ERP Success During an M&A Transaction – Part 2: ERP Selection

Close your eyes and take a minute to envision the future of your business. Where do you want to be next year, over the next five years, and even ten years into the future?

You’ve probably spent a lot of time thinking about size, revenue, profitability and service offerings. The last thing on your mind may be the scalability of core business technology applications. But, without sophisticated tools designed to meet your company’s growth and vision, you are at risk of revenue restriction and stagnant growth.

Now imagine your company merges with another similarly sized business, with a completely different set of back office applications. You are up against the monumental challenge of integrating business processes and systems as the dust begins to settle.

ERP in blue glass cubes - business concept


First Things First: Evaluate Current Systems
ERP selection during integration is a very important time for any company, as there are long term implications regarding the scalability and viability of the tool. The assessment should not be a determination of “will this work for the current business” but rather a snapshot into the future in terms of where you want the business to be in 5-10 years. When two or more companies are in the process of integration, there are several factors to consider when choosing an ERP application including:

  • Scalability
  • Net new licensing costs
  • Comprehensiveness of the tool
  • Level of customization required
  • System version

After announcing the transaction, most major IT projects should be placed on hold in order to evaluate, understand and re-scope for the integrated business. Spending dedicated resources and dollars on projects that may be halted is wasteful and could send the wrong message – that the business is not prepared to handle change. Next, gather key subject matter experts from each organization to review the companies’ ERP systems, integration points, weigh pros and cons, and ultimately decide which system is the best going forward. It is integral to consider the new company’s goals and long term strategy. If one of the businesses has a niche ERP system and the other is a much larger company with more sophisticated needs, consider a more comprehensive system that will help the company scale. Utilizing a graded scorecard can help narrow down options in a detailed, objective manner.

Scalability Matters
Are the goals of the integrated business to grow quickly? Are you expecting a decline in business? Slower growth? The answer to these questions will aid strategic discussions to determine how much the ERP solution needs to scale, and ultimately help you select the right application for the business. It is also important to validate that core business functions can be supported by the ERP’s modules, and the functionality allows the company to scale. If the ERP system has limited CRM functionality and the company is focused on growing the business through sales/marketing, the company should consider alternate applications.

Don’t Forget Licensing…
It is also important to understand any net new licensing costs based on the influx of end users across the integrated business. As you analyze ERP systems, some items to consider include pricing (by individual count or sold in bundles – 1, 5, 20, 50, etc.), user function limitation, security authorization settings, software installation requirements, and ease of new user creation/onboarding.

Licensing costs can fluctuate depending on the type. If you host your ERP on premise, anticipate a one-time cost plus reoccurring maintenance for hardware (e.g., about 22% for Oracle). Or, you might consider a cloud-based ERP, which comes with a one lump sum subscription fee. Regardless of whether you choose cloud or on premise, be sure to budget for ongoing support – your organization can select a tiered support package that is appropriate to meet the needs of the business. It is important to consider the total cost of ownership, as licensing costs can be tricky.

Off the Shelf or Custom Designed?
How complicated is the integrated business? Does the ERP application have the functionality to meet critical business processes performed day to day? If the business model is marketing focused, it may make sense to look for an ERP application that includes strong CRM functionality. If the existing ERP applications are highly customized or non-existent, it may be wise to consider an out of the box solution (or rebuild) to save on long term costs and upgrade challenges. Be cautious not to replicate current business processes as custom functionality in the new system. The current state of some ERP systems can be behind on the current version, and an upgrade may be necessary before migrating application data to the chosen instance. Have you considered reporting requirements for the business? When selecting an ERP system, it is important to understand the standard reporting functionality available for each system. Custom reporting can be costly if created from scratch, so consider using queries and existing tables to pull data into reports within the application. More sophisticated reporting requirements may demand a data warehouse and/or a business intelligence tool.

Integrating multiple business processes and back office systems can be a significant challenge when companies are combined. Ensuring the chosen application is scalable to the projected growth targets over the next 15-20 years is essential. Licensing, comprehensiveness of the application’s modules, and customization are all factors that should be a direct input in any ERP selection post-acquisition/merger.

To review Part I of my series on ERP success, visit ERP Success during an M&A Transaction: Part I.

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