Ventana Research Analyst Perspectives

Fundamental Change is Coming to ERP Systems

Posted by Robert Kugel on Oct 30, 2020 3:00:00 AM

Enterprise resource planning (ERP) systems are central to nearly every organization’s management of operational and financial business processes. They are essential to the smooth functioning of an organization’s record keeping, accounting and finance tasks. In manufacturing and distribution, ERP manages inventory and logistics. Some ERP software vendors incorporate an extended set of capabilities that include managing human resources as well as supply chains and logistics. In the 2020s, technology will drive fundamental change in how ERP systems operate and how companies use the software.

ERP has evolved steadily but only incrementally over the three decades that I have been tracking, and mainly on four paths. The first has beenVentana_Research_Benchmark_Research_Next_Generation_ERP_02_ERP_performance_acceptable_170118 to improve performance as the cost of computing resources has declined.

Second, vendors have been focused on expanding the scope and richness of features and functions by adding capabilities that serve the needs of organizations in specific industries, and even sub-segments of those industries.

Third, the software has increasingly incorporated basic analytical capabilities to communicate beyond performance and an organization’s current situation.

And fourth, there has been a greater emphasis on improving the user experience, increasing productivity, decreasing the need for training and enhancing employee satisfaction. Our ERP benchmark research found that 73% of organizations say that using their current system is easy or easy enough.

Now, however, the era of incremental improvements is giving way to ERP that supports a fundamental shift in the design of work. The change is the result of a confluence of new technologies including cloud computing, artificial intelligence (AI), collaboration, mobility, analytics, planning, in-memory processing and big data. In particular, the next-generation ERP system will support new paradigms for how the finance and accounting department operates. The most consequential of these will be:

  • The systems will support what Ventana Research calls continuous accounting—the ability to spread accounting tasks continuously across accounting periods rather than having to execute them at the end of the month or quarter. By spreading workloads more evenly over accounting periods, continuous accounting can increase productivity, reduce staff stress and shorten the monthly and quarterly accounting close. Until recently, technology limitations forced ERP systems to operate in batch modes that created period-end workload spikes, which made continuous accounting impractical.
  • Accounting processes will use software to streamline or automate routine processes, increasing staff efficiency. For instance, the use of direct digital commerce, electronic documents and the use of scanned images of invoices and receipts will eliminate a significant portion of manual data entry. Workflows, increasingly chat-enabled, will control even cross-functional processes end-to-end, shortening cycles, further reducing the training required for new hires and facilitating the accurate and timely completion of seldom-used operations.
  • To a much greater extent than before, the new generation of ERP systems will be able to maintain the quality of data associated with a transaction, eliminating manual steps by using software to control data movements, robotic process automation (RPA) to auto-fill fields where feasible, and employing AI to supervise data entry and call out potential inaccuracies or inconsistencies. Building quality into the data that make up transactions reduces downstream workloads necessary to correct errors, and cut the time necessary for audits because the system acts as a high-level control supporting financial statement quality.

However, these rosy-sounding improvements in next-generation ERP systems will pose three major challenges for CFOs. The first is deciding when to use these new systems to fundamentally change how the department operates. Just because the technology is available does not mean it will be used. Typically, CFOs are risk-averse, suggesting a prolonged adoption curve. On the other hand, it is possible that the events of 2020 have changed their thinking about risks and created the need to adapt to the constraints of operating virtually in a fast-changing environment. Adoption may be more rapid than in the past.

Second, managing the significant change technology has made possible is a demanding task when trying to lead a department that historically is reluctant to change. In hiring a new CFO, CEOs and company boards will need to look for leadership qualities, not just technical expertise, if they want to achieve full benefit of new technologies. And while the old hands in the department might resist change, finance executives will also have to consider whether they can attract and retain younger talent if they don’t expunge dull, repetitive processes.

The third is deciding what to do with the increased efficiency provided by these new ERP systems. Organizations have the option of using greater productivity to reduce the size of the department without changing its mission, or use technology to shift its emphasis from transactions processing to analysis and planning. The change in emphasis will enable the department to play a larger role as an advisor to the rest of the organization. This idea is decades old, but technology is only now making it possible. The choice is up to the CFO, the CEO and the board of directors.

Technology will provide vendors with much greater scope for differentiation than has been the case in years past. Especially for larger enterprises,Ventana_Research_Benchmark_Research_Next_Generation_ERP_08_ERP_fragmented_in_large_companies_20200518 the ability to serve as what we call a “central ledger” will offer finance and accounting departments operating advantages. This is mainly the case when an organization operates with ERP systems from multiple vendors. Our Next-Generation ERP research shows that 69% of companies with 1,000 or more employees have systems from two or more vendors, and 27% have systems from four or more. Continuous accounting has limited benefits with fragmented ERP systems. For almost all organizations, consolidating multiple ERP systems is too time- and labor-intensive to do more frequently than monthly.

The next generation of ERP will be cloud-based rather than on-premises. Cloud-based ERP systems offer greater security, maintainability and superior disaster recovery. Cloud-based subscription services can be more economical and offer better performance because their hardware is updated more frequently and because the vendor can offer elastic data and processor options that may be unavailable with on-premises deployments. Cloud-based systems better support virtual processes, providing reliable business continuity under a wide array of conditions. For years, cloud-based deployment has been central to vendors’ strategy, however until this year customers have not enthusiastically embraced the cloud. Our research conducted before the pandemic found that 45% of companies said they prefer an on-premises deployment while only 13% preferred the cloud. Today, as a result of the pandemic lockdowns, there is a greater emphasis on business continuity and the ability to work virtually. Anecdotal evidence suggests that preference for the cloud is increasing because these systems are better suited to address current organizational needs.

AI using machine learning will play an increasing role in ERP processes as the decade progresses. AI can be an important source of product differentiation, but there are significant risks to vendors. People are willing to tolerate inaccurate AI-driven movie or book recommendations but they are unlikely to tolerate errors in a business-critical system of record. The time and effort needed to train systems, especially if data is incomplete or unreliable, will initially limit the degree to which AI can be built into ERP processes. Nonetheless, considerable progress has already been achieved in applying AI to small-scale uses; e.g., accurately parsing invoices to automatically record data related to the transaction, and supervising manual data entry to highlight anomalies or omissions. Vendors that can demonstrate an ability to rapidly incorporate AI-driven enhancements into their systems are likely to gain market share over the coming decade.

By the end of the 2020s, ERP systems will have a different look and fulfill a broader role in organizations. CFOs and controllers must have an ongoing process to evaluate how technology can improve both the department’s efficiency and its ability to deliver more timely, useful analysis and advice to the rest of the organization. To be successful, these executives will need to be less hesitant in adopting new technology and the new techniques that become possible. They also need to manage a department that can—and is willing—to adapt to more rapid change than in the past.

Regards,

Robert Kugel

Topics: Office of Finance, Financial Performance Management, ERP and Continuous Accounting, robotic finance, Predictive Planning, AI and Machine Learning

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Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.