We’ve always heard that companies typically replace their ERP accounting software about every 7 to 10 years. That sounds right for smaller businesses buying lower-end systems – especially if the applications only have a few modules, they have few user licenses, and there are no major integrations to other products. But is this true for manufacturers and distributors who tend to have more complex business requirements? We don’t think so and here’s why.
Let’s consider two scenarios and please keep in mind the numbers below are for illustration purposes only. For example, most ERP implementations take more than 10 hours per module and the hourly rates may be slightly less or slightly more depending on the system you choose.
Professional Service Example
A small professional services firm buys an ERP system for 10 users that includes General Ledger, Accounts Payable, Accounts Receivable, Bank Reconciliation, Purchasing, Project Accounting, and Time Entry. Each module is $2,000 each and user licenses are $1,000 each. Total cost is $24,000 (7 modules @ $2,000 plus 10 users @ $1,000) plus a maintenance and support contract at 20% of list price for an additional $4,800. It takes on average 10 hours to implement each module. At $200 per hour it costs $14,000 for implementation. The total project comes in at $42,800.
A small manufacturing company buys an ERP system with 10 users that includes the same 7 modules as the professional services firm plus 9 more modules including Sales Orders, Inventory Management, Warehouse Management, Manufacturing, Engineering Change Orders, Material Requirements Planning, Shipping and Receiving, and Shop Floor Control (MES), and Quality Management. These modules are fairly typical in most manufacturing environments and even companies that do not purchase all of them may purchase others like Estimating, Product Configurator, etc. The additional 9 modules cost $18,000 plus $3,600 in maintenance and support and it will cost $18,000 to implement. We won’t even consider that there will likely be costs for potentially dozens of shop floor workers in this scenario.
The result – the manufacturing company will spend more than double the time to implement the system and they will spend an additional $39,600 – that’s nearly double the initial investment for the same number of users who implemented the same ERP system but in a professional services environment.
Who’s most likely to change software? Yep, the professional services firm. Keep in mind we used this only as an example here. What really matters is how many modules the business needs and how that impacts both the initial cost and the implementation costs and on-going maintenance and support or subscription costs.
In our experience there are many other factors that prevent manufacturers and distributors from changing ERP accounting software more frequently. These include the need for custom modifications to the software to meet specific industry requirements, integration with third party systems for electronic data interchange, machine interfaces, supply chain integration to supplier or customer systems, complex reporting (which often requires significant report creation or modification), and many other factors.
We’ve been selling and implementing distribution and manufacturing ERP software for over two decades and we’ve found that most manufacturers keep their ERP systems for a minimum of 10 years unless they are acquired, divested from a parent, or they’ve experienced rapid growth or decline. In fact, most of our customers that have switched ERP systems did so closer to year 15.
This makes a lot of sense when you think about the shifts in technology. Right now there are a lot of distributors and manufacturers moving to the cloud. The majority of these companies likely replaced their software just before or just after Y2K when everyone was fearful that their computers would simply cease to work properly. Further, you can look at the fundamental shifts in technology from the 1970s (mainframes) to the mid-1980s (personal computers and DOS) to the mid-1990s (client/server and Windows) to the late-2000s where we start to see the major shift to the cloud. This just so happens to be around the 10-15 year mark.
Summary & Predictions
To summarize, manufacturers and distributors are less likely to replace their ERP software because it’s more costly and takes a lot more time to move with increased disruption in their business compared to companies in other industries that have relatively simple business requirements and less reliance on integrated third party applications.
We expect this to change with cloud computing where third party applications should be more easily integrated to ERP systems in a plug-and-play deployment model. Case in point is CRM. Manufacturers can purchase any of a wide variety of CRM applications and the CRM vendors are themselves ensuring that they integrate to the major ERP products on the market to gain market share. This makes it easier for the manufacturer to switch ERP systems without having to change CRM (or vice-versa). The same can be said for almost every major product category including HRMS, APS, EDI, and many more.