You probably can’t afford to risk your blooming startup business by engaging in a huge ERP project – but luckily, there are alternatives.
A startup is a company operating in a highly unknown environment and is aiming for high growth. This is precisely the kind of environment when you should not take on a long and expensive project such as Enterprise Resource Planning, ERP, implementation. When many aspects of the business are unknown long-term planning is difficult. To be prepared for frequent changes, all commitments must be evaluated in terms of flexibility. Something useful today might become obsolete tomorrow.
ERP software is a tool for operations optimization for companies producing or just handling physical goods. ERP helps to deal with large data sets, improves production planning, sales order handling, inventory management, invoicing, and so forth. In general, ERP impacts all departments of an organization. ERP is an excellent example of something that is useful but is very rigid.
ERP Projects Are Costly and Difficult
Due to the vast scope and complexity of ERPs, the implementation projects are very long. Different sources talk about lengths of 12 to 18 months. To my experience, that sounds realistic. At least it will not be shorter. The vast scope impacts the costs as well. The significant project costs consist of external human resources (setting-up of the software, customizations, guidance for internal resources for implementation, and data transfer) and license fees. The latest ERP softwares run in the cloud so hardware costs should be limited.
The scope and complexity make the project not only costly but very difficult as well. The projects are difficult for all, not only for startups. According to a study from 2015, 70 percent of ERP project fail. One of the biggest failures made headlines in 2018 when Lidl gave up on their ERP project after spending 500 million euros on it, ouch!
What is possibly the least tangible issue and most challenging to mitigate is the fact that the project takes a lot of human resources. The issue is highlighted even further because the resources are needed from all departments, not only, e.g., from production. First of all, it is challenging to estimate the required resources and us humans; we have the tendency to be overly positive.
Secondly, undertaking the intense development project means that there can be very little other overlapping projects. Usually, starting any development project means that the people running the daily operations will now have extra work along with the day-to-day stuff. Imagine doing this for 12 to 18 months. Imagine doing this in a startup where human resources are limited, and there is restricted cash to hire outside help. Imagine not having other development projects on-going for a year or two. The case is totally different for established companies because, well, they are established. They have the capital and human resources available for them. Also, it is natural to have fewer development projects in the later stages of a company’s life.
The 3 Reasons Why a Startup Should Never Undertake an ERP- Project
So far, we have taken a look at what makes ERP projects difficult for any organization. In this section, I list three main reasons why ERP projects are even more difficult for startups and why the project should be postponed to later stages.
1. ERP Takes Focus Away from the Most Important
An established company has the market fit and an established production. It is natural for it to look for better operational efficiency, and ERP is a crucial tool for that. A startup does not have a market fit or if it has it in the domestic market or among early adopters. In any case, the company is still to cross the chasm. Also, its production process is still developing in big leaps in a fast phase. The purpose of a manufacturing startup is to learn, not to generate profit. To start an ERP project would lead to taking focus away from development and learning to production cost optimization. This is the number one reason why an ERP project must not be undertaken.
2. ERP Takes Resources Away from More Important Projects
Unlike a large corporation, a startup cannot commit enough resources to such a massive project as ERP. The limited resources are simply used better elsewhere. Depending on the startup, major development projects that are more beneficial to take on are for example production quantity scaling, supply chain development, expansion to new markets, product development, looking for new funding, and so on. What is interesting here is that the reasons to start an ERP project are mostly production-related, but the project takes resources heavily from all departments.
To reduce the costs of the project and to add flexibility, a startup might look at stripping down the functionalities and customizations of ERP at the launching phase. Especially limiting the number of customized parts has a significant impact on the costs and the timetable. Not customizing the ERP for the needs of the specific company will lead to a situation where the best benefits of ERP are not available. This might lead to increased difficulties at launch when some aspects that the old manual or semi-automatic systems work better than the new and shiny. In such a situation, getting the buy-in from all stakeholders is challenging.
3. There is a high risk that ERP-project is a complete waste of money.
Remember the stats from earlier? Staggering 70 percent of all ERP projects fail! Even if the startup manages to finish the long project, there is a highlighted risk of it being out of date. Due to the highly unknown environment and the long project span, likely the scope of the project is not a fit anymore. Maybe some functionalities are missing that are now considered necessary. Perhaps you spent the resources on something unnecessary. Maybe the chosen ERP software was designed for small and medium-sized companies, but now you are already becoming a large corporation?
Also, for a young company, one future scenario is being acquired by an established company. Even if the new owners would not want to completely integrate the startup to its systems (including the ERP), they at least have a process and it-infrastructure in place that can be extremely helpful. In any case, if the project is on-going in the moment of acquisition, it could be so that it must be started all over to match to updated needs and environment.
What Are the Options?
After a certain point, the amount of data becomes so big it cannot be handled with excels alone. There are a couple of options that have some of the functionalities of ERP but are significantly easier and faster to implement. One option is MRP, Materials Requirements Planning, which is a tool for production and inventory management. Small coding and optimization of spreadsheets will do a lot as well. RPA, Robotic Process Automation, solutions are an excellent way to cut off repeatable work. One might argue that an ERP is a complex RPA- tool itself. For example, the RPA tool Microsoft Flow could be valuable for a startup company before moving to Microsoft Dynamics- ERP later on. The presented options require more manual labor than an ERP, but that is a clearly lesser evil than undertaking an ERP implementation project at the early stages of a company.
When Is the Correct Time for ERP?
There is no question that to compete in industrial-scale against global competition, an ERP is needed eventually. The time is right for the implementation is only after you can tick the following boxes:
- Processes are defined.
- Production is standardized.
- Market fit has been found.
- Quality-system is in place.
In general, ERP makes standardized production run more efficiently. In a startup, there is very little standardized work because everything is new, and the company is still learning what should be standardized in the first place.
I see that production scale-up and cost optimization cannot be done at the same time. There is no question that the production scale-up would not be more critical than cost optimization. A working ERP would indeed be beneficial, and ERP is needed in high-volumes and to be able to reach healthy profit margins. But for the presented three reasons, the cons outweigh the pros for startups by a clear margin.
The author has been involved in two ERP projects as a project manager in startup companies. He has also helped startups to evaluate the feasibility of proposed ERP projects.