Many service industry companies are facing similar challenges in increasing transparency into their resource planning, sales, and performance – both operational and financial. At the same time all the bigger ERP vendors are commonly on the market with the sales pitch for “a single, cloud-based, integrated and streamlined solution” – configurable for any service industry actor.
I’ve recently worked with businesses that in my view have rushed into implementing a new ERP system without first having a clear understanding of the business implications, the possible strengths of their legacy PSA solution or the readiness of their organization to adopt the new ERP suite with its built-in logic. Even though the most single-suite ERP products on the market have much of the pieces and concepts in place for example project billing and resourcing, their features and flexibility still often fall short in comparison to what the best piece of software in the PSA breed can offer. This leads me to the question:
In my experience, often no. This is largely because ERP systems have their roots in a manufacturing environment. From MRP II as a starting point and focus around manufacturing the ERP software suites have evolved into covering also features clearly directed for the service industry, adding to the capabilities for production planning and ex. inventory management. I think it helps seeing the fact that these systems are of different breed, and thus often justifiably just can’t compete with the features and especially the flexibility of the best PSA software available.
“Best-of-breed software for professional services.”
As this article is titled, both software branches have their unique features much deriving from their evolution within their space and history. And the professional service companies should perhaps, instead of trying to find a single software suite for their needs, see how to best reap the benefits of both branches of software products available.
PSA products are constructed to fulfil a much narrower space of functionality than ERPs; often reflecting in their flexibility, ease of use or higher level of integration maturity.
1a) Professional Services “automation”
Many service companies spend much of their time pointing out the deficiencies of processes and technology to their clients, while they ignore their own. This fact is supported by numerous studies done amongst service industry companies, and my personal observations support the same; surprisingly many service companies still rely on spreadsheets or paper and manual efforts in planning and managing activities crucial to their core service business.
There is a plentiful offering of PSA software products to support service companies in their core business functions. Sometimes these software suites are referred to as ERP for service organizations, even though the often lack the module for core financials.
Characteristic for PSA products is that they are, almost without exception built around on the concept of a project – collecting time reports (typically in hours), and with scheduling, resourcing, and planning features.
What is also typical, is that the PSA transactions (entries) do not have direct ledger impact to the financials (G/L). In short, one could say the PSA systems are not nearly as deeply interconnected as the modern ERP systems are, one main reason being that the reflections to the real-time accounting platform isn’t there.
Connectors bridging the two worlds
The enablers here are what we call connectors (or interfaces in a more traditional manner). Oftentimes the need for true real-time accounting is debatable for service industry companies, and for example revenue recognition for longer projects is sufficient to be done and reported with a delay. On the other hand, the forecastability of the project sales and upcoming billing is more of the essence.
What then needs to flow fluently into accounting and the financial management software, in case of professional services are typically the invoicing information (with sales accounts), and the possible expenses related with the customer/internal projects (with the designated expense accounts). And simply put these two needs can be fulfilled with the use of:
- Invoicing connector
- Expense(s) connector
Both are largely available with the PSA vendors as productized (out-of-the-box) features, that mainly require a subscription and in-to-use configuration, with relatively low cost.
1b) Cloud-based Financial Accounting
What service companies rarely handle inhouse is the bookkeeping or more widely accounting in its entirety. This service typically tied with a platform selected and supported by the accounting firm is commonly outsourced as a package.
On average service industry companies are of the size where no internal accounting department is realistic. This understandably supports the idea of the accounting firm’s service offering driving the selection for the used accounting software suite.
Many cloud-based options are today largely available (Fortnox, Procountor, NetVisor, Fivaldi, Maestro, Sonet etc.), and it’s more varying on the country/market in which the company operates. For most of the accounting platforms, above mentioned connectors are commonly available from the PSA vendors on the market.
2) Single-suite ERP platforms promising to do it all
As mentioned in the beginning of the article the software giants in the ERP sphere are much appraising their offering for the service industry sector, also targeting the companies in the IT service industry.
What is indisputable is that the market leading ERP Suites have an astonishing amount of functionality and configuration paths available to some extent to cover most of the business process variety known to human. Still, even today the footprint of all single-suite ERP platforms within professional service industry is altogether rather small.
This is explained by the shortcoming fit to the core business and inflexibilities in typical functionality many times better supported by full-blooded PSA products: e.g. handling of indirect/direct resourcing and assignments to tasks, handling of billable/unbillable time reported, managing billing posts and creating/deleting invoice drafts before actual confirmation.
Within the past few years, I have come across more than two service companies struggling with their service business transformation and process automation efforts with a goal to shift their core business onto a single-suite ERP platform. These efforts have typically led only halfway or have after spending a good number of months and considerable money – suffocated altogether.
Instead of this starry-eyed objective service companies – listed or non-listed companies should first engage a proper fit-gap analysis, and then fully understand if any single-suite software platform indeed meets their full set of requirements. Without a timely pre-study and analysis of both the requirements and the fit, the implementation adventures are often uncomfortable for all parties in every respect.
Therefore, before jumping into implementing any of single-suite ERPs out on the market, I strongly recommend the service industry companies to first have a look at the possibilities in combining the use of a modern PSA tool with the use of a commonly available cloud-based accounting software. In many cases, I assume the result is better.
What is good to acknowledge is that both ERP suites with core financials and Professional Service Automation tools have their roots in wholly different operations and backgrounds for application development. Both have their strengths and vice versa, their flaws and inflexibilities.