Legacy ERP Systems: Is it Time for an ERP Replacement?
As manufacturing continues to evolve, many legacy enterprise resource planning system (ERP) systems have failed to keep pace. And while ERP software companies have invested in modernizing their solutions, their missteps along the way suggest that it’s time for a new approach. To understand what manufacturers need today, let’s first define what we mean by a legacy ERP system.
What is a Legacy ERP System?
A legacy ERP system is either an older enterprise software solution that is no longer being enhanced or a custom/homegrown system that has become outdated and hard to maintain.
Many branded legacy ERP systems like DTR or Forth Shift were first created in the 1980s or early 1990s and often based on older technology, such as the IBM AS/400 platform, Progress Software, or even DOS. Their original user interfaces were character-based, although many have received facelifts over the years, often using Microsoft Windows clients to provide a more modern user interface (UI) look and feel.
Meanwhile, homegrown/custom legacy ERP systems were usually created and maintained by business owners or their tech-savvy associates to avoid paying what were then considered unreasonably high software fees to mainstream ERP software providers.
Challenges of a Legacy ERP System
Legacy ERP systems typically have rich, industry-specific business functionality. To extend the product’s life cycle, their creators often continued writing application code to meet the needs of existing customers long after the base technology became outdated. However, they did not have a strategy or the capability to rewrite the solution in modern technology, so eventually, the system became outdated, effectively at its end-of-life. This left their customers in a position of having to identify an ERP replacement for their outdated system.
Many homegrown/custom ERP systems have met the same fate as branded legacy ERP systems. Their core technology has become outdated, and the work to rewrite the system in modern technology is too big of a hill to climb. In addition, homegrown systems present their users with an even more acute risk—their creators, the only people who know how to maintain them, are retiring and leaving the workforce.
The Legacy ERP Acquisition Business Model
Branded legacy ERP systems have faced additional challenges. Between 2000 and 2015, it was commonplace for legacy system founders to sell their businesses to larger software companies, who were ready buyers. It was a sound exit strategy for the sellers but less so for customers as the number of independent legacy ERP vendors shrank by hundreds during this era.
The larger acquiring companies saw the legacy installed base as 1) a steady source of reliable cash flow from support and maintenance fees and 2) a captive market for selling their newer technology to the legacy installed base. So, their business plan was to cut the sales, marketing, and development costs out of the legacy system’s operating infrastructure. They would typically retain just two or three key development and support personnel to keep the system operational and minimally supported. They also would cut out all other costs, e.g., end-of-life the product, while charging customers higher maintenance fees to use it. While the resulting profit margins on legacy systems often exceeded 85%, the overall strategy sputtered.
A large portion of the legacy customer base was alienated by having to pay higher support fees for increasingly obsolete systems. And even remaining legacy customers did not always jump quickly to the new owner’s go-forward ERP solution. First, there was no commonality between the old and the new system. From a training and implementation perspective, this meant starting over. Second, the new systems lacked the deep, industry-specific functionality inherent in the older system, nor did they have the finely tuned business processes that had been developed for years in the legacy systems. Third, many of the new systems’ developers overreached on the underlying system technologies, resulting in technical complexity and slow performance. Finally, several newer ERP systems have been developed as pure software-as-a-service (SaaS) solutions that cannot be deployed on-premise despite the fact that many customers demand a choice of deployment options.
What Came Next
To counter their missteps, many of the acquiring companies offered like-for-like no-cost license exchanges. However, the new ERP systems were not comparable with the legacy software, and the additional cost of re-implementation was so large that customers began to look for new providers. These manufacturers often found that they could buy an entirely new system from a different vendor with a better business fit for less money. Today, it is common to see a company decide to move away from its legacy system, enter the marketplace, and evaluate multiple vendors.
The roll-up of legacy ERP systems has mostly played out, and the desirable legacy ERP companies have largely been acquired. In some cases, they have been bought and sold more than once. More typically, what we see in the marketplace today is the larger ERP companies buying and loosely integrating third-party technology to fill holes in their go-forward product line. Areas of extended functionality include business intelligence, customer relationship management (CRM), manufacturing execution system (MES), and warehouse management system, among others.
For the most part, the acquiring companies have learned their lesson about dramatically raising support prices, but they still shortcut the integration of the companion technology while reducing staff and service levels. Too often, the “bolt-ons” gradually assume the status of “not invented here” or “didn’t work out like we planned” and are pushed to the backburner until the next big trend comes along.
The Future Belongs to Those Who Keep Current
Several early ERP system companies did have the foresight to re-platform their systems. They maintained the rich functionality their customers needed and invested in keeping the underlying technology up to date. Today, these companies’ enjoy rich, industry-specific functionality and modern technology to enable advanced strategies like digital transformation, the industrial Internet of Things (IIoT), and artificial intelligence-based planning and analytics. They are also built on fast, industry-standard technical platforms that can be deployed on-premise or in the cloud. These modern solutions are often the best choice for SMB and mid-market manufacturers that need to replace a legacy ERP system but still require deep industry–specific functionality.
DELMIAWorks (IQMS) counts itself as among the companies that have kept abreast of technology while at the same time continuously building richer business functionality. If you are an SMB or mid-market manufacturer faced with an end-of-life or legacy system replacement like Sage 500, Alliance, BPCS, Fourth Shift, DTR, AIMs, and many others, DELMIAWorks is a strong solution to consider. Today, 30% of our new system business is driven by legacy ERP system replacements, proving both that replacement is practical and that we have the experienced professional services team necessary to successfully manage the system and data conversion.
