A Recipe and Ingredients for ERP Failure

Introduction

An Enterprise Resource Planning (ERP) system covers the techniques and concepts employed for the integrated management of businesses as a whole from the viewpoint of effective use of management resources, to improve the efficiency of an enterprise. They have many advantages both direct and indirect. The direct advantages include improved efficiency, information integration for better decision making, faster response time to customer queries etc. The indirect benefits include better corporate image, improved customer goodwill, customer satisfaction, and so on.

Many organizations and businesses in the world today as part of their strategic development plan, advocate for ERP solutions which would help to re-engineer their business processes in order to accomplish their long-term goals.

The ERP market is very competitive and fast growing market, which is attributed to three primary factors:

a) ERP vendors are continuing to expand market presence by offering new applications such as supply chain management (SCM), sales force automation, customer relationship management (CRM) and human resource.

b) To sustain their rapid growth, ERP vendors sell more licenses into their installed base.

c) While ERP originated in the manufacturing market, ERP usage has spread to nearly every type of enterprise including retail, utilities, the public sector and healthcare organizations.

Among the industry players include SAP (Systeme Anwendungen Produkte), Oracle, QAD, SSA, Jenzabar, Datatel, Peoplesoft, Baan, JD Edwards, Scala, Navision, Sungard just to mention but a few. Even within themselves they categorise each other into High-end and low-end range. In Kenya a cross section of companies are indeed on the warpath of undertaking or planning to invest in an ERP business solution. The future will see fierce battle for market share resorting to mergers and acquisition for strategic and competitive advantage.

There is much hype when the vendors are out to move their products, and will always sell and tell you about their success stories and how you will leapfrog into your vision. They never tell you of any failures of such ERP projects, and there seems to be no attention paid to lessons learnt from the famous FoxMeyer Corporation scenario, which lead to its bankruptcy and the lengthy legal battles in the courtrooms with their consultants thereafter. “My basic principle is that you don’t make decisions because they are easy, you don’t make them because they are cheap, you don’t make them because they are popular but you make them because they are right”- Theordore Hesburgh.

If not properly planned for, the investment may drive you out of business. The epicenter for the problems that rock the corporate world as far as ERP or in general IT project failure is concerned has remained the same over the years.

The following examples are typical of the projects that failed from statistics available from The Standish group CHAOS database

· The Hershey foods ERP system implementation failure lead to massive distribution problems and loss of 27% market

· The FoxMeyer drug ERP system implementation failure lead to the collapse of the entire company

· The IRS project on taxpayer compliance took over a decade to complete and cost the country unanticipated $50 billion

· The Oregon Department of Motor Vehicle conversion to new software took eight years to complete and public outcry eventually killed the entire project

· State of Florida welfare system was plagued with numerous computational errors and $260 million in overpayments

· AMR Corp, Budget Rent A Car, Hiltons Corporation, Marriott “ confirm” project crumbled having spend over $125 million over four years

· Snap-On Inc project to convert to a new order-entry costed the tools company $50 million in lost sales for the first half of 1998

· Greyhound Lines Inc. “Trips” reservation and bus-dispatch system” failed having spent $6 million

· Norfolk Southern Corp. “Systems integration with merger target Consolidated Rail Corp”. failed having lost more than $113 million in business

· Oxford Health Plans Inc. “New billing and claims-processing system based on Unix International and Oracle Corp. databases” resulted in hordes of doctors and patients angry about payment delays and errors.

· Universal Oil Products Project “ Software for estimating project costs and figuring engineering specifications” resulted in unusable systems

IT projects regularly fall short – and quite few are abandoned entirely. Many IT failures have to do with perceptions and expectations rather than absolute bankruptcy of purpose. Most of the so called failures are better classified as “discouraging successes” events wherein the major purpose is accomplished, but not without a good deal of frustration and inefficiency – and a sour taste in the mouth of many users.

Project risks

The FoxMeyer Corporation Delta III project had the following project risks

i) Environmental- the management had little or no control. They depended 100% on consultants and vendors who obscured them from gaining control. The focus of the project dramatically changed prompting the projects costs to escalate

ii) Execution- the project lacked skilled and knowledgeable personnel. FoxMeyer did not have the necessary skills in-house and was relying on Andersen consulting to implement SAP R/3 and integrate it with an automated warehouse system from Pinnacle. Over 50 consultants were inexperienced and their turnover was high.

iii) Scope- FoxMeyer was an early adopter of SAP R/3. After the project began, FoxMeyer signed a large contract to supply university health system consortium (UHC). This event exacerbated the need for the unprecedented volume of transactions on their HP servers which they could not cope

iv) Customer mandate – the commitment from the top management and users. This was not the case for some of the senior management. There was a morale problem among some of its warehouse workers. The pinnacle warehouse automation integrated with SAP R/3 threatened their jobs. With the closing of the three warehouses, the transition to the first automated warehouse was a disaster. Disgruntled workers damaged inventory, and orders were not filled, and mistakes occurred as the new system struggled with volumes of transactions

Project Factors

Factors that attribute to escalation of costs include but not restricted to

a) Project factors- there was a perception that continued investment could produce a large payoff. FoxMeyer expected a saving of $40 million annually.

b) Psychological factors- the consultants had prior history of success that encouraged them to continue the project. “we delivered an effective system, just as we have for thousands of other clients” (Computergram international 1998). This created the impression that the project would radically improve the company’s critical operations. FoxMeyer bit more that what it could chew but embarking on a fast track project with unskilled staff.

c) Social factors- the consulting company did not externally justify the project. De-escalating the project through abandonment would have meant bad publicity

d) Organization factors-The advocates for the project later were forced to resign because of the delays in realizing the projected savings. A change in management was needed in order to control the increasing costs – which was too late.

Recipe for failure

· When the management is not controlling the scope of the project especially when you expect the consultant to provide a magic bullet, is a recipe for failure.

· Changing the sails in midstream, by certain deliverables expected within a third of the documented times and volumes is a recipe for failure.

· By engaging in other corporate projects competing for the meager finances midway, is a recipe for failure

· By not having proper change management policies and procedures, is a recipe for failure

· By going for consultants without prior experience or ERP solutions in which you are the only company within your industry, could be a recipe for failure

· If you do not have a knowledge transfer inscribed in the consulting contract, is a recipe for failure

· If the vendor does not understand your business, is a recipe for failure

· If the project has no clear phases, deliverables and quality control components, is a recipe for failure

· If you have not re-engineered your business processes to be compatible with the capabilities of the technology, is a recipe for failure

· Having multiple vendors within the one project, is a recipe for failure

· Not having an external project audit committee, is a recipe for failure

· Not having a clear end-user training program to transfer skills to employees, is a recipe for failure

· Having the project run as a “one-man show”, is a recipe for failure

· Having the management over- committed (excessively ambitious, prompting unrealistic deadlines), is recipe for failure

· Team member not being accountable for actions, is recipe for failure

· Low morale within team, is recipe for failure

· Unclear statement of requirement, is a recipe for failure

· In no standard implementation methodology use, is a recipe for failure

· Inadequate requirements definition (current processes are not adequately

addressed), is a recipe for failure

· Poor ERP package selection (the package does not address the basic

business functions of the client), is a recipe for failure

· Inadequate resources employed by the client, is a recipe for failure

· Internal resistance to changing the 'old' processes, is a recipe for failure

· A poor fit between the software and users procedures, is a recipe for failure

· A bottom up approach is employed (the process is not viewed as a top

management priority), is a recipe for failure

· The client does not properly address and plan for the expenses involved, is a recipe for failure

· If any functional gaps have not been identified (GAP analysis), is a recipe for failure

· If the implementation does not take into account future technological convergence, is a recipe for failure



Conclusion

The lessons learnt from the failed ERP projects should be a wake-up call for corporations currently in ERP projects or contemplating to go that way. The lessons learnt can as well, serve as a harbinger for failure or bankruptcy by serving as the jetty for launching the rocket to propel you out of the business orbit. The experiences highlighted provide a litmus test on how to avoid ERP failure. There is one final aspect to be considered in any degree of project failure. All success is rooted in either luck or failure. If you begin with luck, you learn nothing but arrogance. However, if you begin with failure and learn to evaluate it, you also learn to succeed. Failure begets knowledge. Out of knowledge you gain wisdom, and it is with wisdom that you can become truly successful.



References

Alexis Leon, “ERP Demystified”, 2000

Judy E Scott, “The FoxMeyer Drugs Bankruptcy”, 2004

Kim watch “Future Watch”, 2000

Lloyd Rain “ IT Project Failures”, 2005

Computerworld “Top 10 Corporate Information Technology Failures”, 2000