ERP Modernization

In 2020, Happy Feet International underwent a complete ERP transformation — much to the company’s relief.

The flooring distributor had been stymied by an old system that made it almost impossible to know how much inventory was on hand at any given time.

At one point, the ERP started counting backwards. When receivables came in, the inventory system marked them as sold. When items sold, it added them to available stock. The inventory snafu surfaced during a global supply chain disruption, adding more chaos to the mix.

The company worked with NetSuite to get a new ERP system up and running in 90 days. Not everything ran perfectly, said Happy Feet International CIO Nick Schwartz, adding that it took another 90 days to smooth out all the wrinkles.

Not getting it right out of the gate is typical for ERP shifts, even when there’s no rush to modernize. “It’s the largest scope software implementation that most companies will ever embark on,” said Chris Perry, M&A ERP lead at West Monroe. “It’s impossible to consider that every task finishes on time.”

When companies modernize ERP systems, it's common to run into security, data and integration issues. But CIOs can proactively address those hurdles and push forward with necessary upgrades.

Digital transformations often falter

Business leaders report various levels of discontent related to digital transformation efforts, according to a Forrester Consulting report commissioned by EdgeVerve.

Just 20% of respondents say that they've achieved success. The report also found ineffective digital transformations cost firms about $18 million a year on average.

The most common stumbling blocks to transformation are data security issues, data quality and integration issues and the lack of a coexistence framework.

Beyond technology-related problems, change management is another puzzle to solve.

The systems that need to be transformed often “cut across many entities and enterprises,” said Sateesh Seetharamiah, CEO of EdgeVerve. Digital transformations can falter when the process is not done holistically, a complex endeavor as most businesses are already separated into their own silos. 

“All of these things are leading to not having an integrated approach.”

ROI on technology isn't guaranteed, as 53% of respondents find less than half of their digital transformation investments translate into tangible business value.

“Obviously these are complex programs, which have different levels of expectations and various stakeholders,” he said. 

Strategy and good governance

A smoother path to critical system upgrades requires strategy. 

“If we choose the wrong strategy or the wrong software, then no matter how well we execute, we’re limited,” said Perry. “If we’re implementing something that doesn’t align with your business strategy, then we’re doing the wrong thing very efficiently — in the best case.”

That means choosing the right software, but also choosing the right approach. Trying to do everything at once in a “big bang” type way instead of phased implementation may mean disaster for an organization that is “not really the type of company that can deal with significant business disruption,” Perry said.

Good governance and a testing strategy with meaningful scripts and capable technicians is also key. “By having a solid approach to testing, I will catch all the other problems,” Perry said. “I might still have those problems, but this is your final check and balance. If you don’t have it, you can be blind going live.”

That also means having a strong go/no go process, so project managers aren’t bullied into saying they’re ready when they are not. “People have to be willing to accept the pain of a delay,” Perry said. “It’s far better than the alternative, which is going live when you’re not ready.”

Post-migration operations

One of Happy Feet International’s biggest challenges was deciding which parts of the old system and processes had to stay, and which had to go. 

The company didn’t always have the appropriate processes documented, and they didn’t always have much “flexibility when determining whether or not those processes need to continue,” said Schwartz.

For example, the old customer service system had 10 fields of information per customer, by far more than was needed. “It was a struggle transferring from using separate fields to just one user note section,” he said. 

They worked through these struggles by having conversations around the “whole concept of change and change management,” Schwartz said, which can be difficult for a company that started out as a small family business. It took some work to get people, especially long time employees, to understand that they needed to work with a more formal and standard process under a new ERP system.

Happy Feet International worked with employees to help them master the software. In one case, a customer service employee struggled to get the hang of the new system, so they transitioned him into a different role. “We still have his knowledge on staff and he doesn’t feel stressed during the transition,” he added. 

Schwartz said that the company is faster, leaner and more scalable, and is now in a second round of conversations about how they can get templates to work better for automation work.

The company was also able to implement a new tax system for its Arizona location in an hour and a half, which might have taken weeks of work otherwise. The shift still required a week of planning, but making the change was a snap with the new ERP. 

Happy Feet International can also do inventory just twice a year now, down from a monthly cadence. Schwartz estimates the company was able to save six figures a month solely on being able to adjust shipping because it knew what it had, and what it needed.

When one of the largest enterprise software companies embarks on a restructuring journey, the announcement reverberates globally, touching IT stacks across industries and economies.

ERP behemoth SAP announced that it will pour billions of dollars into a massive transformation project. The plan, which seeks to increase the company's focus on AI, is expected to impact as many as 8,000 current employees, open additional markets and drive new revenue streams.

The move will also affect tens of thousands of SAP customers, as the company intensifies its shift to a cloud-based delivery model with usage-based pricing.

The company factored AI investments into the transformation bill, allocating $1.09 billion (1 billion euros) to the development of use cases over the next two years. But SAP expects to spend twice that amount, $2.18 billion (2 billion euros), on broader restructuring as it shepherds its vast customer base to cloud.

Behind SAP's interest in business AI capabilities is the need to accelerate cloud adoption among customers, an effort the company previously started but is still in process.

“Cloud ERP suite is our growth engine,” CFO Dominik Asam said, during a Q4 2023 earnings call, noting that cloud revenue has surpassed software licensing and support and is not the company’s fastest growing revenue stream.

“Cloud is the big elephant in the room for SAP, despite some of the other announcements that they spent time on during the earnings call,” Liz Herbert, VP and principal analyst at Forrester, told CIO Dive.

Before cloud, SAP had a decades-long history as a legacy, on-prem software company, dating back to its 1972 foundation. Despite broad cloud adoption across the enterprise application suite, a lot of SAP’s customers haven’t prioritized ERP migration, Herbert said.

Shifting to cloud has clear end-user advantages.

“It opens up this idea of continuous innovation, never having to worry about an upgrade, often having the best, most current capabilities in privacy and security and everything else,” Herbert said.

But ERP modernization isn’t cheap, especially for large enterprises.

“Some enterprise customers are questioning whether now is the right time to spend what can be hundreds of millions or even billions of dollars on a big ERP modernization,” Herbert said. “It's disruptive, it's expensive and it can be risky.”

Accelerating the SaaS shift

SAP isn’t new to cloud.

The company launched its first cloud-based SaaS solution SAP Business ByDesign, in 2007, Christian Hestermann, senior director analyst at Gartner, told CIO Dive.

The shift accelerated three years ago when Christian Klein became CEO of SAP and pushed for cloud-focused transformation. Earlier this month, the company created a board-level cloud migration unit under the direction of former CIO and product engineer Thomas Saueressig.

“It's been an ongoing transformation,” Hestermann said. “Most of the line-of-business solution acquisitions the company has made over the past few years — SuccessFactors for human resources and Ariba for purchasing and supplier network management — have been cloud-based from the beginning.”

But buy-in from SAP’s existing customers base has been a challenge.

Gartner found that only one-third of SAP ERP Central Component, or ECC, customers had initiated their transition to the cloud-based S/4HANA, the company’s newest ERP solution. The analyst firm noted in a midyear report that there was “little evidence that migrations to SAP S/4HANA are taking place at the rate needed to meet SAP’s target to terminate mainstream maintenance support for ECC in 2027.”

“We believe that the vast majority of S/4HANA customers today are using the private cloud version, not the public cloud version,” Hestermann said.

SAP has made several moves to accelerate migrations. The company raised on-prem software support fees in July and announced that some updates and features would not be available outside of the fully SaaS-based ERP platform.

Hestermann said it surprised customers last summer when SAP announced that some innovations will only be made available in the public cloud version.

The cost of modernization

In addition to the billions SAP is investing in modernizing its business, there are inherent costs to restructuring operations around a cloud-first model.

As SAP moves to cloud SaaS, they must ramp up capacity on the cloud side while ramping down capacity for on-prem, Hestermann said. That will require changes in workflows and workforce, leading to reassignment, reskilling and potential layoffs.

The company has indicated that the majority of the 8,000 positions affected will be “covered by voluntary leave programs and internal re-skilling measures.”

The SaaS model has other implications, specifically on the buyer-seller relationship. 

“Business departments outside of IT can subscribe to a SaaS solution,” Hestermann said. “They don’t need to buy new servers or have IT staff operate the system. This means the vendor can bypass the IT department and procurement department and go directly to business users with a product offering.”

Publicly prioritizing the shift has benefits, too.

Herbert said it’s important for SAP to signal to its current and potential customer base that it is serious about modernization.

It’s a positive signal to investors as well. “The stock markets are very interested in how well the move is progressing because SaaS is a more predictable revenue model,” Hestermann said.

The problem has been in the rollout, according to Herbert.

The company implemented the RISE with SAP migration program to ease enterprise adoption two years ago and launched GROW with SAP, a similar service for midsized customers, last year.

“We lead with our RISE and GROW with SAP offerings,” Klein said during the earnings call, adding the company is offering targeted migration incentives and methodologies to accelerate the RISE conversion. 

“It’s good that they are promoting cloud,” said Herbert. “But I think they got themselves into a little bit of trouble by promoting the idea of flexible cloud deployment models and then shifting this year to saying you're not going to get all the innovation and benefits if you don’t move to public cloud.”

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An effective ERP is essential to combining people, systems and processes in order to create a successful, compliance-focused tax function. Business leaders need to have a clear understanding of this interplay to navigate an evolving taxation landscape, remain compliant and make informed financial decisions—as well as respond to globalization, the speed of commerce, the intricacies of tax laws and regulations and ongoing advances in technology.  

An ERP platform is strengthened when it’s combined with a tax engine—which helps further streamline tax calculation by automating tax research with capabilities such as updating tax rules and rates for tens of thousands of jurisdictions worldwide.  It also makes it possible to update content in multiple individual systems, provide more precise tax calculation on complex scenarios and leverage significantly more data fields from each transaction for greater accuracy.  In addition, it centralizes tax across sales and procurement, creating standardized and enterprise-wide tax calculation for O2C and P2P—as well as providing better reporting for audit prep, with consolidated and detailed reporting from a single source instead of piecing together reports from multiple systems.   

Other benefits of an ERP with a tax engine include:  

• Efficiency: Well-designed processes—supported by advanced systems and skilled professionals—can help reduce the amount of manual work and help address compliance issues by minimizing errors.  

• Compliance: The complexity of tax regulations makes a structured, end-to-end approach a necessity. And with the speed of global commerce and real-time reporting mandates, there is increased reliance on the settings and requirements associated with automation.  And getting compliance right is important given its impact on other business areas. In fact, a recent survey of 580 people from around the world with influence over decisions made about indirect tax in their business, 60% of those respondents say that compliance has an impact on financial strategy within their business. 

• Cost management: Effectively managing taxes can result in reduced tax liabilities—which can ultimately create a positive impact to a business’s bottom line. Tax management used to be handled primarily by team members—which can be costly, with the possibility of human error. Now, where it makes sense operationally, routine activities are being handled by automated processes—creating more room for tax specialists to focus on higher value activities. 

• Strategic planning: The result of a holistic view of all the above-mentioned elements. Businesses can optimize their tax positions, manage tax risks and plan for the future—all while spearheading compliance initiatives by deploying their people, systems and processes most effectively. 

While a legacy ERP provides benefits, those benefits expand exponentially when an ERP is migrated to a modern, cloud-based system.  The factors that drive the decision to make that change, include:  

• Scalability: The most effective ERP solutions include features that can help support a company’s future growth objectives. Cloud-based platforms typically offer an ideal way to scale in a secure way. 

• Interoperability: ERP vendors that develop and nurture an ecosystem of certified partners with solutions that are able to integrate with the ERP system, provide the opportunity to achieve a positive return on investment— and with the benefits integration provides—advance compliance goals. 

• Tax flexibility: Tax is an organizational area that can expect to deal with an ever-evolving landscape—which means it’s important that the tax technology within the ERP ecosystem remains agile in order to adapt to sudden changes to tax compliance requirements.  It also helps with compliance by automatically updating all relevant tax rule and rate changes without manual intervention, providing determinations of what is taxable or exempt and validating customer addresses across the ERP platform to ensure accurate tax calculation and shipping processes. 

Modern, cloud-based ERP systems are a key component of digital transformation efforts because they help organizations operate with greater agility and efficiency. Ensuring that an ERP cloud ecosystem is optimized also provides a strong foundation for compliance initiatives—which helps support overall business success. 

Enterprise customers trimmed software spending bloat last year but still wasted an average of $18 million on unused applications, according to a report from SaaS solution provider Zylo. The company analyzed 12 months of customer data and surveyed more than 100 IT and software management professionals.

As budgets tightened, SaaS spend declined 10% year over year, dropping to an average of $45 million for companies analyzed.

With ERP giant SAP and other software vendors encouraging enterprise customers to adopt consumption-based as-a-Service models, software spend is on the FinOps agenda, according to the FinOps Foundation, which incorporated the category into its evolving definition of the practice this month.

As cloud adoption spreads throughout the enterprise, cost concerns and optimization initiatives follow, blending previously discrete budgeting categories into one big mass of tech spending. IT leaders are scrambling to maintain control while sustaining adoption.

More than 9 in 10 IT and software asset management pros now lump SaaS into broader cloud cost governance efforts, according to Zylo.

The savings potential is significant.

Overall, companies neglected billions in savings last year by failing to take advantage of built-in hyperscaler savings plans and discounts. Infosys found more than $300 billion in pre-paid cloud credits lying dormant in enterprise accounts.

A similar dynamic is at work in SaaS. Companies leave more than half of licensed SaaS applications unused, Zylo found. Nevertheless, the average organization added six applications each month last year, a rate of consumption likely to increase as AI usage grows.

Enterprise adoption of generative AI tools was reflected in Zylo’s tracking. OpenAI’s developer API topped the list for year-over-year spending growth.

IT leaders are also concerned with shadow adoption of generative AI and its implication on spending. Two-thirds of respondents acknowledged that employees charging software to expense accounts was a major challenge.

In 2024, executives plan to keep perfecting the crown jewel of the enterprise software arsenal: ERP implementations.

The global ERP market has grown 8% since 2022, and 1.4 million companies are expected to spend $183 billion on ERP software in 2024, according to HG Insights data.

Implementations slated for this year are a mix of companies upgrading systems to make them more regulatory compliant, and companies still on-prem moving into the cloud, with improvements in software and the addition of AI. 

“You could possibly argue that they’re not getting faster, but getting more in there — more bang for your month,” said Chris Perry, M&A ERP lead at West Monroe.

Akshara Naik Lopez, senior analyst at Forrester says most companies are in a “pre-RFP stage,” where clients who know they have to execute a big project are planning and strategizing. 

“You’re going to be seeing a lot of clients being comfortable enough to [follow] the true cloud ERP journey,” she said.

Part of that planning also means making sure current systems are stable and well documented, especially if an organization is anticipating any older employees leaving the field. That way, institutional knowledge doesn’t go out the door with retiring employees, making the shift to cloud more difficult. 

This year is also finally time for on-prem companies to move. They “know there’s a ticking time cloud,” she added.

Any new company that wants to run ERPs on premises will have a difficult time doing so, simply because those products are not readily available anymore. 

“It’s hard to buy on-prem or perpetual licenses,” said Perry. “You can’t walk in as a new customer or new company and buy that version ... they will not sell you an on-prem perpetual license unless you can make a really strong case to them.”

ERP migrations pack more into implementation

While ERP migrations are still taking the same amount of time — between 12 months and two years — companies are getting more out of their ERP work in that time. 

“The software companies are improving the software, so it’s easier to implement,” said Perry, adding that these improvements enable companies to avoid customizing and writing house-written code. Better software is also allowing implementations to be more complex and more sophisticated, he added. 

In 2024, Joe Scioscia, EVP at VAI, expects to see more ERP overhauls done in stages, especially in sectors with new regulatory requirements. Companies that handle food, due to requirements in the Food Safety Modernization Act, must quickly comply. 

“We will typically do what we call department ERP implementation instead of the big bang,” he said. This method is also still popular for companies that have multiple facilities in different places, and for companies that are growing by acquiring other firms. “At that time, ERP vendors are really becoming system integrators,” he said, taking multiple ERP systems and integrating them across multiple platforms.

The AI of it all

AI hasn’t completely revolutionized ERP implementations, but it is helping to improve the process — though incrementally. 

For example, AI is being used to reduce ERP testing time, said Naik Lopez, sometimes saving months of work, especially when it comes to testing anything that is repeatable, and has the same steps that repeat during the project, she said.

AI is also enabling companies to “build a better mousetrap,” said Perry, with small changes that lead to a better whole. AI can manage invoice blocks and predict mean time between failure and flaws in a maintenance environment. 

“These to me are not earth-shattering on their own," he said. "They are all part of this general improvement in capability we’re seeing."

Scioscia is also seeing heavy investment in cybersecurity and AI when it comes to ERPs. AI is being used to understand and look for threats, help businesses understand those threats and what can be done about them.

With increases in the frequency of ransomware and cloud breaches, “companies are very concerned and don’t want to be hit with ransomware attacks that could put them out of business,” he said. 

Warby Parker is implementing a new ERP system as part of a slate of digital capability investments.

The company has spent around $5.1 million in 2022 and this year combined to implement its ERP system. The company previously hired an implementation partner to assist in the ERP rollout.

The vision care retailer invested around $1.9 million in the implementation of cloud-based software last year and up to Sept. 30 of this year.  

Warby Parker is pursuing a stronger tech stack and productivity gains. The company has more than two million active customers and brought in nearly $170 million in net revenue over the past three months, according to its Q3 earnings call presentation. 

While the company raised its full-year outlook this quarter, it also faced challenges. Since Warby Parker went public in September 2021, it has yet to record an annual profit. Adjusted EBITDA has remained steadily positive on an annual basis since 2018, despite decreasing this quarter. 

“We are confident in our strategic direction and continue to believe we are in the early innings of delivering longterm, profitable growth,” co-founder and co-CEO Dave Gilboa said in the company's Q3 earnings release. 

During 2022 and in the first half of 2023, the company developed general IT controls to manage access and program changes across key systems as well as to support improvements to application controls within the proprietary system. 

The team has also leveraged machine learning and AI over the last few years to support virtual try-ons and vision tests, according to Gilboa, speaking during the company’s Q2 earnings call in August.

“We are excited by the rapid evolution of AI and believe we are uniquely positioned to bring this innovation to the optical industry, given our digital heritage and our technology investments,” Gilboa said. 

“We are particularly encouraged by the productivity gains our engineers, product managers and designers are seeing from the expanding use of generative AI as well as early applications of this technology to create easier, faster shopping experiences for our customers,” said Gilboa.

Global commercial software spending will grow by more than 12% annually for the next several years, reaching $1.4 trillion in 2027, according to a Forrester analysis of vendor financial reports, secondary research sources and trade association data.

After a two-year slowdown in revenue increases, Forrester expects software vendors to see incremental upticks going forward. Annual revenue growth fell below 12% last year and bottomed out at 11.2% in 2023. Next year, the report said, spending will approach $1 trillion as it once again nears 12% year-over-year growth.

An industrywide shift to cloud-based SaaS solutions in database and ERP coupled with increased demand for AI tools will drive market growth, as enterprises increase their consumption of infrastructure and application software.

Cloud and software are becoming inextricable as vendors shift to as-a-Service delivery models and usage-based pricing.

On-prem software’s enterprise footprint is shrinking as legacy vendors transition to cloud-based delivery and usage-based pricing. The shift highlights a clear link between cloud and ERP, CRM, data management and other enterprise software products.

“We are definitely tracking the continued shift to the cloud,” Liz Herbert, Forrester VP and principal analyst, told CIO Dive in September. “Leading software companies are all moving to cloud and SaaS — that's almost without question.”

ERP provider SAP launched a premium tier in its enterprise cloud conversion program in October, adding low-code tooling, automation and data integration capabilities to the platform.

“This program offers further commercial incentives to support our customers on their transformation journeys and accelerate their move to SAP’s cloud ERP,” CEO Christian Klein said during an October Q3 2023 earnings call.

Cloud-based, as-a-Service database offerings have made it easier to stand up new infrastructure without incurring upfront licensing fees, boosting growth for data cloud companies Snowflake and Databricks.

Snowflake experienced a Q3 consumption boom, with usage of its processing solution Snowpark up 500% year over year, for the three-month period ending Oct. 31. Databricks, a privately held company that does not report earnings, saw revenue and workloads increase 60% in the last year, according to Forrester.

Oracle is leaning heavily on its cloud database infrastructure to drive growth, too. The enterprise software company and emerging hyperscaler reported cloud services and license support accounted for nearly three-quarters of its $12.9 billion in revenue in the three-month period ending Nov. 30.

As software companies continue to infuse products with generative AI tools, like SAP’s Joule and Salesforce’s Einstein GPT, and leading AI providers like Microsoft move to monetize the technology through subscription services, Forrester expects generative AI spending to increase at a rate of 22% annually through 2030.

Data migrations will come first, Oracle Chairman and CTO Larry Ellison said, during a Q2 2024 earnings call.

As the company prepares to deploy databases in Azure and build dozens of cloud data centers, it's banking on data to drive cloud expansion.

“There’s huge, pent-up cloud database demand,” Ellison said, adding “I expect the OCI growth rate to be over 50% for a few years.”

SAP rolled out a set of new integrations, analytics tools and generative AI enhancements designed to help companies simplify data ecosystems and extract deeper insights, the company announced.

The ERP giant will embed its Joule copilot in SAP Analytics Cloud to automate the creation of reports and dashboards and develop an AI governance solution in partnership with Collibra, SAP said. Collibra, a data intelligence platform, launched an AI governance solution last month.

SAP also added knowledge graphing capabilities to cloud-based data service SAP Datasphere, which it launched last year as the successor to SAP Data Warehouse Cloud. Knowledge graphs generate insights from disparate data, enhance LLM performance and inhibit model hallucinations, according to SAP.

ERP systems are swimming in data that can fuel insights, predictive analytics and generative AI. SAP wants to help customers reap data’s benefits as part of a broader shift away from on-prem and hosted systems to a fully cloud-based SaaS ERP delivery and usage model.

The company said it plans to have a vector database capability generally available by the end of the first quarter to subscribers to the SAP HANA Cloud database management system. Vector databases are used for retrieval-augmented generation model training, as well as for recommendations, classifications and clustering, according to SAP. 

While ERP modernizations are expensive upfront and potentially disruptive, the long term payoff is in continuous innovation and automatic upgrades, Liz Herbert, VP and principal analyst at Forrester, told CIO Dive.

Easing integrations is another upside.

The Datasphere ecosystem meshes with SAP’s cloud ERP and analytics solutions, as well as with non-SAP data products, according to the announcement, which included details of an integration partnership between SAP and Confluent.

“Core to the SAP data strategy is providing customers with the ability to interoperate with the world’s leading data and AI vendors through an open data ecosystem,” Irfan Khan, president and chief product officer, SAP HANA database and analytics, said in a Wednesday blog post.