So what’s the difference between an ERP system and an EPM system? What business problems do they solve? Why do you need both? How do they work together?
ERP – Optimized for Transaction Processing
Let’s start with ERP systems. Although the name makes it sound like a system that’s optimized for planning, in reality, an ERP system is designed and optimized for back-office transaction processing and operational process support. Here are some of the key processes supported by an ERP system:
- Accounts payable
- Order processing and billing
- Accounts receivable and collections management
- Fixed asset management
- Treasury and cash management
- General ledger accounting
Most ERP systems are built and deployed using a relational database management system (RDBMS), which is optimized for high-volume transaction processing. The data in an ERP system is typically summarized in the general ledger module.
So in addition to handling operational reporting on transactional data, ERP systems also support some basic financial and management reporting. This includes basic financial statements, such as the balance sheet, income statement, and statement of cash flows. It also includes management reports, such as actual vs. budget variance reports by cost center and department.
Most ERP systems, however, fall short in supporting the following EPM processes:
- Consolidating and reporting financial results from multiple ERP/GL systems
- Iterative collecting, compiling, and managing of financial and operational budgets
- Orchestrating and managing a rolling forecast process
- What-if modeling of different financial or operational scenarios (M&As, reorganizations, new product or market entry, long-range planning, cash flow forecasting, etc.)
- Multidimensional analysis of financial and operating results
So you may be wondering – how do organizations handle these types of requirements if their ERP systems cannot handle them? The answer: Many organizations augment their ERP systems with a series of Excel spreadsheets or use EPM applications to support these requirements.
EPM – Optimized for Management Processes
EPM software solutions are complementary to ERP systems and typically replace spreadsheets being used to support specific management processes:
- Budgeting, planning, and forecasting
- Financial consolidation and reporting
- Management reporting & analytics
- Enterprise modeling
Let’s take a look at how an EPM system handles some of these processes – starting with budgeting, planning, and forecasting.
The planning module within an EPM system is designed to handle the collecting and compiling of budgets and forecast data, with workflow and process support that recognizes the iterative nature of the process. Budget data entry templates can be created and tuned to the needs of various departments, but line managers cannot typically override business rules and calculations that have been defined by Finance.
And when managers enter their budget data and push enter, the results go directly into a centralized database for compilation. These capabilities allow organizations to accelerate the budgeting process while improving the accuracy of information. The budget can be “seeded” with prior year actual results from the ERP system, and when the budget is finalized, it can be loaded into the ERP system, if needed.
When it comes to financial consolidation and reporting, the consolidation modules of most EPM systems are designed to collect and consolidate financial results from single or multiple GLs, and other data sources. These systems provide built-in support for complexities such as currency translation, intercompany eliminations, and reporting under multiple accounting guidelines, such as US GAAP or IFRS. Plus, EPM systems provide flexible reporting tools that allow Finance users to easily create and produce a wide variety of financial and management reports, with no IT support. This allows organizations to automate and accelerate the period-end close and reporting process, and free up more Finance time for analysis.
And when it comes to supporting “what-if” analysis, the modeling modules in most EPM systems are designed to support integrated, multi-dimensional models that allow organizations to understand the financial impact of operational decisions, pulling data from other EPM modules, or from ERP and other transactional systems.
EPM and ERP – Better Working Together
Once you understand the differences between ERP and EPM systems, the question might be, which do you deploy first? This reminds me of the chicken or the egg question – but this one is easier to answer. In most organizations, the accounting/ERP system comes first. Unless you plan on paying bills and keeping the books manually, your company cannot operate without some type of automated accounting system to run payroll, process invoices, make payments, bill clients, track collections, and produce periodic financial statements.
Spreadsheets can suffice, in the early stages, as a means of creating budgets or forecasts, and doing some basic reporting and analysis. But as companies grow in size and complexity, the manual approach to budgeting, planning, forecasting, and reporting using Excel and email becomes cumbersome. The need for an EPM solution will emerge.
The good news here is that EPM systems can often leverage Excel as a front-end, and are designed to integrate with and collect data from multiple sources – ERP, GL, HR, Sales, Marketing, etc. In some cases, the vendor may even provide certified connectors that provide direct integration with specific systems, which speeds up the integration process and reduces the cost of integration.
And the nice thing about most EPM systems is that, since they’re agnostic to the underlying transaction systems, you can upgrade or replace your underlying ERP/GL system without disrupting your management processes – i.e., planning and reporting – during the transition period. So organizations looking to upgrade these systems, and don’t already have an EPM system in place, may want to implement an EPM system before doing the ERP upgrade in order to reduce the disruption. So in this case, the chicken does come before the egg!
Host Analytics has worked with over 600 companies to help them replace spreadsheets or legacy applications being used for planning, consolidation, reporting, analysis, and modeling – with a cloud-based EPM solution that works seamlessly with their ERP systems. And whether the ERP system is deployed on-premises or in the cloud, Host Analytics can be deployed quickly – typically in a matter of weeks or months.
These customers are able to:
- Reduce planning and forecasting cycles by up to 50%
- Shorten the days to close by up to 75%
- Accelerate financial and management reporting by up to 80%
- Deliver insights that reduce costs and improve business focus
- Do all of the above at a lower TCO than on-premises and other cloud vendors
To learn more, download our free white paper titled “Best Practices: ERP and Enterprise Performance Management.”