Technology

A Piece Plan for ERP

A piece plan for ERP. Plus: HP's positioning gambit, game training gains traction, and is IT a discredited notion?
CFO StaffJune 16, 2003

One of the most vexing IT issues facing large companies is deciding when and how to integrate the disparate “instances” of ERP software scattered throughout the organization. AMR Research suggests that companies begin by asking why. In studying more than 60 companies in various stages of ERP consolidation, AMR found that such projects cost about $10 million for every $1 billion of company revenue, and that the typical 25 percent reduction in IT costs that results is not enough to justify the expense. Instead, the potential benefits vary greatly from one company to another, and depend on corporate goals and strategy, particularly a company’s appetite for growth through acquisition.

The nature of the supply chain also factors in. Companies that have multiple manufacturing and distribution sites for the same products and want a global view of materials available, finished goods, and global coordination of sourcing and suppliers are wise to consolidate. Conversely, companies that lack and do not want to achieve common business processes, customers, and supply-chain management across divisions have found that consolidation does not ultimately pay off. Even when there is a solid business case for consolidation, AMR warns that the change-management issues are significant and that the project should not be viewed as an IT issue, but as a broad transformation of corporate practices.

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One year after its merger with Compaq, Hewlett-Packard is positioning itself to corporate customers as the sensible third option to IBM and Dell. “IBM is high-tech, high-cost, and Dell is low-tech, low-cost,” claims Jeff Clarke, formerly CFO at Compaq and now executive vice president of global operations. “We’re high-tech, low-cost.”

Clarke points to HP’s $4 billion R&D budget as proof of the high-tech part of the equation. The company is spending heavily on tablet and multimedia PCs and wireless technologies, among other areas. As for low-cost, he cites HP’s commitment to standards, and its impressive postmerger cost-cutting, which racked up $3.1 billion in savings in the first nine months, far outpacing the company’s original pledge of $2.5 billion over two-plus years.

Analysts have grumbled that with cost-cutting taken about as far as it can go, HP has yet to demonstrate any real growth. The company did score a major victory when it landed a massive outsourcing contract with Procter & Gamble earlier this year, a deal that Clarke says a premerger HP never would have been able to handle.

While that was clearly a shot across the bow of IBM’s Global Services division, HP seems more intent on fending off Dell than on trumping Big Blue. Company executives are quick to catalog Dell’s alleged shortcomings as the PC giant readies a broader assault on the corporate IT market. “Dell aspires to be us,” says Clarke, “but 80 percent of their revenue comes from PCs. They don’t innovate. We created the server market. We roll out 50 new printers every six months.”

HP contends that Dell is weak in services and averse to creating its own intellectual property, two points hotly disputed by Dell CEO Michael Dell. Last fall he pointed to the company’s 750 patents as proof that it is “more than just a sales channel.” Will the new HP face a challenge from an even newer Dell? Quite possibly, which will make the year ahead even more interesting than the one just ended.

Training & Development: Can I Be The Race Car?

In this post-Enron world, corporate gamesmanship may be passé but game-playing is alive and well, thanks to a company called Root Learning.

Originally a consulting organization specializing in strategic planning, the company became disheartened when its carefully developed reports did little but gather dust on clients’ shelves. So it turned its attention away from what CEO Jim Haudan calls “the embrace of new ideas by the elite” and toward the ability of the masses to execute those ideas.

To that end, the company developed “learning maps” and templates that mimic board games and provide an interactive way for employees to learn about their companies. Mattel signed up for two versions, one that gives a macro view of the company and another that zeroes in on the financial factors that drive profitability.

Kevin Farr, Mattel’s CFO, says, “We get a cross-section of employees playing the game, and they get a much better idea of what each function does. In fact, it’s led to the creation of some informal networks.” Haudan says one client developed a game focused on financial issues and, as a result, “employees said, ‘Now we can finally understand the annual report!’” While the PC version adds bells and whistles, Farr says Mattel opted for the actual board game because “the richness is in getting people around the table.”

Root Learning says the game metaphor is useful because it incorporates the “language of engagement”: visualization, dialogue, interactivity, and measurement. Haudan cites a 2001 Gallup poll in which 55 percent of company employees considered themselves “disengaged” from their work and another 19 percent went so far as to say they were “actively disengaged.” Winning support for new initiatives is tough, he says, when that many people are that tuned out.

FAS 133: Time To Mobilize

The dust may finally be settling regarding FAS 133. True, as recently as April 30 the Financial Accounting Standards Board was issuing a statement that, once again, “amends and clarifies” the 700-plus-page accounting standard for hedging and derivatives. And nearly half of the 175 respondents to a survey conducted last September by the Association of Financial Professionals say that the standard imposes “an excessive” reporting burden on their companies.

But that number was down sharply from a similar survey in 2001. Moreover, evidence suggests companies are beginning to look to various software packages to help them with hedging and reporting — a lagging indicator that perhaps they’ve come to terms with the voluminous accounting standard.

“As always, you have the hype before the reality,” says Thomas Bergqvist of treasury software provider Trema. “We had the hedge accounting software out several years ago, but now we see the actual use of it. Companies are starting to mobilize.”

“We are looking at some new systems,” agrees Frank Kimick, treasurer of Swiss watchmaker Movado Group. Movado’s homegrown systems manage currency exchange well, he says, “but off-the-shelf software is now priced more efficiently.”

Movado already uses SuperDerivatives, a Web-based product that allows companies to price options based on Bloomberg and Reuters data. That, says Kimick, is a boon when it comes time to mark options to market. With software now softening FAS 133’s infamous complexity, Kimick says the standard actually benefits Movado by documenting hedge efficiencies. “It makes people better traders and better hedgers,” he says.

IT Strategy: Levers For Success

Given all the pressure on IT budgets, does anyone still think technology can produce competitive differentiation? A team of McKinsey consultants spent two years studying that question and found that IT investments can still separate the leaders from the pack — if companies know which levers to pull.

The key to substantial boosts in productivity, they say, is to direct IT investments toward projects that enhance innovation. And the keys to enhanced innovation are focus and timing.

Instead of looking to improve operations across the board, McKinsey consultants Diana Farrell, Terra Ter-williger, and Allen P. Webb say companies should target those areas where IT spending dovetails with a commitment to improved business processes and existing operational strengths. They should also avoid copying other firms, even those within their own industries that are often held up as best practices. As one example, they point to Wal-Mart, the current gold standard within the retailer industry. Despite its IT-driven success, its focus on low-cost commodities makes it a poor model to follow for, say, Saks Fifth Avenue, which must cope with the seasonality of the fashion business and the need to avoid unloading inventory at end-of-season discounts.

Timing is also key. When an IT investment complements business goals and leads to innovation, or provides an ongoing benefit even if imitated, it makes sense to be out front. Leaders need to be able to implement IT quickly and have a track record of effecting change. Failing that, restraint is best.

4+2=0(IT)?

If information technology has lost some allure, at least it has plenty of company. A new book, What (Really) Works, tosses “IT investment” onto a vast scrap heap of 200 management practices that fail to drive value. In studying 160 companies over five years, the authors, William Joyce, Nitin Nohria, and Bruce Roberson, attempted to bring statistical rigor to the task of figuring out how winners win. In their view, total return to shareholders, which served as their benchmark for corporate performance, depended on four primary management practices (strategy, execution, culture, and organization) plus the manifestation of two from a list of four secondary practices (talent, leadership, innovation, and M&A).

Companies with high scores in the four primary areas and any two of the four secondary areas consistently outpaced their competitors. “Our results have such a back-to-basics quality that people have told me, ‘It took you five years to come up with that?’” says Nohria. “But often managers don’t have a clear idea of what they’re doing, or they think success hinges on one area when in fact they’ve had to do several things right.”

As for the book’s failure to champion IT, Nohria says, “I’ve been a fan of IT — I even helped develop a business-school course on it — but we found no correlation between IT spending and corporate performance.” Nohria says that too often, companies lose sight of the ends that IT is meant to serve and instead make sucessful deployment an end in itself. Other practices not found to underpin success: Six Sigma quality initiatives, change management programs, and improved corporate governance.