Robert Kugel's Analyst Perspectives

Enterprise Resource Planning (ERP) systems are comprehensive software platforms designed to integrate and manage all the core processes of an enterprise while recording transactions and their financial consequences to support the accounting and finance functions. ISG Software Research recently completed our Buyers Guide™ for ERP systems, designed to help enterprises that are replacing their existing ERP software to make the best choice, both in terms of the product’s performance as well as the customer experience. ERP systems are central to the operations of an enterprise, streamlining cross-functional operations using workflows and consolidating data created by departments such as finance, human resources, supply chain and customer relationship management into a unified database. This integration facilitates the accessibility of real-time data, enhancing situational awareness for executives and managers while boosting overall efficiency and productivity.

Because they intersect so many processes and organizations within an enterprise, ERP systems are notoriously complex, making them time consuming and relatively expensive to implement. Because the software is essential to the smooth functioning of an enterprise, there is significant perceived risk in undertaking their replacement. As a result, our research indicates that the average age of an enterprise’s main ERP system is seven years, with it being typical that they are in service for more than a decade. With that sort of longevity and the negative impact of a poor choice in selecting a software provider, buyers need a complete, objective and reliable assessment of their options.

While replacing ERP systems is expensive and poses risks, executives—especially the CFO—must also recognize how an outdated system poses risks to the continued efficient operation of their enterprise. This is especially the case given the substantial improvement in technologies underpinning today’s ERP systems and the significant advances that artificial intelligence (AI), generative AI (GenAI) and agentic systems will have on every business process managed by these applications.

Our evaluation of ERP providers is based on a comprehensive assessment of accounting and financial management capabilities as well as capabilities necessary for product-oriented companies. These include basic accounting functionality, including how technology is used to enhance productivity, consolidation and intercompany management, indirect tax, compliance, risk management, inventory, fixed asset, order-to-cash, procure-to-pay and investment in the offering. The guide also assesses the software’s ability to support manufacturing and product-centric enterprises. This includes manufacturing operations, advanced planning and scheduling, demand planning, manufacturing execution, shop floor management, material flow optimization, multi-site operations, quality management, facilities and equipment maintenance, warranty management, environmental, smart manufacturing and distribution. AI-enabled features and functions are part of the evaluation.  Our evaluation excludes human capital management-related functionality as this topic is covered in other Buyers Guides™.

When considering modernization or replacement of existing ERP software, the single most important point is to not focus on replacing the old system like-for-like but to take a strategic approach. That is, those engaged in an ERP replacement effort must understand how a new system can complement current capabilities, support new processes, business models and markets. They must balance the need for continuity with an understanding of what will be possible with newer technology. This is especially true for AI, GenAI and agentic capabilities.

Senior executives should also recognize that if their aging, core ERP system has been heavily customized and modified, the software is difficult to upgrade, maintain, and integrate with new technologies. Over the years, having to default to expedients and work-arounds when changes and updates are needed leads to higher costs and constraints on what the software can deliver. Replacing or at least reimplementing the application is indicated, especially to be able to harness the power of AI, GenAI and agentic systems. There are almost certainly data and process issues with these sorts of systems that will prevent the substantial improvements in productivity that these technologies will be delivering over the next few years.

While their outlines remain largely unchanged from their roots in the 1990s, modern ERP systems already boast enhanced functional depth, usability, adaptability and manageability, particularly in cloud-based environments that are easier and less expensive to maintain. An on-premises ERP system first implemented more than a decade ago lacks many of the important new capabilities and features of current cloud-based software. Continuous refinement and development tailored to specific industries have increased ERP system utility and decreased overall ownership costs, particularly in implementation and maintenance.

The technology underpinnings of ERP systems have also changed fundamentally, significantly increasing their business value because they are more easily adapted to the needs of an individual customer and easier to maintain once installed. ISG 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 these systems that offer customization options. ISG Research uses 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, this was utilized by enterprises to allow their on-premises software to perform in specific ways that matched their processes and other requirements. However, these customizations were an expense to implement and often made it difficult to upgrade on-premises versions as ERP providers issued new releases. Cloud-based systems enable enterprises 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.

Now, AI, GenAI and agentic capabilities embedded in ERP systems will change the nature of how work done in the system is performed. They will almost certainly reduce the time spent on low-value chores, accelerate process cycles, facilitate the completion of tasks that are performed only occasionally and accelerate individual training for those new to a role. All this will enable departments to be more productive. For some roles this means having more time for analytical and forward-looking tasks that enhance the performance of their enterprise. Moreover, a modern ERP system will soon become a must for those executives and managers who want to hire and retain the best talent.

AI and GenAI features and capabilities are already at work in some providers’ applications and new ones will be introduced at an accelerating pace. ISG Research asserts that by 2027, all providers of software aimed at the Office of Finance will differentiate their offerings by the capabilities and accuracy of their AI functionality. Some of the more common use cases already available include:

• Task supervision to constantly monitor inputs and results 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 providing assistance to supplement users’ analytical skills.
• Reporting and dashboards functions including AI-generated, automated commentary to accompany charts and tables, with increasingly richer and more meaningful narratives.

Most CFOs understand the need to take a strategic approach to replacing their core ERP system. Especially in the office of finance, technology can be transformative by increasing productivity and effectiveness. Productivity is different from efficiency in that it isn’t just about doing the same things faster or with less effort—it’s about being able to avoid doing them in the first place. Or taking a different approach to performing a business process that accomplishes that task with some combination of being faster, requiring fewer resources, reducing risk or getting consistently better results.

For example, today’s ERP systems are even more capable of supporting what ISG Research calls “continuous accounting,” a term we started using a decade ago to describe a new approach to managing the department, which rests on three pillars:

• Using software to manage data continuously in an end-to-end process, ensures accuracy and reduces workloads caused by the need to check and reconcile figures in the absence of this level of control.
• Taking advantage of software capabilities to spread workloads continuously across an accounting period.
• Instilling a continuous improvement culture in the department to facilitate change, especially as it relates to technology in order to be a fast follower and use available technology to redesign department processes.

One of the more compelling reasons for adopting continuous accounting is to shorten the accounting close. We assert that by 2027, two-thirds of enterprises will have applied continuous accounting principles to close the books within one business week, up from 50% today. A faster close not only makes better use of departmental resources, it provides senior executives and managers with information sooner, enabling them to improve their performance.

Deciding which ERP software to buy is a complex task and replacing these systems is never entered into lightly. Our Buyers Guide™ for ERP systems can be a useful resource to make the best choice, both in terms of the product’s performance as well as the customer experience. I recommend that those involved in the process use this as a resource to help them get the best results and return on their investment.

Regards,

Robert Kugel