Tips for Evaluating ERP Software
There are literally hundreds of ERP systems to choose from, with a wide range of capabilities, strengths, weaknesses, applicability, and price. While the choice of systems may seem daunting, a systematic ERP system comparison process can lead your team to a good decision in a reasonable amount of time.
The time-tested methodology outlined here can help you zero in on the solution that best meets your company’s specific needs. This methodology may sound basic—but companies that undertake the ERP vendor selection process without following these logical steps often encounter delays, additional costs, and unnecessary customization. On the other hand, companies that apply best practices typically have smoother selection processes and subsequent implementations. As a result, they can enjoy the benefits of a modern ERP system sooner and compete more effectively in a digital world.
Five-step methodology for evaluating ERP systems
Once a company has decided to replace their legacy ERP system, the first step is to assemble a team to drive the process of ERP software comparison, selection, and implementation. The team begins its work by developing an initial plan—which is really more of a general strategy at this stage.
The ERP vendor selection process can be outlined in these five steps:
- ERP requirements definition
- The request for proposals (RFP)
- First cut evaluation
- ERP comparison and detailed evaluation
- Final decision and contract
Step 1: ERP requirements definition
You will need to tell your prospective ERP providers about your organization and its needs for them to properly configure, package, and price the appropriate solution. Start by identifying key online resources, such as product demonstrations and blogs, that tell your company’s story.
Describe your business and its processes in a general way rather than creating long lists of specific requirements and processes. Tell prospective providers about the size of your business, volume of activity and transactions, complexity of various processes, and any unique features or factors. Focus on the processes and requirements that give your business its competitive edge. Those are the things that will distinguish the prospective systems from each other and where you’ll look closely at how well each system can be configured to support those unique processes and functions.
Outline the things you like about your current system—you will want your new system to handle them at least as well. Include the things your existing system doesn’t do (or doesn’t do well). Point out any custom applications, functions, or modifications that need to be addressed by standard functionality or simple tailoring (not modification) in the new system. In other words, focus on the things that are unique to your business and assume that the routine things are going to take care of themselves. (You will verify this assumption in the demonstrations and final assessments nearer to the decision point).
Key takeaways and tips
Don’t rely on ERP checklists. Checklists, an old standard industry practice, do little to distinguish the solutions from each other and do not really help you make a good selection. The majority of items on these lists are functions and features that every system provides to some extent, and competing providers are apt to check “yes” in the most liberal interpretation of their system’s functionality.
Get the right people on your project team. The specification of the requirements is hard work. It needs team members who are dedicated to the organization, know the company well, and have the time to devote to the project. Avoid the temptation of packing the team with enthusiastic but inexperienced people.
Make sure your RFP includes this information:
- The description of your business and its processes
- What your current system does well
- What it does not do as well as you would like
- What else you want the new system to do (ranked by importance)
Step 2: the ERP RFP
The next step involves issuing invitations for response to a select group of vendors. The number of invitations you should send out will vary—but remember that you will need to perform a detailed review for each one you distribute. Experience has shown that the smaller the number of potential providers and the more detailed information they are given, the better the responses. It’s best to identify a dozen (or fewer) of the best candidates for your short list.
In response, the ERP vendors should propose a system that delivers the necessary functionality and features to meet the requirements you identified. The proposals will also contain information about their companies, products, experience in the business, resources they will commit to your implementation, and other information intended to win your confidence (and therefore your business).
So how do you identify the dozen (or fewer) candidates to focus your selection efforts on? How do you pare down the list from hundreds of ERP vendors to just a few? Start with industry publications that feature “ERP success stories.” (Note that these publications probably will not tell you about difficulties or failures, so put this information in perspective). Use your industry contacts—associations and business groups, for example—to identify other professionals who may have had recent experience selecting and implementing ERP.
There are also many online directories, selection tools, and system selection services that can help you identify software that has the functionality you need and/or has experience in your industry.
For personalized advice, you can contract with your account firm’s consulting branch or find an independent consulting resource in your local area and/or in your industry. Be sure to check their background and affiliations to be sure that they are truly independent and not associated with one or several ERP providers.
You may choose to include certain ERP system suppliers that are of interest for other reasons. Perhaps one or more of your larger and more important customers uses an ERP system and has encouraged you to use the same system. Or perhaps your company is part of a larger enterprise or industry group that has “standardized” on a given ERP platform. Get a proposal from the recommended provider and give all the proposals a fair and unbiased evaluation when making your decision.
Key takeaways and tips
Ensure that all stakeholders identify their requirements. Your RFP should include input from all stakeholders—otherwise you risk choosing an ERP system that serves only some of your business functions, requiring other areas to invest in standalone systems. Evaluate systems that work for the entire business and use the implementation schedule to deliver priority modules first.
Pay attention to requirement ranking. Often, the RFP is divided up into functional areas with sections for each department to complete. Each area—whether HR or operations—typically does a great job ranking functionality for their business unit but their priorities may not align to overall business goals. It’s up to your project evaluation team to adjust priorities from a broader perspective. Which requirements are vital, important, or simply nice to have?
Check actual feature availability. Software companies have great marketing departments; some sell products that have not been developed and tested completely. Do the research on features “coming in a future release” versus those being used by references today. It’s perfectly okay to consider features in development—but don’t bet your project on upcoming features if they are essential to a successful project.
Evaluate your processes. Processes built into packaged ERP software are considered “best practices.” Experienced ERP consultants and implementers will tell you that it is almost always better to change the procedure to fit the software (recognizing the “best practice” aspect) than to change the software to fit the existing procedure. However, this decision is yours to make. But remember that new processes can drive the improvements and benefits you get from a new system. Also remember that all modern ERP software is tailorable, so you have considerable flexibility to change screen layouts and flow, procedures, data characteristics and treatment, and more—without modifying the code.
Consider your ERP ROI. Most companies require return on investment (ROI) analysis as a prerequisite for authorizing and funding any major project. As the name implies, this is a summation of costs related to the purchase and implementation of the new system plus operating cost differences compared to those of the existing system. ROI also considers benefits in addition to direct cost savings, including improved performance, better customer service, and workplace productivity.
Step 3: first-cut ERP evaluation
Evaluation takes place in two phases. In this first phase, all proposals are evaluated to see how well they fit your environment and requirements as outlined in your RFP. (This phase does not include vendor comparison—that step falls in the second phase of evaluation).
The objective at this point is to eliminate those that do not meet your criteria and to rank the ones that do seem to fit the bill. The result is a short list of the best proposals. These, and only these, will be subjected to a detailed evaluation leading up to the final selection.
If you have many responses to review, details will tend to blur, making it hard to remember which RFP responses are particularly strong (or weak) and in which areas. A numeric rating scale can help you keep it all straight and document your decision process.
- Set up a form or spreadsheet arranged in such a way that reviewers can rate each proposal in accordance with the main criteria you specified in your RFP. Have each reviewer assign a numeric grade (the scale can be one to ten, one to five, one to three, or whatever level of granularity you feel is appropriate) to each evaluation criterion. You can have as many or as few reviewers as you wish.
- Leave space for notes and any questions about the response for follow up. You may want to ask for clarification at this stage or wait until the detailed evaluation on the shortlisted proposals. Assign a weight to each criterion based on how critical the function or process is to your business.
- Multiply the score given by each reviewer by the weight for each criterion and compute a total score for each vendor. Most often, there will be several who rank near the top of the scale, a cluster of responses a bit further in the rankings, and a few who do not make the cut. You should now have your short list of finalists—ideally three to five candidates—for final assessment.
- Odds are good that you will be able to identify the best candidates, but if it’s not that clear-cut, go back to the individual evaluations and discuss with the team.
Key takeaways and tips
Treat every potential provider equally. Do not accept any live demos, special in-person meetings, or onsite visits, unless you are willing to offer the same access to all the vendors—it’s important to keep a level playing field. One common technique is to host a “bidders’ conference” at your facility to show all the potential providers around and answer their questions (in front of everybody).
Remember that a proposal is a sales document. The responses will contain the information you requested and more. Assume that every claim is truthful; you can verify most, if not all, claims during the evaluation process. But understand that the proposal writers will respond to your questions in a way that puts their products in the most favorable light.
Look for outliers. Pay special attention to any criteria where ratings show a wide variation. If one reviewer rates a proposal very high for one criterion and another reviewer rates it very low, it’s worth a discussion. Question both reviewers in a constructive, non-threatening way to find out what each was thinking. Likely one or both noticed something that the other reviewers missed or did not consider important. As a result of these discussions, you may want to adjust the ratings for a specific criterion—and that could change the overall rankings.
Step 4: ERP comparison and detailed evaluation
Once you’ve identified three to five finalists, it’s time to get to work verifying their claims and validating references.
How to start your evaluation
- Get in touch with each of the potential providers and give them the good news: they made the short list! (It’s okay to tell them how many other finalists there are and even let them know which companies they are competing against, if you are comfortable doing so).
- In some cases, you might also ask them to refine their proposals.
- Talk to (or visit) existing users of the system, preferably in your industry (or in a similar market) and near your company size.
- Secure references if the vendors haven’t already provided them. (Vendors may be hesitant to provide references because of competitive concerns. But you should insist. Reassure them that you will sign and abide by non-disclosure agreements).
How to manage system demonstrations
This is also the time to invite the shortlisted candidates to perform detailed demonstrations of their systems—but you must control these demos.
- Provide each candidate a script or list of functions you want to see well in advance of the scheduled demonstration. All potential providers should get the same list.
- Allow them to show off any special features they wish to highlight only after they have shown you the features and processes outlined in the RFP.
- Make sure that your script or list includes the unique requirements identified in step one. ERP systems handle normal processes in much the same way; it’s the exceptions to normal processes that present the challenge. (For example, the ability to enter orders for items not in inventory; the requirement to sell groups or items in packages, kits, or sets; or support for a unique invoice matching process).
- During the demo, you will want to see how the software can be set up and tailored to support your unique processes and procedures. That said, remain open-minded to the extent that you might discover some best practices in those standard functions that would improve operations and results in your company.
- Ideally, the demonstrator will be able to show system function using your own data. This is not always possible but when it is, it will give you a much better demonstration of how the system would work in your environment.
Key takeaways and tips
Don’t be dazzled by the demonstrations. The professionals who demonstrate software are typically very experienced and have great personalities. Their goal is to win you over and sell their software. Do not get distracted by the person or the sales pitch, no matter how entertaining. Focus on how the business processes meet your needs.
Make the most out of site reference visits. Carefully select who you plan to visit. Make a short call to your host to make sure they have implemented the software and have realized the promised benefits. Agree on what they will be showing you and the people who you will be meeting during the visit. Once on site, carefully judge if their success is replicable in your environment. Also ask the hard questions: “What were your biggest surprises?” and “If you had to do it over again, what would you do differently?”
Continue to ask questions. Encourage your selection team to ask questions, if only to clarify answers. Do this in the RFP review as well as during the demonstrations; this will significantly reduce the chance of future surprises. Now is the time to discover any answers you don’t like—before negotiations begin. Also, keep in mind that you get your answers for free at this stage, so learn as much as possible. Once you start to implement the product, you may have to wait for support or even pay for answers to your questions.
Step 5: selection and contract
When you have completed the detailed evaluations, you will likely find that you have two or three vendors that meet your criteria. Select the one that you believe best meets your current and future needs—but don’t dismiss the others. Instead, let them know that they are a fit but not your first choice; this leaves the door open in case your negotiations with the top candidate do not work out as planned.
Now, you can begin to negotiate contract details with the top candidate. Most companies know how this step is “supposed to work.” But like every other step in the ERP evaluation and selection process, you might encounter some surprises here.
The power is on your side in the negotiations. However, it’s best to consider the provider to be a partner in your company’s future success, not an adversary in negotiations. Aim for a fair deal that gives both parties incentives to get the system in place efficiently and running effectively.
Every aspect of the system implementation and ongoing support should be discussed and documented—detailing the price, who is responsible, and in some cases, the time required. There are many aspects of the contract, including (but not limited to):
- Initial purchase, lease, or license of hardware and software
- Implementing the hardware and software (specifying what is “implementing”)
- Cost and timing of the conference room pilot (before or after software payment)
- Initial and ongoing training costs
- Ongoing maintenance support of hardware and software (and at what level)
- Data conversion and integration to other systems
- Networking and security
- Customizations (initial and with future releases)
Key takeaways and tips
Don’t announce your final selection before negotiations. At the end of the detailed evaluation stage, the team may want to declare a “winner.” However, informing the leading candidate that they are the “chosen one” is not in the best interests of the company. It is not unusual for there to be surprises in the negotiation process and you might need to revisit your choice.
Plan for the long term. In the rush to get started, make sure you carefully review the long-term costs so your estimates are correct and you don’t skew the ERP ROI numbers. Some providers provide more free services for a longer period and some may outsource their long-term support to a pay-by-support-call firm. Some providers have a cap on how much they will raise the yearly maintenance or subscription rates, and many do not. Others sell a low software-as-a-service (SaaS) subscription and after a few years start raise it significantly. Some providers provide an annual update but no significant support in the update process. Ask questions and get the answers in writing to make sure you fully understand your long-term costs.
It takes a village (or, at least, a team)
The most important factor in the success of the ERP system evaluation process is the project team. This team should be established very early on and should be the driving force in the development, distribution, and evaluation of the RFP and the selection of the new ERP system.
In our experience, when teams are in the midst of detailed investigation and evaluation, shortcuts are often taken. But if your project team follows these five steps and pays attention to the lessons learned, they will be able to find the optimal solution to meet your company’s requirements, now and for the future.