1. 2 6 I N S I G H T A P R I L 2 0 1 1
BY EBERHARD HOFFMAN
EDITED BY RYAN BALIS
INDUSTRY INSIGHT
F
oreign companies in China, especially
manufacturers and newly established
small- and medium-sized enterprises
(SMEs), increasingly are looking to
Enterprise Resource Planning (ERP)
systems to manage their China business more
effectively, complement larger global operations
and hasten growth.
AnERPsystem,whichintegratescompany-wide
business units under a unified and standardized
information platform, has become invaluable
for companies that want to control and visualize
complex processes and operations. As competition
intensifies in an already crowded and challenging
domestic market in China, installation of ever
more sophisticated tools becomes a pressing need.
“[T]he faster an ERP system can be
implemented, the sooner the return on investment
is realized and the better the operations will be
able to support the future growth of the business,”
writes Tony Cotterell, a partner with Deloitte
Consulting in Shanghai, in Insight.
Although ERP can yield considerable benefits,
companies should take great care when selecting
these systems. Successful implementation is a
major undertaking, requiring both a financial
investment and significant staff resources to train,
adapt to and effectively operate the new system.
Due diligence is critical in selecting the right
system if companies are to realize the gains in
efficiency, productivity and communication ERP
can deliver.
But how should companies go about evaluating
an ERP system and an outside system support
consultant necessary for proper implementation?
What are the important features to check for so
that the system can be operated in China where
such sophisticated platforms are not yet a part of
most companies’ operations?
This article expands on four basic issues that
foreign companies in China need to bear in mind
when they pick out an ERP system. They are:
1) ERP must align with core business functions
and be suitable for the industry in which the
company operates;
2) Sufficient attention should be given to whether
ERP fully conforms to Chinese local regulations,
especially in regards to accounting standards
and tax laws;
3) Careful evaluation should go into selecting an
experiencedconsultanttoguidetheorganization
through implementation and provide ongoing
support; and
Eberhard
Hoffmann,
general
manager
of ABiC
information
systems, caps
off Insight’s
five-part
Enterprise
Resource
Planning (ERP)
series.
ERP Selection Made Easy
ISTOCKPHOTO

2. A P R I L 2 0 1 1 I N S I G H T 2 7
4) Reference checks should be conducted in a
thorough way, being mindful of common traps.
Matching company needs
The first step in selecting the right ERP system is
to determine the elements that are necessary to
satisfy core business functions and management
requirements. A clear understanding of company
needs will help when paring down available
choices.
Generally, ERP links many key business units
and operations, including financial accounting,
sales and distribution, purchasing, human
resources and production planning. But not all
systems are alike, varying by complexity, structure
and scale. ERP systems also differ in their capacity
tohandlemultiplecurrenciesandlanguages,aswell
as support for various types of manufacturing.
When determining the essential requirements,
some companies in China, particularly
multinational corporations (MNCs), model
their ERP on the system used in their overseas
headquarters. These companies’ ERP systems
typically are well-established and integrated into
thebusinessprocesses.Inthesecases,thedefinition
of the business requirements and corresponding
ERP features may be borrowed from company
headquarters and used to assess the functional
capabilities of the systems available in China.
In other cases, companies do not have a set of
requirements and processes that can be readily
borrowed. Managers who evaluate potential
ERP systems must conduct their own in-depth
investigation into the requirements of their China
operations. These business requirements can then
be translated into the functional requirements of
a system.
Next, companies should contact potential
vendors for product demonstrations. Foreign
suppliers that dominate the ERP market include
SAP and Oracle, while Shenzhen-based Kingdee
International is a popular Chinese domestic player,
especially among SMEs. (Disclosure: ABiC is an
authorized foreign business partner of Kingdee.)
The evaluators who make up the company’s
review team should assign weights to a given list
of requirements appropriate for an ERP system
in the industry in which the company operates.
For example, a manufacturing company would
prioritize whether or not the system can support
standard costing and enable variance analysis. An
asset-intensive business would focus on whether the
system supports fixed asset purchase procedures.
Once priorities are clarified, it should be
possible to assign a suitability score to the various
ERP systems under evaluation. Managers may then
choose the system that most closely fits company
requirements and is suitable for the Chinese local
business environment. It is important that the ERP
system be selected on how it will add value for the
company. Larger systems that boast a wide range
of features, while impressive, are expensive and
take more time to implement.
Tip #1: When evaluating the suitability of ERP
features, be sure that suppliers provide a live
demonstration.
Conforming to Chinese regulations
The right ERP must have the capability to
handle both international and Chinese-specific
requirements. When choosing a system, evaluators
should verify that it can process Chinese value-
added tax (VAT) requirements, issue government
tax invoices, or “fapiao,” and is capable of meeting
accounting and bookkeeping demands for both
local and international enforcement agencies.
Chinese law requires companies doing business
in China to collect a tax on the added value
derived from a company’s production, sales or
services. The system should calculate the payable
VAT automatically. Evaluators should also make
sure the system is capable of determining both the
input VAT on purchase invoices and output VAT
on sales invoices. ERP for use in China should
also book these amounts into the corresponding
account code to help with maintaining reliable
electronic record-keeping.
VAT payment in China is controlled through a
system of government invoices, commonly known
as fapiao. Chinese tax law stipulates that fapiaos
must be printed from the government’s official
“A clear
understanding of
company needs
will help when
paring down
available
choices.”

3. 2 8 I N S I G H T A P R I L 2 0 1 1
Jinshui system and bear a unique fapiao number
generated by it. Evaluators should check whether
the ERP system features an interface to integrate
sales invoices with the Jinshui system. ERP should
be able to convert invoice data into a readable
format for the Jinshui system to process in a hassle-
free manner both for government authorities and
the company.
Finally, an ERP system should accommodate
bothinternationalandChinese-specificaccounting
and financial reporting standards, which differ
from international standards and are required
to be submitted in Chinese. Different rules and
bookkeeping principles mean foreign companies
in China often prepare two sets of financial reports:
a first one to comply with China’s Generally
Accepted Accounting Principles (GAAP); and a
second, internationally-accepted report for the
overseas headquarters.
An evaluation should determine whether
a system can operate two different accounting
principles simultaneously, as well as in both
English and Chinese. If not, then the system should
provide mechanisms to facilitate the adjustment
of accounting entries to satisfy International
Financial Reporting Standards (IFRS), a country-
specific GAAP or whatever global accounting
principles a company relies on internationally.
Tip #2: Typically, Chinese ERP systems provide
more extensive “native” support for local
accounting and tax regulations.
Selecting an implementation consultant
The evaluation process extends beyond comparing
an ERP system’s capabilities and compatibilities.
Managers who have been involved with ERP
implementation stress the importance of working
with a quality consultant. The right consultant is
essential for helping with the often demanding
process of putting a new system in place and
responding to problems in a timely manner once
it comes online.
Unfortunately, many companies overlook the
importance of evaluating the skills of a consultant
during the vendor selection process; instead,
they become preoccupied with evaluating ERP’s
technical capabilities. What specifically should
companies consider during this critical step, which
can determine the success or failure of a project?
Foremost, an implementation consultant
should have an in-depth understanding of the ERP
system’s functions. Successful implementation
requires the consultant to lead the company
through a rigorous training program to make sure
users are up to speed on system functions prior
to launch. The goal is for the different levels of
users to operate the new system comfortably and
properly in their daily work without relying on the
consultant’s help to complete ERP-enabled tasks.
A qualified consultant should have more
than four years of relevant experience in China
or a demonstrated track record on more than
10 projects. Experience is the key because the
consultant must accurately capture company
requirements and translate these into the system
configuration. An experienced consultant also will
anticipate functional and technical problems with
the system and will be skilled at putting in place
mechanisms to avert known dangers.
A solid consultant will ensure that the company
defines its goals up front as to how ERP should
add value. Evaluators, therefore, should measure
the consultant’s understanding of issues specific
to the company and probe how the consultant will
collaborate with the company to set up an effective
ERP system, looking always to help the company
realize the business improvements expected.
The consultant should know the principles of
internal control in terms of analyzing management
risks, the techniques to address those risks and
how these techniques can best be fulfilled by the
ERP system under evaluation. A manufacturing
company would be wise to test the extent to which
the consultant knows how to accumulate material,
labor and overhead costs – and how to properly
allocate costs to different products.
Evaluators should also gauge the extent to
which the consultant has the following attributes:
• Expert knowledge of Chinese market conditions,
culture and specific challenges to doing business
in China;
“A solid
consultant will
ensure that the
company defines
its goals up front
as to how ERP
should add
value.”

4. A P R I L 2 0 1 1 I N S I G H T 2 9
• Resources to keep abreast of fast-changing policy
and regulatory changes and update the system
accordingly; and
• Grasp of ERP’s function for advancing the
company’s larger global operations.
Finally, and perhaps most importantly, evaluators
must establish that the consultant will be available
if emergencies occur that risk derailing key
operations.
Tip #3: Always insist on interviewing the
consultant to be assigned by the vendor, especially
if English-language support is a prerequisite.
Question vendors that assign translators to the
client site because third-party instruction usually
is less than adequate for explaining complex ERP-
related issues.
Checking client references
The final step in choosing the right vendor to set
up the ERP system and provide implementation
support is to conduct a thorough reference check.
Ask the vendor to supply a list of at least three
client references either to help nail down which
is the right vendor on a short list or to confirm
known information on the leading candidate.
Evaluators should attempt to interview
references with an eye to acquiring relevant
information to help with the decision-making
process. The goal is to assess the client’s satisfaction
with the quality of the ERP product and uncover
the true level of care the vendor provided on
product support.
Encourage references to expand on general
questionswithspecificexamplesoftheirexperience
with the vendor. Here is a sample list:
• To what extent does the ERP system provide
effective solutions to the key controlling
requirements of the company?
• What are the tangible and intangible business
benefits gained from using ERP? For example, to
what extent has inventory turnover accelerated?
• Is the implementation consultant skilled at
guiding the company throughout the project
– why or why not?
• In terms of support, does
the vendor respond to the
company quickly to rectify
problems? How satisfied
is the company with the
vendor’s professionalism
and problem-solving
ability?
A high satisfaction rate is a
good sign that a vendor can
be trusted to duplicate that
same level of service.
But when conducting a
reference check in China,
companies should pay
close attention to the risk
of cheating among vendors.
In the context of reference
checking, an unfortunate
by-product of “guanxi,” the
Chinese concept of relationship influence, is a
client company may not reveal its true experience
with a vendor to shield it from a negative review. In
some cases, only positive results may be reported,
reflecting the vendor’s close relationship with
customer interface personnel.
Tip#4:Onewaytoascertainobjectiveinformation
is to ask the client to explain in detail how the ERP
system addresses an operational or management
issue held in common. That answer will provide
hints to whether the system is appropriate for
company business operations and management.
Eberhard Hoffmann is general manager of
ABiC information systems (Shanghai) Co., Ltd.,
a consulting company focused on delivering
Kingdee K/3 ERP systems to foreign enterprises.
Hoffman has 30 years’ experience in both ERP
applications and project management. To find
out more about implementing ERP systems in
China, visit www.abic-is.com or contact Hoffman
by e-mail at eberhard_hoffmann@abic-is.com.