Imagine if a hotel chain used one system for taking reservations online and another for taking reservations over the phone? With two different systems for booking rooms, what would prevent a room from being double or even triple-booked? This is exactly the type of problem ERP solves for companies by unifying all their key operations (web, call center) on a single database.
Cash, resources, and clients are three assets that every successful business manages effectively. ERP is a type of software that helps companies manage these assets. The technology is designed to handle a myriad of functions (orders, project management, inventory, manufacturing, accounting, HR, supply chain) all unified in a single database. As such it is notoriously complex often requiring years to implement. Successful ERP implementations typically lead to increased visibility, lowered costs, and higher productivity for companies.
Unfortunately, these gains have eluded SMBs even though they are the most vulnerable to economic downturns, disruptive technologies, and shifts in the market. In this essay, I will explore the reasons behind this and provide an outlook for the future of Enterprise Resource Planning for SMBs.
The Enterprise (Fortune 500)
The two largest vendors in the enterprise space are SAP and Oracle. Their software costs millions of dollars to license and millions more to implement. Implementation takes 12-24 months involving armies of consultants who tailor the software for the business. The high cost is in part due to the scale of the problem: thousands of employees, interoperability with legacy IT systems, hundreds of locations often spanning multiple continents, dozens of departments each with their own internal processes. Unifying all of this in a single database requires extensive customization of already complex software and deployment of dedicated IT infrastructure.
The industry came of age in the early 90s as computers became commonplace on corporate desktops. Most companies realized that they needed greater visibility into their key business operations and data in order to compete in an information driven economy. Existing solutions were custom built, expensive to maintain, and slow-reacting to changing requirements. At the time, IT infrastructure was orders of magnitude less powerful and more expensive than today. As a result only fortune 500 companies and government agencies could afford to purchase these systems.
This led to the industry coalescing around the needs of fortune 500 companies and laid the blueprint for most of the ERP system architectures in use today. They were built to work in company environments with complex workflows, sizable admin overhead, huge IT budgets, and corporate hierarchies with 10 or more levels. Even as these systems evolved to support customer facing functions like sales and support, the basic operating and sales model remained largely unchanged.
The Rise of Software-as-a-Service
Rising Internet adoption later paved the way for SaaS entrants like NetSuite and Workday. They reduced the costs of ERP by an order of magnitude making it more accessible to midsize companies. Typical implementations took 3-6 months with annual costs in the mid to high six-figures in dollars.
The cost savings were caused by two fundamental differences: 1) SaaS ERP is leased and paid for monthly or per use, and 2) SaaS ERP is delivered over the Internet in a web browser.
This meant zero upfront hardware expenditure, minimal upfront licensing costs, lowered risk to the customer, and shorter implementation times. Besides these differences, most SaaS ERP offerings function very much like scaled down versions of their enterprise counterparts for larger companies. Where they differ is in the scale of the implementations, the amount of customization required, and the magnitude of the reporting and compliance requirements.
Small Business Accounting
Small businesses make up 90% of US businesses and account for 70% of new job creation. When it comes to managing their cash, resource, and client assets, most rely on off-the-shelf accounting software. The leading software used today is Intuit Quickbooks, a favorite amongst accountants and bookkeepers. It handles basic accounting, invoicing, expense management, and payroll for small businesses. Several SaaS upstarts have emerged in recent years like Xero, Zoho, and Wave touting ease of use and online access as key benefits.
These applications are cheaper than SaaS ERP systems but require a background in basic bookkeeping. As a result data silos are formed between those with the requisite background and those without. Large companies have the resources and processes to synchronize and move business data across these silos. SMBs however have neither the resources nor processes to manage this so they either abandon the software or outsource its function to a 3rd party.
While these applications excel at producing business documents, they fall short as ERP systems for the day-to-day management of cash, resources, and clients. Ironically, the more features that are added as these systems evolve, the higher the proficiency level required to operate them, the wider the data silos become between users and non-users, the less suitable they become as ERP systems.
Small Business Accounting ≄ ERP
Large companies faced this vicious cycle in the 90s when most cobbled together in-house solutions to solve departmental problems. Over time they realized that their ability to deliver enterprise value was a function of the integrity and velocity of their key business data. The ones that had real-time visibility into this data could react to market shifts quicker than the ones that didn’t. This is why they have invested over 200 billion dollars on ERP in the last 20 years and continue to do so today.
Why can’t SMBs adopt SaaS ERP from companies like NetSuite? The reasons are simple: they cost too much, provide more performance that the typical SMB requires, and incorporate more complexity than the typical SMB can manage. Again, it is important to note that these systems were designed for companies where strategic decisions are made two or more levels above where they are carried out. This influences everything from pricing, to their emphasis on reporting, to the amount of configuration required, to the way the software is sold. In a nutshell, the software is designed for larger companies with different organizational structures and day-to-day priorities.
I wrote an article recently on Quora arguing that upstarts to cloud incumbents like Salesforce and NetSuite faced an uphill battle if their primary selling point was better design. I argued that they needed to do 2 things in order to dislodge the incumbents: 1) gain a deeper understanding of the enterprise sales cycle, and 2) deliver order of magnitude performance gains in key business metrics. I proposed that a design led disruption would make more sense in the SMB market where the decision makers would be in a better position to benefit from an improved design or user experience.
ERP for the People
Two key prerequisites need to be met in order for ERP to gain broad SMB adoption: 1) it needs to deliver enterprise value using metrics that SMBs value (cash flow, new referrals), and 2) it needs to be designed for an organization with one or fewer hierarchy levels. Meeting both prerequisites would require a fundamental product bias towards task completion over report consumption, a complete integration of communication into the user experience, seamless data synchronization between users, and online (preferably mobile) access to core business data.
Several mobile ERP startups are re-thinking ERP for micro business. Delivered exclusively as mobile apps, they target micro service businesses that are mobile and conduct business primarily with individuals and other SMBs. I fundamentally believe that ERP for micro business has to be mobile for two reasons: 1) the business user is always in direct communication with clients and employees, and 2) the business user is often on the go needing access to their data.
These new mobile services let them publish their availability online and accept booking requests from customers. Upon delivery of service, the payment is processed and a review is sent to the business. Integrated with this core booking platform is the ability to exchange text messages and documents with customers and employees. Professional photographers, caterers, cleaners, handymen, landscapers, dog trainers, and other service businesses use these services to collect payment on time (cash), fill their availability pipeline (resources), and communicate with customers (clients).
An Outlook for SMBs
In conclusion, newer mobile service providers are providing a glimpse into the future of ERP for small businesses: easy to install, task oriented, no data silos, and communication built into the core. ERP technology has transformed the way companies operate and deliver value to stakeholders. The benefits enjoyed by these companies have largely eluded SMBs leaving them vulnerable to economic downturns and shifts in the market. Recent shifts in the technology landscape most notably the rise of SaaS and mobile, along with society’s changing views on long-term employment, have created an opportunity for ERP solutions to gain mass adoption with SMBs. I believe that the more productive small businesses become, the wealthier society will be as a whole.