Once your company reaches a certain size, ERP and financial systems become indispensable in your day-to-day operations. However, the more tightly you integrate these systems with your business processes, the harder -- and more expensive -- it becomes to upgrade or replace them.
Even when problems start cropping up, many companies feel that the risks of an upgrade far outweigh any headaches associated with sticking to their tried-and-trusted solutions. In a word, they're stuck. And left unchecked, this "lock-in" can do serious damage to a company's competitive edge.
What Causes System Lock-In?
System lock-in occurs for a number of reasons, most notably when:
- Upgrading to a completely new system is more expensive than the company can justify.
- A company’s ERP system is so central to business operations – from customer relations to accounting and logistics – that an upgrade project will disrupt business in a significant and costly way.
- The system's code has been extensively modified over time, creating a large body of custom code that would have to be migrated to the new solution.
If your systems are meeting your needs, lock-in may not seem like a major issue. But the competitive landscape changes quickly. As companies grow, adjust their business models, or find themselves faced with new accounting requirements, even the best systems start falling short. And that's when the workarounds begin, when businesses begin altering key business practices or slowing the adoption of beneficial new processes to compensate for limitations in their existing infrastructure.
The unfortunate end result is companies that keep systems running long past their prime. While the average ERP system is updated every 2 years, a 2011 Forrester Research report indicated that roughly 50% of all businesses use ERP systems that are at least 4 years out of date.
However, bandaid solutions only go so far. Eventually, you reach the point where the problems created by an inadequate or outdated system finally dwarf the headache associated with the upgrade process. Unfortunately, in many cases, that's also the point where the system is actively dragging down productivity, efficiency, and revenue.
The Risk of the "Rip and Replace"
In the past, companies addressed their infrastructure problems by simply replacing the entire system and starting over. In many cases, this is an extremely painful transition, especially if you have put off the upgrade until your problems hit critical levels -- not only can the software investment easily exceed seven figures, but there’s also the tremendous implementation cost, the disruptions caused by the need to retrain staff, and the risk inherent in the switch itself to consider. What's more, cost and scheduling overruns are common, even in well-planned transitions.
And despite all this pain, companies often find themselves right back where they started from. In a 2013 study conducted by Panorama Consulting, 60% of respondents reported that they received less than half of the benefits they expected from their new system after the upgrade. One in ten went as far as to call their upgrade an outright "failure."
Part of the problem is the nature of modern ERP and financial systems, which offer a broad range of capabilities but lack more significant depth in potentially critical areas like revenue management. To shore up those shortcomings, most vendors custom-code their software to meet clients' specific needs. This addresses the "one-size-fits-all" issues, but makes it harder to upgrade or replace the solution going forward -- and so the cycle of lock-in continues.
The Better Solution: Plug It In
In recent years, we've seen an alternative solution emerge. A number of vendors -- SOFTRAX included -- now offer modular products that will plug into existing core systems to perform particular functions the basic system isn't equipped to handle. We refer to these as “best-of-breed solutions” because they are highly specialized to be the best at what they do, creating depth in areas that would normally require extensive custom coding.
One such area is revenue management, which is rapidly reaching a level of complexity that exceeds the out-of-the-box capabilities of most financial systems. And with coming changes in revenue recognition guidance, the case for going modular with your revenue recognition needs is currently more compelling than ever. ERP plug-ins give you a cost-effective, fully auditable best-of-breed solution specifically built to handle new complexities without sacrificing business agility -- and if your needs change, you can always replace your modules with a newer version or swap them for another product.
If you’re interested in learning more about how ERP augmentation can help you protect your system investments and manage emerging revenue challenges, download our free white paper, “A Guide to ERP Augmentation for Improved Billing and Revenue Recognition.”
Martin Sachs is SOFTRAX's Marketing Manager. An experienced marketing and creative services professional, he was previously active in energy R&D and has provided consulting services to a number of innovative technology and software startups.