II. Adopting standard software: Insights from early adopters of ERP

Numerous companies are at a crucial juncture with their outdated proprietary IT systems. Transitioning to standardized software could offer them opportunities to streamline operations, reduce expenses, and innovate with new digital services.

Since the late 1990s, numerous production and manufacturing companies have shifted from their customized data-management and control systems to standardized, pre-packaged software solutions like enterprise resource planning (ERP) systems and customer relationship management (CRM) databases. This transition has enabled them to automate critical business processes, such as streamlined customer billing and automated supply chain planning, resulting in substantial cost savings derived from shared services.

In contrast, proprietary software systems remain prevalent in various other sectors. For many companies operating in these sectors, upgrading core systems can be arduous and precarious. This challenge stems from the involvement of numerous intricate and diverse products, as well as decades-old IT systems. Furthermore, such upgrades necessitate input not only from various internal stakeholders but also from external entities like regulators, adding layers of complexity and potential risks. Additionally, the market for industry-specific standard software products is still in its nascent stages.

A convergence of technological and business trends could catalyze these companies to embrace change, driven in part by escalating customer expectations for online products and services. Across diverse industries, companies are exploring the concept of two-speed technology platforms. This approach involves the swift development of innovative websites and mobile applications on the front end, enhancing customer interactions. Meanwhile, standardized legacy systems continue to operate on the back end, ensuring data security and reliability.

These companies aspire to pursue a similar path, yet encounter obstacles due to the inflexibility of their proprietary platforms in facilitating the creation of new digital channels or user interfaces. Typically constructed incrementally and patched together over time, these systems often lack the capability to support end-to-end data and process flows, as well as the automation required to deliver fast and reliable online services to customers.

Switching from proprietary to standard software systems requires careful consideration of five key success factors. Executives spearheading this transition must focus on Technological Requirements, Impact of Transformation, Team Composition, Timing of Implementation and Rollout, Organizational Transparency. By attentively addressing these success factors, executives can navigate the complexities of transitioning to standard software systems and drive successful outcomes for their organizations.

Pre-packaged software solutions

Transformation is an ongoing occurrence across all sectors. Numerous brands and sectors are merging, fresh regulations are emerging, and there’s a rising preference for multi-channel business approaches. Present-day consumers anticipate digital offerings, prompting numerous businesses to adapt with online sales platforms and inventive merchandise.

To facilitate digital offerings, businesses necessitate robust business and IT frameworks prioritizing streamlined processes, precise data, and swift time-to-market. However, many enterprises grapple with complex, antiquated legacy systems and a dearth of skilled programmers proficient in managing outdated technologies and integrating them with modern solutions.

A midsize Ukrainian company sought to launch new online products, but its outdated and customized policy-administration system was not capable of supporting this goal. Meanwhile, another Ukrainian firm spent about 10 percent of its IT budget on maintaining proprietary back-end systems to comply with changing legal requirements. As a result, the company had limited resources for new features or improvements. Additionally, the firm’s limited familiarity with proprietary software led to challenges in meeting regulatory obligations and hindered IT support for key back-office processes. This situation caused higher operating costs and limited customer service capabilities.

Experts have consistently anticipated that companies would transition to using standardized, packaged software to tackle challenges such as those mentioned earlier. However, many industries have been slow to adopt these changes for a variety of reasons.

Elevated levels of intricacy

Updating central IT systems can be a significant burden for companies with aging infrastructures, often over 10-20 years old, and complex, varied product lines. Such businesses typically have a highly fragmented application landscape with many silos, complicating the transition process.

Emerging software market

Numerous industries, such as manufacturing and production, benefit from tailored software solutions designed to align with their specific business needs. For example, there are software packages available for procurement and materials management. Some vendors have even developed industry-specific “process languages” tailored to sectors like chemicals, pharmaceuticals, and utilities. In contrast, other industries struggle to find standard software packages that adequately address challenges in policy and claims management while encompassing essential features necessary for meeting diverse business and regulatory demands.

Comprehensive IT solutions are also in short supply. In several smaller nations, companies face a dilemma: opt for global vendors offering modern platforms but lacking country-specific features, or choose local providers catering to local needs with dated technologies and limited features. Concerns about technology dependency and the sustainability of vendors persist due to the longevity of products and ongoing consolidation within the software industry.

Financial limitations

Many industries experience significant margin constraints, prompting constant scrutiny of IT expenditures. Meanwhile, the ongoing digitization trend necessitates rapid, focused product and platform development. Consequently, there’s minimal enthusiasm for extensive core system replacements, which can monopolize a substantial portion of the IT department’s resources and management’s focus over several years. Furthermore, the complete financial advantages of IT system transformations often materialize only after a CEO’s tenure has ended.

Resistance to change

For a prolonged period in certain industries, product revenues remained high and relatively stable, enabling some companies to persist with their legacy systems despite the high maintenance costs. However, the onset of the financial crisis and the rise in price transparency, facilitated by various aggregators and websites, have disrupted this status quo.

While adopting standard software seems crucial, the resources needed for this transition are constrained by both time and finances. The market for software vendors is still evolving, with a limited history of success. Standardization is not a cure-all solution, and each company must navigate its own path through this challenging landscape. However, insights gleaned from core system replacements in manufacturing and production sectors could expedite the process and substantially mitigate risks.

Insights into standardizing processes

Over the past two decades, manufacturing and production firms have dedicated considerable effort to standardizing their IT infrastructures, continually refining them to align with digital advancements. However, this process has been time-consuming. How can other organizations expedite or minimize this lengthy adoption period?

There are five crucial success factors:

  1. Technological Landscape:
    Commonly utilized software often sets the benchmark. Companies like SAP and Priority have emerged as leaders in database solutions, traditional ERP systems, and SaaS (Software-as-a-Service) offerings.
  2. Transformational Approach:
    Moving to standard software should not be viewed solely as a software implementation endeavor. It requires robust leadership from both business and IT sectors, a thorough assessment of potential business benefits, and a steadfast commitment to change management principles. It’s crucial to help corporate leaders recognize the direct correlation between systems and business needs. This enhances the likelihood of project success, not only in terms of staying within budget but also in terms of speed to market and overall impact on customers and the organization.
  3. Team Composition:
    Achieving success in large-scale IT initiatives demands full team involvement. However, companies often overestimate the availability of necessary talent within their organizations. Many IT transformations have faltered due to insufficiently skilled data analysts. It’s essential for companies to invest in competent program managers and information architects, either through direct recruitment or by ensuring their inclusion through a systems integrator. Additionally, qualified individuals from the business side should be dedicated full-time to the transformation project. Some companies have even assigned emerging talents to these projects, leveraging their fresh perspectives and entrepreneurial mindset.
  4. Project Duration:
    Steer clear of projects that exceed your business cycle, typically lasting no more than one to maximum two years. The notion of a “once-in-a-lifetime opportunity for change” is often overstated. In transitioning away from proprietary software systems, shorter, more frequent projects tend to yield greater success as they are less complex, allowing companies to dedicate their full energy to each project for a manageable duration. Some companies may opt to prioritize elements of the software transition that directly impact critical processes, deferring other functions for future phases.
    Numerous production and manufacturing firms that have undergone this transformation might contend that, looking back, their deployment timelines for new standard software were excessively sluggish. With ample time on their hands, they prolonged the process—constantly adjusting the scope, functionalities, and technologies linked to the rollout, only to become entangled in these alterations. Consequently, many projects ground to a halt and had to be restarted.
  5. Openness:
    Successful implementation hinges on effective governance. Surprisingly, some companies overlook fundamental requirements in standardization projects: fostering transparency, prioritizing issue and risk identification and mitigation, meticulously managing project scope, swiftly making decisions with full buy-in and accountability from a robust steering committee, and rigorously managing the repercussions of those decisions. These aspects are often sidelined or compromised as fragmented organizational interests come into play and power struggles ensue. Hence, it’s paramount to establish a steering committee that assumes responsibility for project success, comprehends its role as the decision-making authority (not merely a reporting body), and is empowered to propel the project forward despite organizational pushback.

Prominent corporations that have implemented these five principles have frequently finalized their standard software integrations within a span of one to two years. Subsequently, they have capitalized on the prospects arising from the implementation of uniform processes, data, and systems in the digital realm. The outcomes have been noteworthy. For instance, a logistics enterprise utilizes “real-time” reporting to render more precise planning decisions.

An insurer managed to curtail its overpayment of claims by leveraging the enhanced pricing and underwriting capabilities facilitated by standard software. The system now integrates new external variables into the underwriting pricing model.

Another firm succeeded in significantly slashing costs linked to its recent policy-administration system by adhering to the standards prescribed by the software provider instead of extensively customizing the software. As a result, the company gauges that it has achieved a 30 percent enhancement in efficiency when launching new products and services, attributable to the rules-based framework facilitated by its standard software.

A decade from now, IT architectures are expected to undergo significant transformations, both in their makeup and the functionalities they aim to achieve. Businesses that initiate a reassessment of their proprietary systems and commit to enhancing their IT architectures now will be strongly positioned to leverage multichannel marketing, digital-product innovations, streamlined claims processing, and various other profitable digital-enabled prospects.

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