Rearchitecting the ERP in the Age of Recurring Revenue

By: The Navint Advisory Practice

In the late 90s, enterprise resource planning (ERP) systems were often positioned as a silver-bullet solution that would fully integrate and optimize the company’s end-to-end operations. Enterprise organizations invested millions of dollars on software, hardware, and support over the next two decades, only to realize that the ERP alone would not solve every organizational problem. In the time since, a myriad of specialized enterprise systems, including customer relationship management (CRM), human capital management (HCM) and others related to billing, tax, and other functions have come online, ostensibly to fill in the gaps left vacant by the ERP.

In the modern business landscape, the ERP falls shorter still as organizations shift away from a traditional business model in favor of recurring revenue. Created to support one-time sales and hard good orders, many legacy ERPs do not offer the functionality needed to address the more complex lead-to-renewal processes or the scalability required to manage the volume and speed of the digital economy. We call this the “order-to-cash optimization fallacy”—the idea that businesses have spent years, often decades, organizing people, process, and systems for the unit-based business model that is suddenly irrelevant in a subscription-based economy.

Despite the significant investment made in the ERP, some organizations are realizing that they must now rearchitect their existing system to optimize a variety of monetization strategies, recurring revenue chief among them.

The case for re-architecting the ERP

A key function of a traditional ERP solution is order management—or “order-to-cash”—which includes processing orders and contracts, billing, revenue, invoicing and collection. Legacy ERP systems are optimized to manage these tasks for businesses that are transactional in nature. As such, they often cannot handle subscription-based business needs, such as additions, upgrades, recurring billing or co-term agreements—all of which are subject to change at any time.

Further, existing ERP systems generally do not have the ability to package, price and bundle products in a way that encourages a long-term customer relationship—the hallmark of what we call the Continuous Customer, a cyclical engagement strategy that pushes the client through the basic steps of sell, renew, upgrade and add-on or adapt. Many organizations attempt to address this shortcoming through manual processes and additional staff. Costly and time intensive, this approach also introduces friction within the customer experience, which can lead to customer churn, revenue leakage and other issues that ultimately stymie growth.

The Future of ERP: Evolution, not Extinction

While the nature of the ERP must certainly change to address the needs of a recurring revenue model, most organizations should not ascribe to the idea that they will need to rebuild this system. On the contrary, 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 have all stood the test of time. Further, GAAP/IFRS and FASB rules and regulations will always exist—which means that balance sheets, P&Ls, debits, credits, accruals, estimates, liabilities, and assets are unlikely to change in any major way. Finally, all traditional accounting functions also remain intact as companies continue to pay bills, collect payments, and understand cash flow.

Further, we are of the mindset that no single system can or should service the entire lead-to-revenue strategy. While some organizations may attempt to create a single system that addresses all aspects of the lead-to-revenue lifecycle—sales, marketing, operations, finance and accounting—we believe that a unifying strategy, along with technology harmonization and integration, is both more effective and practical.

For most organizations this will be welcome news, as many have not yet maximized the ROI and total cost of ownership for their existing ERP system. At the same time, the organization must understand exactly where gaps within the legacy system and processes exist and how to close them. To learn more about how to adapt your organization’s ERP system to meet the needs of the modern contract, contact us at info@navint.com.

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