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Compliance: fog bank rolls in to cover all

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Compliance is the number one issue with regards to ERP development, with the requirement to comply with Sarbanes-Oxley, Basel II, IFRS, FDA, CLERP (Corporate Law Economic Reform Program), etc. Such legislation is not only onerous, but often conflicts or overlaps between countries. Worse still, how it should be applied is open to interpretation, causing considerable angst amongst executive teams.

Mercury Interactive Corporation recently produced, in cooperation with the Economist Intelligence Unit, a report entitled “Sustainable Compliance: Industry Regulation and the Role of IT Governance”, which details how compliance places a heavy and ongoing burden on IT operations. HSBC has spent US$400 million complying with regulations in the finance industry, while earlier this year an IBM poll found that “users expect compliance with the Sarbanes-Oxley Act rules governing US public companies to prove to be the least effective or the most wasteful use of their IT resources”.

Legislation is not the only compliance driver. Large retail chains are forcing trading standard compliance on their suppliers via RFID, EDI and EANnet initiatives. For example, Miles Macfarlane, supplier transformation manager, Coles Myer Limited, noted via email recently that EANnet and B2B are CML’s two key focus projects. These key enablers of CML’s supply chain strategy are relevant to all suppliers.

Corporate compliance requirements such as workflows within a company are raised in profile because of the above.

So, like a fog bank in the distance, these compliance requirements are rolling in for smaller companies, often with little regard for the absolute cost or underlying cost benefit of gaining and maintaining compliance.

As an example, the US BioTerrorism Act 2002 requires that food and beverage suppliers, amongst others, implement rigorous systems to allow for “the United States to prevent, prepare for, and respond to bioterrorism and other public health emergencies”.

The impact is likely to flow on to Australian food companies either directly (if you distribute food products into the US) or indirectly (if you are an ERP vendor, who has to incorporate this capability into your software for US food customers).

Pronto Software is responding positively to appropriate legislation by formalising compliance procedures where possible. However, the downward migration of such legislation in developed countries - plus the lack of pretty much any legislation in underdeveloped countries - can only erode further the competitive advantage of developed countries in a number of industries. This political issue is not being addressed in Australia.

Service Oriented Architectures

Service Oriented Architecture (SOA) is an emerging approach to ERP development that literally turns traditional software implementation methods upside down. Instead of software developers hard-coding business processes via an application language, SOA-enabled applications allow business analysts to flexibly create applications as users need them, using standardised components.

“Building blocks” is a term frequently used when describing SOA. Visionaries predict software “Yellow Pages” that deliver components over the Internet, based on dynamic attributes such as cost, quality of service and transaction requirements.

However, while SOA is particularly relevant for new software development projects, the jury is still out on how quickly it can apply to existing applications such as Pronto-Xi.

In particular, the cost and difficulty of rewriting an existing ERP to take advantage of SOA is under scrutiny. Microsoft’s Project Green experience suggests that such a rewrite is considerably harder than it first appears.

Pronto Software plans to enable SOA capabilities into Pronto-Xi, using these to deliver the benefits of SOA into the future without rewriting complete applications in the short term.

Fortunately, it’s early days for SOA. While Pronto Software doesn’t expect all the hype to come true, there are enough benefits in the vision so far to make further investment worthwhile.

In particular, the majors - Microsoft (.Net and Dynamics), SAP (NetWeaver) and Oracle (Fusion) - are backing SOA. Pronto Software is sceptical because the “applistructure” arguments seem to be vertical focused (i.e. “Using our toolset ERP, vendor ABC will be able to lever their expertise in industry sector XYZ … and only XYZ, otherwise we get channel clash”), which is at odds with another observation, Mass Customisation, described next.

Margin Management

Margin management is a blindly obvious issue for many industries (with Retail one of the more vocal). However, many ERP vendors are not attuned to it, particularly for mid-market customers.

Not only does margin management relate to the more obvious aspects of ERP, such as true inventory costs, but also to the IT burden of the ERP system used to supposedly manage margin in the first place.

Apart from this, there are industry trends that are not being reflected in many products – for example, imported goods. The bulk of manufacturing is offshore, yet logistics costs are poorly captured in most ERP systems. Hence establishing accurate gross margins across product ranges that take all costs into account is impossible.

Similarly, for many retailers, supplier rebates are their profit margin. Their ERP systems do not allow them to accurately calculate what the rebate should be (based on goods sold) or to reconcile the actual rebate against the expected rebate.

Mass Customisation

Mass customisation is a real killer in the mid-market as major players assume that “one size fits all”, based on their Fortune 500 vertical market model. However, because few pure-play companies are left in the mid-market, this approach fails to deliver. For example, a wholesale distributor will usually import stock, manufacture kit products under their own SKUs, distribute, possibly own a few retail or “factory” outlets, service their products directly … the list goes on.

SAP et al want this customer to believe that their “best practice” will improve their business.

While there is mileage in process improvements, mid-market customers know what differentiates them from their competition and want a system that allows them to do this faster, cheaper, better.

So the ERP system needs a mass customisation capability to reflect the customer’s business process, not blast a “best practice” overlay that robs the customer of their competitive edge. n

* Commentary by Pronto Software

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