The ERP Renaissance

By Daniel Gingras

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An interesting trend is developing among small and mid-sized companies around the use of information technology, the renaissance of enterprise resource planning (ERP) implementation, either as completely “green field” or as re-implementation of earlier attempts to gain value from this type of system.

It’s a redux of the pre-2000 era where companies were scrambling to get their systems ready for the change in Millennium. That period was marked with a scramble to jam systems in with significant lack of foresight as to the ramifications of such change within the organization. Frankly, it gave ERP a bad name, and there were a number of high-profile failures which cast a pall over the entire ERP genre for many years.

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What we see now is significantly different. We’re seeing a more reasoned approach to both the selection and the implementation, which minimizes the risk, and focuses the enterprise on creating some real value. In addition, we’re also seeing a significant number of companies reexamining their prior implementations with the goal of fixing a number of structural flaws made in their initial implementation. According to Scott Hamilton in his book Maximizing your ERP System: A Practical guide for Managers, (McGraw-Hill, 2003), “… most manufacturers do not effectively use their ERP system to run their businesses”

Why Now

Increasingly companies, particularly companies which have grown by acquisition over the past five-to-six years are having difficulties with reconciling both their financial data and their supply change across disparate multiple systems. In some cases, the original implementation of their ERP systems did not address the organizational changes necessary to create a “single-version-of-the-truth” and the original implementations took the route of “least resistance” and were implemented with multiple instances of the ERP system, or worse, multiple systems across the enterprise.

These organizations are now beginning to realize that a “single instance,” “monolithic” system based on the now ubiquitous browser-based interface would allow significant efficiencies to accrue to the organization, both in allowing for faster decisions based on accurate information, and in creating efficiencies in the supply chain.

Many CEOs are now asking their CIOs about ERP because they’re hearing about it from their peers and reading about it in the trades. They’re hearing about the ability of these systems to allow for faster decision making, and for reducing the costs across the enterprise.

The ERP landscape has also changed in the past decade, driven, in part, by the newer business practices and technologies, including a renewed focus on the customer satisfaction, lean manufacturing, computer integrated manufacturing, and supply chain management all of which are also influenced by the relentless move of manufacturing offshore.

Another factor influencing the redux of ERP is the simple fact that we simply know more about implementing these complex systems now. It’s now taught at many colleges and universities as part of their business or computer information technology curriculum, and the case studies of major ERP disasters are now all well circulated; and the lessons learned from these expensive failures are well ingrained into the both the teaching of ERP and the implementation methodologies.

How to Prepare

No project of the scope of an ERP system should be done without first building a sophisticated business case to justify the expense. In addition, most companies should work with a consulting organization without any ties to specific software vendors.

You should avoid at all costs, working with the software vendors themselves to build your business case, an obvious, but often disregarded, approach.

A trusted advisor will often save you many times the cost of their fees. I recently helped a medium-sized company select a major ERP system and negotiated with the vendor, saving the company almost $8 million in the process, and later we achieved similar savings in negotiating with the system integrator we help selected.

Although the business case is the first step, a concurrent step is to define with some precision your actual requirements. This requirements definition study (RDS) is crucial to the proper selection of the ERP system.

There are dozens of ERP systems and many, if not most, of them are quite good. Picking a system based on name recognition is a prescription for failure. You must have completed both the business case and the RDS before you can select the package. Again, getting help with these two steps will save your company significant costs and most likely save your job.

Selecting and purchasing an ERP system is just the beginning, because most of the cost in ERP is in the implementation, typically three-to-five times the cost of the software, sometimes quite a bit more.

Over the next couple of months, I will detail the steps necessary to help you select the proper software package, and outline a methodology to reduce your chances of failure.

What to Expect

Unlike prior generations of ERP implementations, the current methodologies focus on quantifying the benefits expected from the new systems and implementing a measurement system to insure that those benefits were actually achieved.

Driven by these best-practices, and by the major research done on software acquisition as embodied in the Carnegie Mellon Capability Maturity Model–Software Acquisition (CMM-SA) companies now are willing to make significant investments based on projected return on investment (ROI), no longer relying on “gut feel” to justify major ERP systems.

Complex financial and operational models describing the benefits of the new systems are in place to help the CIO, and many consulting organizations are focused on insuring that the business case is well documented prior to beginning a new project.

According to Hamilton, companies implementing ERP should expect significant inventory reductions. "Improved planning and scheduling practices typically lead to inventory reductions of 20% or better" and “improved procurement practices lead to better vendor negotiations for prices, typically resulting in cost reductions of 5 percent.”

In addition Hamilton’s work shows labor savings of 10%, improved sales, and significantly improved accounting controls including reduction of receivables by 18%.

Clearly with these and other quantifiable measures, you can build a pretty sophisticated model to show the ROI of what typically is a multi-million dollar investment.

Understanding the cultural and organizational impacts of a major system like ERP is also essential. A major ERP system cannot be implemented as an IT-only project. It’s really a business project and, as such, it needs to be driven and lead by a business sponsor.

The IT organization should try to avoid providing the leadership in this scenario because it generally is one of the causes of failure. In fact, the leading cause of ERP implementation failure according to many research studies is the lack of business sponsorship. This is usually manifested in the organization refusing to change their business processes to accommodate the system, and forcing modifications on the system.

I like to tell both my graduate students and my clients that most major ERP systems embody the institutional knowledge of thousands of companies in businesses similar to theirs. If their business process differ from those embodied in the software, there’s a good chance that their processes are wrong, and they should really examine them closely.

Most companies will tell you they’re very different from everyone else, but most ERP consultants will tell you there are very similar themes that run across most organizations, and 95% of most companies can adapt their processes to the software just fine.

So, should you be thinking about a major ERP redux? The time may be right, particularly if you do not have a single view of your enterprise, or if your systems are struggling to keep up with the changing business climate. It may even be time for you to re-examine your current ERP implementation, with an eye on fixing those problems that drive the business users a bit crazy.

Daniel Gingras has been CIO of five major companies and is a partner at Tatum, LLC. , a nationwide professional services organization of senior-level technology and financial executives who take on leadership roles for client companies. He has more than 30 years of IT experience and teaches computer science at Boston University. He can be reached at dan.gingras@tatumllc.com.