Do You Need to Replace Your ERP Because of Subscription Business Models?
When we worked with clients in the late 1990’s, Enterprise Resource Planning (ERP) systems were just about the only thing that anyone wanted to talk about. Y2K fears notwithstanding, ERP was the shiny new toy; a silver-bullet technology that promised to fully integrate and optimize the company’s operations from end to end. Large companies invested millions of dollars on software, hardware, and support over multiple years.
From a systems perspective, we’ve evolved since those days. Customer Relationship Management (CRM), Human Capital Management (HCM), and myriad other billing, tax, and other specialized enterprise systems have come online, ostensibly to fill in the gaps left vacant by ERP.
So, while ERP isn’t getting the same attention that it used to, you’d be surprised how often we’re hearing our clients, even today, talk about the need for modernization of their ERP platform.
Why? Because our clients are changing how they do business. The traditional business models of ‘I sell, I ship, I collect payment’ are being replaced with recurring revenue business models, and traditional ERP has not caught up with these more complex lead-to-renewal processes. ERP, the shiny new toy from the 1990’s, didn’t contemplate the rise of subscription and usage-based business models, especially at the volume and scale of the digital economy.
Now, to anyone that lived through an ERP implementation in those days, the very notion of replacing ERP can conjure up near-PTSD-type memories of long hours, rooms full of expensive consultants, empty Chinese-food containers and pizza boxes, endless data conversion and reconciliation, stressful deadlines, and holidays spent in conference rooms. Yet even with those memories, companies are coming to the harrowing realization that they need to either replace their ERP systems or hire someone to rearchitect their existing ERP investment.
The ERP Strength: The Case for Re-architecting
Despite the shift in business models, the truth is that most ERP systems are performing adequately from a bookkeeping perspective. The general ledger, AP, AR, record-to-report, and procure-to-pay process and functionality are all still relevant and working well. Companies will always require the need to follow rules and regulations of GAAP/IFRS and FASB. Balance sheets, P&Ls, debits, credits, accruals, estimates, liabilities, and assets are not going anywhere. Companies still need to pay bills, collect payments, understand cash flow—all the traditional accounting functions remain intact.
The ERP Gap: Also the Case for Re-architecting
A big part of an ERP implementation used to be order management, or in “macro-process” speak order-to-cash, which includes processes orders and contracts, billing, revenue, invoicing and collection. The functionality works fine for business models that are transactional in nature. But for recurring revenue businesses, these concepts aren’t nearly as clean.
Time and time again, we witness our clients try to leverage traditional ERP to handle subscription businesses. Need 10 more software licenses? No problem. Just process another sales order. Can we set those up for recurring billing? Are we co-terming the agreements? Want to take 5 licenses off, midway through a three-year agreement? OK, I guess we can process that as a return…
It’s no wonder that issues arise like unattainable customer self-service, SKU sprawl, billing nightmares, or any one of the other 12 symptoms of a broken subscription business when using crude workarounds to solve issues inherent in old ERP technology. It’s these inadequacies that can lead to the questions “Why is my ERP system not doing this for me,” or, “Why can’t I get this out of my ERP system? I must need a new one.”
Emergence of Niche Players for Subscription Models
We have seen a lot of specialized applications come into the market to help fill the gaps of ERP. These players are becoming more and more well-known, with the largest amongst them going public a few months back. Their platforms are designed to manage the order-to-cash processes for subscription and consumption-based business models. Some vendors are further specialized for consumer-based subscription models while others are best for sophisticated business-to-business subscription and usage models. But currently they all rely on ERP to fulfill the traditional accounting functions needed to successfully run the business.
Preserve ERP Investment but Architect for Future
So, do you need to throw ERP out with the bathwater? Short answer is probably not.
You’ve built and invested in an ERP foundation that may still be right for core financial operations. It’s important to maximize the ROI and total cost of ownership of these implementations. But you do need to understand exactly where your ERP has gaps and how to close them.
At Navint, we help clients take deeper look the current processes and technologies, the business strategy and revenue models of the future, and help you figure out how to get the most out of your legacy investment while plotting the path to a healthy future in subscription world. If you’re wondering if you should replace your ERP, we’re happy to help.