The current state of the economy is making companies think twice about investing in a new ERP system. But is it time to revise cautious thinking, asks John Stephens, and bite back at the credit crunch?
If you’ve been planning on upgrading your ERP system but uncertainty about the economy is giving you cold feet about committing to the spend, it might be worth thinking again. The cost of a new system can quickly be recouped from the savings it brings from increased control and greater responsiveness for your business. Not only that, but now may be the time to get the best deal from IT vendors as they start to feel the pinch too. But beware; if a deal sounds too good to be true, then it probably is.
Surviving the credit crunch and its knock-on effects is going to require some serious forward thinking, as well as making sure you’re running an efficient business. Identifying where the costs and waste are in your operations and processes can be greatly helped by a modern ERP system. And with all the signs of the slowdown continuing into the spring or even summer of 2009 at least, now is the time to put things in place to ride it out – and hopefully come out the other side, all guns blazing. If you and your solution provider work at it, it’s possible to have a new ERP system up and running inside six weeks; although four to six months is probably more realistic for most. Either way, if you act now you could be feeling the benefits before the end of the year.
Europe’s largest private mint, Pobjoy, is currently getting good value from its Access Supply Chain ERP solution. Pobjoy Mint manufactures coins, medals and tokens. Its customers are diverse and so too are its products and production runs – from hundreds of thousands of coins for overseas governments, such as the Isle of Man, to a handful of special medals for private individuals. With such high value inventory, the need for pinpoint data accuracy is vital. Unlike other manufacturers, Pobjoy Mint’s precious metal inventory is driven very much by the price of materials: “Because we have up-to-the-minute information on inventory, it allows us to plan for and respond to fluctuations in the price of precious metals, which can save us a lot of money,” says production administration manager Mike Aldridge. “If prices drop, we might buy a little more than we would do normally but equally, when prices are high, as they are with gold at the moment, our stocks are leaner than usual.” Less stock doesn’t mean longer lead times, however, as Aldridge explains: “We’ve been able to become more efficient, to sharpen our processes: the MRP reports enable us to set minimum stock limits, so that we can be confident we’re not compromising on service.” Don’t think now isn’t a good time to buy a solution either, because there are some good deals to be done. That isn’t just about discounts on the software price – your solution provider should be able to offer you an attractive package of benefits which might include a beneficial finance deal; additional functionality and users for minimal extra cost; a few free consultancy or training days; or a phased implementation plan so you can spread the cost.
Bear in mind too that any deal has to be a good one for the vendor as well as for you, so push for a discount by all means but be realistic – remember you’re going to need a relationship with your IT vendor over the life of your system and that’s probably going to be anything between five and 10 years. By the time you’ve reached the ‘go/no go’ stage, you should be pretty sure your supplier has given you a good price anyway and there may not be much more room for them to manoeuvre. If your vendor suddenly cuts the price of your software by 40 or 50 per cent, you have to question whether that really is a good deal – were they trying to charge you too much in the first place or are they struggling for business? Either way it doesn’t bode well for a long-term partnership; what seems like a big saving now could turn out to be a costly mistake if your supplier isn’t around in six months time.
Craig Such, managing director of ERP supplier Access Supply Chain, says that if you’re having second thoughts about buying your new system, price shouldn’t be the deciding factor anyway. He believes it’s more important to check that the reasons which drove you to look for a new system in the first place are still valid.
“When things are tight it’s a good discipline to reassess, but when you do, you should leave price out of the equation in the first instance and ask yourself whether this is still the right solution and provider for you. If not, regardless of the price, you shouldn’t be doing business with them anyway,” he says. ”Once you’ve satisfied yourself on that score, you then need to weigh up the cost/ benefits of implementing now rather than later. Then by all means, try to do a better deal with your supplier.”
Beyond a straight cash discount, you will probably find that your solution provider can arrange a better finance deal for you than if you go direct to a bank or finance house, many of whom are reluctant to finance software-based solutions. A typical leasing deal from your solution provider will be at competitive rates and will include the cost of software, training, support and annual licences, all spread over three years. A lease deal like this also allows you to fix your maintenance costs for three years and, unlike traditional finance deals, you don’t have to pay the maintenance costs up front but in the year they fall due.
Craig Such believes that around 60 per cent of customers now finance their software solutions in this way. “Any company that buys a software solution as a lease purchase rather than as a capital purchase will end up paying less for it in the longterm, because of the combination of tax benefits and freeing up cash that can be used elsewhere to invest in stock or machinery, or even just left in the bank earning interest,” he says.
“A lease purchase can also give buyers a credit limit, so they can keep adding to that lease if they wish – as soon as they’ve paid off some of the lease, they can draw down additional money to spend on extra software or services; it’s a bit like a draw-down mortgage.”
Another option is agree to phase the implementation of your new system, installing the modules you need immediately and introducing the others at a later date. You might also be able to negotiate, say, 15 months’ annual support and service desk fees for the price of 12, in the first year. Alternatively, your vendor might offer you one or two days’ services free – if the vendor is using good quality consultants there may not be any movement on the day rate without them providing lower grade staff but you might get 42 days for the price of 40, for example. Similarly, it might be that the vendor will offer you an extra user license free rather than discount the price of the software – 21 users for the price of 20.
So if you are having to decide whether now is the right time to buy your ERP system, make sure you take account of all the issues. Check first that your justification for the system still stands up; push for a good deal but don’t buy on price alone; and get your supplier to work with you on a package that suits you both. Above all, don’t panic, and remember you’re making a long-term decision rather than just responding to what’s happening today.