ERP: Russian Roulette or High Caliber Initiative?

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Originally Posted On: https://libertyadvisorgroup.com/insight/erp-russian-roulette-or-high-caliber-initiative-2/

Worldwide IT spending is projected to total $3.9 trillion in 2021, an increase of 6.2% from 2020.1  For the better part of 20 years, packaged enterprise resource planning (ERP) systems have been big business. According to Gartner, the ERP software market grew 4% to a market size of $40 billion in total software revenue.2

CFOs have hastened digital transformation in response to the coronavirus and rank cloud enterprise resource planning (ERP) at the top of the list for information technology investment through 2024, according to a Gartner survey.3

Systematically integrating business functions into a streamlined application can provide greater operational efficiency, advanced data capabilities, and competitive advantages. Aging platforms and availability of new capabilities are also frequent investment drivers.

However, year after year, ERP initiatives prove to be a game of roulette, with unpredictable risks and rewards. Media reports are littered with accounts of high-profile disasters. For example, Lidl, a German-based global supermarket chain, halted its SAP implementation after a seven-year journey costing over €500 million.4

There are several factors that lead to considering an ERP initiative. Aging platforms, new capabilities, and lower operating costs are frequent investment drivers. Many executives attempt to solve inefficient business processes through the introduction of systematic improvements, but unless the business process design is addressed, simply throwing software at the problem seldom fixes it.

A CIO Magazine study concluded that more than half the executives surveyed are dissatisfied with the results of their ERP programs. Furthermore, significant numbers suggest the benefits of these programs are failing to meet expectations. Executives continuously see program costs and implementation durations exceed projections, while the business value realization is not always clear and measurable. Despite these findings, executives continue to invest in large ERP initiatives to avoid the risk of falling behind both technologically and functionally. This panicked decision can do more harm than good.  When companies change their ERP system, they make sizable investments that can be highly disruptive to the organization and run the risk of failure as the statistics suggest.

There are two common scenarios:

• 1. Companies try to force-fit their business process into the packaged application, limiting the process to the packaged software solution. This approach decreases the ability to differentiate that particular business process, potentially eliminating any competitive advantage in the market.
  2. Companies customize the packaged software to adhere to the existing business process. This can lead to complex solutions that fail or add a high maintenance cost to the final solution.

To reverse this trend toward failure, executives should consider working with partners who have proven expertise in ERP implementation, and can help decipher the available options, and determine readiness to embark on such initiatives.

Executives need a clear framework and appropriate controls to understand the trade-offs in requirements and design, and how decisions impact the business case and future operating costs. Properly contracting and managing the software vendors and implementation partners can accomplish this; however, many executives lack the implementation experience to anticipate the challenges ahead.  For this reason, an objective, experienced senior advisor is an essential part of the implementation team.

With an average ERP program implementation costing tens of millions of dollars, executive leaders are clearly eager to realize the cost savings and other benefits typically promised by ERP software vendors and service providers. Therefore, the development of a clearly defined business case is paramount. This should outline the expected benefits (increased profits, cost savings and new functionality), projected investment amount (time and capital), and predetermined progress metrics (project and value creation), along with operational metrics.

While return on investment can be used as a performance metric, more than half of ERP programs never recoup implementation costs or are not designed to measure value during implementation and after the project is complete. Organizations usually start out with a business case, but this is often disregarded shortly after the start of the program. If focus is not maintained on the agreed objectives, high cost overruns and late delivery become more likely.

When developing a business case, many companies underestimate the importance of executive sponsorship alignment. Companies also underestimate the technological and consulting costs, the change management requirements that accompany business transformation, and the effort required to review and change existing business processes.

Additionally, companies may fail to create a well-defined project charter outlining the strategic direction, and that is clearly embraced and understood by all stakeholders. Once funding has been procured, programs often move into the implementation phase too quickly in an attempt to realize benefits sooner. This can lead to objective misalignment between executive sponsorship and project leadership. Clearly outlining the project charter – including the intent of the program initiative, identification of key stakeholders and responsibilities, and a framework for determining business requirements – improves project direction, understanding and overall adoption.

Implementing an ERP system can certainly be straightforward and impactful, as long as the software selected is integrated properly with your business operations. Little can be gained from diving into a project of this magnitude without a clear understanding of the potential risks, what is required to successfully complete the project, and potential post implementation investments required. Companies must realize that ERP programs should be a business transformational initiative; the belief that simply conforming the business to the software, or vice versa, has led to many ERP failures.

A committee that contains IT, business, and financial leadership should spearhead the creation of the business case. This will ensure input from key stakeholders, as well as creating mutual accountability among them. Outlining the desired benefits from each team and how those benefits will be realized in collaboration is critical to the overall ERP benefit realization.

Clearly identifying the challenges that can be remedied by implementing an ERP system is essential to increasing your odds of success – along with alignment on product selection criteria, key decision protocols, and program governance.

In addition to financial details, the business case should address:

• • How the combination of IT and business process changes will realize the desired benefits
  • What critical resource capabilities and commitments are required to achieve success
  • The process and frequency for review to ensure that the trajectory and completion of the project adhere to the benefits outlined in the business case.

A critical point in the ERP program lifecycle happens before the project even begins: selection of the software vendor and system integration partner. As previously indicated, the business case should predetermine the product and implementation partner selection criteria. Factors such as technical fit, total cost of ownership, and service reputation should all be considered in this selection framework.

In most cases, the software selection decisions fall on IT managers, who may in fact lack ERP implementation experience. As a result, software vendors and consulting companies enter the picture as the educator to the decision makers, often with a bias towards a particular software package and/or service capability. While product providers and system integration firms are typically dedicated to providing high value to their customers, their sole purpose does not end with a successful ERP delivery. Application outsourcing, product maintenance support, and license renewal agreements have recently become vital components to these companies’ revenue stream.

Furthermore, with the widespread allegiances between software vendors and system integrators, companies are seldom receiving truly independent advice on key business decisions. The service providers have organizationally aligned to the software packages, making their consultants experts in configuration for that particular packaged application, but this does not make them experts in your business or business capabilities.

Perhaps one of the most discussed controversies with implementing an ERP system is the topic of customization vs. out-of-the-box functionality. Studies show that less than 30% of companies implement “vanilla” ERP software. Conversely, heavy customization is prevalent in nearly 40% of organizations. Based on this realization, software providers over the last decade have developed industry specific packages, config “starter kits,” and extensive cloud solutions with greater config options to better fit their customers’ needs and drive down, and sometimes eliminate, the need for customization.

Customization adds significant risk and complexity to a project, increases the difficulty of future upgrades, and deviates from the solution best practices created within the software. More importantly, heavy customization can be seen as a symptom of discrepancy between the software selected and the businesses requirements, which are most likely differentiating in the market. While it is certainly possible that heavy customization was intended from the onset, a lack of program governance and experience most likely contributed to these statistics.

Without a well-defined business case and strong project controls, customization requests are often implemented without rationalization of impact and exploration of existing core functionality solutions. Proper analysis and prioritization of customizations should outline the benefits achieved – such as cost or unique competitive advantage – that cannot be obtained via work-arounds in the system.

Furthermore, project metrics need to be aligned at the onset of the project to measure and manage progress towards the operational goals set out in the business case. This is critical in order to gauge project progress, as well as post-implementation success.

“What gets measured gets managed” is often true if management helps define and understands the data they are receiving. The ability to allocate and redirect resources and remove obstacles to progress in real time is vital to preventing project delays. This means that executive and management alignment on these factors is critical from the beginning of the program.

Executives should utilize the business case as more than a one-time exercise to secure project funding.  This should be revisited throughout the life cycle of the program to validate project design, help establish key milestones leading to the implementation phase, and track progress towards targets for post-implementation performance. Using the business case as a value tracker and decision-making toolset throughout the project can be vital to ensure achievement of the initially proposed benefit. All solution modifications and enhancements identified throughout the project should clearly adhere to business case objectives. Updating the business case throughout the project lifecycle should be a consideration as multi-year ERP programs can witness a series of dynamic business changes.

Despite hiring a consulting firm to manage the software installation, configuration, and integration, companies should maintain control of its business processes. There is a recurring misperception that technology can solve or resolve business process inefficiencies. As a result, the transformation of business processes is often underappreciated and underestimated.

Before starting an ERP project, it is essential to evaluate your organization’s ability to take on the initiative. Organizations may be willing to spend millions on software licenses, hardware, and consulting fees, but fail to foresee the internal abilities and investment required. Consulting companies naturally practice the art of “entrenchment,” where a company may be left with no choice but to rely on them for continued support and future enhancements. Executives will typically outline where they believe they will maintain organization control, but this frequently falls to the wayside.

Our clients find that there is a considerable difference between hiring an IT consulting company to implement their ERP solution and bringing in Liberty as an objective advisor. We act as your partner in the truest sense of the word – with your company’s interests top of mind at all times. Our extensive experience in ERP, as well as other facets of critical business initiatives, gives us a unique perspective.  We offer project oversight and engage in management responsibilities along with our clients.

Each of our successful ERP case studies shares many of the same features: reduction of business risk, maximizing business value, and an overall alignment to our client’s long-term goals. Having course-corrected dozens of projects in challenging situations, we have gained unmatched insight into the pitfalls of ERP.

If you are considering an ERP initiative – or are already in one and need guidance – please reach out to Liberty. We will make sure you don’t play a game of chance.

Liberty Advisor Group is a goal-oriented, client-focused, and results-driven consulting firm. We are a lean, handpicked team of strategists, technologists, and entrepreneurs – battle-tested experts with a steadfast, start-up attitude. We collaborate, integrate, and ideate in real-time with our clients to deliver situation-specific solutions that work. Liberty Advisor Group has the experience to realize our clients’ highest ambitions. Liberty has been named as Great Place to Work, to the Best Places to Work in Chicago, and to FORTUNE’s list of Best Workplaces in Consulting and Professional Services.