The ERP platform play: Cheaper, faster, better from McKinsey

Enterprise resource planning upgrades can be expensive and complex—and unavoidable. A product and platform approach can manage costs and improve outcomes.

Upgrading an ERP system is one of the biggest and most expensive decisions IT leaders will make. You could benefit from understanding how tech companies approach changes to their system landscape. These tech companies value speed, flexibility, and scale to create value for the business. That means they make technology decisions that maximize freedom and independence for their developers by reducing system dependencies and complexities.

By focusing ERP upgrade efforts on the modules within the system rather than on the entire system and by understanding what matters for driving business value, CIOs can reduce dependencies, spend less, get more, cut back risk, and do it faster.

From ERP-centered thinking to a modern platform organization

The first lesson to learn is to set strategy first and design their platform architecture later. With the strategy clear (for example, increase the number of new customers and reduce customer churn), they follow a relentless logic in identifying Services and Customer journeys (Price discovery, Quote comparison, carrier and shipping partners), that can drive the strategy. This product and platform approach underscores two clear principles:

1. Treat the ERP system as a sum of capabilities rather than a monolithic stack
2. The services drives the decision about what parts of the ERP system to use, not the other way around.

Traditionally, companies have been focused on buying ERP solutions and managing the vendor and the system integrator to do the customizations.

Determine what parts of the ERP system add value

With clarity around the strategy and a focus on a product and platform operating model, the next crucial step is to determine which elements of the ERP system directly support the business’s strategy. This value analysis divides the functions and capabilities within the ERP system into two buckets:

1. The differentiating elements that deliver value to the business. For a forwarder that wants to provide the fastest delivery, that would mean quick rotation, e-Invoicing, auto tracking shipments, Accounting and taxation capabilities. In many cases, those capabilities are delivered through micro-services and are fully independent of the ERP system.
2. Functions that are not core to driving competitive advantage. In many cases, these functions include legal or property management. The ERP advantages in providing stability, tracking, and capabilities-management functionality are sufficient. If industry standards are applied, the company is often benefiting from innovations of the vendor and creates value without deviation from the standard. 

This view provides a powerful counterbalance to the prevailing norm where the vendors, rather than the business, define the boundaries of functionality and modernization needs. This situation is often reflected in the fact that, in many incumbent companies, even non-IT stakeholders talk about the “ERP vendor X” upgrade project rather than the “finance” or the “supply chain” modernization project.

Focus on lowering cost and risk for upgrades 

For the first bucket, differentiating ERP elements, one should push for immediate upgrades. But for the second bucket, non-differentiating ERP elements, they should sequence upgrades thoughtfully to manage for cost and risk. 

1. Decouple unnecessary connections: Some of the connections help perform standard functions (for example, accounts payable). These connections are doing the jobs they were designed for and should not be touched. However, there are often many connections between parts of the system that are either workarounds or ad-hoc solutions that are in place. The sheer volume and uniqueness of these connections make any modernization effort complex and time consuming. The first step is to create a new layer between the core system and the applications it connects to. This is often called a façade. All new connections will go to this façade layer via APIs that access data from the ERP system. In this way, the myriad connections are decoupled from the core system. This provides the big advantage of being able to make changes within the system, such as implementing modular architecture facets, without affecting all the connecting applications. 
2. Extract the customization: Most core systems have been customized to death, from complex reporting functions to bespoke access protocols. Each customization needs to be migrated and often remediated in some way to the new environment, which can be risky because of the corresponding complexity. To address this issue, companies need to build a digital platform (generally in the cloud) that can be accessed through micro-services. For example, will create one platform for customer-facing functions, one for supply chain, and one for the ERP system itself. It’s important to assess which customizations are most important. This process inevitably uncovers many customizations that are no longer needed and can be removed, thus simplifying the upgrade.
3. Shrink the core: Once customizations have been removed from the core, it’s necessary to start to shrink the core itself to its most necessary functionality. This is essentially a disaggregation process that removes the many intricate connections that are often built into large systems. In this way, developers and engineers can then replace or improve a specific functionality without affecting other parts of the system. This process generally includes cleaning up the code base as well, making it easier to understand and, therefore, to fix or replace.

ERP upgrades are massive, complex, and necessary, especially as business pressures increase and cloud and ERP providers roll out new software and services. By taking a Product and Platform approach, however, companies can prioritize upgrades that create value and de-risk the upgrades that don’t. In this way, companies can better manage costs and improve outcomes.

Source: https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/the-erp-platform-play-cheaper-faster-better