Avoiding ERP. Implementation Failure EXECUTIVE SUMMARY BY ELISABETH J. UMBLE AND M. MICHAEL UMBLE

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1 EXECUTIVE SUMMARY Avoiding ERP While it s true that successful of an enterprise resource planning system is a task of Herculean proportions, it s not impossible. If your organization is to reap the benefits of ERP, it must first develop a plan for success. But prepare to see your organization reengineered, your staff disrupted, and your productivity drop before the payoff is realized. Implementation Failure BY ELISABETH J. UMBLE AND M. MICHAEL UMBLE january / february

2 Enterprise resource planning systems appear to be a dream come true. They are designed to enhance competitiveness by upgrading an organization s ability to generate timely and accurate information throughout the enterprise and its supply chain. The latest generation of commercially available software packages promise seamless integration of all information flows financial and accounting, human resource, operations, supply chain, and customer information. This provides for a unified view of the business, encompassing all functions and departments by establishing a single enterprise-wide database in which all business transactions are entered, recorded, processed, monitored, and reported. A successful ERP can shorten production cycles, increase the accuracy of demand fore- materials management, and sourcing. It also led to inventory reductions because material planners had access to more up-to-date and accurate data that improved the company s ability to track and control system-wide inventory and forecast future demand. For managers who have struggled with incompatible information systems and sub-optimum operating practices, the promise of ERP to solve the problem of business integration is enticing. But the price of securing the benefits of ERP may be high. The cost of a modest ERP can range from $2 million to $4 million, depending on the size of the organization and the specific products and services purchased from vendors. The cost of a full-blown in a large organization can easily exceed $100 million. A recent survey of 63 companies with annual revenues rang- The price of securing the benefits of ERP may be high. The cost of a modest ERP can range from $2 million to $4 million... and the cost of a full-blown in a large organization can easily exceed $100 million. sive training requirements, and lead to productivity dips and mishandled customer orders that can temporarily damage the bottom line. Moreover, experience indicates that between 50 percent and 75 percent of U.S. firms experience some degree of failure when implementing advanced manufacturing or information technology. Unfortunately, many companies have already experienced significant problems trying to implement ERP systems and these poorly executed s have had serious consequences. One recent survey revealed that 65 percent of executives believe ERP has at least a moderate chance of hurting their business. Clearly, it is critical to identify and understand the factors that largely determine the success or failure of the. Why ERP s fail In a recent survey, information technology managers identified three primary reasons for the failure of all IT-related projects: poor planning or poor management (cited by 77 percent), change in business goals during the project (75 percent), and lack of business management support (73 percent). Since ERP is an IT-related project, the above are valid reasons for explaining ERP failures. But more specifically, ERP failures fall into 10 categories: casts, improve customer service, trim fat from operating expenses, and may lead to a reduction in overall information technology costs by eliminating redundant information and computer systems. Owens Corning claims ERP software helped it save $50 million in logistics, ing from $12 million to $63 billion indicated that the average cost $10.6 million and took 23 months to complete. Not only do ERP systems take a lot of time and money to implement, even successful s can disrupt a company s culture, create exten- Poor leadership from top management. If top management is not strongly committed to the system, does not foresee and plan for the profound changes necessitated by ERP, or does not actively participate in the, the has a high likelihood of failure. The of ERP must be viewed by top management as a transformation in the way the company does business. Automating existing redundant or nonvalue-added processes in the new system. The integrated environment of the new ERP system will require the 26 Industrial Management

3 organization to do business in a different way. Therefore, existing business processes need to be reengineered from the bottom up to dovetail with the ERP structure and requirements. Unrealistic expectations. Many companies grossly underestimate the amount of resources, time, and outside assistance required to implement and run the new system. Moreover, managers and workers frequently assume that performance will begin to improve immediately. Because the new system is complex and difficult to master, organizations must be prepared for an initial decline in productivity after the new software is put into operation. As familiarity with the new system increases, the expected improvements will come. But management must be prepared for initial waves of frustration. Poor project management. Managers are often surprised by the scope, size, and complexity of an ERP. As a result, management sometimes does not initiate the necessary level of detailed project management planning and control. Inadequate education and training. Top managers and all system users must be fully educated so they understand how the ERP system should be integrated into the overall company operation. All users must be trained to take full advantage of the system s capabilities. A failure to educate and train all relevant personnel will guarantee problems. Trying to maintain the status quo. People have a natural tendency to be comfortable with the status quo and may be fearful of changes brought about by any new system, especially one as pervasive as an ERP system. They may fear that the new system will make their jobs more difficult, reduce their importance, or even cost them their jobs. People are also afraid to fail. And ERP systems may create a great deal of uncertainty in some people as to whether or not they will be able to perform their jobs as well as they did under the old system. Some front-line staff may be uncomfortable with the realization that with better information, upper management can keep better track of what they are doing and the money they are spending. A bad match. Some of the biggest ERP system failures occur because the new software s capabilities and needs are mismatched with the organization s existing business processes and procedures. An ERP system that is not designed to meet the specific business needs of the company can cause tremendous problems. A significant mismatch between the technological imperatives of the system and the existing structure, processes, or business needs of the

4 organization will generate widespread chaos. Less severe mismatches between business processes and software requirements will merely create significant problems for implementers and users. Inaccurate data. Data entered into an ERP system may be used throughout the organization. Because of the integrated nature of ERP, if inaccurate data is entered into the common database, the erroneous data may have a negative domino effect throughout the enterprise. Inaccurate data can lead to errors in market planning, production planning, material procurement, capacity acquisition, and the like. If a company with inaccurate data just forges ahead under the assumption that data errors will be corrected when they are spotted, the ERP will lose credibility. This encourages people to ignore the new system and continue to run the company under the old system. ERP is viewed as an IT project. If the is treated as simply an IT project, the ERP system will never realize its full capabilities. In such cases, it is likely that the technology will be deployed in a vacuum, business processes will not be properly reengineered and aligned with the software requirements, and staff will resist using it. Significant technical difficulties. Every ERP will encounter a certain number of problems. These difficulties can include bugs in the software, problems interfacing with existing systems, and hardware difficulties. Normally, such problems simply contribute to the organization not achieving its target goals. However, if technical problems go unresolved or are poorly managed, they can doom the. Prerequisites for success Six basic building blocks are required to implement an ERP system successfully: Organizational commitment. ERP is essentially new information technology. As such, it is a package of ideas that requires people to change the way they work in order to realize its full advantages. Without clear leadership and commitment from top management, individuals throughout the organization will discover enormously creative ways to maintain the status quo, and the power inherent in the new information technology will be wasted. The proper of an ERP system should force key business processes to be reengineered and cause a corresponding realignment in organizational control to sustain the effectiveness of the reengineering efforts. An ERP system will clearly change the normal mode of operation within and between functions, but it will also change many social systems through- 28 Industrial Management

5 out the organization. If people are not properly prepared for the significant changes that need to take place, the natural reaction will be resistance to change, which may sabotage the entire. A company implementing ERP must obtain a sincere commitment to the change process from all functions and all levels of the organization. In return, since system users will have to deal with organizational restructuring while learning new processes, management will have to make a strong commitment to satisfy the needs of these people. The companies that have successfully implemented ERP systems typically approach the as an exercise in change management. A change as dramatic as an ERP usually requires an executive champion a prominent, highly respected individual who leads the change initiative and stakes his or her reputation on the success of the new system. Moreover, the champion The companies that have successfully implemented ERP systems typically approach the as an exercise in change management. should be backed up with a strong project team and the unwavering commitment of top management. Many companies that have experienced problems implementing ERP systems have exhibited difficulties in the areas of cultural adaptability, top management commitment, and change management. Clear communication of strategic goals. Before an can begin, key people throughout the organization must create a clear, compelling vision of how the company should operate in the future to satisfy customers, employees, and suppliers. This vision, along with a clear picture of expectations and deliverables, must be communicated to all functions and all levels of the organization. In most organizations, many people do not fully understand their organization s strategic goals and how their individual or departmental activities support those goals. Thus, it is likely that these

6 individuals will not understand why the ERP system is being implemented and what critical business needs the company is trying to address. Management must ensure that the entire organization understands and agrees with the need to implement the ERP system. The successful of an ERP system requires a tremendous degree of integration. Unfortunately, many organizations are not well positioned to support such system-wide integration. The existing processes and organizational structure may be incompatible with the new processes and structure imbedded in ERP systems and will have to undergo significant transformation. It is management s job to ensure that this transformation proceeds as smoothly as possible. View ERP as an enterprise-wide venture. An ERP system is the information foundation of an organization. Correctly implemented, it is the dovetailing of industry best practices with state-of-the art information technology that fundamentally changes the way every function operates. But it is important to remember that IT plays the supporting role and is not the final objective. Unfortunately, because ERP systems involve the introduction of significant new technologies, some shortsighted organizations have offloaded the responsibility to information technology specialists. But treating an ERP as essentially an IT project only invites disaster. To realize the full potential of an ERP system, the technological aspects of the must be managed as part of a broad program of transformation. In fact, successful ERP s are typically headed by an individual outside the IT department. Select a compatible ERP system. Given the rapid development of new technology, the expansion of features and capabilities, and the proliferation of software vendors, there are numerous options for ERP systems. Since an ERP system will impose its own logic on a company s strategy, organization, and processes, it is imperative that the enterprise system selection decision be a wise one. While most ERP packages have similarities, they also have substantial differences. Most ERP software vendors make assumptions about management philosophy and business practices. Buying an enterprise package means much more than purchasing software it means buying into the software supplier s view of best practices for many of the company s business processes. A company that implements ERP must largely accept the supplier s assumptions about business processes and reengineer existing processes and procedures to conform to those assumptions. Therefore, each organization should select and implement a system that underscores its unique competitive strengths while helping to overcome competitive weaknesses. When ERP systems are compared across different s, 80 percent to 90 percent of a particular system will be the same, and 10 percent to 20 percent will be tailored to the specific needs of the enterprise. Therefore, each company must determine the critical business needs it is trying to address and identify the desired features and characteristics of the selected system. The importance of the software selection process must not be underestimated. From the very inception, executives and cross-functional teams representing all affected sites must identify, examine, and rethink existing business processes. Management will then appoint a vendor selection team consisting of respected individuals who are familiar with the various software packages, company processes, and competitive aspects of their industry. This team is responsible for identifying the features, functions, and goodness of fit of the software to Treating an ERP as essentially an IT project only invites disaster. To realize the full potential of an ERP system, the technological aspects of the must be managed as part of a broad program of transformation. support each functional area as well as the overall company vision. The general procedure is for the team to create a software vendor candidate list, narrow the field to four to six candidates, request and review proposals from each potential vendor, select two or three finalists to demonstrate their packages, select a winner, and negotiate the contract. After the contract is negotiated, the company should run a pre- pilot to uncover any major surprises about the software as quickly as possible. Finally, using all available information, make a final go/no-go decision on the. In extreme cases, it may be necessary to renegotiate the contract, change vendors, or even delay the decision. Ensure data accuracy. Accurate data is an absolute requirement for an ERP system to function properly. Effective processes must be in place to ensure a high level of data accuracy. Thus, educating users about the problems that data errors and mistakes can cause throughout the company should be a top priority. If processes to ensure data accuracy are not in place before the begins, it must be a top priority during the. Of course, this generally tends to extend the period. Resolve multi-site issues. In some organizations, the ERP system will be implemented at multiple sites. This generates special problems that must be resolved before the begins. One common issue is whether or not to standardize or allow customization at each site. Standardization brings with it simplified interfaces among diverse parts of the organization, the ability to move people and products between sites with minimal disruption, and relative ease in consolidating data across the organization. On the other hand, customization at individual sites may result in more effective and efficient operation at each 30 Industrial Management

7 site and may reduce operating costs. A second common issue is whether to implement ERP simultaneously at all facilities or to use a phased approach, starting with a pilot at one site. Simultaneous s require less time for the entire system to be integrated. However, they require a higher level of available expertise for the project. Sequential site-by-site s can be overseen by a single team. Sequential s may create positive momentum from early successes, especially if the pilot site and other early sites are carefully selected. The sequential approach also allows for lessons learned in early s to be applied to subsequent s. Critical success factors The of an ERP system is not simply a technical project. ERP s are people projects: Successful s require that people, departments, processes, and organizations change. As a result, ERP system s are times of high stress, long hours, and uncertainty. But they also provide the opportunity to improve dramatically the way the company operates. The way a company implements its new ERP system will largely determine its success. Depending upon the specific situation, a variety of factors might be critical to the success of an ERP. Given that the prerequisites for are satisfied, there are 10 prominent critical success factors: Strong leadership provided by an executive management planning committee. This group must understand how ERP will integrate the entire enterprise, support the costs required by the, champion the project, and demand full integration and cooperation. The successful implementa- tion will have a highly respected, executive-level project champion to spearhead the project. The is viewed as an ongoing process. The ultimate goal of an ERP should be to improve the business not simply to install software. Therefore, the acquisition of new technology should be considered an ongoing process of learning and adaptation that continually evolves over time. The should be business-driven and directed by business requirements and opportunities. Implementation teams are composed of the company s best workers representing all functions. These cross-functional teams, consisting of highly respected individuals from each function, should be entrusted with critical decisionmaking responsibility. Guided by executive-level input, these teams should be charged with the responsibility to

8 identify, examine, and rethink existing business processes. Fully supported by top management, these teams should also have the authority to reengineer existing business processes or develop new business processes to support the organization s goal. Mid-level management is totally involved in the. Middle levels of management must be included in the decision-making process, especially when determining the detailed plans. This will ensure that everyone s interests and concerns are considered before final decisions are made. Mid-level managers should have hands-on responsibility and authority for the detailed aspects of the. Moreover, successful s require constant communication between the implementers and end users. Mid-level managers must facilitate continual feedback from employees, provide honest answers to their questions, and help resolve their problems. Excellent project management techniques are used. Implementation teams should take a disciplined approach to project management, including a clear definition of objectives, development of a work plan, and establishment of a resource requirement plan. Milestones should be established, and progress against those milestones should be carefully tracked. Since timely decisions save time and money, management should empower rapid decisionmaking at the proper levels. The old systems, including all informal systems, are eliminated. Everyone must work within the new system, not around it. If people are to trust the system, the data in it must be sufficiently available and accurate. Once the new system is fully operational, old systems should be killed. This commits the company to using the new system. Running parallel or informal systems gives employees a way to avoid using the new system. Proper measurements are implemented and closely monitored. Appropriate project evaluation measures must be included before the begins. If system is not tied to compensation, it will not be successful. If management will receive their raises and bonuses next year even if the system is not implemented, successful is less likely. Management, vendors, the team, and the users must share the responsibility. If some staff are unable to achieve agreed-upon objectives, they should either receive the needed assistance or be replaced. When teams reach their specified goals, rewards must be presented in a very visible way. The system and the project must be monitored until final completion. Education is arguably the most important and widely recognized critical success factor because user understanding and buy-in are essential. An aggressive but achievable schedule is established. The schedule should instill and maintain a sense of urgency. Especially if ERP is installed in a phased approach, early successes will increase momentum and help reduce resistance to change during the rest of the. Avoid scope creep, which will complicate and slow down the and strain the ERP budget. This includes minimizing any customization of the basic ERP code. Standardizing the as much as possible reduces the time and effort required to implement exceptions and helps keep the on schedule. Successful change management techniques are applied. The team, top management, mid-level managers, and supervisors should use successful change management techniques to identify and target resistance to change. All employees must be made to understand how the new system can both benefit the company and make their jobs easier. If the organization is flexible enough to take advantage of opportunities as they arise, ERP will make available more information and enable more improvements than first seemed possible. Extensive education and training is provided. Education is arguably the most important and widely recognized critical success factor because user understanding and buy-in are essential. A successful requires a critical mass of knowledge to enable people to solve problems within the framework of the system. This critical mass of knowledge includes general education about the ERP system for everyone from top management down to the end users before the begins. It includes a massive amount of end user training before and during as well as follow-up training after the. To make end user training success- 32 Industrial Management

9 ful, the training should start early, ideally before the begins. Executives often dramatically underestimate the training costs necessary for a successful ERP. Top management must be prepared to spend a significant amount of money on this training and incorporate it as part of the formal ERP budget because the full benefits of ERP cannot be realized until end users are using the new system properly. If the employees do not understand how a system works, they will simply invent their own processes using those parts of the system they know how to manipulate. It has been suggested that reserving 10 percent to 15 percent of the total ERP budget for training will give an organization an 80 percent chance of a successful. All too often, top management expects employees to be able to use the new ERP system effectively with only the education and training received before and during the. Yet, much of the learning process comes from hands-on use under normal operating conditions after the period is over. Thus, there is an ongoing need for a designated individual, preferably the team leader, to keep in contact with all system users and monitor the use of the new system. Periodic meetings of system users should be convened to help identify problems with the system and to encourage the exchange of information gained through experience and increased familiarity with the system. As problem areas are identified, post training should be immediately provided. For further reading Buchanan, G., P. Daunais, and C. Micelli, Enterprise Resource Planning: A Closer Look, Purchasing Today, February Davenport, T., Putting the Enterprise into the Enterprise System, Harvard Business Review, July Davis, B., and C. Wilder, False Starts, Strong Finishes, Information Week, Nov. 30, Langenwalter, G., Enterprise Resources Planning and Beyond: Integrating Your Entire Organization, St. Lucie Press, Ptak, C., and E. Schragenheim, ERP: Tools, Techniques, and Applications for Integrating the Supply Chain, St. Lucie Press, Stein, T., Making ERP Add Up, Information Week, May 24, Travis, D., Selecting ERP, APICS, June Volkoff, O., B. Sterling, and P. Nelson, Getting Your Money s Worth from an Enterprise System, Ivey Business Journal, September/October Your idea is sound, Wellmore. It s your thinking that is flawed. january / february