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


Si Chen said...

Thank you for taking the time to summarize the last 20 years for us like this. It's great to see it all from a broad sweeping perspective: as ERP has become more commonly adopted, it has become an essential part of the infrastructure instead of the Holy Grail/magic bullet.

Will you be doing a piece on where we go from here? I think that'd be really interesting and would love to compare notes with you.

Jon Reed said...

Frank - I've been meaning to post a comment on this piece since you posted it. I watched the longer 40 minute presso and I think you nailed both why ERP has had staying power within companies and why cost of ownership/implementation remains a very serious issue. Excellent work.

I did have a few comments. An additional risk I see that maybe you would classify underneath one of your stated risks is "integration risk." Most ERP customers run heterogeneous environments and I see continued expense and headaches integrating systems from multiple vendors that haven't always made that integration easy. Open standards are helping here but there's still no guarantees that after your ERP upgrade your integration with other enterprise systems will be smooth and transparent.

One change I do see from ERP twenty years ago ties in with your observation that ERP buyers are savvier. I think this is true and one aspect of this is far better networking via user groups and online communities. Also better access to "best practice" research through firms like yours and many others. This has created a savvier buyer that may not be able to avoid all mistakes and cost overruns but has a much better chance of avoiding being the next headline ERP project failure.

In my view the health of ERP in the next ten years will prove out based on how easy it is for companies to build out collaborative "networked" business models on top of their ERP systems and create new extensions on top of the ERP back end, whether via mobility, on-demand, etc. Add to this embedded analytics and much more sophisticated predictive models drawing on the transactional data. I still think the big on-premise ERP vendors have a long way to go here though they all seem aware of both the threats they face and the value they have yet to fully deliver.

One more point you made I'd like to hammer home is that I'd like to see more ERP customers bringing in an independent auditor/voice in two different flavors. SIs in general have improved in terms of not leading customers down dead end "milk the cow" relationships, but I believe an independent project auditor with deep ERP experience needs to be brought into the mix on a regular basis to gut check the project status and advise on issues like scope creep, documentation and user adoption issues, etc.

I would add another flavor of independent that can be very valuable: the hands-on subject matter expert. Most ERP projects these days resemble focused extensions more than big greenfield projects. So bringing in a subject matter expert with deep project experience in the tools being used is important. Sometimes the SI can provide this and sometimes that expertise is available internally, but in many cases, it pays off to have an independent voice that understands intimately the potential gaps between the functionality the customer expects and what the ERP software can deliver. This is particularly important in terms of your key point of avoiding excessive customization. Often there are configuration options that provide an alternatives to code customization that true hands-on expert is aware of - those who don't live and breath the software often don't have a clue about that. This is certainly true in SAP where much of the configured functionality is underutilized partially because an expert in that area has never had a chance to look under the hood and point out the possibilities.

- Jon

Frank Scavo said...

Jon, you've lived through much of the pain and suffering of ERP in the past. Your comment greatly expands on the lessons learned. Definitely adds to the discussion and deserve to be incorporated into future versions of this presentation. Thank you!

Vijay said...

Nicely done, Frank. I fully agree with your POV.

What is often lacking in ERP is a feedback loop. This partly explains why a lot of things like how to estimate/budget, how to align business and IT and so on still remain an art and not a science. The lessons learned in 20 years are not always used to make the next rev of ERP more successful. Stories of success do not get same air time as stories of failure.

Frank Scavo said...

Vijay, thank you. I don't itemize those lessons learned in the post, but they are given in the full video linked at the bottom of the post. They are not the sort of things that change between generations of ERP.

So, why does the current generation of ERP users seem to need to learn the same lessons over again? I think you are right that the "success stories" do not get as much attention as "failure stories." It's only the Hershey's, the Waste Management, and the Nike experiences that get the press. Few people apparently wants to write about, or read about, case studies of success.

And you are right: anything that involves changing people, or organizations, is an "art." But you can still learn what works best in accomplishing that.

Ben Benjabutr said...

I totally get your points. In order to succeed in implementation, I think project justification is the first step. Business leaders should ask why they need it and what do they want from it. As you said, ERP implementation is often viewed as "computer project".Then business process re-engineering side of the implementation is overlooked. Then, companies end up with automation of poor processes and business rules.