When inflation and high interest rates last got together in the 1970s, they spawned the lovechild of ERP and drove a revolution in materials and cost management. Today, inflation and interest rates are flirting with each other again, only this time they will drive a revolution in people management and human resources.
It is a subject close to my heart. Veran Performance, which I co-founded, has spent the past decade advising and helping businesses through HR, payroll finance and procurement business cases to justify and fund ERP programmes. At Veran we have a ringside seat on the impact rising inflation and high interest rates – separately and together – can have on business cases for all sectors. Our role is to help businesses put in place systems, processes and the technology to achieve positive digital transformation of back offices and these reflect our detailed understanding and planning of macro-economic issues that affect them.
To better understand what is happening now, I wanted to go back to that early history of how inflation and high interest rates created the ERP world as we know it. That history should give us clear lessons about how to grow and protect our businesses in 2022 and beyond.
Way back – the birth of ERP
Much like now, in the 1970s inflation and interest rates were raging. Expensive materials hanging around in our supply chains became a massive drag on growth. To put this into context, if you left £100,000 worth of steel lying on a dock for a year in 1974, it would cost over ten percent of its value just to leave it there – and that’s without the storage costs and any degradation of the steel itself.
With justification, that was then seen as the biggest single problem for businesses. Companies needed to make an extra ten percent profit just to stand still, to make up for the capital cost of materials stuck in their supply chains.
A revolution in productivity was required and this came in the guise of materials resource planning (MRP), the first version of our current ERP systems. The names of these MRP tools remain familiar to those of us who have been in the industry for many years; early companies included SAP with R/2 in 1972, JD Edwards founded in 1977, BAAN in 1978 and late starter Oracle, in 1987. At the start of the 1970s, there was a handful of companies using these tools, and by the end of the decade over 700 businesses had deployed one or another of these technologies.
Businesses invested huge sums in these tools to manage their supply to minimise materials and drive huge productivity growth. This productivity drive came about by answering three key questions: what materials are required; how much is needed; and when must they be delivered?
This productivity drive came about by answering three key questions: what materials are required; how much is needed; and when must they be delivered?
Roll forward to 2022
Half a century on from this revolution in how businesses managed materials and costs, and we stand again on the brink of a revolution. This time it is all about people.
Experts are predicting inflation and interest rate increases. The Bank of England increased interest rates in December 2021, and manufacturers are raising prices. Factory gate inflation of up to 10 percent is being ‘built in’ to customer expectations according to Make UK, the highest reading since it started to monitor inflation expectations in 2000.
Given the return of these twin pressures, it’s time we all considered their impact on the fortunes of ERP and human resource management tools. Here are my predictions, using the past as a guide:
1. Much stronger business cases
The first impact we’re likely to see is much stronger business cases, particularly those that are HR and people based. Whilst the 1970s were characterised by a need to deal with material costs and the supply chain, those in 2022 are much more likely to be focussed on people and how to drive better productivity in our human capital costs.
I’ve seen this effect already on the HR and ERP business cases I have been writing for my clients. The increases in those two little boxes of ‘Interest Rates’ and ‘Inflation’ on the top right of the calculation sheets have powered those business cases. As the numbers have risen from around the one percent I’ve been using for the past ten years, they are compounding any savings I can identify and magnifying the value of these by two, three or even ten times multiples.
It means cases that we might have thrown out a couple of years ago now make sound economic and commercial sense, so much so, that they are becoming must do projects.
After 15 years where both figures have been consistently hovering around zero, it’s a surprise return to business cases that soon add up, for what we now call digital transformation.
2. Projects that drive people digital transformation
Digital processes and systems hold the key to human-centred workplaces. Rather than competing with digital transformation and any threat it might have to roles, it is time to fully embrace it.
Whilst we’ve seen the digital transformation of our front offices in the past few years, we’re going to see the same revolution in our HR back offices. This digitalisation of the back office is a direct response to inflation in costs of people and the acute shortages of skills that have emerged in recent months. The shortage has been accelerated by the COVID-19 pandemic, a move to remote or hybrid working and the so called ‘Great Resignation’.
We will be looking for HR systems to answer accurately the key questions of ‘who is needed’, ‘how many people we need’ and exactly ‘when they are needed’. Of course, it will go further than this. They should be tools which retain as well as attract the right people. Over time HR systems should give executives information to help them make decisions about talent, how to build their teams, and how to shape careers.
They should be tools which retain as well as attract the right people. Over time HR systems should give executives information to help them make decisions about talent, how to build their teams, and how to shape careers.
3. Real visibility of people spending
Having the right people with the right skills is only part of the answer for this new workplace revolution. If we go back to the 1970s, it wasn’t enough to simply identify the right materials, it was also about driving productivity growth.
In the 2020s, it is about identifying the right people and then working out how they too can drive any productivity improvements. Detailed understanding and visibility of people costs is becoming critical. Any projects that bring this visibility fast, allow interventions and improvements to be made. Businesses are looking to tools that will give answers quickly, differentiating those roles that are strategic and those that are not, and effectively targetting those areas for productivity improvement.
It is here that the story comes full circle. The development of projects and tools that allow us to eliminate the non-strategic and automate the strategic mirrors the automation that happened during the last phase of high inflation and interest rates half a century ago.
Whilst the focus then was on materials and the management of those materials, this time, I firmly believe the focus is more personal.
Rising inflation and interest rates helped bring about a fundamental change in productivity once before. Today their lovechildren are bringing about a new change; they are ensuring we are getting the best from our teams and that we’re giving them the right tools to deliver to their best. Underpinning all this is a need to innovate, to streamline processes and to take advantage of technology that can transform businesses. For businesses that are grappling with how to better support, motivate and incentivise their workforce, they could now be on the brink of a new and exciting revolution.