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Blog | why an ERP will not magically solve all your controlling challenges

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Author: Jan Korfer, Actuals

Why an ERP will not magically solve all your controlling challenges and can create new bottlenecks as well.

We hear it a lot these days: “We’re busy onboarding an ERP or selecting an ERP, so we’ll use that to perform our controls”. As a fintech company in the field of continuous control, risk reduction and margin optimization, we have mixed feelings about this way of argumentation. Why that is, I’ve explained below by addressing some of the common pitfalls we experience in combination with some important considerations on how an ERP can be used properly with respect to the Finance & Control function.

Let’s be very clear, we really do believe it’s a good sign when companies are investing in an ERP. Due to their centralizing and configurational capabilities, ERP’s are the go-to solutions for fast growing companies when they’re scaling up in activity volume and, in line with that, the number of transactions/orders they process. In addition it also shows that companies understand that keeping records in standalone accounting systems doesn’t suffice anymore in relation to their growth ambitions.

So if that’s the case, then why the mixed feelings about using an ERP for control purposes? The answer lays in a number of reasons and/or pitfalls we often come across when helping our ERP using clients.

Investigating and especially onboarding ERP’s often marks the beginning of what are widely known to be tricky and lengthy projects with regularly undesirable outcomes. The generally long implementation times take up a lot of organizational resources and are often justified by the assumption that many if not all challenges will be solved when the ERP is finally embedded in the operation. The reality, however, isn’t always that positive.

First of all, the long onboarding times often lead to changing desires, needs and end-goals. Not that these are necessarily bad, but they could impact the ultimate effectiveness of the ERP greatly. Secondly (often in relation to the aforementioned reason), we over and over again see that new Finance, Control and Accounting pitfalls emerge during the configuration and subsequent use of the ERP, instead of them being prevented or resolved. Some of the most common pitfalls are:

1. ERP systems are great for standardized processes and keeping track and record of the so called organizational ‘happy flow’ (being a default scenario featuring no exceptional or error conditions).

Pitfall: instead of creating the happy flow, many companies are left with an alternative flow that causes a black box of (material) transactional/order mismatches on the sales and/or purchase side. These unhappy flows are generally shortcuts or workarounds, where the process tends to end prematurely and doesn’t reach the desired end goal. This is the result of the fact that fully configurational solutions are prone to bring fort the unhappy rather than the happy flow. They tend to:

  • incorporate a proliferation of functionality configuration for many departments. Simply put, the more desired flavors and demands exist company wide, the less effective the solution becomes.
  • run in massive delays because of this proliferative nature and;
  • subsequently overrun in costs.

The effect of this decreased effectiveness is that Finance & Control departments become (partly) blindsided and are forced to create manual and error prone workarounds performed in Excel or Google Sheets.

2. The assumption that, due to the highly configurational nature of an ERP, it’s capable of performing automated checks & balances and closed loop reconciliations on its own.

Pitfall: people invest too much of trust into a sub-optimally designed system and then minimize their effort in actually (re)performing reconciliations from A to Z. Combined with the unhappy flow, the mentioned manual workarounds then risk to become retrospective needle-in-the-haystack approaches rather than a proactive execution based on proper insights.

3. Once implemented, the ERP will definitely propel the company to a next level of combining and storing data in a centralized manner. It does, however, not automatically mean that the ERP is at the heart of the IT landscape.

Pitfall: By not placing the ERP at the heart of the IT landscape and connecting it in the right way to all relevant finance applications, companies are still going without the desired single source of truth they acquired the ERP for in the first place. When not properly connected, it’ll still lack the relational overview. Needless to say, this situation doesn’t allow for proper controlling purposes and adds to unclear insights when performing monthly and yearly close processes. Next to that, it also hampers the daily activities ranging from double paid supplier invoices to incorrect refunds towards customers (just to name two examples).

So what to do about it?

If, based on the pitfalls described above, you want to prevent creating bottlenecks for Finance & Control when implementing and/or using an ERP for your fast growing company, it’s necessary to take the following considerations into account:

  1. Do you really have a clear view on your organizational happy and unhappy flows from a process perspective? Try to dig deep and alter the unhappy flow instead of trying to configure (solve) it in the ERP. After all, it’s more cost-efficient to use the ERP for the happy flow and look for an alternative solution for the unhappy flow. That is, if the business concludes it’s commercially attractive to have this unhappy flow in the first place;
  2. Have you designed the controls and checks & balances and do you understand how the reconciliation between the ERP and the WHM, order database and payment flows towards suppliers or incoming cash from customers (e.g. PSP’s) works? Understand whether all data parameters are in place, which reports inside the ERP system are necessary, whether data can be easily exported, whether Finance & Control can access this data without the support of IT (this is a very obvious one, but often forgotten) and whether data will be up to date and available in all systems when the controls need to be executed.
  3. Have you assessed all relevant applications in which the required data is stored for checks & balances (being the data that allows you to conclude on accuracy, completeness and timeliness from a Finance & Control perspective)? Hopefully quite the no-brainer to many, but often overseen or not properly taken care of by just as many as well.
  4. Have you assessed whether the ERP should form the primary source for your control and reconciliation activities in the first place? Perhaps a silly question to ask (especially when it’s the last question in this section), but a fair one nonetheless. Given the wide (often diffuse) applicability of most ERP’s, combined with the ongoing configurational alterations and regular occurring manual workarounds, it’s worth considering whether the ERP offers the best pinnacle of control. From a technical point of view it’s often capable of doing so, but due to mainly human and time related factors it, in many cases, doesn’t. In those cases it could be very worthwhile investigating solutions that are capable of providing the continuous grip for specifically the control function outside of the ERP and use the ERP as one of the relational sources, not as the source.

Conclusion

To sum up, I can say that onboarding and using ERP’s will solve a lot of challenges related to the further scaling of the company. ERPs are simply great for a myriad of functions and reasons.
However and supported by the variety of cases we experience on a daily base, we shouldn’t simply assume that using an ERP will magically solve sub-optimal processes and internal controls. Due to their highly configurational nature and wide applicability, ERP’s can quickly grow into tricky dragons to tame and subsequently lose effectiveness and grip rapidly.

Therefore and from a Finance & Control and Accounting perspective, the key to an effective ERP really hinges on whether you’re able to prevent and/or resolve the described pitfalls and are willing to consider alternative solutions when it turns out that your ERP won’t offer the grip and control you’re looking for. After all, the means should serve a clear purpose and if that isn’t the case, alternatives should be explored to achieve the set goals.

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