can’t afford failure. Those CFOs have a special use case for ERP systems: accelerating the close process, reducing reporting time, and providing sponsors with the right metrics and analytics in the requested timeframe and cadence.
So, what’s a private equity-backed CFO or any other CFO to do? Beware the hidden pitfalls on the path to ERP assessment, purchase, and implementation, the five most notable of which are the following.
1. Assuming, Not Assessing
Not all ERP systems are created equal, nor are the functionality needs of the purchasing company. The first ERP pitfall occurs well before implementation, and even before the purchasing process. It happens during the due diligence phase — or absence thereof.
A precursor to any review of external product options should be an internal inventory of “must haves,” “nice to haves,” and “don’t needs.” What is the organization’s current level of automation relative to manual implementation and does it want to achieve a more automated state? What are the reporting metrics and KPIs the system will need to produce, as required and requested by top executives or the sponsor? What is the functionality of the current system — what’s performing well, and where are the holes? Who are the stakeholders and how does the system need to collaborate with or support their departments?
Those questions, among many others — and their answers — should then inform a review of the ERP options on the market, and should help guide the company in comparing ERP systems from one of three broader buckets:
Once an internal assessment informs the most appropriate external bucket from which to shop, a side-by-side comparison of the options within that bucket, based on budget, capabilities, or both, becomes less laborious, confusing, and, importantly, less intimidating.
No assessment works if the holes, gaps, and needs identified are based only on current conditions. Private equity investment is meant to fuel growth, both of the organic and inorganic variety. With growth comes added complexities, integration issues, and often, more sophisticated requirements than status quo needs.
A full internal assessment will take inventory not only of current gaps, but of the anticipated needs that come with growth. We’re not advocating buying a system with capabilities well beyond the needs of the company, but we are imploring CFOs to find a system that can scale with anticipated growth, matching both current gaps and future requirements.
The sponsor ask, whether for permission, budget, guidance, or expertise (depending on the type of management-private equity firm relationship that exists) is the wrong CFO play. The right play is advocacy.
Given high valuations and relatively short hold times, private equity sponsors may be less inclined than other stakeholders to understand the value of an ERP implementation — and certainly the value of funding a more costly system. It’s therefore incumbent on the CFO to close the ERP deal by outlining its sponsor benefits.
Of course, a fully integrated and functioning ERP system eases the portfolio company’s reporting burden, but that’s the CFO’s burden to manage. The selling point for the sponsor is the ERP’s influence on the end game.
An interconnected system makes the sell-side process cleaner and faster. The numbers needed for due diligence during a sale are at the ready, making the exit more seamless and, perhaps, more profitable. Indeed, clean data and healthy financial systems help portfolio companies achieve financial goals and value-creation objectives. A well-structured ERP system is also much more attractive to a buyer, increasing ultimate valuation. If that doesn’t convince a sponsor, nothing will.
Penny-wise, pound-foolish. Such is the CFO (or fund sponsor) who underfunds and under-resources implementations to curtail investment costs at the expense of investment returns. Remember, most ERP implementations fail. That’s not necessarily because companies choose the wrong system or the wrong system for their future state, or because they don’t get fund sponsor buy-in; it’s because they underestimate the talent and funding demands for a thorough and effective implementation process.
The process requires not just an ample budget, but the participation of a significant number of stakeholders — the right “consulting” group and the right “owning” group. It then depends on the ability of those initial stakeholders to advocate for system-use and to train staff appropriately.
All those bells and whistles an organization invests in to address all those gaps and holes identified during the assessment phase are of little value if they are not implemented and integrated.
We call this ERP-by-Half. Whether it’s because the company was forced to go live too early or the execution plan was never properly phased, too many companies simply don’t complete the implementation, leaving CFOs with an overly-expensive, insufficiently functioning half-ERP system.
The key to avoiding this starting and stopping scenario is to take an efficient, agile approach to implementation. Implementation should be done in digestible steps with end-user involvement. This not only helps user buy-in, but it allows the company to continue to assess requirements, find gaps, and then repeat for successful completion.
Late last year, we told you the dirty truth behind financial system implementations, (most of the time they fail), and we told you about the particular dangers to private equity-backed CFOs when they do. And, all that remains true.
What we didn’t talk about — what we hope this article illuminates — is that the health and well-being of a company’s broader financial system starts and ends with its ERP architecture.
Only when the above pitfalls are identified and eliminated will CFOs have ERP systems that are integrated, functioning, and contributing to the achievement of value-creation plans. And only then can ERP reclaim its rightful title of CFO partner, not CFO problem.
Ayla Queiroga is a Director at Accordion, the private equity financial consulting and technology firm focused on the office of the CFO.