Risk Management

Case Study: What If Your ERP Can’t Deliver?

CFOs at the AICPA aim to mitigate risk as they install an enterprise resource planning system. (Last of a series.)
David KatzApril 19, 2001

Hershey still haunts them.

True, CFOs whose companies are installing enterprise resource planning (ERP) systems try to avoid the cost overruns and other, even worse perils.

But the candy maker’s scary tale seems to have staying power. Maybe it’s because it all came down on Halloween, 1999.

By then, the installation of its $115 million ERP system had flopped so badly that Kisses and other Hershey sweets couldn’t be found in many trick-or-treat bags. Third-quarter sales plummeted by 12.4 percent compared with 1998, and earnings were off 18.6 percent.For Hershey’s tale of woe, click here.

Dan Brennan, chief operating officer of Gladwyne Software Surety, a King of Prussia, Pa.-based risk management consulting firm, thinks Hershey’s experience and other prominent ERP failures show how risky it’s become to disrupt a company’s supply chain.

“The risks in general for CFOs [are] increasing,” says Brennan. “Failed systems are starting to impact customer relationship [s].”

In the old days, before the E-economy, he recalls, “if you had system failures in the warehouse you could buffer customer reactions by having surplus inventories.” With today’s tight inventories, such buffers don’t exist anymore.

The anxieties also extend to less tangible industries, where delivering services as promised is crucial. In both cases, the most feared outcome is a damaged reputation.

That’s the case for the American Institute of Certified Public Accountants (AICPA), which is installing an ERP that’s slated for final launch by July 2002, says Clarence A. Davis. After two years as CFO, he became chief operating officer Nov. 14.

Like other senior executives, Davis is scrutinizing the hazards involved in assembling an ERP.

Click here to learn how Jackson Laboratories coped with an ERP installation.

Click here for the story of Natural Organics.

Davis estimates that the AICPA has 340,000 members, noting that with the ERP the institute will extend its reach to about 70,000 accountants who belong only to state CPA societies. Yet as big as the profession is, “it is very small in terms of [accountants] talking with one another,” Davis points out. “Once you get a bad rap it can travel through the network very quickly,” Davis tells CFO.com.

Davis says his biggest potential nightmare on the project would be if it wound up hurting the AICPA’s reputation by causing errors or delays in the delivery of its products and services.

Proper functioning of the ERP system, which will be used to run the institute’s sales processes “from order entry to fulfillment,” is crucial to meeting customer expectations, he notes.

“If you, as a member, ordered a course for construction and you got [one for] not-for profits, and I sent you a bill, you would find me very ineffective,” Davis says.

He envisions an even worse disaster: The loss of the data involving someone who has taken and passed an online AICPA course. “That would constitute a catastrophe,” he says.

It also wouldn’t help the AICPA’s quest to boost membership if it takes two months to deliver a course to an applicant, Davis says.

He adds that such worries have been “clearly articulated in my mind” during the AICPA’s search for a software provider. Protections must “be embedded in the system to make sure that [such] non-delivery of services [does] not take place,” he says.

Davis says the software search has been narrowed to three finalists he refuses to name. The cost of the ERP will fall in the range of $12 million to $20 million, he confirms.

To avoid ERP problems, executives involved in the project are scanning trade publications and Web sites, asking the advice of third-party consultants, and looking at demonstrations of software in use at client firms, says Mark Herman, CFO of CPA2BIZ, the marketing and distribution arm of the AICPA. The unit plans to launch a Web portal in October.

The executives are focusing on existing software rather than a customized system, says Davis. That’s because it’s hard to reconfigure a customized system to accommodate product updates, he adds.

Herman worked on previous ERP installations at Caminus Corp. and GT Interactive Software (now Infogrames, Inc.). He says the most important factor in choosing an integrator is finding one that specializes in the kind of software you’re installing.

If he chooses SAP software, for instance, “I’m not going to a firm that deals with Oracle… and vice versa,” he says. People Cause Problems
Besides software concerns, however, the personalities and habits of integrators weigh heavily on the minds of senior executives installing ERP systems.

A particular worry is that miscommunication will spawn unexpected project expansion and mounting costs.

In fact, avoiding “scope creep” on the AICPA project will be a tall order. The ERP will link many operations of AICPA; CPA2BIZ; and Shared Services LLC, a corporation servicing state CPA societies.

Replacing AICPA legacy systems supplied by about six vendors, the ERP will incorporate general-ledger, manufacturing, distribution, human resources, and other functions, Herman says.

Davis points out that to avoid scope creep, the AICPA “effectively created a fixed fee and put [in] a percentage for contingencies” in the contract it will use with its integrators.

“We have milestones and a payment schedule,” he says. “You have to complete certain portions of the deliverable to get paid.”

Thus, while the AICPA has spelled out its expectations clearly, it’s left room for negotiation. That should help it avoid hassles with integrators.

Herman notes that a hazard in signing a fixed-fee contract with an ERP integrator is that “if something goes wrong, they can come back to you and say, `It’s not in the scope, so we’re not going to do it.’”

That, in turn, creates the potential for a standoff, leaving the project in jeopardy, the CFO notes.

Companies should interview integrators carefully “at the front edge” to make sure that “personalities don’t clash,” he adds.

In managing ERP risks, it’s also important to ask integrators if they have what Herman calls the “band width”—adequate personnel—to deal with their projects over the many months they typically take.

If you find, in talking to a small firm, that it has, say, 100 projects in the pipeline, you might consider looking elsewhere, he advises.

Despite the precautions organizations like the AICPA are taking, however, Hershey’s-like nightmares seem destined to trouble the sleep of their CFOs. These are, after all, multi-million-dollar projects that turn companies upside down before setting them aright.

Installing an ERP thus calls for a realistic attitude toward the hazards. As Herman says, while “you can mitigate some of it, you always have risk.”