Following enterprise resource planning systems provider iContro managing director Frank Lee's assertion that the take-up of ERP by Malaysian manufacturers 'was dismal,' Computerworld Malaysia asked him for his take on different sectors in Asia and challenges that lie ahead for various Malaysian industry sectors.
These challenges include coping with the Goods and Sales Tax (GST) in 2015, said Lee, and in his response below he cites a recent survey by the Japanese Chamber of Trade and Industry Malaysia (Jactim), Malaysia largest direct investor, which showed that more than 70 percent of its member companies are expected to suffer a decline in profit, with a fifth by 10 percent due to recent hike in electricity. Close to 4 percent are mulling either to downsize or shift their operations elsewhere.
Photo - Frank Lee, Managing Director, iContro Software: "Mobility is the ideal model of current and future business operating environments."
What do you see as the top challenges that CIOs in different Asian industry sectors are grappling with?
As an example, let's look at the financial services (FSI) sector, which has been a fragmented landscape, usually consisting of core Legacy banking systems entwined with a host of transaction systems spanning across different data warehouses and technology platforms, and often involving multiple vendors. This requires constant need for integration and interoperability coupled with high cost of ownership and more critically rendered an operating environment that is slower to response to market changes and challenges.
The top challenges faced by FSI CIOs are typical for other sectors and can be summed up in one word, SPEED. Speed both to response to market forces and adopting cutting edge technologies are the key differentiator in today's ultra-competitive and mellowed economic environment. New cutting-edge technologies and innovations are born within months and could become common in the same market just as fast. The constant massive explosion in data, both structured and unstructured, if intelligently mined, offers both unique and un-paralleled opportunities to be gained. This often revolves around new market insights and taking advantage of being the 'first mover', within the opportunity window time.
Big Data: For CIOs, implementing Big Data business intelligence [BI] is a natural strategy. Adopting emerging technologies like Hadoop to leverage the unstructured data is a way forward. However, the following are some of the suggestions in order to rise up to the challenges:
The importance of BI is reaching a level never seen before. Especially in emerging markets, there is a need to re-new and refresh with a new sense of urgency, both in focus and importance must be put in place.
This means there should be comprehensive and dedicated investment coupled with execution plans in tools and expertise is required. Not just a plug-in.
Cloud computing: There has recently been a substantial increase in compliance and regulatory requirements as well as an intensification of security and privacy concerns. And this, against a backdrop of a rapid growth of mobile and digital services.
In addition, ever-changing customer expectations coupled with legacy systems issues, are adding to the complex scenario for CIOs. A short-term measure is to simplify where possible the existing fragmented systems by shifting non-core and non-critical systems into the Cloud computing platform which is more cost effective and nimble.
Mobility & social media: These should be managed as part of corporate strategy to maximise productivity and effectiveness of communication. Usually problems arise due to mismanagement or no clear policies or measures in place.
For instance, at iContro, our challenge is more acute as the recruitment and retention of young, energetic and IT-savvy talent is crucial, particularly the "Generation X". And it is counter-productive to stop or even constraint them from mobility.
Mobility is the ideal model of current and future business operating environments.
In essence, the region's fast-changing business landscape requires a nimble and responsive system that would synch the required speed in implementing new initiatives. It's time to comprehensively look into the overhaul of the core legacy system issues.
Would you apply your comments uniformly across different markets in Asia or are there differences between say Malaysia and others?
Firstly, I would like to single out Singapore. Singapore is in its own league as a developed nation. Besides being a major foreign direct investment [FDI] outflow financier, it is driven firstly by service-oriented sectors, particularly the financial services and secondly the high-end value manufacturing for exports. Our company, for instance, does not focus on the financial services market currently.
The rest of the Asean's economies are typically resource-based with heavy reliance on FDIs. Malaysia market stands out from the rest of the pack as industrialization started much earlier, starting with the coming of Intel to Malaysia in 1972. This meant that many companies in Malaysia started the adoption of ERP systems much earlier compared to other countries. However this also means that the Malaysian ERP market is smaller, if not smallest in the Asean region, due to its saturation.
It is mostly an upgrade or a replacement market with highly experienced users and therefore higher expectations. Only those with consistent track record and proven powerful ERP solutions can prevail. Nevertheless, they are also new opportunities from the bigger SMI/SMEs although smaller in numbers as compared to countries like Indonesia and Philippines.
In addition to discrete-based industries, iContro Software invests heavily on process-based industries like chemicals, paints and coatings, drugs pharmaceuticals, tiles, steels and etc. Process-based manufacturing is associated with formulas and manufacturing recipes which is very complex in nature and is a direct opposite to Discrete-based manufacturing. Process-based manufacturing sectors yields the most success for iContro Software as we hold a dominant position in the Malaysian market.
What sort of steps do you take potential customers through to ensure they achieve the best returns on using IT services in your ERP services; how much customisation do these customers request?
As we know, ERP systems are designed and developed based on the operating environment within a business entity. Therefore Western ERP systems are developed based on western businesses' operating environment, or in other words Western business culture.
Currently Western ERP players dominate the Asian markets. As a result, I believe most Asian businesses are accustomed to 60-40 or 70-30 ERP implementation ratio, whereby the former refers to requirement compliance and the latter for customisation, usually done by their locally appointed dealers, not the vendors' own research team. This is because generally Asian manufacturers dominate the western economics as we are more competitive.
Therefore we need a bigger and more "competitive" ERP system in order to remain more competitive than the west. The results, "chaos" in ERP implementations! Project schedule and costs overrun. Disruptions as focus on customisation become top priority.
About 30 or 40 percent of customisation is considered highly substantial. An IT specialist will agree that heavy customisation is the main reason for ERP project failures. At the end of the day, the ERP system may have gone "live", but still considered a failure if the desired ROI is not achieved. Worst if it is performed by the dealer. It is universally known that customisation for complex technologies are best left to the researchers. You may maintain and accessorize or change the surfaces but not beyond.
What excites me about Malaysia market is that companies are beginning to invest again in ERP system due to the imminent GST implementation. The market has been slow for quite some time due to economic uncertainties.
Just like Malaysia, Asian businesses including those in developed countries like South Korea and Japan usually share a common set of characteristics, namely highly fluid, dynamic and versatility as compared to Western's straight-line and simplistic culture. Asian business culture is unique and different from the Western. This explains why our manufacturing dominates the world.
This is the main reason that Asian companies are still struggling with their ERP systems. Apart from that, most western ERP systems are designed for discrete-based manufacturing industries which are common in industrialized economies. Unfortunately Asian's economies, especially the developing countries are resource-based in nature and require Process-based or Formula-based manufacturing ERP system, which is very different from discrete-based ERP system.
With the release of our fifth generation ERP system, iContro G5, what truly excites me about the rest of Asian countries is iContro Software is now ready for regional and international expansion.
We have successfully replaced numerous top 10 ERP systems with higher efficiency and ROI. We believe we could replicate the same success stories across Asian countries as we share the same business culture.
What are your plans to upscale and bring deeper value to existing customers? Also what are your plans to serve new sectors or areas?
Being an ERP vendor, our continuous responsibilities towards our existing customers are two-fold.
i. Continuous upgrade on latest ERP innovations for higher efficiency in the ever-growing competitive marketplace
Competition evolves at bleeding speed in today's borderless marketplace. As the bridge to our customers on latest technological development, it is imperative for iContro to continuously improve existing systems as well as invest in new business innovations. This is to ensure our customers continue to operate under an optimum operating environment in line with the competition.
On contrary to typical ERP upgrades that are usually associated with risks and unacceptable disruptions, our TUV-certified iContro G5 delivers smoother upgrades within shorter period yet without having to re-do all their previous customisations. This is thanks to our unique commodity-based delivery model, pioneered by iContro Software.
ii. Adoption of beneficial new innovations
Continuously engaging customers on the latest technological innovations that are beneficial to them, for instance, for those with regional and international presence, one of key technologies that we are currently educating and engaging is cloud computing.
As for new sectors and areas, it has been our standard R&D practice for iContro ERP to adopt between 3-5 new sectors per year, while continuously strengthening our existing ERP technologies.
Our expansion plans for the next 3 years will be Asian countries starting with Indonesia and Philippines. Once our multi-lingua version is ready, scheduled by the 2nd half of the year, we plan to start exploring Japan and South Korea markets.
Recently, you warned of some of the challenges Malaysia's economy will need to be wary of with the implementation of GST in 2015 as announced in by the Malaysian prime minister in Budget 2014. Could we do a little deeper in what do you believe are the pros and cons of the proposed GST implementation for Malaysia's industry and economy in general?
Pros of GST implementation
Positive fiscal discipline: The abolition of subsidies and introduction of GST is part of government's strategy to maintain the positive fiscal discipline. These measures are both "Unpopular" yet "Imperative". In addition, with the implementation of GST, we could expect the enhanced effectiveness and transparency of tax administration and management.
Cons of GST implementation
1. Dampened consumer sentiment - impact on the economy
GST will be implemented starting from 1st April 2015 in Malaysia. As we know Malaysia has a significant consumption market that has partially shielded us from the recent economic turbulences. The problem starts not with the imminent GST implementation alone. Drastic abolition of various subsidies especially on core items like sugar was implemented in the last quarter of 2012. Although some parties that may argue the benefits of the abolition otherwise, one thing for sure the cost of living is going up. The news of unhappy consumers grappling with higher costs of living appears almost every other day. Years of stagnation in growth of income and salaries only leads to consumers scaling back purchases. This moderation of private consumption is certainly not healthy in the face of economic uncertainties that may persist for many more years to come.
2. Industry challenges and unwelcome distortion
The retraction of the local consumer economy has poised an additional critical challenge to the local industries already grappling with various challenges like subdued economy and labour crunch. The situation is further compounded with the recent trimmed fuel subsidies for power producers in Malaysia due to part of our government efforts to reduce subsidy to industries.
Industry players have described the recent increase in tariff as too big an increase in too short of time, for not being given sufficient time to adapt accordingly. A recent survey by the Japanese Chamber of Trade and Industry Malaysia (Jactim), Malaysia largest direct investor, shows more than 70 percent of its member companies are expected to suffer a decline in profit, with a fifth by 10 percent due to recent hike in electricity. Close to 4 percent are mulling either to downsize or shift their operations elsewhere.
3. GST to compound further Inflation and cost of production.
Although GST is touted to replace existing sales and service tax (SST), it covers a wider range of products and services that previously was not taxable under the SST. Although arithmetic calculation may show that the difference compared to SST will be minimal, the typical 2-3 percent inflation due to speculation will still be present and that is not within our control.
The biggest concern is that the actual inflation rate could be higher as by the time of its implementation on 1st April 2015, the consumers will still struggle on the impact of abolition of subsidies. This is certainly too big an increase for such a short time frame.
What advice do you have for the implementation of GST from a government level as well as how businesses should be preparing for this?
1. Government level
a. Simplicity and effective communication for smoother Implementation
GST implementation is a huge nationwide exercise, involving both the public and private sectors that may take years to stabilize. Uncertainty and confusion are bound to happen. It is therefore crucial to keep it simple to be understood and implemented in order to minimize the unnecessary disruptions.