10 essential ERP selection criteria
ERP is a software tool we all use and it is at the heart of our businesses helping us achieve our goals. Selecting the right one for our business is one of the most important decisions we will make. The decision has to be right. Here are some ERP system selection criteria that you should bear in mind during your selection project.
Top 10 key criteria when selecting an ERP:
- Business requirements
- Upper management support
- User support
- Functional requirements
- Integration with existing systems
- Budget and resources
- Technology and future scalability
- Total cost of ownership and ROI
- Evaluate and select options
- Necessary customization
ERP selection criteria #1: business requirements
Develop a clear and comprehensive list of your requirements for your ERP. Use every resource available to make this list excellent. Talk to your production workers and your purchasing manager. Listen to executive management, and your customers and suppliers. Call in former employees and current salespeople. When every thought is written, then prioritize the entire list. Reach a solid consensus as to which requirements are absolutely “must have”. The next priority tier includes things that are not mandatory but there is general agreement that including them will benefit the company. Any other listed items are in a lower category, merely “nice to have”.
Take your priority list around to the same people who provided your inputs. Do they agree with the requirement list? Does it need to be updated? Can someone provide a solid case to elevate a point from tier 2 to tier 1? Much of every other criterion assumes this list is as good as it can be.
ERP selection criteria #2: upper management support
This could seem like an obvious criterion. Too often, it is not recognized for its importance. One can select the absolute best ERP for their organization, yet without upper management support, the project is likely doomed. Support goes beyond simply getting a spending approval. You want your management to actively embody their support. When a resource from another department is needed, the manager can throttle progress by providing lukewarm support. When a choice arises to support the new ERP or use the present system, you want confidence that the manager truly supports the ERP even if there is a short-term cost at the point of the choice.
ERP selection criteria #3: user support
People in every functional area will be users of the new ERP. Gain their support by ensuring their needs and desires are included in the requirements list. Those users, wherever they work, will have much to gain through the success of your ERP implementation. Let those users know they will have the support they need such as training and equipment they need to use the ERP and receive value for them as well as for the overall organization. Make certain they know they will have support helping them through the needed changes. In return, they will support your efforts to use and benefit from your new ERP. Make sure here that the documentation users will need is available when and where needed by users and is of sufficient quality to meet their needs.
ERP selection criteria #4: functional requirements
Your business has certain functional requirements that must be satisfied even before your change and update requirements. Does this ERP support sales orders that include both physical products related and services? If that is what your business sells, it has to. Your business operates in multiple countries around the globe. Do the accounting components of ERP include multiple currencies and the ability to work with the variety of tax systems in those countries?
Think about any ERP components not required by your business. If your business is distribution and you perform no manufacturing, can you easily work around any work-in-process demands made by an integrated inventory system included in some ERPs?
ERP selection criteria #5: integration with existing systems
Most businesses considering an ERP selection have other systems that are quite adequate for their purpose and the business is not interested in changing multiple systems along with their ERP. The question now to be asked: how will those systems integrate with ERP? Almost always, there are common data elements. Can ERP read and use the existing data in that other system? Will you allow the same data to exist and how will you keep those separately updated data elements compatible? Will you be better served by changing the other system to use that data from ERP?
What integration tools come with this ERP? It should have simple integration such as .csv files for occasional data updates. That type of update is inefficient and likely too slow for everyday use. Web services and XML files that allow different systems to quickly transfer data between systems are a more modern way to work.
Many customers and suppliers use EDI (electronic data interface) to share data between companies. If this is needed, be sure your ERP supports that need.
ERP selection criteria #6: budget and resources
How much money is available for an ERP system? If you only have $10, then you have to have a very strict selection criterion. A 2019 Software Path report stated that on average you can expect to spend about $7,200 on each user of your system - that's a big investment and a reminder that ERP selection is a long-term consideration. Most ERP systems will be used for a decade or longer so ongoing maintenance and support for the ERP as well as the infrastructure related are a budget concern. Your choice today will lock costs into future budgets.
Who is going to take the time and perform the work involved in selecting and implementing ERP? Ideally, you can devote full-time resources to the project but many businesses will want to use part-time resources. You need to plan who will perform the necessary work those resources perform now while they devote time toward ERP.
ERP selection criteria #7: technology and future scalability
These concerns apply to the software used to develop your ERP system and to the hardware required to use that ERP. We know there will be ongoing developments and improvements in both domains. We might not want either to perform on the bleeding edge of technology but neither do we want either one to use obsolete technology today. At the same time, we want to buy our ERP from a provider that has a good record of accomplishment of keeping up with technology developments and who promises to maintain that strategy.
ERP selection criteria #8: total cost of ownership and ROI
Add up all the incremental costs you will incur due to this ERP. There will be the initial purchase amount and some initial consulting expense. You might need some updates to your servers and networks immediately. You will spend money on training and temporary labor while your people are implementing ERP. You will have support and maintenance costs every year while you use the ERP.
At the same time, you will benefit from improvements in the cost to perform work. You might see additional revenue because you now can provide services and products to your customers that were not possible without this ERP.
Spread those costs and benefits over time and calculate your return on investment. Most businesses have a threshold return needed before making an investment. Ensure that this ERP passes your business ROI threshold.
ERP selection criteria #9: evaluate and select options
The traditional ERP system running on an on-premises server and supported by an in-house IT staff is not the only choice today. Many businesses choose an ERP that runs in the cloud using a SaaS framework. The initial investment is reduced in favor of monthly “rental” payments that include the software and most support needs.
You can choose a hybrid approach where your business owns the ERP but operates it in the cloud running on shared servers.
Many ERP systems today are developed using open source software too. These benefit from free or very low cost to acquire the software. You have the source code for open-source so you have the power for complete customizations. Users everywhere update open source ERP and they find and fix bugs. Those improvements are available to all users immediately with no need to wait for a development company to issue a new revision.
If you have concerns related to these options, your choice will point to what ERP system selection criteria are essential for your business.
ERP selection criteria #10: necessary customization
The perfect ERP will never require any customization. Since none are likely to be perfect, any customization will be a selection criterion. Understand among your team what customization is desired and whether it truly is essential. Today’s ERP systems use knowledge gained from thousands of customers. Is there some component of your business that is unique among every other business around the world? Not likely. If your desired customization can be worked around easily using an existing ERP, that customization is not a selection criterion. If that customization can be deferred while you use an existing ERP and evaluated later, it is not immediately a criterion, but the ability to implement that customization later is a criterion.
On the other hand, if your desired customization is required, look at ERP systems with an eye toward the ease and efficiency of that customization. Do you have developers skilled in the programming language required? Are developers with that skill available in the employment market?
How will your ERP handle the customization? Can you use business objects or other validation techniques to ensure compatibility with other components of the ERP? Can you introduce your customization with no adverse effects on other components of ERP?
Some ERPs available will have better answers to your questions than others will and will help limit your available choices among ERP systems.
If you have the answers to all these ERP selection criteria, you are well on the way to selecting an ERP that serves your business now and for the future.
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