Lots of numbers – it was a great year – selection processes for Pharmaceutical Manufacturers, Food & Beverage, Defense Contractors, a National Orthopedic Practice, A/V Technology for Healthcare and a few dozen other clients.
Of course some firms are hesitant to bring in outside consultants, I suppose they’re used to dealing with software companies who make their money on sales commissions and offer a lot of advice – which seems like it’s ‘free’ until you add up the cost. Software companies make their fees on software commissions – and commission incentives are only secondarily tied to the customers’ best interest. One more factor driving the industry standard 80% ERP project failure rate – so there’s that.
If you were wanting to really cost out the ‘free’ advice from ERP software companies, you’d tell yourself:
- There’s an 8 in 10 chance I won’t get the program live on time
- I probably won’t get the features I thought I saw in the demo
- If I manage hit the ‘average’ I’ll get to explain the 186% cost overrun – potentially more than that
Using ‘free advice’ means basically you’re going to pay about double your $400k budget, look like a moron when it drags on 6 months after you told everyone in the building you’d have it up by July, and then you’re going to have to run your business for the next 6 or 7 years kneecapped by a system that doesn’t really do what you need.
It doesn’t exactly take MBA-ninja-math-skills to see that while commissioned based advice may not have an up-front charge, it’s anything but ‘free’.
The real question – is “what value are we, the consultants, bringing to the table?”
So looking at last year’s numbers in the Annual Report, here’s the answers – as delivered in real life. Once again, your mileage may vary, past performance is not indicative of future gains – but here’s what happened last year.
Paying off in the Short Run
Discounting in the software world is rampant – most vendors will offer a 25-35% discount right out of the box. The discounts we negotiated for our clients ran from 49% – 51% on all selection engagements last year. ERP packages ranged from $160k – $1.2m. In EVERY case, with EVERY client we completed, the software discount EXCEEDED OUR ENTIRE BILLABLE HOURS. That is, everything we charged for selection consulting was less than the software discounts we negotiated. (We’re seriously pondering an hourly rate increase.)
But let’s say you’re a hard nosed businessman who negotiates with every breath you take and you don’t believe you need a consultant to handle software pricing – – that brings us to the next question:
How would you like a Large Pile of Money?
Our methodology focuses on Cost and Revenue Modeling using new ERP technology – basically advanced ROI studies – we determine which Costs can be avoided by automating transactions – which Revenues can be enhanced by better systems.
Many ERP software vendors talk about ROI – but none really put a dollar figure on it for the simple reason that if they did, and the customer didn’t achieve those goals, it’s a quick lawsuit waiting to happen.
What we’re doing is sitting down with the bakery operations manager and saying “if you didn’t spend half the day doing paperwork, could you bake twice as much bread?” He of course says “YES!” and then we compute the revenue increase of 30% more bread – creating a 70% buffer in our estimates – we also model what’s the COGS of selling more bread, extra ingredients – etc.
I can show you study after study, client white paper after white paper showing companies who set these cost/revenue goals at the outset of the project are between 80% and 90% more likely to achieve the goal in the first place.
We’re doing this even before we’ve selected software.
So when we look at software, if knowing cutting down on paperwork is our key driver, we’re selecting ERP packages that excel in the paperwork area. Sure, other ERP systems might track oven temperatures in bakeries – which might be nice – but if our client has already solved that problem it’s not as high on our list – unless of course the bakery manager is spending half his days filling out oven temperature paperwork.
Here’s the Real Return
The average return for our clients on ERP packages was 22% the first year, 143% annually in subsequent years. Remember – we’re discounting the promise of ERP by 70% – that is, if we think we’ll save $100 – we’re counting on saving $30. So in most cases, our clients far exceeded projected returns.
Some of our smaller clients did not fully participate in the Cost/Revenue Modeling – some of our larger clients would stop the process once the ROI on the project was achieved – and the customers who used our consulting services from the beginning of the evaluation process all the way through implementation and optimization achieved better outcomes.
Our clients ranged from smaller companies spending $213k on the total project including software and services, to larger manufacturing with $1.2m budgets, to a straightforward $553k software add-on, which increased projected revenues by $8m across 120 retail locations for a regional distributor.
Our engagement fees ranged from $5k for a simple project to provide new FDA mandated labelling in the food industry to $203k to completely design and document an FDA-regulated pharmaceutical manufacturing environment – and just about everything in between.
And there were a couple of projects with large integration or customization projects – first year returns were in the 15-25% range, but year two – when implementation costs were absorbed, returns were 130-150%.
Granted we’ve had a great year – but it’s not completely outside expectations.
- ERP Software is expensive because it has potential to deliver a great deal of value
- Succeeding with ERP is largely contingent on the client company
- The chance of selecting the right ERP software from demos is just south of the odds of beating the tables in Vegas – it sometimes happens to a few players, but somebody’s paying for those big fancy buildings
- Few companies have substantial experience implementing ERP systems
- Modeling common methodologies behind successful implementations increases success
It seems as if we’re bragging – but like rest of our Practice – it’s not rocket science, it’s really just experience. And yes, we do get paid upfront – but engage us, and you’re the one who really gets the payoff in the end.
Gene Hammons, MBA is the Practice Director for Software Selection and Implementation for Vaco Resources in Phoenix AZ. Over the last 20 years he’s participated in nearly 400 software projects for ERP, WMS, CRM, Supply Chain and Business Intelligence and has held positions and certifications with many major software publishers such as Microsoft, SAP, Oracle, Sage, Epicor, Infor and several partner channels.
You can reach Gene via GH@genehammons.com
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