February 5, 2025 • 36 mins
In this episode of “Growing EBITDA,” Mike McSweeney and James Bandy deliver a crucial Public Service Announcement (PSA) on the hidden costs of inadequate ERP systems and their impact on the bottom line.
With their signature blend of expert insights and dry humor, the hosts dive into how outdated or underperforming ERP systems can cripple operations, escalate costs, and even affect M&A valuations. They share real-world anecdotes on operational inefficiencies, costly supply chain issues, and the risks of financial mismanagement—all stemming from inadequate ERP investments. Plus, they discuss strategies to mitigate these risks and optimize ERP systems to support long-term growth.
Highlights:
• Introduction and PSA: Why inadequate ERPs are a silent drain on your bottom line
• Operational impacts: How ERP failures lead to overspending and inefficiencies
• Financial risks: Customer dissatisfaction, bad data, and inflated costs
• Supply chain disruption: Stockouts, excess inventory, and poor procurement practices
• M&A consequences: Lower valuations and deal-killing ERP risks
• Cybersecurity concerns: Legacy systems and threat vectors
• Scaling challenges: Why inadequate ERPs stifle growth and hinder integrations
• Data-driven decision-making: The importance of clean data for future growth
• ERP failure rates: Sobering stats and why boards hesitate to upgrade
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcome to the Growing EBITDA Podcast, where we unlock the doors to management and technology
(00:08):
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Stay tuned and let's grow together.
(00:31):
We got a little bit of a public service announcement today, don't we, James?
We do.
How inadequate ERPs impact your bottom line?
Why is this a PSA?
Because we care about...
Because this is your passion project.
Yeah, 100%.
I'd say we care about the people that we work with, we care about our clients, we want people
to be successful, but really, I'm tired of seeing it.
(00:56):
I think it's something that's out there all the time, and I think that other folks are
way too comfortable in continuing to support inadequate ERPs.
Where are you seeing the inadequacy?
Yeah, there's a lot of factors that we see in that, and we can get into some of those,
but I'm generally seeing it across all businesses.
(01:18):
So one of the unique things about TriVista is we cover almost every business vertical
there is.
So from distribution and manufacturing to a business service to a software development
company.
And we try to draw insights as we interact with our clients and say, oh, maybe this group
is XYZ, right?
(01:39):
So from a distribution group, it's IOP is important, and we know that those systems
and some of the planning helps them.
But no matter what the business is, and no matter what the size is, we see inadequacies
every day.
And they're small.
Some are small and some are large.
Some are I'm running QuickBooks, some are I have a big ERP and I don't have support,
and some are my ERP hasn't existed for the last 10 years.
(02:01):
So we kind of see it every day and everywhere.
And I don't want to be doom and gloom, but it is a PSA.
And I'm a kid that grew up in the 80s and 90s, and those PSAs, they were usually pretty
doom and gloomy with some eggs in a frying pan, if you remember those, Mike.
Those are some memories.
And so I think this is a bit of supporting our friends and letting them know, hey, there's
help out there and we can turn this thing around.
(02:23):
How are you seeing it impact the bottom line?
Where is it showing up in the financials?
Yeah.
So on the bottom line, we're seeing it on the operations side.
So really struggling on the operations to be successful.
And some of the new initiatives, we see those fail sometimes because the system can't keep
up.
So when you think about like operational improvement, a thing that we do a lot of times is, you
(02:47):
know, I'm making these changes in my operation and the system needs to come along with on
the journey with me.
And if it doesn't, that's a failed program.
There's capex attached to that.
There's change attached to that.
Bottom line effect.
Customer dissatisfaction.
I don't know where my order is.
My order is incorrect.
I'm having challenges.
It's another one that impacts the bottom line.
(03:08):
And then just generally we see it that there's chances to overspend in this space and you're
paying for a product that you're not getting the true value out of.
You're talking about overspend on the implementation side, on the maintenance side, all the above?
Maybe all the above.
All the above.
My favorite answer.
Let's get specifics on how it's driving operational costs.
(03:29):
I'm glad you caught that one.
That's one that's an important one.
And some of the operational costs that we see is really around, and you touched on it,
is around the support side of it and the folks needed to do it.
And that's your internal team.
You could have four or five people that are doing some very manual processes that are
required to be able to support that need and that system that could be done in a much more
(03:54):
efficient way.
But due to the system not being able to support it, it really drives up those operational
costs.
And those are human hours that you're putting towards that.
And a lot of times you hear when there's like a manual process, you always hear the throw
more people at it.
We can do it.
Well, there's a challenge.
It reaches kind of a peak where you can no longer throw more people at it.
The system has to kind of come in and help.
And then another one is when you have all these manual processes and you have all these
(04:18):
people kind of propping the system up, you have a high probability of bad data.
And we've talked about on multiple other podcasts, data-driven decision making, being able to
really focus on data.
We all know that the base for AI that's coming is good data.
When you're manual and you have this bad, I guess the opposite of rich, unrich data
(04:39):
that's sitting out there, it's a challenge for you to use some automation tools.
It's a challenge we'll make decisions.
It's a challenge to know where things are.
And that poor data can really cause costly mistakes.
And that's from inventory, procurement, reporting, many different venues that are challenging.
So I think really it does drive up operational costs, not all the times dollars and cents,
(05:02):
but it's kind of those soft dollars that just kind of is the vibe that goes to the organization.
So you and I were having a conversation a few weeks ago that I thought was interesting
and relevant to this topic.
We were talking about supply chains and how ERP systems, particularly those that were
outdated or inadequate, whatever label you want to put on it, the impact that that has
(05:25):
on supply chains.
Because I think a lot of executives go straight to what you just talked about, the operating
costs, the headcount, the manual data entry, the manual report outs that need to be done.
But I thought it was interesting when you started talking about the impact on the supply
chain and kind of the downstream impact that that has, especially given how big the supply
(05:46):
chain can be, particularly in certain business types.
You get into industrial environments and 60% of cogs might be supply chain related.
So huge portion of spend.
Talk to me about how inadequate ERPs are impacting supply chain costs.
So I had this boss at one point, we'd go around and tour and so I was supporting global ERP
(06:12):
systems and we were rolling out a new warehouse management system or WMS.
And we really needed this WMS because we globally sourced and then we kind of cross-docked each
other to kind of backhaul and supply each other.
And so we really needed really good visibility into what we had across the organization.
And as we walked the warehouse, he would always say to me, he's like, well, there's a Honda
(06:33):
Civic on that shelf.
There's a BMW on that shelf.
And essentially those dollars that you spend on whether it's raws or finished goods, they're
sitting on shelves.
So excess inventory costs.
We all know during COVID prices went up, folks over procured because they wanted to have
a little nest egg, potentially overpaid, didn't have that visibility and potentially overspent,
(06:55):
definitely had more stock than they needed.
Another place you see that kind of dis-energy of value on procurement is in the M&A space.
We spend a lot of time helping folks come together.
So post merger integration or whatever you want to call it.
That integration side, making sure I have the best price across my organization and
have visibility to that and opportunity for poor inventory practices.
(07:19):
Also it's a very interesting thing.
It's pretty interesting transactionally.
If you don't have it to sell, it's really hard for a client to buy it.
So having stock outs, having the ability to not know when you're going to be up against
that or not procure effectively to build a support that can lead to lost sales.
And the last one is, which is super important business, is the ability to forecast.
(07:42):
Know what's on the horizon, know what's needed to build and make sure those other two don't
fail.
And we talked about the bad data that existed.
If I don't have good data and I don't have that information, like you're talking about
what we're seeing on the supply chain side, people want richer data, better insights to
kind of systemically drive not someone who feels this is what they need, but have a reason
(08:03):
and knowledge that they need that.
If you don't have that visibility, it does create some challenges.
Spend a little bit of time talking about overspend with vendors too, which I found our conversation
about that recently also pretty interesting.
So going back to a couple of those topics, if I don't have that visibility into how I'm
spending and what I'm spending because I don't know what I have, it leads me to be able to
(08:27):
overspend because either I don't know what I need, I buy too much, or maybe they're getting
away with overcharging me.
And we unfortunately see this a lot.
We negotiate and spend a lot of time upfront to negotiate a good fair price for two organizations
to work together.
If that information is not loaded into a system that I can look at the PO and then I can look
(08:47):
at my invoice and make sure they match out and I'm spending what I expect, that it causes
issues.
I can easily overspend.
It's kind of sad because you spend all that work upfront to do that and then it fails
on the other side.
A lot of times also, and I think that a lot of organizations struggle with this, is that
contract management side.
Where do these documents exist?
How do I have access?
(09:09):
Turnover happens, changes happen.
What's that central repository?
And I know that this is one that you're big on, which is the process side.
If I don't have good processes in place and those processes aren't systemically enabled
or supported, by the way, I don't think the ERP is going to be able to drive the process.
I think the good process is supported by the system.
(09:29):
That can really lead the opportunity to overspend with that vendor because those controls aren't
in place.
I think the challenge with that is sometimes you don't even know you're overspending until
it's too late.
That retrospective side, we do struggle on helping people, but I think if you clean that
up, organize, we can start to tighten those pieces up.
(09:51):
We wanted to talk a little bit today about the impact on M&A too, right?
Which somebody might argue, well, is that a conversation about bottom line or is that
a conversation about enterprise value?
But let's spend a few minutes here talking about how ERP systems can impact M&A transactions.
The first thing that comes to mind for me is just simply lower valuation, right?
(10:14):
If somebody's coming in looking at your business, whether it's a corporate acquirer or a private
equity buyer, whether it's a platform business or an add-on acquisition, everybody's going
to look at each business a little bit differently, but most of them are going to want to understand
is the ERP system sufficient to run the business?
(10:36):
Is it under invested?
Is it costly to maintain?
How costly is it to maintain it relative to similar businesses that they've seen?
Is there a single point of failure?
Some rogue individual out there, contractor or full-time employee who is the only person
that knows how to run one of those antiquated systems with tons of custom code.
(10:58):
The more antiquated it is, the more under invested it is, the more expensive it is to
maintain it.
If it's lacking the ability to enable some of those processes, those core business processes,
that's going to drive lower valuations every time, right?
Because you have a highly functioning ERP system that's scalable, that you can go and
(11:19):
do add-ons with, that you can grow sales three or four X and it can continue to find the
right support and it's got the right modules you can grow into, et cetera.
Obviously, that's a more positive thing.
And especially if somebody else, if the current owners have taken the initiative to spend
the money with the system integrators and stand up that functioning ERP, that de-risks
(11:40):
the deal and ultimately sometimes that'll lead to a higher enterprise value or higher
valuation as well.
Tell me a little bit though, during those M&A processes, those sale processes, talk
to me about due diligence.
How are you assessing whether an ERP system is adequate or not?
And at the end of this, I would like to hear some guidance from you because I know you
look at a lot of deals every year and you support our clients and you yourself review
(12:02):
tons of SIMs every year.
And I think it's interesting when I go through the diligence piece, because I'm going to
talk about it kind of on the outbound side.
I think I would like to hear from you and I'm sure listeners would as well as like,
once you receive that, has it affected deals recently?
What are you seeing in the market based on this and how are you seeing this effect kind
of, again, we're talking about how it affects the bottom line or the ability to sell that
(12:25):
business in an M&A process.
Yeah, I think it's a lot of the stuff I mentioned a second ago.
If you're doing diligence on an asset and you find that the ERP system is barely functional,
it's holding on paper clips and glue, you're sitting there thinking to yourself, hey, how
much money is it going to take to stand up a functioning system?
(12:46):
And the risk for a particularly a private equity buyer is they don't know anything about
ERP systems.
So that's complicated, sounds expensive, start having conversations about the risk profile
of the deal becoming elevated.
Quite frankly, one of the biggest things that we've seen blow up deals and one of the biggest
things that we've seen really impact outcomes for private equity investors is having to
(13:11):
way overspend versus what they anticipated during their ownership cycle of the business,
overspend on ERPs.
It's a huge cash drain on the business, especially businesses that have a reasonable amount of
leverage.
And it's a huge distraction if you've got to go and upgrade one of these systems.
So you'll find some buyers who are happy to buy a business with a dysfunctional or antiquated
(13:35):
or insufficient ERP system, but they're going to buy it at a big discount as a result of
that, perhaps a big discount amongst other discounts that they're seeking.
But yeah, no, a highly functional ERP system, it's one of the first things the most at least
private equity buyers so I can speak to more directly are looking for.
And it's something they diligence the heck out of when we're looking at these targets.
(13:57):
So to play that back for a second, and I just want this to be like a plain English thing
for our listeners, do you feel that a deal could be passed on if it had an ERP that was
significantly underperformant or had issues?
Would it be a deal breaker?
Absolutely.
And then the second one is, have you seen deals get discounted based on the ERP?
(14:21):
Yes.
Wow.
I mean, that's pretty impactful and direct.
I would like also another thing-
And it's probably a double whammy, James.
You can probably make some reasonable assumptions here.
Like we've talked about at length, antiquated, insufficient, whatever labels you want to
put on it, ERP systems are probably costing the business more money than they should,
(14:44):
which impacts their EBITDA or their bottom line.
So there's the first hit, but then most of M&A transactions, most of the valuations are
based off of some type of multiple of those earnings or that EBITDA, right?
We hear a lot about multiples of EBITDA, especially in private equity.
So if your earnings are depressed because your ERP system is inadequate, when you go
(15:05):
to put whatever multiplier you put against that, you're going to get a lower number than
you otherwise would have.
If you also are getting a discount on the number you're multiplying by because there's
perceived significant risk or the buyers think they have to spend significant dollars to
upgrade the system, now you're getting kind of burnt from both ends, right?
So not only can it impact your bottom line, but it impacts shareholder value in a meaningful
(15:29):
way, and in some cases, in multiple ways.
So a really big issue.
And listen, deals still get done.
Sometimes they get done at prices that are less attractive to the sellers and more attractive
to the buyers, provided they're willing to roll up their sleeves and do the work.
Interesting.
Now, I appreciate that insight, not to skip out.
And just a couple more questions before I go back to your original question, which was
(15:50):
around the diligence side.
Sure.
And try this to help me out.
I don't know the number.
What do you think of our diligence work is a sell side diligence?
Probably 15%.
But you should make sure everybody understands what sell side diligence means.
Yeah, please.
So in an M&A context, typically buyers do diligence on the targets, right?
(16:11):
The businesses that they're looking at buying.
We call that buy side diligence.
We do a lot of that at TriVista from an operations and supply chain and technology and cybersecurity
perspective.
There are many other folks out there who do different work streams.
You've got the accountants that do their check of the numbers, the lawyers are drafting the
legal docs.
Everyone who's representing the buyer in that situation is conducting what we call buy side
(16:35):
diligence.
What you're talking about now on the sell side is the company that's putting itself
up for sale.
It's the diligence they're doing on themselves and presenting to the buyer to encourage the
buyer to want to be attracted to buying that business, right?
So in an operations and supply chain and technology context, which is where we play, you'll see
(16:58):
things like companies wanting to make sure that they're articulating that they do have
the appropriate cybersecurity measures in place.
Not only do they have a functioning ERP system, but they have a world-class ERP system.
They'll get third parties like us to come in and attest to the fact that they do have
those systems or processes or leadership capabilities in place.
(17:20):
That can have a pretty meaningful impact on enterprise value as well.
If you think about it like this, the story I always like to use is when you go to sell
your house, you're going to hire a realtor, right?
One of the first things that almost every realtor is going to come in and tell you is,
we should stage the house.
If we stage the house, we're going to get more money for the house.
(17:41):
Some buyers, listen, other buyers don't.
And they don't at the risk of maybe getting less money for that house.
But some people are very comfortable doing that.
Thanks, Mike.
I didn't realize it was 15%.
That's an interesting piece of information.
The reason I asked the question and you kind of go through the evaluation and some of the
(18:02):
pieces is I noticed that when folks are putting together a sim, I probably look at a couple
hundred sims a year.
I'm sure you look at way more than I do.
What's a sim?
I know what a sim is.
I'm just making sure the audience knows what a sim is.
You're doing such a good job defining today.
You want to take that one?
I'll take it.
By the way, just so you know, Mike, I was going to ask you the question and say before
(18:22):
you answer, can you define it?
So I just love how much you and I are lined up.
Just take it.
Beat me to the punch.
So sim stands for confidential information memorandum, confidential information memo,
for short, because it's three of the longest words ever put together.
Term very commonly used in the M&A community.
(18:43):
Think about it like a house listing, right?
You go back to the selling your house analogy.
This is where the advisors on a deal will help put together all the pertinent information
about a business that is coming up for sale.
So 60, 70, 80 slides long, customers, operations, IT systems, management team, kind of a summary
(19:04):
of the current state and where the business is trying to go.
It's interesting you mentioned IT systems.
So I look at a lot of them and I review them and a lot of times in preparation to go do
a diligence, which we're going to talk about, but I've noticed that a lot of them do not
include information about the ERP in any depth or any additional information.
(19:29):
And sometimes it doesn't even mention which ERP they're running.
If it's so important to the deal value and so important that folks want to know what
they have and making sure it's running efficiently, obviously it's part of diligence.
Do you think it's a miss that folks aren't including more about the ERP in the SIM?
I think it's an opportunity for improvement maybe.
(19:49):
I think if you have great businesses with great systems and great leadership teams and
maybe suboptimal supply chain, right?
You're probably going to focus on what you're great at and maybe focus a lot less on what
(20:10):
you're not so great at.
Go back to the selling a house analogy.
When you're selling a house in most states, at least I have the impression that in most
states you have to have seller disclosures, right?
So if you know there's something fundamentally wrong with the home before you sell it, you
have to disclose that.
The same is generally true in the M&A community.
(20:30):
But if you think that the home needs a new roof, but you're not 100% sure, you don't
have to disclose that when you're selling a house.
Well, the same thing goes with the business, right?
It's kind of an eye of the beholder type situation where you're selling the business kind of
as is.
The buyers are more than welcome to come and do their investigatory and confirmatory diligence.
(20:51):
But at the end of the day, you're not going to tell all the buyers where the skeletons
in the closet might be.
You may tell them where a few of the skeletons are, but it's not really your obligation.
There's no legal requirement that you have to tease out every nook and cranny of shall
we call them opportunity for improvement in these businesses.
So it's just kind of how things are done.
(21:14):
No.
And I love the house analogy.
I get asked a lot of times by friends, what does it mean when you do diligence?
What do you do for a living?
What is this diligence thing?
And so I always explain to folks, I'm essentially a home inspector of businesses.
And I think that's an interesting segue to talk about the question you had earlier of
like, what do we diligence when we diligence an ERP?
(21:36):
Sure we look at the ERP.
We a hundred percent look at what the system is by name, its support, its version, all
those things, kind of check the box if you will.
But one of the differentiation, differentiating factors I think for us is we look at the business
enablement side.
So one of the things that's unique about the, my team, let's call it, because that's where
(21:57):
the folks are really focused on it, is we hire former operators who have lived and done
ERPs and have at least implemented one ERP.
So one of the things that we love is we love that the opportunity for a diligence, we get
to go on site and experience how the organization, the users are using the system.
So some of our tricks, which we'll be happy to give away to our listeners, you know, you
(22:18):
go to that outbound Bay door and you see a pile of paper back there, you know, they're
not using the system the right way.
And there's an opportunity.
And instead of just saying, Hey, they have paper processes.
What we do is we really dig in on why do they have that and how they're better.
So in our diligence, we look at the system, we look at the processes, we look at how the
people interact with it.
(22:38):
We also go as far to look at who supports it and how they support it.
We look at the cost side of things.
So really try to get this comprehensive view.
And we've talked about this on other podcasts, because we do about those 150 transactions
a year, we have a rich database of benchmarks that were able to score your ERP based on
those factors by industry and by revenue.
(23:00):
So when you receive that scorecard back, if you're a small business, that's a very simple
business and you're doing a great job at it, you're not going to compare you to a business
services business at 10x.
So we really try to bring the diligence close and tied out to how the organization functions
and what the organization does and be as comprehensive as possible because we do feel that accountability.
(23:22):
And I guess for skeleton hunters, for your example that you gave earlier, to help find
those skeletons and bring them to light and not only bring them to light, but talk about
a path to remediate.
So let's change gears.
Let's talk about business risks that inadequate ERP systems present.
You want to talk about a major one in our space, scale.
(23:44):
If I try to take my business up and it's not able to support it, it's definitely a challenge.
I think when we talk about scale, one of the things that we have a conversation a lot of
times with businesses we work with is what is that future roadmap and what are your growth
(24:05):
goals?
Let's bring that conversation forward.
Let's get it on the table and let's have that conversation.
I think one of the things that's overlooked and maybe some of our listeners, if you're
on the CFO side of the house, is that compliance side.
Am I able to support regulatory requirements?
That goes down all the way to sales tax by region.
(24:26):
Right now we're reporting this podcast in Colorado and the way sales tax works in Colorado
is it's done by county.
So it's really a tough one to be able to track some of these counties and their dependencies.
You need a system to ensure compliance.
If you don't have that system, you're doing a lot of manual work to get that done.
And then one of your most favorite topics to talk about because it's on your mind all
(24:47):
the time is that cybersecurity side.
Having a system that creates risk, one of the largest risks to an organization is that
cyber and what do we call it?
Threat vectors.
Yes, I like it.
Somebody listens to the podcast.
We discuss threat vectors a lot.
I think I was our third and final listener.
(25:08):
It was producer Matt, myself, and then you.
I asked my wife to listen.
She said no.
Oh, perfect.
Well, I will tell you, my wife did and provided lots of feedback on how I can be better.
Just feedback.
She said you were excellent.
I was opportunities for improvement.
There you go.
She's right.
She's right.
(25:28):
Just like she's right about a lot of things.
But the cybersecurity side and those improvements and getting those vulnerabilities out of the
business and so there's not opportunities for improvement is a really important thing.
And then the last side, this one could be a little more soft, but those operations risk.
Do I have a gap?
Am I missing something?
Am I not doing something the best I can?
(25:50):
What are those risks to the success of my business that the system's not supporting?
So there's a lot of risks.
So full admission, you know cybersecurity is near and dear to my heart.
Hyper concerned about it in every business that we're involved with.
James talked to me about the cybersecurity risks that are associated with an inadequate
(26:12):
ERP system.
Is there increased risk with an inadequate system?
Tell me about that.
Yeah.
So there's an interesting lens for this conversation that we're talking about how it affects your
bottom line.
You and I both know Wall Street Journal levels of cyber exposure cost folks business every
day.
So to put it aside in the sense that how can affect my bottom line, plain and clear reputation
(26:36):
risk at the top.
But some of those risks in an unsupported system that's no longer a viable system, it
does expose you.
So when I run my ERP on my site, a local ERP that I'm running in my data center, it runs
on Windows.
If I have a legacy ERP that I'm supporting, it could cause my Windows instance, which
(27:01):
is no longer supported to have issues.
Those two are a bit of a symbiotic relationship that one holds up the other.
We know that older systems aren't patched because vendors move on to the newest system.
That creates that exposure from a cyber risk.
But to be honest with you, and this is something we try to really help our clients, is this
idea of moving to the cloud or moving to a SaaS solution and de-risking that portion
(27:24):
of your business and pushing it to a vendor, an MSP, managed service provider, or SI.
Getting that out of your four walls and put on somebody else really is a way to reduce
some of those cyber risks.
And so having that legacy system, that older system sitting in your four walls is just
the same risk you have with old data storage.
It's there and it's a problem.
(27:46):
The last one I want to talk about, because we talk a lot about infrastructure, there's
also this cyber risk of not auditing your controls and access control.
If I have a system, for example, let's say an individual starts at the organization and
they start in distribution and get credentials for distribution.
Then they move over to APAR and get credentials to do that.
(28:07):
Then they take a management role in the customer service center.
And I'm not auditing that trail as they go through.
Those kind of permissions follow me.
And that internal threat vector of disgruntled employee or just a plain mistake, it follows.
And so cybersecurity is not only external threat vectors, it's also those internal threat
vectors to ensure we have those controls clamping down the system, locking it down to make sure
(28:31):
people have the right permissions to be able to do what they need to do.
So that's another threat vector.
Internal threat vectors are common.
Let's think about a middle market business.
Maybe a company has been built over the last, I don't know, 15, 30, 60 years, 100 years
in some cases.
You got a $200 million business running an ERP system for the last, I don't know, 12
(28:54):
years, 15 years.
Kind of generally known in the business that you've outgrown some of its capabilities.
Maybe it's not quite as well supported as it used to be.
But the business is growing.
You've got some really interesting growth opportunities, could be inorganic via M&A.
It could be organic, new product lines, new markets.
(29:16):
Let's talk about that for a minute.
What kind of challenges are you going to run into with an inadequate system?
And ultimately, how might that impact your bottom line as you try and scale?
One of those things is, and you talked about the inorganic, and I'd like to touch on that
because a lot of the conversations I have are around this.
And that's the ability to integrate two groups or two companies you've brought together and
(29:39):
that ability to scale and find those synergies that exist between the two organizations.
I know you've seen this a lot and we've had this conversation, you and I.
The quicker two businesses can come together, have common visibility, whether it's an ERP
or a reporting system, to have that single view really drives that value and allows them
(30:00):
to scale and be able to kind of expand and become all that they intended to be pre-acquisition.
The other one is there's additional complexities.
And we were just having this conversation, I think last night, that one of the businesses
you're on, as the business started to grow, you continually started to look for people
to be able to help you.
And then you actually had to go find people to truly do some of those things that were
(30:23):
additional complexities and bring in those systems to be able to support it.
And I think just like we had to solve, I shouldn't say we, you, I took a little credit there,
as much as you had to solve that, I think others also are on that journey as well.
The larger you get, the more complex it becomes.
And then we've talked a little bit about it, but my risk is also greater.
And I know that that's, you know, every board season we get the call around risk and how
(30:46):
to reduce it.
And maybe that's a good one for you to talk about a bit, because it ties a little bit
to Cyberg.
But like that business expansion with risk, what are some of the things that you see in
the board meetings you're in that people talk about when they talk about the risk side of
this?
I'm sure folks with some different experience, you know, might have some better examples
(31:06):
than I would.
But you know, the first one that comes to mind is when a business is small, you know
everyone in the business, right?
So you're 20 employees, 40 employees, 70 employees, maybe you might be the CEO or the CEO, you
might still know the first and last name of every single one of your employees.
When somebody leaves, especially if you're co-located on a single site, maybe in an industrial
(31:29):
environment, you might know everyone's birthday.
You might know which part of town they live in because you all live in the same town.
And when somebody leaves, you pretty quickly off board them, you remove their access to
the ERP system, you take down their email.
When you're 150 employees, when you're 300 employees, and maybe you've gotten there from
(31:52):
75 to 300 in the last two or three years, maybe it's via M&A, maybe you've been growing
very rapidly, and you go to off board somebody, you might not have ever met them before if
you're the CEO at that point.
And if you don't have the right processes and protocols in place to off board them out
of every one of your systems, you could have just fired somebody who's disgruntled and
(32:16):
nobody really remembered to take their system access away, and next thing you know, you've
got a bad actor in your system messing up all your very important and sensitive data.
And that's really more of kind of an off boarding gap than it is necessarily an ERP inadequacy.
(32:36):
But your risk grows exponentially as you grow.
You start dealing with bigger dollar numbers, you start dealing with more sites, more employees,
more threat vectors.
It's just more opportunities for there to be failure modes across the enterprise.
So certainly, I certainly understand where you're getting at.
And I'm curious to ask you about one that I've seen a bit this year, and a couple deals
(33:00):
actually fall, multiple deals fall through this year.
I think it's a rough M&A market out there generally.
And not to take a tight lens, but let's take a tight lens as it relates to what we're discussing.
But that financial mismanagement, the inability to articulate your financials, the inability
to prove your financials.
And a lot of people say, you know, it was just a COVID bump or those type of things
and the ability to not take folks on the journey.
(33:21):
Do you feel the opposite of what we've been discussing in the sense that the ability to
not articulate those financials or show the ability to that?
Do you think that is also something that's a risk at scale as we start to look at deals
for folks?
Oh, absolutely.
If you can't root cause problem solve, and that might not be the appropriate way of describing
(33:41):
it, but if you are trying to sell your business and a buyer asks you a question, well, why
did that happen?
And you don't have the data to back up your hypothesis.
I wouldn't necessarily say it's a red flag.
It depends on the context of the question being posed.
But if you can't present data that would demonstrate that you understood exactly why something
(34:04):
happened or exactly when something happened, absolutely.
If it's not a red flag, it's certainly something to consider and could easily impact the value
of the business, the speed or the certainty of the transaction getting done, any number
of factors.
Yeah, that's interesting.
And when I was trying to sell you on this, I went and pulled a couple of facts and figures
(34:26):
and we can wrap up on these to kind of close it out.
Because I know one of the things that you really focus on is data-driven decision making.
So I knew that there were some facts and figures that could help you make these decisions.
Do you remember the numbers we discussed on the failed ERP implementation side?
It was billions and billions and billions of dollars.
(34:47):
Yes.
Do you remember what percent of those was a failure?
More than 50?
Correct.
50 to 70%.
And I think that's what kind of drove the PSA side of this.
And I think that's one of those things that it's a good conversation to have for our listeners
to know what some of those are and to understand that there is a high probability of those
(35:10):
failures.
Yeah, it's interesting.
You've got this situation where even if you go and put a new system in today, you may
very well outgrow that.
You may be a great, very well-run company, very well-capitalized, very forward thinking
in your technology adoption.
You're going to outgrow your current ERP system.
You're going to outgrow at some point your next ERP system.
(35:31):
But we find ourselves in this interesting environment, particularly in the mid-market,
where there are a lot of companies running inadequate ERP systems.
But in order to make change happen, they have to take the risk on of the sobering statistic
that 50 to 70 odd percent of these transformations fail, right?
(35:51):
And at a cost of tens and tens of billions of dollars annually.
So it's an interesting conundrum, which obviously this is one of the reasons why it's a big
decision for boards, for CEOs to fund and want to back going through some of these changes.
What's the answer?
How do they do it right?
I think that's a great future episode conversation.
(36:14):
There you go.
Can I close on a bit of marketing?
Because it was a PSA, I thought I'd look it up and try to create a cool PSA tagline.
Get ready.
Get ERPs, the silent drain on your bottom line.
Upgrade now or pay the price later.
So did you write that or was that chat GPT?
I think producer Matt wrote that.
(36:38):
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(00:08):
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(00:31):
We got a little bit of a public service announcement today, don't we, James?
We do.
How inadequate ERPs impact your bottom line?
Why is this a PSA?
Because we care about...
Because this is your passion project.
Yeah, 100%.
I'd say we care about the people that we work with, we care about our clients, we want people
to be successful, but really, I'm tired of seeing it.
(00:56):
I think it's something that's out there all the time, and I think that other folks are
way too comfortable in continuing to support inadequate ERPs.
Where are you seeing the inadequacy?
Yeah, there's a lot of factors that we see in that, and we can get into some of those,
but I'm generally seeing it across all businesses.
(01:18):
So one of the unique things about TriVista is we cover almost every business vertical
there is.
So from distribution and manufacturing to a business service to a software development
company.
And we try to draw insights as we interact with our clients and say, oh, maybe this group
is XYZ, right?
(01:39):
So from a distribution group, it's IOP is important, and we know that those systems
and some of the planning helps them.
But no matter what the business is, and no matter what the size is, we see inadequacies
every day.
And they're small.
Some are small and some are large.
Some are I'm running QuickBooks, some are I have a big ERP and I don't have support,
and some are my ERP hasn't existed for the last 10 years.
(02:01):
So we kind of see it every day and everywhere.
And I don't want to be doom and gloom, but it is a PSA.
And I'm a kid that grew up in the 80s and 90s, and those PSAs, they were usually pretty
doom and gloomy with some eggs in a frying pan, if you remember those, Mike.
Those are some memories.
And so I think this is a bit of supporting our friends and letting them know, hey, there's
help out there and we can turn this thing around.
(02:23):
How are you seeing it impact the bottom line?
Where is it showing up in the financials?
Yeah.
So on the bottom line, we're seeing it on the operations side.
So really struggling on the operations to be successful.
And some of the new initiatives, we see those fail sometimes because the system can't keep
up.
So when you think about like operational improvement, a thing that we do a lot of times is, you
(02:47):
know, I'm making these changes in my operation and the system needs to come along with on
the journey with me.
And if it doesn't, that's a failed program.
There's capex attached to that.
There's change attached to that.
Bottom line effect.
Customer dissatisfaction.
I don't know where my order is.
My order is incorrect.
I'm having challenges.
It's another one that impacts the bottom line.
(03:08):
And then just generally we see it that there's chances to overspend in this space and you're
paying for a product that you're not getting the true value out of.
You're talking about overspend on the implementation side, on the maintenance side, all the above?
Maybe all the above.
All the above.
My favorite answer.
Let's get specifics on how it's driving operational costs.
(03:29):
I'm glad you caught that one.
That's one that's an important one.
And some of the operational costs that we see is really around, and you touched on it,
is around the support side of it and the folks needed to do it.
And that's your internal team.
You could have four or five people that are doing some very manual processes that are
required to be able to support that need and that system that could be done in a much more
(03:54):
efficient way.
But due to the system not being able to support it, it really drives up those operational
costs.
And those are human hours that you're putting towards that.
And a lot of times you hear when there's like a manual process, you always hear the throw
more people at it.
We can do it.
Well, there's a challenge.
It reaches kind of a peak where you can no longer throw more people at it.
The system has to kind of come in and help.
And then another one is when you have all these manual processes and you have all these
(04:18):
people kind of propping the system up, you have a high probability of bad data.
And we've talked about on multiple other podcasts, data-driven decision making, being able to
really focus on data.
We all know that the base for AI that's coming is good data.
When you're manual and you have this bad, I guess the opposite of rich, unrich data
(04:39):
that's sitting out there, it's a challenge for you to use some automation tools.
It's a challenge we'll make decisions.
It's a challenge to know where things are.
And that poor data can really cause costly mistakes.
And that's from inventory, procurement, reporting, many different venues that are challenging.
So I think really it does drive up operational costs, not all the times dollars and cents,
(05:02):
but it's kind of those soft dollars that just kind of is the vibe that goes to the organization.
So you and I were having a conversation a few weeks ago that I thought was interesting
and relevant to this topic.
We were talking about supply chains and how ERP systems, particularly those that were
outdated or inadequate, whatever label you want to put on it, the impact that that has
(05:25):
on supply chains.
Because I think a lot of executives go straight to what you just talked about, the operating
costs, the headcount, the manual data entry, the manual report outs that need to be done.
But I thought it was interesting when you started talking about the impact on the supply
chain and kind of the downstream impact that that has, especially given how big the supply
(05:46):
chain can be, particularly in certain business types.
You get into industrial environments and 60% of cogs might be supply chain related.
So huge portion of spend.
Talk to me about how inadequate ERPs are impacting supply chain costs.
So I had this boss at one point, we'd go around and tour and so I was supporting global ERP
(06:12):
systems and we were rolling out a new warehouse management system or WMS.
And we really needed this WMS because we globally sourced and then we kind of cross-docked each
other to kind of backhaul and supply each other.
And so we really needed really good visibility into what we had across the organization.
And as we walked the warehouse, he would always say to me, he's like, well, there's a Honda
(06:33):
Civic on that shelf.
There's a BMW on that shelf.
And essentially those dollars that you spend on whether it's raws or finished goods, they're
sitting on shelves.
So excess inventory costs.
We all know during COVID prices went up, folks over procured because they wanted to have
a little nest egg, potentially overpaid, didn't have that visibility and potentially overspent,
(06:55):
definitely had more stock than they needed.
Another place you see that kind of dis-energy of value on procurement is in the M&A space.
We spend a lot of time helping folks come together.
So post merger integration or whatever you want to call it.
That integration side, making sure I have the best price across my organization and
have visibility to that and opportunity for poor inventory practices.
(07:19):
Also it's a very interesting thing.
It's pretty interesting transactionally.
If you don't have it to sell, it's really hard for a client to buy it.
So having stock outs, having the ability to not know when you're going to be up against
that or not procure effectively to build a support that can lead to lost sales.
And the last one is, which is super important business, is the ability to forecast.
(07:42):
Know what's on the horizon, know what's needed to build and make sure those other two don't
fail.
And we talked about the bad data that existed.
If I don't have good data and I don't have that information, like you're talking about
what we're seeing on the supply chain side, people want richer data, better insights to
kind of systemically drive not someone who feels this is what they need, but have a reason
(08:03):
and knowledge that they need that.
If you don't have that visibility, it does create some challenges.
Spend a little bit of time talking about overspend with vendors too, which I found our conversation
about that recently also pretty interesting.
So going back to a couple of those topics, if I don't have that visibility into how I'm
spending and what I'm spending because I don't know what I have, it leads me to be able to
(08:27):
overspend because either I don't know what I need, I buy too much, or maybe they're getting
away with overcharging me.
And we unfortunately see this a lot.
We negotiate and spend a lot of time upfront to negotiate a good fair price for two organizations
to work together.
If that information is not loaded into a system that I can look at the PO and then I can look
(08:47):
at my invoice and make sure they match out and I'm spending what I expect, that it causes
issues.
I can easily overspend.
It's kind of sad because you spend all that work upfront to do that and then it fails
on the other side.
A lot of times also, and I think that a lot of organizations struggle with this, is that
contract management side.
Where do these documents exist?
How do I have access?
(09:09):
Turnover happens, changes happen.
What's that central repository?
And I know that this is one that you're big on, which is the process side.
If I don't have good processes in place and those processes aren't systemically enabled
or supported, by the way, I don't think the ERP is going to be able to drive the process.
I think the good process is supported by the system.
(09:29):
That can really lead the opportunity to overspend with that vendor because those controls aren't
in place.
I think the challenge with that is sometimes you don't even know you're overspending until
it's too late.
That retrospective side, we do struggle on helping people, but I think if you clean that
up, organize, we can start to tighten those pieces up.
(09:51):
We wanted to talk a little bit today about the impact on M&A too, right?
Which somebody might argue, well, is that a conversation about bottom line or is that
a conversation about enterprise value?
But let's spend a few minutes here talking about how ERP systems can impact M&A transactions.
The first thing that comes to mind for me is just simply lower valuation, right?
(10:14):
If somebody's coming in looking at your business, whether it's a corporate acquirer or a private
equity buyer, whether it's a platform business or an add-on acquisition, everybody's going
to look at each business a little bit differently, but most of them are going to want to understand
is the ERP system sufficient to run the business?
(10:36):
Is it under invested?
Is it costly to maintain?
How costly is it to maintain it relative to similar businesses that they've seen?
Is there a single point of failure?
Some rogue individual out there, contractor or full-time employee who is the only person
that knows how to run one of those antiquated systems with tons of custom code.
(10:58):
The more antiquated it is, the more under invested it is, the more expensive it is to
maintain it.
If it's lacking the ability to enable some of those processes, those core business processes,
that's going to drive lower valuations every time, right?
Because you have a highly functioning ERP system that's scalable, that you can go and
(11:19):
do add-ons with, that you can grow sales three or four X and it can continue to find the
right support and it's got the right modules you can grow into, et cetera.
Obviously, that's a more positive thing.
And especially if somebody else, if the current owners have taken the initiative to spend
the money with the system integrators and stand up that functioning ERP, that de-risks
(11:40):
the deal and ultimately sometimes that'll lead to a higher enterprise value or higher
valuation as well.
Tell me a little bit though, during those M&A processes, those sale processes, talk
to me about due diligence.
How are you assessing whether an ERP system is adequate or not?
And at the end of this, I would like to hear some guidance from you because I know you
look at a lot of deals every year and you support our clients and you yourself review
(12:02):
tons of SIMs every year.
And I think it's interesting when I go through the diligence piece, because I'm going to
talk about it kind of on the outbound side.
I think I would like to hear from you and I'm sure listeners would as well as like,
once you receive that, has it affected deals recently?
What are you seeing in the market based on this and how are you seeing this effect kind
of, again, we're talking about how it affects the bottom line or the ability to sell that
(12:25):
business in an M&A process.
Yeah, I think it's a lot of the stuff I mentioned a second ago.
If you're doing diligence on an asset and you find that the ERP system is barely functional,
it's holding on paper clips and glue, you're sitting there thinking to yourself, hey, how
much money is it going to take to stand up a functioning system?
(12:46):
And the risk for a particularly a private equity buyer is they don't know anything about
ERP systems.
So that's complicated, sounds expensive, start having conversations about the risk profile
of the deal becoming elevated.
Quite frankly, one of the biggest things that we've seen blow up deals and one of the biggest
things that we've seen really impact outcomes for private equity investors is having to
(13:11):
way overspend versus what they anticipated during their ownership cycle of the business,
overspend on ERPs.
It's a huge cash drain on the business, especially businesses that have a reasonable amount of
leverage.
And it's a huge distraction if you've got to go and upgrade one of these systems.
So you'll find some buyers who are happy to buy a business with a dysfunctional or antiquated
(13:35):
or insufficient ERP system, but they're going to buy it at a big discount as a result of
that, perhaps a big discount amongst other discounts that they're seeking.
But yeah, no, a highly functional ERP system, it's one of the first things the most at least
private equity buyers so I can speak to more directly are looking for.
And it's something they diligence the heck out of when we're looking at these targets.
(13:57):
So to play that back for a second, and I just want this to be like a plain English thing
for our listeners, do you feel that a deal could be passed on if it had an ERP that was
significantly underperformant or had issues?
Would it be a deal breaker?
Absolutely.
And then the second one is, have you seen deals get discounted based on the ERP?
(14:21):
Yes.
Wow.
I mean, that's pretty impactful and direct.
I would like also another thing-
And it's probably a double whammy, James.
You can probably make some reasonable assumptions here.
Like we've talked about at length, antiquated, insufficient, whatever labels you want to
put on it, ERP systems are probably costing the business more money than they should,
(14:44):
which impacts their EBITDA or their bottom line.
So there's the first hit, but then most of M&A transactions, most of the valuations are
based off of some type of multiple of those earnings or that EBITDA, right?
We hear a lot about multiples of EBITDA, especially in private equity.
So if your earnings are depressed because your ERP system is inadequate, when you go
(15:05):
to put whatever multiplier you put against that, you're going to get a lower number than
you otherwise would have.
If you also are getting a discount on the number you're multiplying by because there's
perceived significant risk or the buyers think they have to spend significant dollars to
upgrade the system, now you're getting kind of burnt from both ends, right?
So not only can it impact your bottom line, but it impacts shareholder value in a meaningful
(15:29):
way, and in some cases, in multiple ways.
So a really big issue.
And listen, deals still get done.
Sometimes they get done at prices that are less attractive to the sellers and more attractive
to the buyers, provided they're willing to roll up their sleeves and do the work.
Interesting.
Now, I appreciate that insight, not to skip out.
And just a couple more questions before I go back to your original question, which was
(15:50):
around the diligence side.
Sure.
And try this to help me out.
I don't know the number.
What do you think of our diligence work is a sell side diligence?
Probably 15%.
But you should make sure everybody understands what sell side diligence means.
Yeah, please.
So in an M&A context, typically buyers do diligence on the targets, right?
(16:11):
The businesses that they're looking at buying.
We call that buy side diligence.
We do a lot of that at TriVista from an operations and supply chain and technology and cybersecurity
perspective.
There are many other folks out there who do different work streams.
You've got the accountants that do their check of the numbers, the lawyers are drafting the
legal docs.
Everyone who's representing the buyer in that situation is conducting what we call buy side
(16:35):
diligence.
What you're talking about now on the sell side is the company that's putting itself
up for sale.
It's the diligence they're doing on themselves and presenting to the buyer to encourage the
buyer to want to be attracted to buying that business, right?
So in an operations and supply chain and technology context, which is where we play, you'll see
(16:58):
things like companies wanting to make sure that they're articulating that they do have
the appropriate cybersecurity measures in place.
Not only do they have a functioning ERP system, but they have a world-class ERP system.
They'll get third parties like us to come in and attest to the fact that they do have
those systems or processes or leadership capabilities in place.
(17:20):
That can have a pretty meaningful impact on enterprise value as well.
If you think about it like this, the story I always like to use is when you go to sell
your house, you're going to hire a realtor, right?
One of the first things that almost every realtor is going to come in and tell you is,
we should stage the house.
If we stage the house, we're going to get more money for the house.
(17:41):
Some buyers, listen, other buyers don't.
And they don't at the risk of maybe getting less money for that house.
But some people are very comfortable doing that.
Thanks, Mike.
I didn't realize it was 15%.
That's an interesting piece of information.
The reason I asked the question and you kind of go through the evaluation and some of the
(18:02):
pieces is I noticed that when folks are putting together a sim, I probably look at a couple
hundred sims a year.
I'm sure you look at way more than I do.
What's a sim?
I know what a sim is.
I'm just making sure the audience knows what a sim is.
You're doing such a good job defining today.
You want to take that one?
I'll take it.
By the way, just so you know, Mike, I was going to ask you the question and say before
(18:22):
you answer, can you define it?
So I just love how much you and I are lined up.
Just take it.
Beat me to the punch.
So sim stands for confidential information memorandum, confidential information memo,
for short, because it's three of the longest words ever put together.
Term very commonly used in the M&A community.
(18:43):
Think about it like a house listing, right?
You go back to the selling your house analogy.
This is where the advisors on a deal will help put together all the pertinent information
about a business that is coming up for sale.
So 60, 70, 80 slides long, customers, operations, IT systems, management team, kind of a summary
(19:04):
of the current state and where the business is trying to go.
It's interesting you mentioned IT systems.
So I look at a lot of them and I review them and a lot of times in preparation to go do
a diligence, which we're going to talk about, but I've noticed that a lot of them do not
include information about the ERP in any depth or any additional information.
(19:29):
And sometimes it doesn't even mention which ERP they're running.
If it's so important to the deal value and so important that folks want to know what
they have and making sure it's running efficiently, obviously it's part of diligence.
Do you think it's a miss that folks aren't including more about the ERP in the SIM?
I think it's an opportunity for improvement maybe.
(19:49):
I think if you have great businesses with great systems and great leadership teams and
maybe suboptimal supply chain, right?
You're probably going to focus on what you're great at and maybe focus a lot less on what
(20:10):
you're not so great at.
Go back to the selling a house analogy.
When you're selling a house in most states, at least I have the impression that in most
states you have to have seller disclosures, right?
So if you know there's something fundamentally wrong with the home before you sell it, you
have to disclose that.
The same is generally true in the M&A community.
(20:30):
But if you think that the home needs a new roof, but you're not 100% sure, you don't
have to disclose that when you're selling a house.
Well, the same thing goes with the business, right?
It's kind of an eye of the beholder type situation where you're selling the business kind of
as is.
The buyers are more than welcome to come and do their investigatory and confirmatory diligence.
(20:51):
But at the end of the day, you're not going to tell all the buyers where the skeletons
in the closet might be.
You may tell them where a few of the skeletons are, but it's not really your obligation.
There's no legal requirement that you have to tease out every nook and cranny of shall
we call them opportunity for improvement in these businesses.
So it's just kind of how things are done.
(21:14):
No.
And I love the house analogy.
I get asked a lot of times by friends, what does it mean when you do diligence?
What do you do for a living?
What is this diligence thing?
And so I always explain to folks, I'm essentially a home inspector of businesses.
And I think that's an interesting segue to talk about the question you had earlier of
like, what do we diligence when we diligence an ERP?
(21:36):
Sure we look at the ERP.
We a hundred percent look at what the system is by name, its support, its version, all
those things, kind of check the box if you will.
But one of the differentiation, differentiating factors I think for us is we look at the business
enablement side.
So one of the things that's unique about the, my team, let's call it, because that's where
(21:57):
the folks are really focused on it, is we hire former operators who have lived and done
ERPs and have at least implemented one ERP.
So one of the things that we love is we love that the opportunity for a diligence, we get
to go on site and experience how the organization, the users are using the system.
So some of our tricks, which we'll be happy to give away to our listeners, you know, you
(22:18):
go to that outbound Bay door and you see a pile of paper back there, you know, they're
not using the system the right way.
And there's an opportunity.
And instead of just saying, Hey, they have paper processes.
What we do is we really dig in on why do they have that and how they're better.
So in our diligence, we look at the system, we look at the processes, we look at how the
people interact with it.
(22:38):
We also go as far to look at who supports it and how they support it.
We look at the cost side of things.
So really try to get this comprehensive view.
And we've talked about this on other podcasts, because we do about those 150 transactions
a year, we have a rich database of benchmarks that were able to score your ERP based on
those factors by industry and by revenue.
(23:00):
So when you receive that scorecard back, if you're a small business, that's a very simple
business and you're doing a great job at it, you're not going to compare you to a business
services business at 10x.
So we really try to bring the diligence close and tied out to how the organization functions
and what the organization does and be as comprehensive as possible because we do feel that accountability.
(23:22):
And I guess for skeleton hunters, for your example that you gave earlier, to help find
those skeletons and bring them to light and not only bring them to light, but talk about
a path to remediate.
So let's change gears.
Let's talk about business risks that inadequate ERP systems present.
You want to talk about a major one in our space, scale.
(23:44):
If I try to take my business up and it's not able to support it, it's definitely a challenge.
I think when we talk about scale, one of the things that we have a conversation a lot of
times with businesses we work with is what is that future roadmap and what are your growth
(24:05):
goals?
Let's bring that conversation forward.
Let's get it on the table and let's have that conversation.
I think one of the things that's overlooked and maybe some of our listeners, if you're
on the CFO side of the house, is that compliance side.
Am I able to support regulatory requirements?
That goes down all the way to sales tax by region.
(24:26):
Right now we're reporting this podcast in Colorado and the way sales tax works in Colorado
is it's done by county.
So it's really a tough one to be able to track some of these counties and their dependencies.
You need a system to ensure compliance.
If you don't have that system, you're doing a lot of manual work to get that done.
And then one of your most favorite topics to talk about because it's on your mind all
(24:47):
the time is that cybersecurity side.
Having a system that creates risk, one of the largest risks to an organization is that
cyber and what do we call it?
Threat vectors.
Yes, I like it.
Somebody listens to the podcast.
We discuss threat vectors a lot.
I think I was our third and final listener.
(25:08):
It was producer Matt, myself, and then you.
I asked my wife to listen.
She said no.
Oh, perfect.
Well, I will tell you, my wife did and provided lots of feedback on how I can be better.
Just feedback.
She said you were excellent.
I was opportunities for improvement.
There you go.
She's right.
She's right.
(25:28):
Just like she's right about a lot of things.
But the cybersecurity side and those improvements and getting those vulnerabilities out of the
business and so there's not opportunities for improvement is a really important thing.
And then the last side, this one could be a little more soft, but those operations risk.
Do I have a gap?
Am I missing something?
Am I not doing something the best I can?
(25:50):
What are those risks to the success of my business that the system's not supporting?
So there's a lot of risks.
So full admission, you know cybersecurity is near and dear to my heart.
Hyper concerned about it in every business that we're involved with.
James talked to me about the cybersecurity risks that are associated with an inadequate
(26:12):
ERP system.
Is there increased risk with an inadequate system?
Tell me about that.
Yeah.
So there's an interesting lens for this conversation that we're talking about how it affects your
bottom line.
You and I both know Wall Street Journal levels of cyber exposure cost folks business every
day.
So to put it aside in the sense that how can affect my bottom line, plain and clear reputation
(26:36):
risk at the top.
But some of those risks in an unsupported system that's no longer a viable system, it
does expose you.
So when I run my ERP on my site, a local ERP that I'm running in my data center, it runs
on Windows.
If I have a legacy ERP that I'm supporting, it could cause my Windows instance, which
(27:01):
is no longer supported to have issues.
Those two are a bit of a symbiotic relationship that one holds up the other.
We know that older systems aren't patched because vendors move on to the newest system.
That creates that exposure from a cyber risk.
But to be honest with you, and this is something we try to really help our clients, is this
idea of moving to the cloud or moving to a SaaS solution and de-risking that portion
(27:24):
of your business and pushing it to a vendor, an MSP, managed service provider, or SI.
Getting that out of your four walls and put on somebody else really is a way to reduce
some of those cyber risks.
And so having that legacy system, that older system sitting in your four walls is just
the same risk you have with old data storage.
It's there and it's a problem.
(27:46):
The last one I want to talk about, because we talk a lot about infrastructure, there's
also this cyber risk of not auditing your controls and access control.
If I have a system, for example, let's say an individual starts at the organization and
they start in distribution and get credentials for distribution.
Then they move over to APAR and get credentials to do that.
(28:07):
Then they take a management role in the customer service center.
And I'm not auditing that trail as they go through.
Those kind of permissions follow me.
And that internal threat vector of disgruntled employee or just a plain mistake, it follows.
And so cybersecurity is not only external threat vectors, it's also those internal threat
vectors to ensure we have those controls clamping down the system, locking it down to make sure
(28:31):
people have the right permissions to be able to do what they need to do.
So that's another threat vector.
Internal threat vectors are common.
Let's think about a middle market business.
Maybe a company has been built over the last, I don't know, 15, 30, 60 years, 100 years
in some cases.
You got a $200 million business running an ERP system for the last, I don't know, 12
(28:54):
years, 15 years.
Kind of generally known in the business that you've outgrown some of its capabilities.
Maybe it's not quite as well supported as it used to be.
But the business is growing.
You've got some really interesting growth opportunities, could be inorganic via M&A.
It could be organic, new product lines, new markets.
(29:16):
Let's talk about that for a minute.
What kind of challenges are you going to run into with an inadequate system?
And ultimately, how might that impact your bottom line as you try and scale?
One of those things is, and you talked about the inorganic, and I'd like to touch on that
because a lot of the conversations I have are around this.
And that's the ability to integrate two groups or two companies you've brought together and
(29:39):
that ability to scale and find those synergies that exist between the two organizations.
I know you've seen this a lot and we've had this conversation, you and I.
The quicker two businesses can come together, have common visibility, whether it's an ERP
or a reporting system, to have that single view really drives that value and allows them
(30:00):
to scale and be able to kind of expand and become all that they intended to be pre-acquisition.
The other one is there's additional complexities.
And we were just having this conversation, I think last night, that one of the businesses
you're on, as the business started to grow, you continually started to look for people
to be able to help you.
And then you actually had to go find people to truly do some of those things that were
(30:23):
additional complexities and bring in those systems to be able to support it.
And I think just like we had to solve, I shouldn't say we, you, I took a little credit there,
as much as you had to solve that, I think others also are on that journey as well.
The larger you get, the more complex it becomes.
And then we've talked a little bit about it, but my risk is also greater.
And I know that that's, you know, every board season we get the call around risk and how
(30:46):
to reduce it.
And maybe that's a good one for you to talk about a bit, because it ties a little bit
to Cyberg.
But like that business expansion with risk, what are some of the things that you see in
the board meetings you're in that people talk about when they talk about the risk side of
this?
I'm sure folks with some different experience, you know, might have some better examples
(31:06):
than I would.
But you know, the first one that comes to mind is when a business is small, you know
everyone in the business, right?
So you're 20 employees, 40 employees, 70 employees, maybe you might be the CEO or the CEO, you
might still know the first and last name of every single one of your employees.
When somebody leaves, especially if you're co-located on a single site, maybe in an industrial
(31:29):
environment, you might know everyone's birthday.
You might know which part of town they live in because you all live in the same town.
And when somebody leaves, you pretty quickly off board them, you remove their access to
the ERP system, you take down their email.
When you're 150 employees, when you're 300 employees, and maybe you've gotten there from
(31:52):
75 to 300 in the last two or three years, maybe it's via M&A, maybe you've been growing
very rapidly, and you go to off board somebody, you might not have ever met them before if
you're the CEO at that point.
And if you don't have the right processes and protocols in place to off board them out
of every one of your systems, you could have just fired somebody who's disgruntled and
(32:16):
nobody really remembered to take their system access away, and next thing you know, you've
got a bad actor in your system messing up all your very important and sensitive data.
And that's really more of kind of an off boarding gap than it is necessarily an ERP inadequacy.
(32:36):
But your risk grows exponentially as you grow.
You start dealing with bigger dollar numbers, you start dealing with more sites, more employees,
more threat vectors.
It's just more opportunities for there to be failure modes across the enterprise.
So certainly, I certainly understand where you're getting at.
And I'm curious to ask you about one that I've seen a bit this year, and a couple deals
(33:00):
actually fall, multiple deals fall through this year.
I think it's a rough M&A market out there generally.
And not to take a tight lens, but let's take a tight lens as it relates to what we're discussing.
But that financial mismanagement, the inability to articulate your financials, the inability
to prove your financials.
And a lot of people say, you know, it was just a COVID bump or those type of things
and the ability to not take folks on the journey.
(33:21):
Do you feel the opposite of what we've been discussing in the sense that the ability to
not articulate those financials or show the ability to that?
Do you think that is also something that's a risk at scale as we start to look at deals
for folks?
Oh, absolutely.
If you can't root cause problem solve, and that might not be the appropriate way of describing
(33:41):
it, but if you are trying to sell your business and a buyer asks you a question, well, why
did that happen?
And you don't have the data to back up your hypothesis.
I wouldn't necessarily say it's a red flag.
It depends on the context of the question being posed.
But if you can't present data that would demonstrate that you understood exactly why something
(34:04):
happened or exactly when something happened, absolutely.
If it's not a red flag, it's certainly something to consider and could easily impact the value
of the business, the speed or the certainty of the transaction getting done, any number
of factors.
Yeah, that's interesting.
And when I was trying to sell you on this, I went and pulled a couple of facts and figures
(34:26):
and we can wrap up on these to kind of close it out.
Because I know one of the things that you really focus on is data-driven decision making.
So I knew that there were some facts and figures that could help you make these decisions.
Do you remember the numbers we discussed on the failed ERP implementation side?
It was billions and billions and billions of dollars.
(34:47):
Yes.
Do you remember what percent of those was a failure?
More than 50?
Correct.
50 to 70%.
And I think that's what kind of drove the PSA side of this.
And I think that's one of those things that it's a good conversation to have for our listeners
to know what some of those are and to understand that there is a high probability of those
(35:10):
failures.
Yeah, it's interesting.
You've got this situation where even if you go and put a new system in today, you may
very well outgrow that.
You may be a great, very well-run company, very well-capitalized, very forward thinking
in your technology adoption.
You're going to outgrow your current ERP system.
You're going to outgrow at some point your next ERP system.
(35:31):
But we find ourselves in this interesting environment, particularly in the mid-market,
where there are a lot of companies running inadequate ERP systems.
But in order to make change happen, they have to take the risk on of the sobering statistic
that 50 to 70 odd percent of these transformations fail, right?
(35:51):
And at a cost of tens and tens of billions of dollars annually.
So it's an interesting conundrum, which obviously this is one of the reasons why it's a big
decision for boards, for CEOs to fund and want to back going through some of these changes.
What's the answer?
How do they do it right?
I think that's a great future episode conversation.
(36:14):
There you go.
Can I close on a bit of marketing?
Because it was a PSA, I thought I'd look it up and try to create a cool PSA tagline.
Get ready.
Get ERPs, the silent drain on your bottom line.
Upgrade now or pay the price later.
So did you write that or was that chat GPT?
I think producer Matt wrote that.
(36:38):
Thanks for tuning into this episode of Growing EBITDA.
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