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Home/Magazine Archive/April 2000 (Vol. 43, No. 4)/Enterprise Resource Planning: ERP System Migrations/Full Text
Communications of the ACM
Enterprise Resource Planning: ERP System Migrations
It has become increasingly clear that implementing an ERP system requires extensive efforts to transform the organization's processes [1]. ERP systems are supposedly based on best practice generic business processes. Therefore, when buying an ERP system off-the-shelf, organizations obtain these practices and subsequently are pushed into the direction of implementing them.
After an ERP system is successfully implemented, often with substantial difficulty and at high costs, and the advantages of the "best practice" processes are gained, worries are not over. As ERP systems evolve to meet the requirements of the customers, new versions regularly become available. Each time, organizations will need to decide whether or not to migrate to the new version of the system.
Little is known about migrations of ERP systems. Furthermore, there is no general consensus as to what constitutes "migrations." The terminology used (such as version, release, upgrade, bug fix, patch) is highly company specific. For instance, when Baan talks about a new version, PeopleSoft will call it a "major release," just like a Baan "upgrade" is very similar to a "minor release" in JD Edwards terms. Here, a software migration is defined as a major change process resulting from the implementation of a new version of an already installed ERP system. An example is the migration of SAP R/2 to R/3. Successive versions of ERP systems tend to be profoundly different, both functionally and technically. The definition excludes minor changes within a version of an ERP system, such as new releases that usually only add new functionality to the core product, or pure technical upgrades such as patches and bug fixes.
Motives and inhibitors for migrating ERP systems are discussed here, and considered in terms of the provider and customer viewpoints. To collect data on migrations, research was conducted among the vendors of ERP systems and their customers to be able to assess both their points of view. First, open-ended interviews were conducted with migration specialists of key providers1 to establish their reasons for trying to convince their respective customers to migrate to a new version. Next, a customer survey, based on semistructured telephone interviews with 24 Baan customers worldwide2 was conducted to obtain information on their experiences with software migrations. Both customers that migrated in the past and customers that did not (yet) migrate were included in the sample. Baan was chosen because Baan was one of the first players on the ERP market (established in 1978) and therefore has a rich "version" history.3
The value of an ERP system lies not so much in the product itself, but in its effective and efficient usage.
The Provider's Perspective
In the late 1980s and early 1990s, ERP vendors were determined to absorb as much market share as possible. Driven by economies of scale in software development, the ERP vendors put major emphasis on enlarging their customer base. Along the way, the service aspect of the business was stalled on the proverbial sidetrack. They got away with it because of large market potential. However, after years of growth and numerous success stories, the last two years have been difficult for the ERP software industry. The ERP market became sluggish in 1998 with revenues from selling (new) software licenses declining significantly. This recent drop in license sales is mainly due to three factors. First, because client companies needed to solve the Y2K problem, little financial resources were available to invest in new projects. Second, the high-end ERP market, once a prime target for ERP vendors, is in serious decline because of saturation. Finally, the financial crises in the emerging markets of Asia and Latin America have affected the international revenues of most ERP vendors.
Today ERP vendors are undergoing rapid changes as they attempt to cope with the new market conditions. They now typically focus more on the service aspects of their business. As a result, the attention has shifted toward leveraging the installed customer base. The obvious motive is to neutralize the effect of a sluggish market by trying to generate a more stable cash flow from servicing one's own installed base. In this new service perspective software migrations play an important role.
Migrations are important to ERP vendors for a number of reasons. First, and arguably most importantly, migrations intensify the customer lock-in effect. ERP systems are very complex products with a flat learning curve. The value of an ERP system lies not so much in the product itself, but in its effective and efficient usage. In order to be able to work effectively with an ERP package, one has to train the users and they have to accumulate experience. This is an on-going and time-consuming process, in which the switching costs of changing to another system are constantly rising. In general, the older the installed system the higher the costs of a migration. Switching to a different provider becomes therefore comparatively inexpensive. To ensure a long-term relationship with their customer base, ERP vendors have to offer smooth migration paths to upgrade older systems.
Second, it is easier to support and service a smaller number of different software versions than it is to support a large variety of products. Migration policies typically aim at reducing the number of versions on the market. This has associated cost efficiencies and provides easier training of service employees, allowing them more time to spend on issues that add value for the customer.
Third, migrations can lead to increased revenues through more sales. This increase stems from two sources: sales of more seats for the new software solution due to increased functionality, and extra revenue to be gained through sales of add-on products that are supported in the new version, but were not in the old one. This last source is becoming increasingly important, since add-on modules are the "stars" and future cash cows of the ERP industry.
Finally, through an effective migration program a vendor is able to develop a unified customer base, which may serve as a reference base to attract new customers.
Against the background of these advantages it is clear that software migrations are currently a hot topic for ERP systems providers. A variety of migration policies are being established, including conversion tools, migration methodologies, and services and support to facilitate a smooth and reliable migration to more recent versions.
The Customer's Perspective
The migrated customers in the sample were asked what the reasons were for reconsidering their installed ERP system. Their answers were clustered in four main categories (see Table 1). The companies were allowed to mention multiple reasons, but were also asked to indicate a key reason. Technical reasons (such as compliance, expired program support, dissatisfaction with the current system, and keeping the system up-to-date) were most frequently mentioned. In addition, more than half of the companies (57%) mentioned a technical reason as key reason as well. This is not surprising since, especially in larger companies, the initiative to migrate was taken by the IT department. Overall, added functionality was the most frequently mentioned reason, while 29% of the companies claimed that they mainly migrated because of added functionality in the new version.
Many migrated customers perceived migrations as difficult, costly, and above all as time-consuming processes. Table 2 provides an overview of problems encountered. Costs and time required are perceived to be important problems with migrations: 50% of the migrated companies in the sample mentioned they thought the migration process took far too long to execute; 25% stated it was too costly and 25% mentioned the estimates made by the migration partner (either the ERP system provider or a consulting company) proved to be unreliable, both in terms of costs and time required. A total of 31% of the companies found it difficult to cope with software bugs in the new version. The migration tools also received some bad reviews (25%). The last aspect mentioned was the strain a migration process imposes on the organization.
There is a large variation in installed versions of a specific ERP system at customers. For example, about half of the Baan users still have a version of Triton installed. This makes clear that many customers are reluctant to migrate to a newer version when it becomes available. Although many different obstacles can be imagined as to why companies decide not to migrate their installed ERP system, the results of the survey turned out to be rather straightforward. The companies interviewed were of the opinion that migrations are an unavoidable part of the software life cycle. The question is not "Should we migrate?" but "When do we migrate?"
The mentioned migration inhibitors were very similar. Most evolved around two key issues: time and costs. Overall, the results suggest that migrations are a notorious phenomenon. The main reasons given by the nonmigrated companies in the sample for postponing the actual migration were financial. There was either no money currently available for a migration, or the payback period to recoup the initial investment in the currently installed version hadn't been completed yet. In addition, companies that are trying to integrate their information systems across countries and/or business units often allow little room for autonomous decision-making at the business unit level. Once a corporate standard has been set, there is a temporary "version freeze" in effect until all members of the corporate family have implemented this version. This may take quite some time. Further, one company mentioned the migration option was seriously considered, but the time required for such a process made them choose a short-term customization project instead. Finally, bad experiences in the past with either migrations or implementations of ERP systems was also a factor in explaining the reluctance to migrate: "Not that again, unless there is really no other way out...".
Conclusion
Changing market conditions have shifted the focus of ERP providers toward a more service-oriented approach. Consequently, ERP system migrations have recently enjoyed renewed interest from the vendors. An effective migration policy, including all sorts of support offerings has clear advantages for the providers. However, despite this emphasis, the findings of this research suggest that migrations have a bad reputation with the users of ERP systems. They consider such projects as time-consuming and expensive. As a result, many organizations do not migrate the moment a new version becomes available. In addition, migrations are sooner motivated by technical reasons than by business opportunities. These findings suggest that many organizations may have problems leveraging their (often large) investments in ERP systems. Implementing an ERP system with its generic business processes implies fewer possibilities to differentiate from competitors [1]. In addition, new improved versions of ERP systems regularly become available at the same time for all users. Therefore, at best, organizations may try to compete on the basis of the capability to migrate to a new version quickly. Given their reluctance to migrate, few organizations seem to be aware of this.
References
1. Davenport, T.H. Putting the enterprise into the enterprise system. Harvard Business Review, (JulyAug. 1998), 121131.
Tables
Table 1. Reasons mentioned for migrating to a new version.
Table 2. Problems encountered with migrations of ERP systems.
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