Upgrading an ERP system is an extraordinary undertaking. Contrary to conventional thinking, we don't recommend an ERP upgrade unless the circumstances demand it. On our podcast above, we discussed the five most common reasons why companies upgrade their ERP system, with a look at how to know if the time is right for your company to upgrade their financials or ERP system. We advise companies to only consider an upgrade if they are experiencing one of these issues.
What is an ERP upgrade, exactly?
When we discuss upgrading your ERP system, we are talking about two very specific types of ERP upgrades:
The first type of upgrade we discuss is the more literal kind. Say, for example, you're running version 10 of a particular software package, and you want to upgrade to 11.2, the newest version. You’re still using the same application, and the same vendor — it's just a different version. These updates, especially in cloud-based applications, tend to happen rather frequently, and often without you even knowing it.
The second type of upgrade is when you want to move to a better system, just like you might upgrade from an apartment to a house, or from a Toyota to a Lexus. So if you are responsible for software systems in your business, and you feel the time is right to upgrade to a better system, that is the type of ERP upgrade we are going to explore here in more detail.
Five reasons for an ERP upgrade
As mentioned in the podcast, there are five major reasons why companies want to upgrade an ERP system.
The first reason is growth — and there are four growth indicators to look at in determining if your company might need to upgrade its ERP system.
- More Business Transactions: When a business is experiencing a significant change, there is more data that comes through that needs to be tracked. There are more sales, more fulfillment transactions, more employees, more projects, more of all the things that need to be tracked by people in management positions.
- New Products and Services: As a business continues to grow, their model may also expand or shift, which we have seen happen in many of our clients. They may start to add additional services to their portfolio to build a stronger value proposition.
- Selling to New Markets: Growth often leads to expansion. Where a business may be focused on a certain geographic region in the U.S. to begin with, growth may create opportunities to build business in additional regions, or even develop territories outside the U.S. Expansion often creates the need to incorporate new business requirements including new tax rates, new number formatting conventions, or multiple languages — all features that your current ERP system may not be designed to handle.
- New Business Line: This is more than just a new product or service. A new business line is a completely different product or service, with a different customer base, different manufacturers, different processes, and more. With a new business line, you would need an adequate ERP system to handle all the different aspects.
Anytime your company is experiencing rapid growth, it might be a good time to evaluate your ERP system and select a software application that can aid in the growth of your business.
2. Mergers and Acquisitions
Many of the clients that we serve are mid-sized businesses ranging from well-funded early stage startups all the way up to companies with $600 million in revenue. Within this area of the market, we see a lot of changes, especially when it comes to mergers and acquisitions. If there is a new investor group coming in and looking at a business, you may need to upgrade your ERP system to support their needs and preferences. The same thing holds if a smaller organization gets bought by a larger organization, the acquired firm is probably going to have to be merged into the ERP system used by the parent company.
3. Legacy Technology
When discussing ERP upgrades with many of our clients, legacy technology is something we run into often. A legacy system is usually a custom-built application that an organization has used for years or even decades. Company leadership never wanted to upgrade to a newer version, let alone a new brand of software, for fear of losing their customizations. In the older on-premise software deployments, the cost of replacing those custom features were immense so it was always easier for companies to just leave them as is. The problem with this strategy is that there are not many vendors available to support this type of customized software, so upgrading to a widely supported ERP system can often save a company in several different ways.
Another common problem we see in companies who depend on legacy technology is not only a lack of outside vendors that support the application, but within the company, there are usually only a handful of employees that know how the application runs and works. When those individuals leave or retire, there is usually nobody that can replace them. Proactively upgrading your ERP system may be a beneficial (and necessary) decision for your organization if you find yourself in this type of situation.
Finally, the legacy technology may not do what it supposed to do anymore or what you need it to do anymore. Processes change over time, businesses shift over time, and the application might not be able to track exactly what you need now, or in the future, even though it was perfect for what you needed in the past. If your legacy software isn’t doing what you need it to do, it may be time to upgrade to an application that can do exactly what you need.
4. Regulatory Considerations
The next reason for an ERP upgrade is because of regulatory changes, which is a great reason to upgrade your software. We see this occur a lot on the accounting side, as we see very complex accounting and revenue recognition rules coming out more often than before. For example, when the Sarbanes-Oxley act passed in 2002, there were many companies with existing applications that couldn’t provide the controls that were required. Most often, the regulatory reasons for upgrading an ERP system stem from weak controls and weak functionality and not being able to control risks involved. Therefore, regulatory reasons are an excellent reason for an upgrade.
5. New Leadership
The final instance in which your company may consider upgrading the ERP system is when there is new leadership. For example, a new CEO or CFO is hired to bring the organization to the next level, either through organic means, through acquiring other organizations, or just through better operations. They may want better visibility into the business or may want to automate more of the processes, or they may want to use a specific solution that they used in the past. While this isn’t a guarantee like the other instances we discussed, it is something to keep in mind that a new leadership position or team may want to upgrade the company’s ERP system.
We’ve covered the top reasons a company may undergo an ERP system upgrade: growth, mergers and acquisitions, legacy technology, regulatory reasons, and in some instances, new leadership — and our decades of experience tells us that if you are not experiencing one of these five conditions, an upgrade may not be necessary or warranted.
We don’t recommend undertaking an ERP system upgrade unless a business or an organization is being impacted by one of the key factors outlined in this article. We are available to discuss specific scenarios — for a free consultation, you can connect with us here.