High-growth companies often reach a crossroads where implementing an ERP system is necessary for continued growth. A significant investment requires a strong business case. It’s expensive and takes a lot of time and effort. It’s not just the hardware you’re implementing—you’re investing resources and people and making a big commitment.
So how do you know when it’s the right time to implement an ERP in your organization? What are the signs? And how important is it really?
A main indicator is company size and structure. For large companies with $500M+ in revenue, implementing an ERP is almost a no-brainer. You need an ERP to help manage the business and be financially compliant. For smaller organizations or high-growth smaller companies, the decision to invest in an ERP requires more consideration.
First, it’s important to assess your organization. The stage you're in influences the decision to implement an ERP. Most companies fall into one of these three categories:
Companies commonly progress from family-run to public, in which case an ERP might be beneficial in a company’s earlier stages. However, it’s not always necessary across all types of organizations depending on your business needs and future goals.
Simply put, an ERP automates processes, provides the organization with better information, and establishes controls. It’s important to consider if your company currently needs all this functionality and in what capacity. For example, family-run businesses don’t typically need the full functionality of an ERP in the same way a publicly traded company does. We’ll dive more into this below.
Main constituents:
In a family-run business, the family knows how their business is being run. There might even be additional family members working in the company. Maybe one is a plant manager, another is a treasurer, and someone else runs a storefront. This alone is a type of control. They have a front-row seat into how the business operates, and in general, they’re going to run the business to the benefit of the family.
There’s also “management by wandering around.” Family members wander around offices, talk to employees, and generally know what’s going on. That alone is a control mechanism. They have a good sense for knowing when something is off because they grew the business from the start.
Family-run businesses don’t really need an ERP to tell them what people are doing and to ensure segregation of duties. They oversee money coming in and out and can easily notice unusual activity or transaction discrepancies.
Even if a family-run business doesn’t have perfectly accurate cost accounting information (e.g., in-between month inventory changes), they still have a sense of how well they’re doing in terms of revenue, cost control, and the business pipeline. An outsider isn’t going to come in asking about specifics (e.g., “What’s the quarterly demand? Why did profits recently decrease?”).
Bottom line? ERP is probably a small need unless the business is highly complex, has many moving parts, or has global reach. It’s difficult to justify considering the money and resource investment needed. If a family-run business does need an ERP at all, it might just be to support banker or lender requirements and track AR and AP balances, inventory lists, and asset lists.
Additionally, if a family-run business plans to go public one day, an ERP may be beneficial at some point to set a good foundation for financial reporting and controls. If it will remain family-run for a while, the business case for an ERP becomes difficult to justify.
In a private equity owned business, there’s more at stake with a broader range of constituents and massive amounts of money invested in the organization.
Main constituents:
These businesses are more complex, which requires some level of additional audits beyond the basics. Control audits are required to have some process in place (although not quite to the extent of SOX). Take purchase orders for example. POs need to be tracked. What did you buy? Are you paying on term? Did you capitalize it properly? These are things constituents will want to know.
PE firms by nature but don’t know as much operationally about the business as the original family member or owner does. This raises more unpredictable questions about the business. An ERP system can help provide the information to answer these questions. For example, why did margins go up last month? The ERP can help internal management identify why issues happen and how to fix them. The ERP provides internal management with the metrics they need to report back to the PE firm. The PE firm can then report back to investors. This instills confidence up the chain.
At the PE level, an ERP can support continued growth throughout the organization both internally and externally. Suppose a PE firm merges four companies. They need consistency to operate as one, and an ERP drives that.
Additionally, most PE firms have an eventual plan to move toward going public. It’s beneficial to build a foundation for proper controls, processes, and reporting before the IPO, and an ERP can help do that.
Main constituents:
A publicly traded company is a whole different ballgame. Depending on what the company’s market capitalization is (accelerated filer or emerging growth), there are different reporting requirements—and there’s also SOX.
SOX 404 requires all publicly traded companies to establish internal controls around financial reporting. Without a robust ERP system, it’s almost impossible to build a controls framework for SOX 404. Companies with less mature ERP systems or ERP systems that only do a small portion of what’s needed have a very manual controls environment. They must do a lot of manual work to prove SOX 404 compliance to auditors and the board. It’s a huge effort considering the amount of security controls and financial reporting controls required. If you don’t have a decent system to document operational information (inventory, assets, authority, etc.), public shareholders will dump their stock. Needless to say, there’s a lot on the line.
An ERP helps publicly traded companies manage delegation of authority, segregation of duties, processes, and information needed to run the business The ERP system supports the entire organization and is a must for this type of organization.
A factor to consider: Often, family members or executives have grown with a company as they’ve gone from family-run to publicly traded. It may be difficult for them to justify spending millions of dollars on an ERP when they have in-depth knowledge of their entire business. However, many additional constituents come into play and it’s important to shift.
At Trenegy, we help organizations select and implement fit-for-purpose ERP solutions, establish a robust controls environment, and navigate SOX 404. To chat with our team, email info@trenegy.com.
Trenegy is a non-traditional consulting firm based in Houston, Texas.