What is ERP? How to Choose a Provider (2024)

Today’s enterprise ecommerce brands have access to more data than ever before. 

There are many ways to put this data to work, and leadership is expected to explore as many of them as possible. Each provides unique opportunities for competitive advantage and profit, from supply chain improvements to new revenue streams and market demand forecasts.

And a key way for an organization to centralize and make sense of this data is with enterprise resource planning (ERP).

In this article, we’ll cover the basics of ERP, the best ERP solutions, and how to choose the right ERP system for your organization.

Table of contents

• What is ERP?
• How does ERP work?
• What is an ERP system?
• Benefits of ERP
• Three types of ERP
• How to choose the right ERP system
• Best ERP software solutions
• ERP risks
• Enterprise resource planning FAQ

What is ERP?

Enterprise resource planning refers to the software and systems that an enterprise uses to manage core business processes. It collects data across departments, such as supply chain, sales, human resources, manufacturing, procurement, accounting, and project management. 

ERP empowers an entire organization with greater visibility and real-time data, anytime, anywhere. 

How does ERP work?

ERP originated in the 1960s as material requirements planning (MRP) systems. Manufacturers used MRP software to plan, schedule, and manage inventory during the manufacturing process. Twenty years later, vendors developed a manufacturing resource planning (MRP-II) system, which offered new ways to centralize and process information scheduling, inventory management, and cost control in manufacturing.

Source: Robotics & Automation News

The idea behind ERP is to help larger organizations become more agile and efficient, as well as make data-driven decisions that result in better business outcomes. The data compiled in an ERP system is often presented in a dashboard that decision makers can use to monitor and manage their businesses in real time.

Projected to be a $49.5 billion industry by 2024, companies are increasingly relying on ERP to manage business activities. These systems continue to evolve to incorporate new technologies and support a range of functions. But the goal remains the same: improve business processes and increase profitability.

What is an ERP system?

An ERP system brings all this data into one common database for stakeholders to establish company-wide baselines, find benchmarks, and set goals for moving forward. It’s done through ERP integrations that allow information to flow between your software so it can be used in unison.

But what motivates an organization to create an enterprise resource planning software system in the first place? Almost all (94%) of companies say timely innovation is important and ERP can help with that.

Other common reasons include:

• Improve business performance. 
• Position the company for growth. 
• Reduce working capital. 
• Better serve customers.
• Make employees’ lives easier. 

In a recent survey from Shopify and IDC, 28% of companies have already gained significant benefits, such as improved customer experience and faster time to market, through the deep integration of a SaaS commerce platform into their business.

Benefits of ERP

Think of your business activities as parts of an engine. The ability to look under the hood while the engine is running can be invaluable when trying to decide whether to pull over and do preventative maintenance, take it to a shop for immediate repair, or keep going for as long as possible because all is well. 

ERP software provides a centralized data system every organization needs. Some 73% of companies consider breaking data silos and fostering better internal communication and collaboration to be very or extremely important. An ERP system integration can help your business achieve that.

An ERP software system can save organizations money by:

• Controlling IT costs
• Providing financial visibility 
• Securing all company data in one place
• Creating a single analytics or reporting location
• Making it easier to accurately track inventory and sales
• Streamlining collaboration between employees in different departments
• Improving customer service
• Increasing supply chain efficiency
• Providing smarter business intelligence

ERP helps create a single source of truth in your business, which means you get real-time insights in one place. This helps you identify patterns and predict trends that aren’t possible without the help of ERP. 

Three types of ERP

The right ERP can help you increase productivity and improve customer experience personalization. However, not all ERPs are made equal. There are three different types to know, specifically if you’re new to ERP. 

1. On-premise ERP 

On-premise ERP is when the organization owns the data center. Most legacy systems are considered on-premise. It’s still a recommended practice for large enterprises to use on-premise ERP because they have the money and resources to manage maintenance and infrastructure changes.

On-premise software can be purchased through a perpetual license and can be hosted internally or externally. 

The reason many organizations are hesitant to go cloud is because of on-premise ERP systems. Moving to a new infrastructure and system is daunting and can be expensive. 

Characteristics of on-premise ERP systems include:

• Installed locally on your company’s computers and servers
• Charged as one-off license fee
• Slower to deploy (can take months to years)
• You’re responsible for hosting, maintenance, software updates, and operational costs
• Requires a full-time administrator
• Limited to which ecommerce solutions you can use
• Difficult to make changes 
• Some systems may need heavy customization 
• Data security is the company’s responsibility

2. Cloud ERP integration

In 2023, almost 65% of surveyed organizations selected cloud software over on-premise. With the rise of the Internet of Things, it's no surprise vendors are moving toward cloud-based offerings. Cloud software is hosted in data centers with providers managing the platform and has become a common business solution. 

Cloud ERP systems are accessed over the internet rather than a local computer or installed software. It’s hosted in the cloud and can be deployed as a hosted model or software as a service (SaaS).

Panorama found that nearly 90% of companies that chose cloud-based ERP systems opted for a SaaS model. It’s relatively easier to use and is entirely managed by the vendor, which equals lower IT maintenance costs. 

Characteristics of cloud ERP include:

• Subscription pricing model
• Comes with all hosting, server, maintenance, and software updates
• Can cost up to 46% less compared to on-premise
• No in-house developers or IT admins are required
• Easy access to ecommerce platforms like Shopify for enterprises
• Faster deployment times 
• Quick to make process or software changes 
• Scalable as needed 
• Easy to integrate with third-party systems via API connections
• Cloud vendors have strict security protocols in place to prevent hacks

“After syncing millions of ERP records with other systems,” says Todd Earwood, founder of Integrate IQ, “we’ve found three core reasons people choose cloud over on-premise.”

“First, the removal of versioned software improves user adoption and satisfaction with constant updates and additional features. Old software versions frustrate users and force hard financial decisions on stakeholders on when to upgrade and maintain the system.”

“Second, cloud-based systems offer support plans or offer a network of partners that can provide top-level support from anywhere, at any time. And third, the maturation of the cloud has given comfort to technical leaders for security. Most ecommerce brands exceed security requirements while choosing a cloud option for their organization.”

The one drawback? Vendors can change process flows that need continuous training and documentation updates.

3. Two-tier (hybrid)

Companies traditionally deployed one ERP system for their entire organization, from headquarters to regional offices and subsidiaries. It was a costly and difficult approach to implement. Certain subsidiaries had special requirements and didn’t need the full corporate suite. This one-size-fits-all approach doesn’t work for many organizations. 

A newer system for modern enterprise resource planning, two-tier ERP systems let organizations use their current legacy ERP systems (tier 1), while smaller business units use a different ERP solution (tier 2), which is often cloud-based. The goal of a two-tiered system is to safely and efficiently move data between the two tiers. Some cloud solutions now have built-in integrations to work with corporate ERP systems. 

Two key benefits of a two-tiered system are: 

• More affordable than configuring a corporate ERP system to work for all units
• Easier to implement cloud-based tier-two solutions

As Gartner states, organizations should “assess whether a two-tier ERP strategy would offer more business benefits than a single-tier one, especially by modernizing small potential fast-growing business units.” 

How to choose the right ERP system 

Think you’re in the market for an ERP system? Selecting the right product and vendor depends on understanding your organization’s needs and evaluating competing systems side by side. 

Here’s what to consider when choosing an ERP system.

• Decide if your business is ready for ERP
• Set objectives and business requirements
• Measure ROI
• Demystify the demo
• Check references
• Get the real price
• Determine vendor viability 

1. Decide if your business is ready for ERP

Building an ERP system takes time and money. It’s also not the answer to all your problems. You want to make sure you’re getting the most from your investment. 

Every company is different. There’s not one defining factor that screams out, “We need an ERP!” But there are common issues that most organizations face before they go looking for a solution.

If you’re experiencing the following five criteria, you may be ready for an ERP:

• You have many different software for different processes.
• You don’t have easy access to critical business information.
• Accounting is a long and difficult process.
• Your customers’ experience is less than ideal.
• Your IT department is complex and confusing. 

Look at your organization and ask yourself honestly if it’s having trouble keeping up. If these criteria sound like your business, it may be time to consider an ERP solution. 

2. Set objectives and business requirements

Why exactly are you interested in ERP implementation? What problem are you trying to solve?

Outlining specific objectives will help you identify narrow requirements ERP software must meet to be purchased. To avoid being influenced by vendor marketing, you might consider listing your requirements before you begin researching options.

Use every resource available to create your requirements. Talk to purchasing managers and suppliers. Chat with executive management and accounting teams. 

Have each group create a list of things they feel the ERP system must have. This could be specific integrations or ERP modules, such as workflow automations or mass updates and CSV imports for data management.

Have teams break their list down into need-to-haves and nice-to-haves. Make the need-to-haves top priority. This will help you deploy an ERP system that meets everyone’s requirements. 

When identifying your needs, remember to balance them with your employee policy on mobile devices. While mobile ERP isn’t new, the trend is and should be considered when balancing the advantages of using ERP on the go and ensuring data is secure.

3. Measure ROI

When you begin researching ERP options you’ll notice no shortage of warnings regarding how difficult it is to measure ERP ROI. Fortunately, clearly articulating specific goals as you’ll have already done will help.

 You might measure ERP performance by:

• Reducing headcount by X% in Y months
• Increasing employee productivity by X% in Y months
• Reducing inventory by X% that results in Y accounting improvement
• Improving accuracy of manufacturing cost quotes by X% in Y months

When figuring how you’ll measure performance, be sure to consider differences between in-house and cloud ERP. While cloud ERP is often user friendly and may require less in-house staff to maintain, it also means sensitive data will be stored off site. 

Conversely, an in-house ERP may allow you to store sensitive data closer to home, but doing so could require additional staff for system maintenance. Either decision can impact your IT culture and headcount.

4. Demystify the demo

At this point in the process, you’re ready to see software demonstrations.

You may want to provide a demo script that outlines key business functions, workflows, or features you expect to see during the demo. Directing the demo with precision will save time and help you better determine whether the software meets your goals.

An alternative approach is to simply provide the vendors with a goal and see how they respond.

Remember, you provided the vendor with several of the goals you expect ERP to help you achieve:

Do the salespeople spend time learning about your business, asking follow-up questions about how you’ll use ERP, and voluntarily incorporate your goals in the demo?

The demo you receive can be extremely revealing in terms of what kind of partner the vendor will be over the long haul.

5. Check references

Realizing you’re not likely to call or get cooperation from a direct competitor, it may be helpful to speak with a reference that has similar goals to yours and can answer questions like:

• Which promises were kept?
• Which promises were broken?
• What surprised you about the vendor/product?
• What doesn’t the product do that you were told it would?
• Are you paying for modules/tools you don’t need?
• Which deadlines were met and which weren’t?
• Were there additional or surprise costs?
• What mistakes did you make or what do you wish you knew about prior?

Potentially even more important is asking a vendor for something they’re not likely inclined to give: a list of companies that recently selected a competing ERP provider. It might not be standard practice to ask for this type of information, but a vendor’s response to your inquiry can be telling.

6. Get the real price

To select the right solution for your business, understand exactly how much the project will cost at each stage:

• Upfront cost
• Maintenance
• Support
• Recurring costs

Having a thorough discussion about price can prevent future surprises and disappointment. It can also help you shape a contract both parties can be happy with.

Customization is crucial in squeezing every bit of value from ERP software. However, too much can result in major cost overruns and delayed implementation. Over-customization can also result in higher upgrade costs. Unless a specific customization provides a competitive advantage or measurable benefit, consider saving the extra time and money custom coding often requires.

7. Determine vendor viability

As the enterprise software space consolidates, companies may not wish to support all of the products they acquire in perpetuity. Acquirers may choose to sunset a specific product or notify customers it will no longer support a product after a certain date. This is a risk to anyone considering ERP software.

It’s important then to try to understand a vendor’s strategic vision:

• Was the product created to be attractive to a potential acquirer?
• Who controls the company and are they looking to sell it?
• Do the founders have a history of selling software companies?
• If so, what’s the time horizon, and who are they trying to sell to?
• Does the ERP vendor have investors?
• If so, what type of track record do they have?
• Does the product target a specific niche or solve a unique problem that larger vendors haven’t targeted or solved?

For ERP providers that do not appear to be acquisition targets, it’s important to see their balance sheets so you can assess their financial strength and whether they’re likely to be around for the long haul.

Best ERP software solutions

With over 250 ERP vendors on the market, it can be tough to know which one is the best fit for your organization. To give you a head-start, we narrowed that number down to a list of the four best enterprise resource planning systems. 

Shopify

With Shopify's Global ERP Program, selected enterprise resource planning partners can integrate directly with an app from the Shopify App Store. Shopify partnered with Microsoft Dynamics 365 Business Central, Oracle NetSuite, Infor, Acumatica, and Brightpearl to make ERP integration easier. 

You can access accurate, up-to-date inventory, product, order, and customer data using the Global ERP Program's apps. Your proprietary data flows seamlessly and securely between Shopify admin and ERP without the need to connect with third parties.

With fewer requirements to run business operations, you can implement automations that make their operations more efficient.

Brightpearl

Brightpearl is a leading business management software for online retailers. Brightpearl has a native Shopify integration built and maintained in-house. 

It allows Shopify Plus merchants to better manage post-purchase operations from real-time inventory updates to automated order management processes, multi-location warehouse management, CRM, integrated financial reporting, and more. 

NetSuite

Oracle NetSuite is ranked the world’s number one cloud ERP solution. It offers a suite of cloud-based ERP applications, from financials to HR, inventory management, and omnichannel ecommerce functionality, and is used by more than 24,000 companies around the world.

NetSuite is a robust platform and can likely provide everything you need. It’s fully customizable and has an open API so you can connect with third-party applications easily. NetSuite always updates the latest version of its applications at no extra cost. 

Acumatica

Acumatica is software as a service designed to help organizations scale their financial and enterprise resource planning. It offers on-premise or cloud deployment with a browser-based app that makes it easy to use on mobile devices. 

Acumatica’s pricing structure is based on resources instead of per-seat numbers, which is different from traditional ERP vendors. All applications are integrated into your system, and more can be added any time. You only buy what you need. 

Microsoft Dynamics 365 Business Central

Microsoft Dynamics 365 Business Central is an all-in-one business management solution for small- to medium-sized organizations. It’s ideal for brands that encompass multiple industries and business units, offering features for finance, operations, sales, and customer service.  

ERP risks

If you’ve been researching ERPs for a while, you’ve likely come across many ERP failure stories, such as companies like Dow Chemical spending US$1 billion on an ERP system that took eight years to build. More recently, fleet management company Leaseplan wrote off nearly $100 million in project costs associated with failed ERP implementations. 

Considerations that can impact cost, integration time, and functionality include:

• Whether you’re integrating existing software with new ERP software
• Whether you’re starting from scratch and weighing cloud ERP versus in-house ERP
• Whether you’re integrating an existing in-house legacy ERP with a new cloud ERP

The IT resources necessary for the scenarios outlined will vary and thus also impact cost and duration of implementation. The vendor you select may implement the software itself, partner with a third-party consultant, or leave it all up to you.

Additional ERP challenges may include:

• Going over budget. Most ERP implementations cost three to four times what was initially budgeted. 
• Security and data migration risks. Your most vital business information exists in your ERP system. It must be protected. At a time when cyberhackers are targeting ERP software, the more complex your system, the higher the chance of being hacked.
• Employee training. To take full advantage of ERP, employees must use it, which could require training that reduces productivity and increases costs.
• Reliance on a lone vendor. The vendor you select will be responsible for upgrades and customizations and must remain in business for years for you to reap the full benefit of an ERP system.

To start on budget and schedule, you’ll need to:

• Identify exactly what your objectives are by implementing ERP
• Evaluate the IT and infrastructure necessary to integrate and maintain the system
• Map out exactly how you’ll track and measure success.

Understanding these items well in advance will not only help you select the right vendor but also contain costs and improve the odds implementation won’t drag out for years to come.

Build your ERP system today

It’s clear that modern ERP systems can benefit your organization. That’s why 72% of companies already have a fully integrated SaaS commerce platform within their business operations. With the right solution, you’ll improve business performance, automate repetitive tasks, serve your customers better, and position your company for growth. That’s sure to have an impact on your net income. 

Whether you’re putting together an ERP for the first time or looking to upgrade your system, the information we’ve outlined in this article will help you find the best software to meet your business needs.

Illustration by Jennifer Tapias Derch