White paper Why ERP fails at Enterprise Project Management
Content Study Results... 2 Risk, Cash Poorly Managed... 5 Conclusion... 6 About IFS... 8
Why ERP fails at Enterprise Project Management By Mike Lorbiecki Vice President of Sales IFS North America When it comes to specific needs to be satisfied by enterprise software such as enterprise resource planning (ERP), not every company is created equal. A manufacturer with predictable, repetitive processes may find a broad spectrum of software offerings that can meet their needs. But some companies, like engineer-to-order manufacturers, engineering procurement and construction contractors, and even process manufacturers find their situation so demanding than even tier one ERP products cannot meet their needs completely. One area that frequently is left wanting is project management. Because ERP came from the world of materials planning for repetitive manufacturing, these applications cannot address the more anecdotal, complex, and dynamic requirements of real-time enterprise project management. At least that is generally the sentiment we at IFS North America encounter in our interactions with executives at project-centric companies. And that is also the conclusion of a recent study IFS North America conducted with help from Mint Jutras Principal Analyst Cindy Jutras. Among the study s key findings: While the use of set projects to manage tasks and procedures is a necessity for 85 percent of study respondents, 39 percent have no integration between their project management software and their ERP or other enterprise system. The ability to control processes in real time correlates directly with better integration between project management functionality and ERP. The best results stem from running an ERP application with embedded project management functionality, which is a rarity. Risk management is one of the major gaps left by existing ERP solutions used by project-intensive companies. This ought to concern company stakeholders and owners as they are exposed to financial risk as well as potential legal repercussions they cannot predict or mitigate. 1
Study Results In September 2012, IFS North America conducted a study among manufacturing executives and professionals of middle- to large-market manufacturers to better understand how well current ERP options meet the needs of companies in projectdriven industries including engineer-to-order manufacturing, aerospace and defense manufacturing. engineering, procurement, and construction contracting, and assetintensive businesses such as batch process manufacturing. We surveyed more than 200 executives with industrial companies having more than $100 million in annual revenue. We then ran frequencies on the data to identify the companies with more complex, project-centric business models. This included companies engaged in engineer-to-order manufacturing, companies delivering projects as an engineering, procurement, and construction contractor, and those involved in batch processing, and thus the enterprise asset management of process manufacturing plants and equipment. It becomes clear, reviewing the data, that exposure to projects enters an organization in two different ways. Either the company relies on projects as part of its product delivery system, or it relies on projects as a way to manage its capital assets. Engineer-to-order manufacturers and engineering procurement construction contractors are examples of the former. They are involved in short-run or one-off projects where the administrative and management overhead costs normally counted as overhead must be accounted for and managed just as aggressively as materials and manufacturing or fabrication costs. Process manufacturers are an example of the latter. They plan, construct, and then maintain process manufacturing plants and equipment to yield a return over a period of years or decades. That entire asset lifecycle may be considered as a project that needs to be managed on a macro level. But on a micro level, there are numerous equipment installations, refits, overhauls, and plant shutdowns that require aggressive project management to control cost, ensure a successful outcome, and limit business disruption. Many other manufacturers, according to the study, find that their product lifecycles are short enough that they, too, are best managed as projects would be. The conception, engineering, design, prototyping, and product launch cycle may come frequently enough that they represent a significant portion of the cost of a given product or product line. Again, for these manufacturers, project management is required at both the macro and micro levels. 2
Very few executives in this study reported having substantial integration between project management functionality and their underlying enterprise application. Another fascinating revelation coming out of the IFS study was the direct relationship between the degree of integration among project management tools and the underlying enterprise system. Without exception, important project elements are better controlled when there is tight integration between systems used to manage both the projects and the rest of the enterprise. It is not hard to imagine why this is the case. If a company is using a stand-alone piece of project management software, that system may have quite limited functionality, such as really only being a way to display project data visually across a Gantt chart, or more proactively track project deliverables. But if the system for managing projects is removed from the enterprise system that actually drives the completion of that work and the reporting of project results across functions like purchasing, maintenance, engineering, and manufacturing or fabrication, real-time visibility and control is hampered. The fact that 39 percent of respondents had no integration between their project management and ERP systems and only 4 percent use a module of their ERP as part of their project management solution would suggest that there is a great deal of room for improvement when it comes to the use of enterprise project control. If anything, the fact that just 4 percent of respondents overall reported using a module of their enterprise application for project management seems quite high given what we know about the project management functionality available from major enterprise software vendors! Whether an enterprise handles projects through a fully integrated suite or a separate order administration or manufacturing system of record, there must necessarily be at least some integration with project management functionality to avoid work being performed on outdated revisions, duplicate data entry, schedule slip, and unpleasant surprises that can threaten profitability. 3
The length of projects a company is involved with naturally contributes to the problems they may experience trying to run separate project management and enterprise software. The longer the duration of the project, the more complex it likely is and the greater the need for integration with things such as advance ordering of long-lead time items, subcontractor billing and subcontract management, progress billing, and cash flow management. In some cases, projects run by study participants are fairly well contained at less than a month long. However, most engineer-to-order environment respondents are involved in projects of between one and six months. The high percentage of engineer-to-order manufacturers reporting that they do not use a project management system was surprising. How are they successfully managing months-long projects without one? Despite this involvement in months-long projects, engineer-to-order manufacturers seem to still mainly be using desktop applications to manage projects, which really drives a wedge between project planning and critical management functions like finance, manufacturing or fabrication, customer relationship management, etc. This can fragment data by pulling it out of the shared enterprise environment. Use of Microsoft Project to manage projects is prevalent among study respondents. There is an enterprise-level version, but the vast majority of Microsoft Project use is in a desktop configuration. Microsoft Excel, the universal spreadsheet management tool, is also heavily used (see the earlier IFS study, Does ERP Mean EXCEL Runs Production?). The key to using Excel without creating silos or islands of data is to integrate it with enterprise applications so the enterprise data can be shared through Excel while it still resides in the ERP system. Once an Excel spreadsheet exists wholly outside of the enterprise software environment, managers are at risk of making decisions based on bad data, or the enterprise application may cease to be the true system of record. 4
Risk, Cash Poorly Managed Projects involve risk more risk than repetitive processes that are more predictable and easily controlled. And while risk management may be intuitively associated with assuring on-time and under-budget project performance, in many companies and industries it also has implications for performance against contractual commitments as well as protection of the environment and mitigation of safety risks, factors not often managed in stand-alone project management software systems. Study results also show that areas of risk apart from budget and timeline are less effectively controlled in enterprise software than concrete factors like cash, machines, and materials are. While 78 percent of respondents can control schedules in real time and 76 percent can control costs, a much smaller percentage can manage risk in real time. Risk management and cash management are the biggest gaps in existing ERP solutions. Even with full or embedded integration between projects and ERP systems, only around half of respondents can control these two variables. Among respondents reporting full integration or embedded project control within their ERP system, the ability to control the cost and schedules increases into the high 80th or even the 90th percentile. With this tighter integration, the ability to manage materials, human resources, machinery, cash, and risk is held by half to two-thirds of respondents. But risk management is the least supported project need, even with full integration between project management systems and existing ERP systems. It is also not surprising that cash management is poorly handled by existing project ERP configurations. To manage cash in real time in a project environment requires very thorough integration indeed, as contract management, purchasing, and other functionality plays a role in determining committed cost, the degree to which firm obligations or purchases have been made with regard to project expenditures. Very few applications can track committed cost. 5
Conclusion The data from the IFS study ought to be of interest to the management of any company that relies on projects as a core business discipline. And since more and more manufacturers are either already performing projects or plan to expand into manufacturing modes that rely on projects rather than repetitive make-to-stock (see earlier IFS study), the project-focused organizations make up a broad swath of the industrial sector. Years ago, analysts and software vendors, including IFS, created a new category of enterprise software called project-based solutions (PBS). These applications originate not so much from the world of materials requirement planning (MRP) in the automotive industry, but from project-oriented industries involving capital projects. In an enterprise selection cycle, a company ought to ask the vendor hard questions regarding the degree of project functionality built directly into the application functionality and the degree to which this functionality relies on integration between a stand-alone project management tool and the enterprise application. As the data in this study attests, companies running ERP systems with built-in project management functionality can expect more favorable results and a higher degree of control than those who are running these functions on separate and distinct pieces of software. Mike Lorbiecki is Vice President of Sales at IFS North America, Itasca, Ill. He has held sales management positions with the company since 2000, and holds a degree in finance from the University of St. Thomas in St. Paul, Minn. Download a copy of this study on IFS web site, here. 6
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About IFS IFS is a public company (OMX STO: IFS) founded in 1983 that develops, supplies, and implements IFS Applications, a component-based extended ERP suite built on SOA technology. IFS focuses on agile businesses where any of four core processes are strategic: service & asset management, manufacturing, supply chain and projects. The company has more than 2,000 customers and is represented in some 60 countries with 2,800 employees in total. More details can be found at www.ifsworld.com. For further information, e-mail to info@ifsworld.com Americas....+1 888 437 4968 Argentina, Brazil, Canada, Mexico, United States Asia Pacific... +65 63 33 33 00 Australia, Indonesia, Japan, Malaysia, new Zealand, Philippines, PR China, Singapore, Thailand Europe east and central asia...+48 22 577 45 00 BALKANS, Czech Republic, GEORGIA, Hungary, Israel, KAZAKHSTAN, Poland, RUSSIA and cis, Slovakia, Turkey, UKRAINE Europe Central...+49 9131 77 340 AUSTRIA, Belgium, GERMANY, ITALY, netherlands, SWITZERLAND Europe West...+44 1494 428 900 France, Ireland, Portugal, Spain, United Kingdom Middle East and africa................................................+971 4390 0888 India, South Africa, Sri Lanka, United Arab Emirates Nordic...+46 13 460 4000 Denmark, Norway, Sweden Finland and the Baltic area.... +358 102 17 9300 Estonia, Finland, Latvia, Lithuania www.ifsworld.com This document may contain statements of possible future functionality for IFS software products and technology. Such statements of future functionality are for information purposes only and should not be interpreted as any commitment or representation. IFS and all IFS product names are trademarks of IFS. The names of actual companies and products mentioned herein may be the trademarks of their respective owners. IFS AB 2013 En4827-1 Production: IFS Corporate Marketing, February 2013.