Are ERP Systems a Good Fit for Small and Mid-Size Businesses?

Written By: Eric Kimberling
Date: October 9, 2023

One of the prevalent inquiries among our small and mid-sized clients is whether they are too small for a large ERP system. This is the question I aim to address in this discussion.

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When working with our small and mid-market clients, one of the most pressing questions we encounter is: "Are we too small for a large ERP system?" They wonder if such a system will be overly intricate for their operations, if the costs will be prohibitive, if the risks will be excessive, and if the system will deliver the anticipated business value. These concerns are recurrent among our small and mid-market clientele. Today, I aim to provide insights and considerations to assist in determining whether an organization is appropriately sized for an ERP system. For further details on leading ERP systems in the market and their comparative analyses.

Cost Benefit of ERP Systems

When evaluating whether your organization is suitable for a new ERP system, it's essential to consider the overall cost-benefit analysis of such a deployment. This involves assessing the costs, benefits, and risks associated with implementing a new ERP system.

For some entities, the introduction of a substantial ERP system might be too intricate, expensive, and fraught with risk. Conversely, organizations that prioritize investment in growth may emphasize the long-term business value derived from such an investment. The critical aspect is to comprehend the organization's objectives and future trajectory. For a smaller business with stable, incremental growth over the years, investing significantly in a new ERP system without notable growth ambitions might not be judicious. However, for a rapidly expanding entity, or one with considerable aspirations, or those with private equity investments, it may be prudent to invest in an ERP system that facilitates scaling.

It's also vital to enumerate the business advantages an ERP system can confer. For instance, can it boost top-line revenue? Can it enhance cost efficiency throughout the organization? The objective is to identify potential business benefits and evaluate them realistically.

To illustrate, if you are a small or mid-sized organization utilizing a system like QuickBooks or a similar basic accounting tool, the essential consideration is the potential advantage of transitioning to a more sophisticated system. Many clients, reliant on such software, find their needs exceed its capabilities, especially concerning inventory management, manufacturing, and sales automation, areas more robust ERP systems address. The pivotal action here is to ascertain the incremental business value improvements against the potential costs of upgrading from simpler tools like QuickBooks.

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Smaller ERP Software Options

For smaller or mid-sized organizations, one of the advantages of ERP software is the array of options available. It is not obligatory for such organizations to invest in large-scale ERP systems like SAP, Oracle, or Microsoft Dynamics 365, which might be prohibitively expensive and present significant risks. Instead, there are ERP software solutions tailored to fit the unique needs of small and mid-sized entities.

It might not be advisable for smaller businesses to consider systems like SAP's S/4HANA, Oracle Fusion ERP, or Microsoft D365, as they might be overly intricate, costly, and risky without offering commensurate business value. Alternative solutions in the market cater specifically to smaller organizations. For instance, Oracle NetSuite is a cloud-based solution tailored for smaller and mid-sized entities. Open-source ERP systems like Odoo, ERPNext, or OpenERP are also suitable for organizations seeking cost-effective, high-value systems. Many of these scaled-down solutions not only cater to current organizational needs but are also scalable to accommodate future growth, without mandating exorbitant initial investments.

The crux is to identify the optimal solutions for smaller and mid-sized entities. For a comprehensive understanding of leading ERP contenders tailored for small and mid-market businesses, there are resources available which provide independent and objective rankings of top-performing systems. These systems are designed to support growth and offer platforms for gradual business enhancement, eliminating the need for drastic change or significant immediate investments.

Best of Breed/Point Solutions

For organizations apprehensive about the size, complexity, or cost of ERP systems, an alternative approach might be "best-of-breed" or "point solutions." These terms describe technologies that aren't holistic or fully integrated but cater to specific functions within an organization.

Rather than implementing a comprehensive ERP system that addresses every facet of a business, an organization can choose specialized technologies. For instance, one might opt for a tool focused solely on Customer Relationship Management (CRM) or another dedicated to Human Capital Management (HCM). There are also systems that concentrate on Supply Chain Management or exclusively on Manufacturing and Warehouse Management.

The market is replete with these narrower, more targeted solutions that may present a lower risk and a more incremental way of delivering business value. One advantage is the flexibility to progressively integrate different systems addressing various organizational needs.

However, a potential drawback is the proliferation of disparate systems over time, leading to integration challenges. Still, for organizations at certain stages of growth, beginning with point solutions might be advantageous due to reduced risk and enhanced value. Therefore, when considering technology for scaling, point solutions or best-of-breed ERP systems should be explored as viable alternatives.

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Interoperability and Business Intelligence

In this discussion, I have addressed smaller ERP systems tailored for small and mid-market businesses, as well as point solutions and best-of-breed options. An even less intrusive alternative to consider is the realm of interoperability or business intelligence solutions. These solutions are particularly less invasive because they don't necessitate replacing current technologies. If you currently utilize financial systems like QuickBooks or Xero, for instance, you might opt for a solution that consolidates data from these and other systems in your organization, creating a foundation for growth. As you introduce new technologies, an interoperability or business intelligence toolkit can integrate these systems, offering comprehensive insights into your business operations.

Two notable examples of such technology are Palantir and Snowflake. These vendors specialize in interoperability and business intelligence. Their primary function isn't to substitute back-office systems or serve as direct ERP replacements but to amalgamate various technologies and ensure cohesive functionality.

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For those interested in further details on Palantir, a representative software in this category, there are independent reviews available that delve into the strengths and weaknesses of the product. Even if Palantir isn't on your radar, these reviews provide insight into alternative technologies to traditional ERP systems.

It's vital to explore and understand the various technological and ERP software options available, as well as their advantages and disadvantages, to make informed decisions for your organization.

I would enjoy brainstorming ideas with you if you are looking to strategize an upcoming transformation or are looking at selecting an ERP system, so please feel free to contact me at eric.kimberling@thirdstage-consulting.com. I am happy to be a sounding board as you continue your digital transformation journey.

Be sure to download the newly released 2024 Digital Transformation Report to garner additional industry insight and project best practices.

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Eric Kimberling

Eric is known globally as a thought leader in the ERP consulting space. He has helped hundreds of high-profile enterprises worldwide with their technology initiatives, including Nucor Steel, Fisher and Paykel Healthcare, Kodak, Coors, Boeing, and Duke Energy. He has helped manage ERP implementations and reengineer global supply chains across the world.

Author:
Eric Kimberling
Eric is known globally as a thought leader in the ERP consulting space. He has helped hundreds of high-profile enterprises worldwide with their technology initiatives, including Nucor Steel, Fisher and Paykel Healthcare, Kodak, Coors, Boeing, and Duke Energy. He has helped manage ERP implementations and reengineer global supply chains across the world.
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