Deriving value from an enterprise resource planning (ERP) transformation is not an unrealistic goal. What is troubling, however, is how many firms fail to realize any top- or bottom-line improvements from their ERP transformations; according to Gartner, up to 75% of these do not meet their objectives. Based on this disconcerting trend, Liberty Advisor Group has developed an ERP benefit process and tracking asset to consistently identify, scrutinize, and validate opportunities.
Regardless of how successful a go-live milestone may be, an ERP system alone will not bring about incremental growth and savings. Achieving value targets requires careful analyses of revenue, profit and cost centers at the onset of an engagement, along with stakeholder collaboration throughout the assessment, to ensure outcome goals are realistic and achievable. Taking all of this into account, a resource planning system should be viewed strictly as a tool that facilitates value creation.
Before reviewing Liberty’s method to deliver benefits, several terms require definitions to prevent any misunderstanding due to differences in usage (Table 1).
|Hard Benefit||Direct and measurable benefits that impact top and/or bottom lines; e.g., average annual cost of goods sold reduced by 2%|
|Soft Benefit||Intangible benefits that improve operations, administration, etc.; e.g., time spent on paperwork decreased by 25%|
|Recurring Benefit||Continuous benefit that is realized on a specific time interval; e.g., renegotiated contract resulted in an annual savings of $1M|
|One-Time Benefit||Benefit is not continuous and results in a new baseline once established; e.g., Reduced days sales outstanding creates a one-time working capital uplift of $600K|
Our approach to benefiting from an ERP transformation is simple and intuitive. Seven key elements are illustrated below, using an automotive supplier example.
ERP software packages have been on the market for decades and, as a result, departments that will likely benefit from such a solution are well understood.
For a manufacturer’s supporting operations – such as Purchasing, Inventory/Warehouse Management, QC/QA and Finance – ERPs are well suited to track and record transactions because they are structured and repetitive tasks.
For Sales & Marketing, Product Engineering, and Manufacturing there are potential benefits as well. However, compared with supporting operations, these tend to involve more dynamic and complex processes and have outcomes that are more uncertain and may not materialize for months or even years. Therefore, tailored solutions are required for each specific workflow:
Without the support of each department, validating benefit targets will be difficult. Senior leadership can mandate compliance but this increases the likelihood of resentment, leading to unnecessary iterations and resistance to calculated outputs. Once potentially affected functions are known, Liberty works with program sponsors and department leadership to integrate stakeholders into decision-making. This upfront effort promotes inclusion and encourages members to contribute to the benefit process.
Liberty’s combined ERP and industrial experience has enabled the firm to create a repository of functional value drivers, which serve as a starting point for this phase of the engagement. The complete list, however, comes from the stakeholders based on their knowledge of departmental operations, current issues, and potential opportunities. As with brainstorming, Liberty documents ideas without initial analysis to ensure maximum input from participants is captured.
All proposed value drivers are not equally plausible or beneficial and, as such, Liberty uses a system to gauge and rank each proposal. The definitions in Table 1, coupled with timing to realize benefits and their relevance to the client, establish a consistent and repeatable basis for comparison. With the framework in place, Liberty’s first step is to analyze costs or revenues for each driver. Examples may include:
Stakeholders are responsible for providing the value driver data, and Liberty calculates the total cost and revenue numbers based on the timeframe under investigation. Twelve or 24 trailing months are, generally, acceptable to reflect current operational conditions and support projected benefits.
Once calculated, Liberty discusses benchmark improvement ranges with stakeholders, ensuring that the client’s input is reflected in all yardsticks. This is an important step because these ranges set the foundation for projected benefits. Furthermore, Liberty has compiled benchmarks from previous projects and can provide guidance. The following automotive example demonstrates this approach:
With proposed benefits calculated, each value driver is categorized using the comparison method described at beginning of section 4. Based on the results, a priority ranking is recommended. Continuing with the automotive example, the purchasing value driver would be classified and ranked as follows:
As mentioned at the start of this paper, ERPs may enable benefits but they do not automatically deliver them. Achieving outcomes requires tactical planning with an understanding that benefits may not materialize until after the stabilization period. The following plan depicts recommended actions and timelines to realize a lower connector piece-price for the automotive example (Figure 1). This re-emphasizes that a majority of the work is done outside of the enterprise solution.
The above plan is not etched in stone; rather, Liberty uses it as a level-set for clients to understand the entirety of what is likely to be required to attain a targeted outcome.
Liberty’s proven ability to help clients achieve realistic outcomes is a result of two factors:
Once Liberty’s proposed benefits and corresponding plans are available, stakeholder meetings are held to review the approach and underlying assumptions, and to revisit benchmarks. These conversations ensure that there is general consensus around forecasted numbers and the proposed activities and timeframes required to support financial objectives.
It is important to recognize that stakeholder feedback is an iterative process. In Liberty’s experience, three to four rounds are the norm where clients largely concentrate on computed benefits; this is expected given that stakeholders will ultimately own the targets. To achieve alignment with its customers, Liberty is transparent about the calculus and, where appropriate, modifies inputs and assumptions to better emulate stakeholders’ operational experiences.
To bring this into focus, the proposed benefit range from the auto example is revisited. During the iterative review process, purchasing stakeholders mention that previous negotiations for similar categories led to price reductions of <1%. Not wanting the client to “leave money on the table,” it is noted that prior to this company-wide ERP engagement, it was not possible to determine complete category consumption across all product lines. At the end of the stabilization period, however, a thorough connector volume-pricing scenario analysis will be feasible and better position the client to achieve a lower piece-price. The client agrees and modifies the range from 3%–5% to 2%–4%, a benefit of $0.5M to $1.0M.
The final step in Liberty’s procedure is to review the agreed-to benefit ranges and recommended plans with the program’s sponsors. Senior leadership typically defaults to stakeholders as they perform the day-to-day operations. There are occasions, though, when leadership disagrees with the findings and, based on examples among Liberty’s previous ERP projects, directs the team as follows:
For the second and third scenarios, Liberty will work with the stakeholders to restart the process where assumptions, benchmarks, and plans are scrutinized for improvement opportunities.
As mentioned earlier in this article, Liberty documents and maintains the value drivers and their underpinning assumptions, inputs, benchmarks, and outcomes in its ERP benefit asset. Over the course of the engagement, some of the proposed value drivers will likely be deemed out of scope (OOS), rejected due to infeasibility, or disqualified because the effort required to realize the benefit is too great.
Regardless of whether a value driver is precluded, Liberty captures these proposals for two reasons:
Beyond recording future prospects, Liberty takes an additional step and details recommended actions to realize OOS benefits. Returning to the automotive example, the following is an OOS value driver that could deliver a future benefit:
Framing a problem or an opportunity and recommending a procedure to address either one is an important aspect of Liberty’s operating model. That said, Liberty’s clients expect quantifiable results that cut costs and/or boost toplines. To demonstrate that the ERP benefit process is actualized, the following case depicts how Liberty applies its methodology to substantiate “hard benefits” once a central ERP program is implemented and stabilized.
A manufacturer of durable goods – whose global annual revenue is approximately $1B USD – had grown through acquisitions over several years. When Liberty was contracted to assess the company’s enterprise footprint and operations, the client was running multiple business units (BUs) with disparate ERPs. Compounding matters, several legacy ERPs were no longer vendor supported and the staff responsible for maintaining the solutions were nearing retirement.
Liberty’s objective was to identify the right, centralized ERP for the BUs to manage their operations. Further, the client was cost sensitive due to the pandemic’s impact and wanted to understand which benefits an ERP would facilitate.
Actions and Outcomes
Liberty analyzed each BU’s operations to establish a baseline and understand differences across the divisions. It became apparent that complexity extended beyond incongruent ERPs as there were notable differences in manufacturing – specifically:
The supporting departments were equally complicated and pertinent functions, such as inter-company transfers and sales and operations planning (S&OP), were chiefly done outside of the varied enterprise systems.
Given the client’s objective of centralizing the ERP, Liberty and the stakeholder-partners followed the benefit process to identify and validate value drivers. After several months of iterative and collaborative work, the outcomes were agreed upon and approved by the CFO and VP of Operations (Table 3).
Liberty Advisor Group is a goal-oriented, client-focused, and results-driven consulting firm. We are a lean, handpicked team of strategists, technologists, and entrepreneurs – battle-tested experts with a steadfast, start-up attitude. We collaborate, integrate, and ideate in real-time with our clients to deliver situation-specific solutions that work. Liberty Advisor Group has the experience to realize our clients’ highest ambitions. Liberty has been named as Great Place to Work, to the Best Places to Work in Chicago, and to FORTUNE’s list of Best Workplaces in Consulting and Professional Services.