Making the critical decision about replacing a computer system has always been difficult because it involves subjective, intangible factors as well as dollars. And now it can be more confusing because the decision should consider a new kind of “system” - Application Service (AS). With AS, a distributor does not pay a large sum up front for a license to use ERP software; nor is it necessary to purchase a new, larger server. PCs are used, usually via the Web, to access software and data on a computer residing at the company that provides the Service. The distributor pays only for the resources used (e.g., the amount of processing done), which can be less expensive than owning a system.

Based on experience, here are the steps to take to make a non-emotional, unbiased, cost-effective decision.

1. Create a list of the reasons why replacement of the current system is being considered; call them “goals.” It may be possible to achieve these goals without getting a new system.
2. Define the planned and expected growth and change at the company.
3. For the current system, identify where improvements or changes in user job-functions and/or procedures/controls could achieve some goals listed in step 1. Also determine if enhancements to the current system could achieve some goals.
4. Based on steps 1 and 2, define all the features that are desired in a new system. Then determine the availability of suitable new software and the availability of an Application Service.
5. Identify savings, benefits and efficiencies that only a new system or AS would yield.
6. Identify where improvements or changes in user job-functions and/or procedures and controls could produce some benefits of a new system.
7. For the current system, determine which enhancements would be needed to provide the same financial savings and intangible benefits that a new system or AS would.
8. For each software enhancement identified in steps 3 and 7, estimate the direct cost, the value of internal time involved, and the resulting savings and benefits. Also estimate the level of risk of success.
9. Judge whether the system environment is structurally suitable for all the enhancements being considered; whether the current system is user friendly and easy to use; the adequacy of software support.
10. Determine if the current server could handle enhanced current software. If not, estimate costs for any hardware expansion or replacement hardware, taking step 2 into account.
11. For each enhancement, do a cost-benefit analysis, and classify it as immediate, mid-term, or not worth doing.
12. Determine if the current server could handle new software. If not, estimate costs for any hardware expansion or replacement hardware, taking step 2 into account.
13. Add up the cost of all the enhancements classified as immediate or mid-term.
14. Estimate the true future cost of using the current system, as enhanced/expanded, the savings and benefits from enhancements, and the net cost (savings).
15. For a new ERP system, estimate the true cost, the savings and benefits it would produce, and the net cost (savings).
16. Repeat step 15 for an AS.
17. Use steps 9, 15 and 16 to make the big decision - including whether to license software or use an AS.

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• Dick Friedman