Explainer
ERP stands for enterprise resource planning: one system that runs finance, purchasing, stock, sales and operations on a single set of data. Here is what it does, what it costs and when a business needs one.
By Christopher Fagan, Managing Partner, PEF Consulting Partners
ERP stands for enterprise resource planning. An ERP system is business software that brings the core processes of a company, such as finance, purchasing, inventory, sales, manufacturing, projects and HR, into one system with one database. Instead of each department keeping its own spreadsheets and systems, everyone works from the same records, so a sales order, the stock movement it causes and the invoice that follows are all connected.
The idea grew out of MRP, material requirements planning, which manufacturers used from the 1960s and 1970s to plan materials and production. In the 1990s the term ERP widened that idea to the whole business. Today most new ERP systems are cloud software sold on subscription.
At its heart, an ERP system records each transaction once and uses it everywhere. Typical modules include:
Because the modules share data, the system can show a live view of margin, stock and cash, and the month end close becomes a review rather than a reconstruction.
A wholesaler takes an order. In an ERP system the order checks stock and reserves it, raises a purchase order if stock is low, tells the warehouse what to pick, creates the invoice when the goods leave and posts the revenue and cost of sale to the ledger. Without ERP, each of those steps lives in a separate system or spreadsheet and someone rekeys the data in between.
The benefits are real but they are not automatic. They depend on standardising processes and cleaning data, which is why so many ERP projects run late: the software is the easy part. We cover that in why ERP implementations fail.
Cloud ERP is hosted by the vendor and sold as a subscription, with upgrades applied for you. On premises ERP runs on your own servers, which gives control but leaves upgrades and infrastructure to you. Private cloud sits between the two. Most mid sized UK businesses now choose cloud products such as Microsoft Dynamics 365 Business Central, Oracle NetSuite, Sage Intacct or SAP Business One, while larger organisations tend to use SAP S/4HANA, Oracle Fusion Cloud ERP, Microsoft Dynamics 365 Finance or Unit4.
Accounting software such as Xero, QuickBooks or Sage 50 keeps the books for smaller businesses. ERP covers the books plus the operational processes around them. CRM, customer relationship management, runs the front office: leads, opportunities, contacts and service. Many businesses run CRM and ERP side by side and integrate them; see ERP vs CRM for the detail.
The usual signs are several systems and spreadsheets that do not talk to each other, a month end that takes more than a week, no reliable view of stock or margin, growth into new entities or countries, or an accounting package that can no longer cope. Size alone is rarely the trigger; complexity is.
There are two parts: the software, now usually a subscription per user or per company, and the implementation, which for a mid sized business often costs one to two times the first year subscription and more where there is complex manufacturing, several entities or heavy data migration. Our ERP implementation cost guide breaks the numbers down.
Start with your processes and requirements rather than the vendor list. Shortlist on fit, run scripted demonstrations with your own data, and judge the implementation partner as carefully as the software. Then plan the implementation in phases with clear ownership on your side. Our guides on how to choose an ERP system and the ERP implementation plan cover both.
Related reading: independent ERP consultancy, the free ERP readiness check, the best ERP software for UK businesses.
Enterprise resource planning: business software that runs finance, purchasing, stock, sales, manufacturing and other core processes on one shared database.
Microsoft Dynamics 365 Business Central and Dynamics 365 Finance, Oracle NetSuite and Oracle Fusion Cloud ERP, Sage Intacct, SAP S/4HANA and SAP Business One, and Unit4 are common examples in the UK.
No. Spreadsheets can hold the same information, but they do not connect processes, enforce controls or keep one version of the data, which is the point of ERP.
MRP plans the materials a manufacturer needs and when. ERP covers the whole business and usually includes MRP as one of its modules.
Typically six to eighteen months for a mid sized business, depending on scope, data and how much change the business is taking on. See our guide to ERP implementation timelines.
If you are weighing up ERP for the first time, or replacing a system that has run its course, an independent view before you talk to vendors saves money later. We take no commission from any vendor.