ERP Migration as a Catalyst for SG&A Cost Transformation

As cost pressures rise across various industries, CFOs and other executives aim to increase efficiencies in central functions. On average, companies allocate 21% of their revenue to Selling, General, and Administrative (SG&A) expenses, with considerable variations across sectors: IT firms spend 11%, healthcare companies 14%, and energy providers 4%. Unsurprisingly, 76% of executives identify cost management as a top priority for the next 12 months, targeting cost reductions of 10-15% in SG&A functions. However, 46% of these executives express uncertainty and feel unprepared to achieve their cost-reduction goals.

Cost pressures are anticipated to rise further as consumers increasingly demand healthy products, personalized experiences, and ultra-convenient services.

The significance of enterprise resource planning (ERP) systems in driving change within corporate functions is growing. Companies are transitioning from monolithic ERP processes and solutions to embrace the capabilities necessary for marketplace success, such as real-time, centralized transaction processing and data-driven decision-making through analytics and insights. While ERP systems continue to serve as the foundation for many businesses, they are increasingly paired with best-of-breed, hybrid systems architecture. These modern ERP systems and their associated satellite systems—such as procurement and HR solutions—impact most SG&A domains.

Some companies may not view ERP systems as a source of savings currently due to the significant upfront expense involved. This investment can easily reach six figures and amount to up to more than $100’000 for large organizations.

Companies grappling with the need to reduce costs while justifying a major technology investment may not have asked a crucial question: Can they leverage ERP transformation to achieve greater and faster SG&A efficiencies using the ERP core and related systems? Indeed, they can—if they treat ERP as a chance to transform their operating model and create new business value by redesigning overly complex or inconsistent business processes.

Unlocking Value from ERP Investments

Companies can adopt a focused and precise approach to ERP transformation by concentrating on optimizing specific business processes that can provide the most significant value and cost savings. Many businesses that have already transitioned to ERP systems have been dissatisfied with the outcomes because projects went over budget and beyond timelines, failing to deliver expected savings. However, companies that view ERP migration as a foundation for business transformation, rather than merely as an IT project, can steer clear of these issues and potentially cut their SG&A costs by up to 25%.

The potential efficiencies that ERP systems provide are closely tied to the value a company can gain from its investment in the ERP system and related applications. The ultimate aim of this investment is to optimize processes, redesigning them to generate the most value for the company. Instead of transferring all existing processes—whether effective or not—onto the new ERP platform, companies can focus on specific areas for redesign, simplification, and standardization. This targeted approach maximizes the utility of the ERP solution and enhances the performance of the company’s IT systems as a whole.

For ERP-based systems, companies can enhance processes by adhering to ERP standards. This approach helps companies avoid expensive, complex customizations that are costly to design and maintain. By harmonizing and simplifying nondifferentiating processes in areas such as HR, finance, sales, and supply chain management, companies can ensure alignment with their ERP solution’s standards.

New capabilities enabled by ERP systems can drive substantial business value in several ways:

• Modifications to transaction flows, interfaces, and wait times can streamline processes and operational models, leading to a reduction in operating costs by 10 to 30%.
• Real-time, integrated analytics can decrease time-to-provisioning by 30 to 50%, facilitating quicker and better decision-making.
• Enhancing user experience, including multi-device access, can increase end-user efficiency and reduce inventory levels by 10 to 30%.

Identifying Value Pools: A Structured Approach

To maximize value realization from investments in ERP systems and surrounding applications, companies need a structured approach that begins with establishing a clear line of sight from efficiency potential to value realization. This structured approach includes:

• Determine the baseline: Start by mapping resources across all key end-to-end business processes. This exercise helps identify areas that are overresourced and require optimization. ERP-enabled business transformation drives changes in processes and operating models, capturing value within specific functions and across cross-functional end-to-end processes.
• Assess the status quo: Analyze subprocesses with the most resources allocated, focusing on inconsistencies across countries or entities and manual transactional work. By identifying pain points, companies can uncover potential efficiencies.
• Identify optimization levers: Pinpoint value levers such as automating manual tasks for process automation or simplification. Function-specific value levers help establish future-proof organizations with agile principles for efficient task delivery. Process-specific levers ensure effective execution of end-to-end processes across various functions.
• Size the potential impact and prioritize: Quantify the impact of identified opportunities on personnel costs, headcount, and indirect spending by comparing industry spending benchmarks with company-specific data. Define necessary “enablers” such as organizational changes or effective change management to unlock potential savings. Most digitization projects involve significant changes in processes, organization, and working methods.

Guidelines for planning an ERP-supported SG&A transformation

As companies leverage the various business transformation opportunities made possible by their ERP systems, they should consider five best practices when setting up an ERP-backed business transformation to reduce SG&A costs and redirect spending toward value-creating activities:

1. Zero-Based Productivity: Adopting a zero-based mindset involves challenging all costs within an organization, allowing resources to be redirected towards high-impact areas that drive growth. Zero-based budgeting encourages companies to rethink their budgets from scratch, reallocating funds based on value creation. This approach can be integrated into budgeting software tools, incorporating zero-based policies and offering capabilities for spend visualization, forecasting, and systems integration. Companies employing a zero-based approach can achieve up to 20% in indirect-spend savings in under six months.
2. Early Identification of Major Value Pools: Using the approach described earlier, companies can develop hypotheses around existing process pain points, such as fragmented system landscapes and cumbersome reporting and controlling processes. By targeting pain points, companies can conduct focused diligence efforts to uncover and prioritize opportunities for efficiency within core SG&A processes. Early identification of major value pools is essential for a successful ERP business case and for creating a prioritized road map.
3. Synchronization of Strategy, Business Processes, and IT Perspective: Aligning a company’s overall strategy with its business processes, IT, and ERP teams helps synchronize SG&A transformation with ERP system implementation. Companies can make the most of the implementation by optimizing business processes and leveraging ERP technology. By working closely with all relevant stakeholders from the outset, companies can determine which processes to streamline and simplify, reducing migration costs.
4. Cross-Functional Digitization Road Map: Develop a comprehensive digitization road map and governance structure to guide ERP-enabled business transformation. This road map should encompass technology elements needed to unlock value, including ERP systems, satellite systems, and toolchains. Prioritize initiatives based on ROI, dependencies, IT budget and capacity, and functional ownership. Categorize initiatives into ERP preparation, implementation, and unrelated digitization opportunities, and balance quick wins with long-term potential.
5. To ensure sustained change and continuous improvement after the planning stage of an ERP-backed SG&A transformation, companies should focus on building key capabilities:
   • Deliver the Transformation: Hire the necessary IT resources and establish a transformation office to oversee the project. This dedicated team will guide the implementation and ensure that the transformation aligns with the company’s strategic goals.
   • Extract Value from New Solutions: Develop an agile continuous-improvement model for SG&A processes to capitalize on the potential of new ERP-enabled solutions. This approach helps companies remain flexible and responsive to changes.
   • Knowledge Transfer and Collaboration: Facilitate the sharing of knowledge between IT and functional teams to ensure both groups can effectively implement, utilize, and enhance the new solutions. This collaboration promotes a deeper understanding of the technology and its applications, leading to more effective use and ongoing improvement.

A business process excellence team is typically nurtured within a transformation office at the start. As the organization evolves, this team often transitions into an independent, specialized function dedicated to ongoing continuous improvement. This shift allows the team to focus on refining and enhancing business processes across the organization, fostering long-term efficiency and excellence.

Initiating the process

We recommend starting with an independent diligence exercise that results in three deliverables: a business diagnostic, a technical assessment, and a transformation design.
The business diagnostic leverages benchmark data and analyzes key ERP performance indicators to quantify the potential value and evaluate the company’s readiness for transformation, including any significant risks.
The technical assessment outlines the ERP strategy and establishes a high-level target architecture based on best practices in ERP.
The transformation design refines the program’s scope to be modular and straightforward (rather than a “megaproject”) and includes a comprehensive business case for transformation that extends beyond ERP implementation and considers stakeholder buy-in. It should also establish a value-driven, high-level transformation road map that involves all stakeholders and partners.

SG&A Transformation Powered by ERP

An ERP-enabled SG&A transformation is most effectively carried out through a three-phase timeline that incorporates quick wins and targets specific value levers and business processes.

Phase 1: Independent Diligence (up to 1 month). Establish the full potential business case for transformation beyond ERP, design the ERP strategy, develop high-level architecture, evaluate migration readiness, and define the transformation scope, road map, and setup.
Phase 2: Bottom-Up Planning (up to 1 month). Create a value-based transformation plan that includes two waves led by line managers and choose the systems integration partner for the first implementation wave.
Phase 3: Transformation Implementation (2-3 months or more). Deploy ERP functionalities in agile waves prioritized by value and carry out initiatives independently of the ERP implementation to generate value before going live.

The implementation should be backed by a dedicated transformation office that oversees the transformation program and creates the structure (tools, cadence, etc.) needed to advance progress and drive value to the bottom line. This office should be proactive and future-oriented, taking preemptive actions to address challenges. It should build capabilities for ERP and beyond on a large scale to deliver and benefit from the solution. Fully capturing and sustaining value from the transformation demands continuous improvements driven by a small, focused team.

Taking these initial steps will position companies for success in implementing ERP systems that transform SG&A processes and create new value. Companies can then begin the structured approach we recommend, targeting processes that offer the most value when optimized and significantly shortening the ERP implementation timeline—sometimes by several months.