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To maximize the return on this massive software investment, plenty of planning is needed, even if you've been using ERP for years.
Doug Bartholomew, CFO IT
September 15, 2004
Even as Y2K ushered in boom times for ERP vendors, they were beset by a string of negative press reports regarding the complexity and cost of getting their software to run effectively — assuming it could be made to run at all. ERP horror stories abounded, with Hershey Foods Corp.'s perhaps the best-known example. In 1999, the company attributed a 19 percent drop in third-quarter net income in large part to problems associated with its big-bang implementation of SAP software.
Ancient history? Maybe, but as recently as last year, Goodyear Tire & Rubber Co. saw one of its units make a $19 million adjustment to operating income due to "several factors relating to the company's ERP systems," including an "inability to locate or re-create account reconciliations for prior years." More notably, NASA blamed an ERP foul-up for its financial woes related to the audit of its 2003 financial statements (see "NASA, We Have a Problem," CFO, May). It should be noted that Goodyear's problems were "more an issue with the implementation, not the software itself," according to a company spokesman. Similarly, NASA says conversion to its new ERP system caused the problems with its audit. But the question remains: does ERP have to hurt? Years after cost overruns and disappointing returns became press staples, has anything improved?
Although ERP sales, which expanded at more than a 30 percent annual rate in the late 1990s, have flattened, companies spent a robust $20.7 billion on ERP packages last year, including about $6 billion in maintenance and support fees. So if there is widespread disenchantment, it hasn't dragged down sales, although it may have helped usher in a remarkable buyer's market: testimony during the Oracle-PeopleSoft antitrust trial revealed that some customers paid only a fraction of the software's list price.
Disasters aside, most companies of a certain size — generally $100 million and above, although simplified ERP software is often pitched to much smaller companies — find ERP virtually indispensable. ERP serves as an all-important information pipeline that links finance, manufacturing, logistics, sales, and other departments, with new functions being added continuously, further extending its presence in an organization. The "resource planning" that gave it its name is now just a very small part of the capabilities it brings to an enterprise.
How to avoid an embarrassing blurb about ERP in your next annual report? First, stay focused on why you're moving to, upgrading, or otherwise changing your approach to ERP. That way, you won't be misled into thinking of it as a technology project. "The benefits come from changing your business processes, not from installing ERP," says Bill Swanton, a vice president at AMR Research in Boston. Adds Buzz Adams, president of Peak Value Consulting, a Pasadena, California, consultancy that specializes in process improvement, "The technology will work the way you implement it, so what's important is how you improve the processes — the way you do things."
When Agri Beef Co., a privately held, family owned company that custom feeds 400,000 head of cattle annually, and fabricates and sells 230 million pounds of beef a year to retailers and restaurants, determined that its financial systems were antiquated and its accounting processes out-of-date, a move to ERP seemed warranted. Casey R. McMullen, director of information systems at the Boise, Idaho, company, says that not only did Agri Beef get a new system up and running in six weeks with no glitches, but that the benefits began to accrue at once.
"We had 20 different processes identified where we thought we could get greater efficiencies from new systems," says McMullen. Chief among those was the company's old method of manually handling intracompany transactions, which saw various business units cutting and mailing checks to one another. "With the old method, we had to walk each transaction through," says Kim Stuart, treasurer of the $500 million-plus firm. "Now we can post transactions straight through to another division's general ledger account," she says. "That change alone saves us 200 hours a month." A change to its accounts-payable process allowed the company to accomplish in 2 check runs what used to require 22.
Aware of the Bad Press
Because Agri Beef's software, from PeopleSoft, automated so many manual processes, it also gave the company the ability to look at key financials at a glance. "It makes it easy to get important information in front of you," says McMullen. "For example, we can see which customers have the top 10 highest outstanding balances." Agri Beef, which began installing the software last fall and went live in January, is already considering adding modules for human resources, payroll, and supply-chain management.
McMullen, aware of the bad press ERP implementations have received, says Agri Beef took a number of steps to avoid that fate. For one, it put a premium on identifying power users and schooling them in the software so that they could in turn train others. "One of the benefits of the rapid implementation was that the limited scope prevented project scope creep and kept everyone focused on meeting the defined project needs and requirements. The reduced implementation time also reduced the amount of time for risk exposure," says McMullen. "The other key factor in our success was having decision-makers on our project implementation team. Everyone on the team was able to make decisions not only about software configuration and setup issues but also regarding business-process changes and best practices. This allowed us to make choices and decisions on the fly about how the software would work and how our business would use it."
As a newcomer to ERP, Agri Beef is something of a, dare we say, rarity. Large ERP projects these days are more likely to involve standardization, particularly when acquisitions have left companies with disparate systems. That's the case at Tyson Foods Inc., which, following its recent closing on its acquisition of $14 billion Iowa Beef Packers, is rolling out the latest version of ERP software from SAP across the entire merged business. Senior vice president and CIO Jeri Dunn says a key driver is the need to get all the company's financial groups on the same page. "Our GL is not common yet," she says, "and my CFO wants that in order to reduce the number of days it takes to close."
To that end, Tyson has established a companywide effort called Project Won. The project involves more than 400 people, some of whom have traveled to Germany several times, working closely with SAP to make sure the software meets Tyson's needs. While some of those needs are similar to those at Agri Beef — integrating formerly separate systems in various areas of accounting, for example — others are highly specific. Tyson and SAP worked together to customize the system so it could cope with the company's "sell in cases, bill in pounds" procedure, a rare example in which customization, often the bane of ERP projects, made sense.
Dunn has some advice for those installing or upgrading their ERP systems, particularly SAP's. First, she says, treat finance as more than a separate module in SAP. "All roads lead to finance in SAP. So if you get it right, you can close your books very quickly. But if you get it wrong, you will end up with an army of financial people trying to close at the end of the month."
Dunn also recommends paying special attention to change management — that is, the people aspect of organizational and technological change. "SAP won't map exactly to the way your company looks and operates today," she says. "Your company must undergo significant cultural change. For that you will need communication and a training team to minimize the pain of ERP on the organization." Dunn's latest hire, in fact, is a vice president of organizational change.
Dunn also suggests that companies embarking on an ERP effort take care not to underestimate the amount of work needed to develop a clean overall set of master data. The chart of accounts, product data, and other mission-critical information has to be accurate from the get-go, she says, or mistakes will multiply throughout the system. Many an ERP project has been scuttled or gone south altogether because companies failed to do this kind of basic blocking and tackling early on.
M.R. Rangaswami, the former lead marketing executive at ERP vendor Baan Co. who now runs Sand Hill Group, a San Francisco investment firm, suggests that current users of ERP systems pause to first take stock of what they have. "They should really look inward to see if they are getting value from the applications they already have, before going on to the new ones," he says. "Ask why you need that upgrade. Is there anything of a compelling business nature?"
Therein lies the rub: just what constitutes "compelling"? While ERP vendors have extended their products into a vast number of areas — from CRM to analytics to, inevitably, Sarbanes-Oxley compliance — the software is almost never seen as a source of competitive advantage, which might make its complex implementation easier to bear. As Rangaswami says, "The problem with ERP is, how do you justify the high cost? The answer is, you've got to have it — ERP is a necessity."
It's worth noting that despite its problems in 1999, Hershey Foods embarked on a massive upgrade of its SAP system in late 2002 and could point to dozens of quantifiable process improvements by the end of the year. That's a happy ending — by ERP standards, at least.
Doug Bartholomew is a writer in Berkeley, California, and former senior technology editor at IndustryWeek.
The Fast(er) Track
Tips for keeping ERP projects on the rails.
Have a clear, simple corporate vision and objective before you start, and measure and publicize successes as you proceed.
Have a group dedicated to business-process improvements. Also rely on experienced project managers (possibly including internal or external managers who have been certified by the Project Management Institute). Involve key stakeholders as early as possible.
Create a financial analyst position or team to track and analyze project costs and realized benefits.
When choosing a new vendor, put a premium on vertical-industry expertise. Avoid customization, or demand that such requests meet rigorous criteria.
Make sure that data cleansing is addressed as part of the project.
Sources: CFO IT; Accenture; SAP