Robert Kugel's Analyst Perspectives

ERP systems have been the central nervous system of enterprises for more than three decades, handling business-critical process management and recordkeeping. While their basic outlines are unchanged, today’s systems are far more capable in their functional depth, adaptability, usability and manageability. Especially for cloud-based systems, they are far easier to maintain. Decades of refinement and focused development to support specific industries, and even specialized categories within these industries, have increased their utility while decreasing the total cost of ownership, especially in implementation expense and maintenance. Artificial intelligence (AI) is the latest supporting technology to increase the business value of the software. So, when considering replacing existing ERP software, it’s most important to understand and evaluate how a new system can add to the capabilities of the incumbent and how to manage the organizational change that will become possible and necessary with that change.

The decision to replace a core ERP system is difficult because of the cost and the potential disruption to an enterprise’s basic functioning. For these reasons, our Office of Finance Benchmark Research finds that their average age is seven years, suggesting that they are typically replaced every 14 years. The reality is that there are many that are much older than that. And especially because they’ve become used to using old technology, when it comes time to consider replacing an enterprise’s core ERP system, CFOs must avoid thinking of the process as a like-for-like replacement. Doing so misses the necessity of understanding how to extract the full value from a new system.

The technology underpinnings of ERP systems have evolved considerably, which has significantly increased their business value relative to the decade-old-plus version. The ongoing shift from on-premises to cloud-based ERP has been accelerating as more configurable and customizable systems become available, especially those that are designed for specific business verticals. While generally unseen, ongoing evolution of the underlying technology architecture will support major changes in how finance and accounting departments work. In particular, AI is changing the nature of accounting and finance staff work, reducing the number of low-value chores and enabling departments to be more analytical and forward-looking. Substantial gains in productivity provided by the software will enable finance executives to cut costs and do more. Technology will enable those who adopt a continuous accounting methodology (more on this below) to attract and retain the best talent by offering a more attractive working environment.

In the early days of cloud ERP systems, many companies—especially those in manufacturing and other businesses that deal in physical products—found that their specific requirements could not be met with what was on offer. Decades on, one factor accelerating the shift to the cloud is the ongoing enhancement to the configurability of ERP systems, particularly to address the needs of specific industry verticals and sub-verticals. ISG Ventana Research uses the term “configuration” to refer to a system’s native tools that are used to change its behavior or features without changing the underlying code. This enables subscription software and infrastructure providers to update the underlying code without affecting configurations made by customers. Software providers have also been expanding their configuration options to support specific industries, making them more fit for purpose and reducing cost and time to value.

Moreover, there are an increasing number of providers that offer customization options. We use the term “customization” to refer to a feature, extension or modification that requires custom coding and/or some form of special implementation. In the past, enterprises used customization—sometimes considerably—to allow their on-premises software to perform in specific ways that matched their existing processes and other requirements. However, these customizations were an expense to implement and often made it difficult to upgrade as ERP providers issued new releases. Cloud-based systems enable organizations to incorporate customizations using extensions that are independent of the core code and that are far less prone to breaking as the core system is upgraded. Some systems have low-code or no-code customization environments that enable subject matter experts in lines of business (rather than consultants or IT professionals) to create and maintain these additions.

Today, AI, generative AI (GenAI) and techniques such as natural language processing (NLP) are poised to fundamentally change how finance and accounting departments operate. I prefer to use the alternative term “augmented intelligence” because it emphasizes that these systems enhance, rather than replace, the capabilities of the humans employing them, especially in improving decision-making and eliminating the need for an individual to perform repetitive parts of a process. We assert that by 2027, almost all providers of ERP software will have incorporated AI to reduce workload, speed processes and reduce errors. CFOs must have a solid understanding of what technology can deliver and when to formulate a strategy and change management effort to incorporate these capabilities as they become available.

AI in this form is either already available or will become available in areas such as daily accounting tasks, procure-to-pay, order-to-cash, reconciliations and transactions matching. It’s important to note that the difference between cloud-based and on-premises ERP systems is that as AI-enabled capabilities are introduced, they are immediately available to those that want to use them.

Some of the more common applications of AI to ERP systems include:

• Task supervision to constantly monitor inputs and results in order to spot potential anomalies, inconsistencies, outliers, errors and omissions in data entry to reduce accounting staff workloads devoted to finding and resolving errors.
• Recommendations to suggest a next best step or options for the next step, or a range of values to input that represent a best fit under the circumstances, which increases productivity, speeds task completion and reduces training required.
• Opportunities to accelerate production through automation as well as provide assistance to supplement users’ analytical skills.
• Reporting and dashboard functions including AI-generated, automated commentary to accompany charts and tables, with increasingly richer and more meaningful narratives.

Many software providers have indicated that core AI-enabled capabilities will be included in the subscription price, which is consistent with current spending intentions. ISG Research recently asked participants in its Market Lens AI Study how much more they would be willing to spend on AI capabilities as a percentage of what they were currently paying. This provides insight into how enterprises currently expect to gain value from using AI and, therefore, their propensity to pay for AI capability in applications. The research finds the greatest inclination to spend is in sales performance management and far less on back-office tasks.

The long-standing reasons for staying away from cloud-based ERP have largely disappeared. For most companies, advances in the functionality and configurability in all providers’ offerings make them similar enough to existing on-premises software, and customization capabilities can plug most or all of the remaining holes. Moreover, the total cost of ownership may be lower, security in the cloud is superior to what all but the largest organizations can afford, and system performance is better, since providers are constantly upgrading equipment and usually offer elastic computing resources. I recommend that organizations that are contemplating changing their core ERP system should now consider a cloud-based system as their default option.

Regards,

Robert Kugel