Don't Reinvent the ERP Wheel - ERP and Potential Legal Liability

Don’t Try to Reinvent the ERP Wheel – A Look Into ERP Selection Tips

A title meant to grab your attention, glad it worked. Did you know, if neglected or misused your ERP system can lead to potential legal risk for your company? From our experience, legal implications to a business are often overlooked when evaluating an ERP project. Before continuing, let me be clear that I am not an attorney (nor do I want to be), and am not trying to offer legal advice. What I am offering is observation on this often overlooked aspect of business risk.

Even when purchasing a package from a solution provider, it is the responsibility of the implementing company, not the ERP vendor or implementation partner, to ensure adherence to reporting and regulatory requirements. An ERP system, after all, is only as good as internal business processes allow it to be. Where significant concern arises is when trying to create your own ERP system. We have discussed in previous posts the financial implication of building your own, but now let’s look closer at the risks, specifically those that could lead to legal issues.

A pain point with creating your own ERP system in-house is staying on top of the ever-changing regulatory requirement that effect your industry. An area that immediately comes to mind is financials. Companies need to make sure that they are abiding by reporting regulations which are constantly changing. Where an off-the-shelf system will have automated updates that help address changing reporting requirements or at least make modifications easier, if you have constructed your own system you are on your own.

There recently was an engineering company that decided to build a custom ERP system. Their system was well put together and worked great for the manufacturing side of the business. When the company brought in new leadership they discovered that, while the system was well-programmed and worked great for the unique business processes, on the financial side the company was not meeting current reporting regulations. This turned into a serious issue and ultimately the company needed to integrate a new financial system to ensure compliance. This new implementation, along with the original build, ended up costing the company more in the long run than had they purchased off-the-shelf to start.

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Though finance may be the first area that comes to mind when considering legal risks in your ERP system, every industry has different requirements. Whether it is Food & Beverage companies with the FDA, or telecommunications and the FCC, Aerospace & Defense and a whole slew of regulations, or if you hold operations outside of The United States and think about all the varied international regulations to worry about, the impact of potential liabilities is large. Companies need to abide by these regulations or face the consequences, which almost always end with a financial loss at minimum. 

With all the different industry regulations to be aware of in addition to the general scope of an ERP implementation project to start, putting it all together and managing in-house can be very difficult. ERP consultants and system integrators will help in testing and mitigating potential risks, but remember that ultimately it is your company’s responsibility to ensure that you are meeting regulations. As stated before, there are times where building your own may be the best approach, but this is rare. Working with an off-the-shelf software generally increases the chances that your software can be programmed to handle common industry regulations and increases your chance of legal compliance.