Reasons For and Against
Enterprise System Adoption
Enterprise Architectures Conference
David L. Olson
Stockholm, 28 October 2004
Enterprise Systems (ERP)
• A tremendous success
– Enable firms to more efficiently
• Integrate data
• More timely reports needed for
decision making
• Improved processes lead to more
efficient operations
– One of the most profitable
software implementations
And yet…
• 65% of executives believe ERP can be harmful
(Sarkis & Sundarraj, 2003)
• IT investment is often wasted (Garry Lowenthal, CFO of
Viper Motorcycle Co – Millman 2004)
• Only a small minority, 10%, believe they are
achieving a high return on technology
investments (annual survey of financial executives, FEI &
Computer Services Corporation – Millman 2004)
• Only a select few companies have gotten value
out of their ERP implementations, and those are
world-class companies (David Hebert, The Hackett Group
– Millman 2004)
Millman (2004)
• ERP is notoriously over-sold and
under-delivered
• ERP is the most expensive but
least-value derived kinds of
implementation (Scott Phares, VPbusiness services, Business Engine)
• When a lot of ERP investments
are made, there wasn’t a
business case built (Brian Zrimsek,
The Gartner Group)
Notable ERP Failures
• 1999 Hershey Foods Corporation had 19% drop in 3rdQuarter profits, 29% increase in inventories – problems
in $112 million ERP (Motwani et al., 2002)
• City of Oakland – paycheck problems from $21 million
ERP project (Motwani et al., 2002)
• Miller Industries - $3.5 million operating loss in 4thQuarter 1999 from ERP problems (Motwani et al., 2002)
• WW Grainger Inc. - $11 million reduction in operating
earnings after ERP implementation (Motwani et al., 2002)
• FoxMeyer Drug bankruptcy through ERP (Ehrhart, 2001)
Carton & Adam (2003)
• Four Irish ERP implementations in
manufacturing
– Each had international operations
– ERP for supply chain efficiencies
• Pain of Learning
–
–
–
–
Require unlearning old ways of working
Changes often imposed rather than designed
Integration of data led to centralizing ownership
IT support often centralized to reduce cost
• Responsibility for accurate data entry at subsidiary
– Changes balance of power, usually centralizing
Overview
• Multinational ERP Issues
– Business Process
Reengineering
– Federalism/Customization
– Supply Chain
Issues/Outsourcing
– Lessons Learned
– Conclusions
• Social issues from
– Network Society
– Emergence of Systems
– Future expectations
Business Process Reengineering
Millman (2004)
• Brian Zrimsek, The Gartner Group
– “The value isn’t in the system, but in what you
change.”
• Mitch Spitzer, VP GreenPoint Financial Corp.
– “It wasn’t Oracle that got us the savings, but rather
the reengineering of existing business processes,
most through elimination of systems, reduction of
headcount, streamlining processes.”
BPR Problems Reported:
4 Cases
Study
BPR Problems
Suggested Resolution
Al-Mashari
& Zaire
(2000)
Anxiety from job reduction
Scope & focus creep
Communication needs
Technical mindset
Communication
Project milestones
Newsletters, e-mail, Web
Focus on business value
Motwani et
al. (2002)
Projects out of control
Sarkis &
Sundarraj
(2003)
Initial productivity dip
Planned for
Yusuf et al.
(2004)
Match process to software
Data cleanup
Training
Communication with users
Bridge legacy systems
Plan, focus on value
BPR & Multinationals
• The need to reflect different costs of doing
things may change best practices by
country
• Different legacy practices exist across
countries
• Regulations impose different constraints
• Cultural resistance to change may vary
Federalism
Davenport (1998)
• Different elements of the organization have their
own ERP versions
– Linked together at a high level
– Enable elements to cultivate unique competitive
advantages
– Regional units tailor operations to local requirements,
local regulatory structure
• Implemented by:
– Monsanto
– Hewlett-Packard
– Nescafe
Customization
Millman (2004)
• Ken Stoll (partner, Accenture)
– “Taking a firm line on customization is one of the most
effective ways to control ERP cost and maximize
value.”
• Plan $6 million, but $20 million customization
• Paul Janicki (global finance director, Dow
Chemical Co.)
– “Dow one of first adopters of SAP, customized
extensively, held off upgrading. SAP is discontinuing
support, Dow faces difficult decision.”
Tradeoff
• Federalism vs. Customization
• Federalism provides flexibility to meet local
needs
– Multinational subsidiaries have local
requirements
• CUSTOMIZE
– Customization is very risky & expensive
Supply Chain Factors –
Multinational ERP
• Multinational organizations inherently involve
supply chains
– Link suppliers, customers
• A great deal of value in open systems
– A major ERP trend since 1999
Supply Chain Successes
• Texas Instruments (Sarkis & Sundaraj 2003)
– Web ability key factor in enterprise system
• Over 70% of external transactions electronic
• Reduced customer order costs
• Had access to global information in real time
• Rolls Royce (Yusuf et al. 2004)
– Integrated supply chain activities
Supply Chain Benefits
Goutsos & Karacapilidis (2004)
Benefit
Comments
Improvement of buyersupplier relationship
Web-based platform
facilitates early supplier
involvement
Coordinate resources,
synchronize work
Reduction of production
costs
Inventory management
Balance carrying costs
and acquisition costs
Open System Effectiveness
Ash & Burn (2003)
• B2B - business
– Efficient sourcing of standard components
– Efficient asset leverage in business network
– Create new competencies through alliances
• B2C - customer
– Remove product/service delivery
– Product/service customization
• B2E - expertise
– Maximize individual experience
– Harness organizational expertise
– Leverage community expertise
Multinational ERP Supply Chain
Conclusions
• Multinational organizations naturally
involve supply chain coordination
– Web linkage can tie non-ERP systems
together
– Gain from EDI
• Inherent security problem
– Technology exists to cope
Outsourcing
• Supply chain participation brings in many
smaller organizations
– May not have had their own ERP
– Forced to conform to core business ERP
• “For smaller companies, the only way to
reap fruits of globalization may be through
outsourcing.” Paul Janicki, global finance director,
Dow Chemical Co. (Millman, 2004)
Outsourcing ERP
• When a large organization implements
ERP, they often hire consultant to operate
it
– Texas Instruments: transferred 250 IT
personnel to Andersen Consulting
– Rolls-Royce: transferred IT development to
EDS
• While not called outsourcing, in effect it is
– Technical difference – ownership of platform
and rental of software
Beulen & Ribbers (2003)
• Asian discrete manufacturing
– Locally managed subsidiary of European country – 5year outsourcing contracts in 1998
– Operated assembly & testing in 3 countries to access
lower wage costs
– Lacked experience in client/server systems
– Transferred 17 IT employees to services supplier
• Kept 8 for IT strategy & functional specifications
– Problem:
• Lack of IT sophistication in low-wage work force
• Still improved competitive position
Huin (2004)
• More small to medium-sized enterprises in
Southeast Asia involved in supply chain
operations
• More outsourcing ERP
– Heavy investment too risky
– Forced to purchase from approved vendor
lists
– Forced to use customer document formats
Multinational Outsourcing
• Large multinationals likely to have own IT
– Better to retain control
– Still often use consultant to operate
• Smaller participants in supply chains (or
smaller firms operating independently)
– Need to hire expertise
– Application service provider risk
• Reduces risk of vendor upgrade
• Introduces risk of ASP stability, pricing
Lessons Learned
Lesson
4
firms
Business case
X
Benchmark
X
Align w/strategy
X
Tex
Inst
Rolls- 2
Royce firms
X
X
Data cleanup
X
Mid-course correction
X
Training
X
Metrics
X
X
X
X
Business Cases
• Mabert et al. (2001); Olhager & Selldin (2003)
– Formal financial methods often not used
– Cost data unreliable
– Benefits unpredictable
• Cases indicate business case lacking
– Texas Instruments did, but included intangible
• Web access for supply chain
• Consolidation of independent IS programs
• Improved inventory accuracy
Survey of Manufacturers
Mabert et al. (2000); Olhager & Selldin (2003)
FORMAL
METHOD
ROI
Use in US
53%
Use in
Sweden
30%
Payback
35%
67%
Expected NPV
15%
12%
Other
11%
20%
Critical Success Factors
Reimers (2003)
• Job security a significant factor
– Resistance has sabotaged a number of cases
• Top management involvement needed
– Leadership rather than imposition
• Teamwork required
• Team member qualifications critical
• Avoid customization
Importance of Training
• Training traditionally under-budgeted
– Typically 6% of budget; 11% of actual
– If do not customize, training even more
important
• Force employees to learn new methods
• The cause of the “1st year dip”
• Those who learn stay; those who don’t leave
(the source of ERP savings)
Multinational Training Factors
• Multinational subsidiaries have labor
forces with varying computer skill
background
– BPR: automation replaces labor
– If labor skill high (or if cost lower),
less reason to automate
– The greater the regulatory variation (or
cultural factors of doing business),
the more need for local labor
CONCLUSIONS
• ERP systems very valuable
– BPR provides improved methods
– Open systems provide greater supply chain
efficiency
– Federalism can satisfy local requirements
• Need to balance with cost of customization
• ISSUES
– Vendor manipulation
– Application Service Providers
FUTURE
• We live in a Networked Society
– Castells
• Systems emerge
– Maturana & Varela; Steven Johnson
– Systems naturally emerge without plan
• These emerging systems are beyond
control
– SAP, Microsoft, economies, politics
– unknown future systems
• At best, we can be flexible, prepared
for change