Why are Companies Constantly Upgrading their ERP Systems?

Enterprise Resource Planning (ERP) is the lifeblood of any business today. Any business, be it a medium scale enterprise or a multinational corporation relies extensively on the use of Enterprise Resource planning systems. This is the reason why these systems tend to be very expensive. There are mega-corporations like SAP and Oracle, which make billions of dollars every year selling upgraded versions of the ERP system.

This raises a very important question. When companies have already made a huge investment into buying an ERP system, why is it that these same companies agree to spend large chunks of money in order to upgrade the systems that they just recently built? The money spent on upgrading the IT systems seems to be a constant drain and to some extent has an adverse impact on the bottom line.

In this article, we will list down some of the common reasons which lead companies upgrading their systems constantly.

Technology as a Process

Many companies tend to view technology as a product. Hence, once they make a purchase, they are reluctant to buy another product within a short span of time. However, the reality is that technology is not really a product. Instead, it is a process. Hence, just like all processes, it is dynamic i.e., it keeps changing over time. Also, since the industry grows quite rapidly, changes tend to become significant even though only a small amount of time has lapsed. This is the reason that multinationals are forced to upgrade to newer and better processes. If they don’t do so, they will end up being left behind by their peers.

Increased Efficiency

As technology evolves, it becomes more and more sophisticated. This is the reason why newer versions of any product have more features in them. When it comes to ERP systems, newer versions provide better reports, faster processing of data, and more automation. Automation tends to save multinationals a lot of money since they tend to operate on a large scale. Also, better reports allow them to focus their resources at the right place and at the right time. Many times, these increased efficiencies make up for the costs that are incurred during upgrades. Hence multinationals decide to keep upgrading their ERP on a regular basis.

Higher Implementation Costs

If multinational companies do not upgrade their ERP systems on a regular basis, they often end up on a lower and outdated system. IT companies nowadays charge money from their clients based on the current system that they are on. Hence if there is a huge gap between their current system and the future desired system, the implementation costs are higher. Also, when systems are moved to a considerably higher version than the current one, they are likely to face significant downtime.

Companies are, therefore, not saving much money if they don’t implement the latest versions of available software. They are just postponing the expense to a later date. Someday in the future, the company is likely to want to update their software to the newer version. Hence, as far as the companies are concerned, the choice is between one big bang implementation and several small implementations.

Higher Training Costs

There is not much difference between the successive versions of any software product. Hence, the training needs are limited and can be managed with a smaller budget. On the other hand, if the company moves to a considerably higher version of a given software, then they will have to spend a lot of time and money to train their employees. Also, this leads to increased downtime and productivity loss. This is the reason why multinational corporations prefer to keep their systems updated.

The Costs of Dysfunction

Multinational corporations also try to maintain a very high service level. For instance, they often sign contracts where they have to pay fines and demurrages if the delivery is delayed. As a result, these companies have a need for systems which work accurately in a predictable manner. If their systems keep crashing intermittently, they tend to lose a lot more money than is generally spent in any software implementation. This is the reason why frequent software projects are preferred by many multinational companies.

Security Concerns

Last but not least, data security has become a big issue nowadays. Within the past year itself, there have been data breaches involving several high profile companies such as Facebook. Also, there have been cases where hackers have asked for ransom from multinational companies using their confidential data as leverage. Threats from hackers are evolving every day based on the new technologies which are being created. Hence, the security measures to overcome these threats also need to evolve constantly. Newer versions of the software are equipped with the latest security measures. Since data loss also ruins the reputation of any company, multinational corporations are more comfortable on spending money on security rather than doing damage control at a later date.

To sum it up, even though Enterprise Resource Planning (ERP) systems are expensive to update, it doesn’t seem like these companies have too much of choice. If they don’t update regularly, they are likely to become less efficient and prone to security hazards.


❮   Previous  Article


Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.