Sunday, August 28, 2011

Twenty Years of ERP Lessons Learned

I gave a keynote presentation last week at the Manufacturing ERP Experience conference in Chicago. You can watch the full presentation by clicking on the image to the right.

Because the primary attendees were end-users and prospective buyers of ERP systems, I wanted to share something on current ERP trends and best practices for success.

But this presented a challenge: I've been speaking about ERP for over 20 years. How would a presentation on this subject be different today than one I would have given 20 years ago?

So, during the keynote, I thought of at least three ways in which ERP is different today, and one way in which it is still the same.

ERP as a Platform

Twenty years ago, ERP was viewed, in effect, as the final destination. For example, CRM was not yet popularized (Siebel was founded in 1993). In most companies, business intelligence was limited to report-writing or custom-built data warehouses. Mobility apps and collaboration systems were a long way off in the future. Even email was not well-established in business communications. So, ERP was where most of the action was, especially in the manufacturing sector, where it has its roots.

Although ERP was a hot topic in the early 1990s, today we understand that ERP really doesn't do all things equally well. Even the acronym "Enterprise Resource Planning" (an evolution of "Material Requirements Planning" and "Manufacturing Resource Planning" systems of the 70s and 80s) is a misnomer. ERP is not primarily a planning system, it's a transaction processing system. Its benefits are primarily in standardizing and automating business processes. To perform what-if planning, or to understand trends hidden in the data, or to gain a 360-view of customers, for example, you need to go beyond ERP.

Does that mean ERP is just one of many investments that an organization can choose to make in enterprise systems? Not at all. ERP plays a unique role in the applications portfolio, as the foundation for so many other things that organizations want to do.

Sure, you can go out and implement CRM as a standalone system, but CRM works better when it is integrated with ERP for end-to-end business processes. Some organizations have implemented supply chain management without ERP, but SCM is more powerful when it builds upon ERP as the system of record. Likewise, business intelligence systems, collaboration systems, and mobility apps add more value when they have ERP as their foundation.

Today, ERP is critical as the transaction processing hub of the organization and the system of record for major organizational entities, such customers, suppliers, people, orders, and accounting entries. In many respects, we can think of ERP as the new IT infrastructure, as a standard platform for building out the rest of an organization's enterprise applications portfolio.

Recognition of the Risks of ERP

The second way I think things have changed is in how organizations perceive the risks of ERP. Everyone has read about he horror stories of failed ERP implementations. Names like Hershey, Waste Management, and Nike are well-known examples. Many times the understanding strikes closer to home: most business leaders by now have either experienced for themselves, or heard from their peers, what can go wrong with an ERP implementation.

This wasn't the case 20 years ago. Executives often believed the hype of software vendors who claimed that implementation could be rapid or painless, or that business leaders could go about their jobs while the vendor, or a systems integration partner, did the hard work for them.

Very few executives believe this any more.

General Acceptance of Key Success Factors

Similarly, twenty years ago, executives were quicker to believe that new software could solve their problems, or that systems could be customized to match how the organization did business in the past. ERP projects were often viewed as "computer projects," not business projects.

Today, I find that business leaders have a better understanding of best practices for successful ERP implementation. They realize that ERP means changing now the organization does business. They usually recognize that top management needs to be committed and that it will require participation by all affected functions. They often realize that it is best to pick a system that fits the business, and as much as possible to avoid customizing software code.

But Outcomes Have Not Improved

So, if ERP plays a critical role, and executives understand the risks and best practices, then organizations must be more successful with ERP today then they were 20 years ago, right?

Sadly, I don't think this is the case. According to our 2011 survey, 38% of ERP projects exceed their budgets for total cost of ownership. Furthermore, as I indicated in my keynote, the risks of ERP go beyond cost overruns: ERP is particularly subject to functionality risks (the project was within budget, but the system doesn't satisfy key requirements), adoption risks (the project was within budget, but the organization is not fully using it), and benefit risks (the project was within budget, but the expected benefits are not realized).

So, what is the answer? The answer is that business leaders need to be reminded again and again about these lessons learned, and they need to execute on these best practices. So, while I could have given (and did give) much of this presentation 20 years ago, the lessons are still relevant.

You can watch a video excerpt of my presentation at the top of this post. The complete presentation is also available on Youtube. And, if you'd like a copy of the slides, please email me. My contact information is in the right hand column.

Related Posts

Four problems with ERP
Solving the four problems with ERP

Thursday, August 11, 2011

IT Budgets vs. Tech Industry Spending: What's the Difference?

According to our research at Computer Economics, we reported that 2010 IT budgets showed no growth at the median. At the same time, IDC reported the global IT market grew by 8%.

So which is it?

Over the years, I see a lot of confusion between these two metrics, so let's start with some basic definitions.
  • IT Budgets: This is the view from within an IT organization, of all IT-related spending.

  • Tech Industry Spending: This is the view of the technology industry and the investor community, of the total market for technology-related products and services.
As you can see, these are related but entirely different measures. Unfortunately, many industry observers refer to both of these metrics as "IT spending."

So, What's the Difference?

Even though much tech industry spending comes from corporate IT budgets, tech vendors have a lot of revenue that comes from outside IT budgets. Furthermore, corporate IT budgets contain quite a bit of spending that does not go to tech vendors. Here are the big three differences.
  1. Consumer tech spending. Not all tech industry revenues come from corporate IT buyers. For example, Apple just surpassed Exxon as the world's largest corporation, by market cap. How much of Apple's revenues are derived from consumer tech spending vs. business IT spending? Surely, the majority. Microsoft has a much stronger business focus, but still a large percentage of Microsoft's revenues are consumer-related.

  2. Corporate IT spending outside the IT budget. Not all corporate IT spending is in the corporate IT budget. The percentage varies by organization, but typically 20-50% of what could be considered "information technology" spending can take place under departmental budget authority. Some of this is "rogue spending," for example, when a sales group buys a few seats of, without approval or oversight from the IT department. But a lot of it is by design. For example, in most manufacturing companies, spending on computerized machine tools is entirely within the manufacturing operations budget. Such machinery has an enormous amount of computing power and there is typically an entire group within manufacturing devoted to programming these machines. But the machines themselves and the staff members that program them are typically outside the IT budget.

    Similarly, as my friend Vinnie likes to point out, products in nearly every industry today are becoming "smart products," with embedded computing power--not just automobiles, but even washers, driers, and refrigerators have IT capabilities. Do you think the technology spending that goes into designing and building products is under the manufacturer's IT budget? My observation is, almost never. Such spending accrues to the benefit of Intel, Cisco, and other tech vendors, but it is outside the corporate IT budget.

  3. IT budgetary lines that are not tech industry spending. Finally, not everything in the corporate IT budget goes to technology vendors. The biggest item, of course, is personnel costs. Typically 40-50% of the corporate IT budget goes toward salaries of internal support staff, such as programmers, data center personnel, network personnel, and managers. Microsoft, Intel, and Cisco never see that money. So, right off the top, half of the IT budget does not show up in tech vendor revenues.
In addition, there are other corporate IT budget line items, such as facilities, power and utilities, and supplies that are typically not technology-related. Therefore, these show up in IT budget trends, but not in tech vendor market statistics.

When to Use Each Metric

Each of these measures is useful, but for different purposes. If you are a corporate CIO, you are interested in how your organization's IT spending compares against other, peer, organizations. You would like to know how your IT spending and staffing levels and their mix compares against industry standards. Therefore, you are really focused on IT budget metrics. Though they may make interesting reading, reports of tech industry revenues are not your primary focus.

On the other hand, if you are a technology vendor or an investor in the technology sector, you are really interested in how tech industry spending is expanding or contracting. You would like to know about overall tech industry revenues, and you would really like to know specifically about spending forecasts in the market you compete in. You are not interested in the typical corporate IT budget, unless your products or services are highly focused on that market.

What about consultants? If you are a consultant to IT organizations, your interest should be on IT budgetary metrics. Conversely, if you are a consultant to IT product/service providers, you probably want to focus on tech industry spending metrics.

So, when you read reports about IT spending trends, understand the context. Is the report referring to the IT budgets within user organizations, or the revenues of technology vendors? Those are two different things.

Related Links

The IT Spending Recovery and Implications for Enterprise Software
IT Spending and Staffing Benchmarks 2011/2012
Computer Economics IT Spending and Staffing Custom Benchmarking