With the new ASC 606 and IFRS 15 regulations, companies cannot continue with their current revenue accounting practices. When legacy ERP systems no longer support financial processes, it’s time to take action and analyze the options for upgrading ERP and financial systems. Organizations with complex revenue recognition must implement a system and a process to remain compliant. This blog series examines four options to get systems up to date – invest in the existing ERP system, supplement with spreadsheets, rip and replace systems, and augment the ERP system. In this blog post, we will help companies analyze the possibility of a “Rip & Replace” of their ERP system with new software.
Pros Rip & Replace ERP Systems
Companies are no longer getting the benefit from their ERP systems to support revenue recognition needs. Simultaneously[TZ1] , the cost to maintain existing systems is high – the older the ERP system, the more likely it contains expensive customizations driving version and vendor lock-in. Companies might choose a “Rip & Replace” approach when weighed against these factors.
Further, by ripping out existing systems companies can migrate to start of the art solutions that, theoretically, have the depth of functionality to support contemporary requirements, and are based on modern architectures such as multi-tenant cloud, modern Application Programming Interfaces (API’s), modern reporting, etc…
Cons Rip & Replace ERP Systems
To pursue this approach, as many would suggest, is to assume old monolithic ERP systems can be replaced by the new monolithic ERP systems designed for, and capable of supporting, the current state of affairs and that all problems will be solved.
Those that support this theory are doomed to repeat the mistakes of the past. First, ERP systems by their nature, are typically a mile wide and ½ an inch deep in terms of functionality. Even if an ERP vendor could provide depth of functionality around all of today’s requirements, there is no guarantee that the future will remain as it is today. Just as Internet of Things (IoT) and recurring revenue models changed today’s business landscape, new opportunities will change things again tomorrow. No single ERP vendor has kept up with the pace of change to provide depth in many, let alone all, functional areas covered.
Further, specifically regarding revenue recognition as a driver, there is simply not enough time left to pursue this approach. It will be disruptive to an organization’s productivity and workflow. Companies need to factor in the time it takes to train their employees on the new ERP system as they will need to learn and understand what the new ERP system capabilities are. Companies don’t have time on their side with the new revenue recognition rules fast approaching. Before choosing this deployment method, companies should consider their culture and adaptability to change before diving into a full “Rip & Replace”.
ERP and financial systems represent some of the most significant investments a company makes. According to ERP Software Blog, the cost for a typical ERP system at a mid-sized company is between $150,000 and $750,000 (ERP Software Blog). ERP implementation is one of the most expensive, time-consuming and complicated tasks an IT department must endure. In addition, unexpected expenses can occur if there is a constant need for ERP updates based on company changes.
ERP Augmentation is the quicker, less costly and less risky approach. ERP augmentation software allows companies to keep their legacy ERP systems as a backbone and protect their initial investment. They are able to surround these core systems with modules designed specifically for specific functional areas. Such an architecture is extremely agile as a company can replace certain modules as needs change without impacting the entire ERP landscape.
In order to be successful, revenue recognition compliant companies will need to determine which system and model is right for them. Looking for more information to make your decision easier?