Chapter 1
What Is an ERP System?
In This Chapter
▶ Understanding project-based businesses
▶ Defining ERP
▶ Choosing between project-based and generic ERP
▶ Learning the roots of ERP
Just about everyone handles projects from time to time, at home and at work. But would you consider your business to be project-based? Good question, and to figure out the answer, you’ll need to educate yourself about what a project- based business is.
Confirming whether your company is project-based helps you decide whether your current ERP system really fits the needs of your company — or whether you have an ill-fitting system that is crippling your profitability and productivity. In this chapter, we discuss just what constitutes a project-based business and reveal more about ERP (starting with what those initials stand for, and no, it’s not the sound someone makes when burping). Then we talk about how to make the choice between project-based ERP and a more generic variety.
What Is a Project-Based
Business?
The answer isn’t all that difficult. A project-based business is simply a company that generates the majority — or at least a large portion — of its revenue from managing and delivering projects for its clients. A number of important characteristics define a project-based company. If these descriptions sound like your company, you may be a candidate for a project- based ERP system.
A funnel filled with opportunity
There’s a very special kind of business development team at a project-based enterprise. It’s all about filling the funnel. Visualize a funnel, and think of the size of the top of the funnel — yes,
it’s much larger than the bottom. The business development department’s job is to fill the top of that funnel with opportu- nities, bids, and contract wins so that the business can pro- duce revenue. It’s a never-ending job because the funnel must be constantly filled. That doesn’t mean the team can toss just anything into the top of the funnel, though. In order to know what to bid on, the business development organization must understand what kinds of projects have historically been prof- itable and must really grasp the diversity of the portfolio.
Built for executing projects
You won’t be surprised to know that the overall organiza- tion of a project-based business must be crafted to execute projects and put the right people resources in place to make those projects happen. Many project-based companies have a matrixed organization, which means people with particular skill sets can be used wherever work they’re trained to do needs to be done, whatever it is. This type of organization respects skill sets, and it’s known to have a very high utiliza- tion of labor. Matrixed is more of a descriptor than a name in many compa- nies. Matrixed organizations are often called functional groups or departments.
Wanted: program or project managers
Program or project managers may handle work at the product level or the work-type level. You might hear these profes- sionals called integrated product team (IPT) leaders, con-
trol account managers (CAMs), or work package managers.
Whatever you want to call them, these project team members are responsible for delivering the project to the client, and must manage their project’s scope, schedule, and budget.
What in the World Is ERP?
The ERP acronym stands for enterprise resource planning. ERP systems are designed to integrate an organization’s business information, including finance/accounting, customer relation- ship management, management accounting, procurement, human resources, budgeting, sales order entry, materials, and manufacturing.
It makes sense to integrate all these functions into one ERP system because it allows your company to establish business rules that will enforce critical processes. The whole idea is to seamlessly flow accurate and timely information between the different business functions. That gives leaders visibility into what’s happening inside the enterprise and a much greater control of the components of a business.
What’s an ERP like? Here are some key characteristics:
✓ There are transactional inputs.
✓ It has one central database for all information.
✓ Information is current (near real time).
✓ It’s modular in design.
✓ It features open system architecture.
A project-based ERP has all of the preceding characteristics, just like any ERP. At its heart, though, it focuses all the pro- cesses and all the data on the company’s central revenue generator: the project!
Why to Choose a Project-Based ERP
Project-based companies have their own distinct needs and requirements, and they must be able to view their business in three dimensions. They need to be able to see the nature of the expense, what resource performed the work, and the project for which the work was accomplished. But take that one step further.
Generic ERP systems depict the business as flat (see Figure 1-1). They can’t fundamentally understand the project dimension — they simply try to pancake over the top of the vastness with some level of project information. Projects are truly an after- thought in the system design. Because such a system requires customizations to make it operate with a project point of
view, you must pay big bucks upfront, resulting in a higher total cost of ownership.
Beyond that, customization of generic ERP systems often doesn’t work well. Project-based businesses that attempt this pancake maneuver find they have poor visibility, manual cost- ing, manual reconciliations, assumed revenue calculations, and manufacturing systems that aren’t tied to the projects for which the work is being done.
Generic solutions struggle to provide common deliverables that are tied to the project, and that struggle makes it difficult or impossible to produce an accurate view of project profitability and health. Businesses often respond by using predictive methods to approximate materials costs and try reconcili- ation efforts to connect accounts receivable and accounts payable transactions. They may spend weeks summing all this information up into useful materials so leaders can make busi- ness decisions. This creates a situation where visibility into projects is blurry at best and somewhat fictional at worst.
With a true project-based ERP system, every single transac- tion is tied to an account, an organization, and — you guessed it — a project! Look a little further at these three important elements that are fundamental to success:
✓ Account: The general ledger account that describes the expense. Examples include hotel costs, airfare, labor, and subcontracts. Think of this as a chart of accounts.
✓ Organization: This may describe a department, a func- tional group, or a product line. Most importantly, it describes who is doing the work.
✓ Project: This is the product or service being delivered to a customer or client. The project is where economic value is created within the firm and where billings and revenues come from. It’s the central activity that makes the business stay in business.
Linking these elements makes it possible to produce accurate and timely deliverables that are the lifeblood of any business, including:
✓ Financial reports
✓ Invoices
✓ Payroll
✓ Project status reports
When your corporate information and project financial infor- mation are tied together through the system, you have unpar- alleled visibility and control of your business. That enables you to make decisions based on current, real-time informa- tion, instead of managing through a rearview mirror.
The roots of ERP
The enterprise resource planning concept got its start in the 1960s, when manufacturing companies real- ized they needed a way to better con- trol their manufacturing operations. The first answer was known as MRP, short for materials requirements plan- ning. These systems were developed to order and allocate the materials needs for the manufacturing process.
From these early attempts to manage inventories came such new con- cepts as just in time or JIT. It wasn’t until the early 1990s that the Gartner Group employed the acronym ERP. You may have noticed that ERP is a lot like MRP, with just one letter swapped out. That’s important because ERP came to encompass much more than manufacturing. In fact, not all ERPs have embraced MRP and manufacturing at all.
As technology got more sophisti- cated, so did the adoption of the ERP system within companies. In the mid-1990s, ERPs incorporated all the core functions businesses needed to operate. By the end of the 1990s,
ERP installations really exploded, as the euro took off, and as companies started to worry that their legacy tools might be disrupted by Y2K issues.
By the first decade of the new millen- nium, ERPs started to encompass not only the back office but also front office applications such as customer rela- tions management (CRM). The role of ERP began to move from transactional- only to playing a major role in the deci- sion making of the company.
Today, ERP may be a source of joy or pain. Many companies purchased generic systems that were expen- sive to operate and needed a bunch of customization. This was especially true for project-based companies that tried to shoehorn their busi- ness into a generic, manufacturing- based system. The globalization of the economy has also had a major impact on evolution of the ERP system. Today’s enabling technology gives you the information you need to run your business no matter where in the world your employees live or work.