Critical issues Affecting an ERP Implementation

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Implementing an ERP causes massive change that needs to be carefully managed to reap the benefits of an ERP solution. Critical issues that must be carefully considered to ensure successful implementation include commitment from top management, reengineering of the existing processes, integration of the ERP with other business information systems, selection and management of consultants and employees, and training of employees on the new system.
THE ENTERPRISE RESOURCE planning (ERP) software market is one of the fastest growing markets in the software industry. It has seen a rocky start with several project failures and a huge shortage of skilled and experienced workers. The ERP market is predicted to grow from a current $15 billion to a gigantic $50 billion in the next five years. The estimated long-term growth rates for ERP solutions are a stratospheric 36 percent to 40 percent. Some estimates put the eventual size of this market at $1 trillion. Recently major ERP vendors such as SAP AG, Baan, and Oracle have reported significant financial results. Contributing to this phenomenal growth is the estimation that 70 percent of the Fortune 1000 firms have or will soon install ERP systems and the initiatives by ERP vendors to move into medium to small tier industries with gross revenues less than $250 million. ERP vendors are aggressively cutting deals with these industries to make their products more affordable. For example, SAP, one of the leading ERP vendors, recently started selling its products to customers in the $150 million to $400 million revenue range.
Companies could spend hundreds of millions of dollars and many years implementing ERP solutions in their organizations. Once an ERP system is implemented, going back is extremely difficult; it is too expensive to undo the changes ERP brings into a company. There are several failed ERP attempts, and companies lost not only the capital invested in ERP packages and millions paid to outside consultants, but also a major portion of their business. Recently Unisource Worldwide, Inc., a $7 billion distributor of paper products, wrote off $168 million in costs related to an abandoned nationwide implementation of SAP software.(n12) FoxMeyer Drug, a former $5 billion drug distributor, went bankrupt in 1996 and has filed a $500 million lawsuit against SAP. FoxMeyer charged the ERP giant that its package was a "significant factor" that led the firm into financial ruin.(n14) Dell Computer Corp. has recently abandoned a much-publicized SAP implementation following months of delay and cost overruns. Dow Chemical, after spending half a billion dollars over seven years of implementing SAP R/2, the mainframe version, now has decided to start all over again on the new client/server version (R/3). Implementing an ERP system is a careful exercise in strategic thinking, precision planning, and negotiations with departments and divisions. It is important for companies to be aware of certain critical issues before implementing any ERP package. Careful consideration of these factors will ensure a smooth rollout and realization of full benefits of the ERP solution.
ERP SOLUTIONS
An ERP system can be thought of as a companywide information system that integrates all aspects of a business. It promises one database, one application, and a unified interface across the entire enterprise. An entire company under one application roof means everything from human resources, accounting, sales, manufacturing, distribution, and supply-chain management are tightly integrated. This integration benefits companies in many ways: quick reaction to competitive pressures and market opportunities, more flexible product configurations, reduced inventory, and tightened supplychain links. The Earthgrains Co. implemented SAP R/3 and reports that its operating margins improved from 2.4 to 3.9 percent and pushed its on-time product delivery rate to 99 percent in 1997.(n13) The company also reports better management information and happier customers. Similarly, at Par Industries in Moline, IL, an ERP system allowed management to base production on current customer orders rather than forecasts of future orders. The delivery performance improved from 60 percent on time to more than 95 percent, lead times to customers reduced from six weeks to two weeks, repair parts reduced from two weeks to two days, work-in-process inventory dropped almost 60 percent, and the life of a shop order dropped from weeks to mere hours,(n1) IBM Storage Systems division, after implementing an ERP system, was able to reprice all of its products in five minutes compared with five days prior to the implementation. It also reduced the time to ship a replacement part from 22 days to three days, and the time to perform a credit check from 20 minutes to three seconds.(n2)
The first tier players in the ERP market are SAP, Baan, Oracle, and PeopleSoft, while the second tier players are vendors such as J.D. Edwards, Lawson, and QAD. SAP, a German company, holds about one-third of the market share and is the leading vendor of ERP products. SAP's ERP product is R/3 and the current commercial version is release 4.0 b. Worldwide there are more than 16,500 SAP R/3 installations. The product has a strong international appeal with capabilities to support multiple currencies, automatic handling of country-specific import/export, tax, and legal and language needs. The complete suite of SAP R/3 applications is available in 24 languages, including Japanese (Kanji) and other double-byte character languages.
The current ERP systems have an open client/server architecture and are real-time in nature, i.e., clients can process information remotely and the results of a new "input" will "ripple" through the whole "supply-chain" process. The appeal of such systems for businesses is that all employees of a company will have access to the same information almost instantaneously through one unified user interface. ERP systems such as SAP/R3 include not just the functional modules that "crunch" the numbers but also the most advanced technologies and methodologies. Implementing such a system results in benefits from the "integrated" nature of the system as well as from the "reengineering" of the business practices and the entire "culture" of the business, all at the same time.
The popularity of ERP programs can be attributed to an increasing trend towards globalization, mergers and acquisitions, short product life cycles, and the fear of looming disasters from aging legacy systems that cannot handle dates beyond the end of this century (commonly know as Year 2000 problem). To be successful, a global enterprise must have accurate real-time information to control and coordinate the far-flung resources. ERP systems have the capability to integrate far-flung outposts of a company along with the supply-chain activities. This integration allows sharing of information in a standard format across many departments in the home country as well as across the national borders regardless of language and currency differences. In this era of global competition and uncertain markets, companies are merging for competitive advantage. In the United States, the past couple of years have seen about $1 trillion in mergers annually, many of which involved overseas firms. These newly formed corporations often have very little in common other than a corporate logo. To achieve synergy across national boundaries and product lines, these businesses must implement a set of standard business applications and consistent data definitions across all business units. ERP packages are extremely useful in integrating a global company and provide a "common language" throughout the company. Digital Equipment Corp. is implementing PeopleSoft's human resources system across its 44 locations worldwide. Digital is not only implementing a standardized human resources application but is also moving to a common architecture and infrastructure. For many companies, a global software rollout is a good time to do some serious housecleaning and consolidation of their IT infrastructure around the world. Digital is expecting a return on investment of 27 percent from this global rollout.(n5) If the merging companies have already implemented the same ERP solution, then they will save a tremendous amount in cost and time when integrating their systems. Recently, Daimler-Benz AG and Chrysler Corp. merged to form Daimler Chrysler AG. The new company could dodge five to ten years of integration work because the companies use the same computer-aided design systems and SAP financial applications.(n15)
Companies are also finding that the ERP solutions help them get rid of their legacy systems, most of which are not Year 2000 compliant. Sometimes it costs less for companies to replace their dinosaur systems than fix them. AlliedSignal Turbocharging Systems, a California-based turbocharger manufacturer, had more than 120 legacy systems, and the average age of the company's legacy systems was 18 years. In addition to these legacy systems, the company had several homegrown applications that had little or no source code documentation. These systems were so disparate and inefficient that running them not only drove IT costs up but also increased the time to fill customer orders. AlliedSignal is implementing SAP R/3 to replace its 120 legacy systems in 15 of the company's 17 facilities worldwide. Company officials estimate a full payback on the $25 million project in a little more than two years. It has already started seeing the benefits of the ERP implementation in the first sites that went live with the new system. It is able to reduce the order fulfillment process to lust a day from its previous weekly procedure.(n8)
CRITICAL IMPLEMENTATION CONCERNS
Even in a single site, implementing ERP means "Early Retirement Probably." An ERP package is so complex and vast that it takes several years and millions of dollars to roll it out. It also requires many far-flung outposts of a company to follow exactly the same business processes. In fact, implementing any integrated ERP solution is not as much a technological exercise but an "organizational revolution." Extensive preparation before implementation is the key to success. Implementations carried out without patience and careful planning will turn out to be corporate root canals, not competitive advantage. Several issues must be addressed when dealing with a vast ERP system, and the following sections discuss each of them in detail.
Top Management Commitment
The IT literature has clearly demonstrated that for IT projects to succeed top management support is critical.(n4) This also applies to ERP implementations. Implementing an ERP system is not a matter of changing software systems, rather it is a matter of repositioning the company and transforming the business practices. Due to enormous impact on the competitive advantage of the company, top management must consider the strategic implications of implementing an ERP solution.(n2) Management must ask several questions before embarking on the project. Does the ERP system strengthen the company's competitive position? How might it erode the company's competitive position? How does ERP affect the organizational structure and the culture? What is the scope of the ERP implementation -- only a few functional units or the entire organization? Are there any alternatives that meet the company's needs better than an ERP system? If it is a multinational corporation, the management should be concerned about whether it would be better to roll the system out globally or restrict it to certain regional units? Management must be involved in every step of the ERP implementation. Some companies make the grave mistake of handing over the responsibility of ERP implementation to the technology department. This would risk the entire company's survival because of the ERP system's profound business implications.
It is often said that ERP implementation is about people, not processes or technology. An organization goes through a major transformation, and the management of this change must be carefully planned (from a strategic viewpoint) and meticulously implemented. Many parts of the business that used to work in silos now have to be tightly integrated for ERP to work effectively. Cutting corners in planning and implementation is detrimental to a company. The top management must not only fund the project but also take an active role in leading the change. A review of successful ERP implementations has shown that the key to a smooth rollout is the effective change management from top. Intervention from management is often necessary to resolve conflicts and bring everybody to the same thinking, and to build cooperation among the diverse groups in the organization, often times across the national borders. Top management needs to constantly monitor the progress of the project and provide direction to the implementation teams. The success of a major project like an ERP implementation completely hinges on the strong, sustained commitment of top management. This commitment when percolated down through the organizational levels results in an overall organizational commitment. An overall organizational commitment that is very visible, well defined, and felt is a sure way to ensure a successful implementation.
Reengineering
Implementing an ERP system involves reengineering the existing business processes to the best business process standard. ERP systems are built on best practices that are followed in the industry. One major benefit of ERP comes from reengineering the company's existing way of doing business. All the processes in a company must conform to the ERP model. The cost and benefits of aligning with an ERP model could be very high. This is especially true if the company plans to roll out the system worldwide. It is not very easy to get everyone to agree to the same process. Sometimes business processes are so unique that they need to be preserved, and appropriate steps need to be taken to customize those business processes. Hydro Agri North America, Inc. implemented SAP R/3 in 1994, and since then the company is fighting against the integration SAP provides because some of the company's processes are very unique. Trying to fit the SAP mold resulted in a lot of pain and fewer benefits. Now Hydro Agri will either build a different front-end application or use a different package whenever their processes clash with that of the SAP.(n7) The companies also face a question as to whether to implement the ERP software "as is" and adopt the ERP system's built-in procedure or customize the product to the specific needs of the company. Research shows that even a best application package can meet only 70 percent of the organizational needs. What happens to the rest? An organization has to change its processes to conform to the ERP package, customize the software to suit its needs, or not be concerned about meeting the balance 30 percent. If the package cannot adapt to the organization, then organization has to adapt to the package and change its procedures. When an organization customizes the software to suit its needs, the total cost of implementation rises. The more the customization, the greater the implementation costs. Companies should keep their systems "as is" as much as possible to reduce the costs of customization and future maintenance and upgrade expenses.
Integration
There is a strong trend toward a single ERP solution for an entire company. Most companies feel that having a single vendor means a "common view" necessary to serve their customers efficiently and the ease of maintaining the system in future. Unfortunately, no single application can do everything a company needs. Companies may have to use other specialized software products that best meet their unique needs. These products have to be integrated along with all the homegrown systems with the ERP suite. In this case, ERP serves as a backbone, and all the different software are bolted on to the ERP software. There are thirdparty software, called middleware, which can be used to integrate software applications from several vendors to the ERP backbone. Unfortunately, middleware is not available for all the different software products that are available in the market. Middleware vendors concentrate only on the most popular packaged applications and tend to focus on the technical aspects of application interoperability rather than linking business processes. Many times, organizations have to develop their own interfaces for commercial software applications and the homegrown applications. Integration software also poses other kinds of problems when it comes to maintenance. It is a nightmare for IS personnel to manage this software whenever there are changes and upgrades to either ERP software or other software that is integrated with the ERP system. For every change, the IT department will be concerned about which link is going to fail this time. Integration problems would be severe if the middleware links the ERP package of a company to its vendor companies in the supply chain. Maintaining the integration patchwork requires an inordinate and ongoing expenditure of resources. Organizations spend up to 50 percent of their IT budgets on application integration? It is also estimated that the integration market (products and services) equals the size of the entire ERp market.(n3) When companies choose bolt-on systems, it is advisable to contact the ERP vendor for a list of certified third-party vendors. Each year, all the major ERP vendors publish a list of certified third-party vendors. There are several advantages to choosing this option, including continuous maintenance and upgrade support.
One of the major benefits of ERP solutions is the integration they bring into an organization. Organizations need to understand the nature of integration and how it affects the entire business. Before integration, the functional departments used work in silos and were slow to experience the consequences of the mistakes other departments committed. The information flow was rather slow, and the departments that made the mistakes had ample time to correct them before the errors started affecting the other departments. However, with tight integration the ripple effect of mistakes made in one part of the business unit pass onto the other departments in real time. Also, the original mistakes get magnified as they flow through the value chain of the company. For example, the errors that the production department of a company made in its bill of materials could affect not only the operations in the production department but also the inventory department, accounting department, and others. The impact of these errors could be detrimental to a company. For example, price errors on purchase orders could mislead financial analysts by giving a distorted view of how much the company is spending on materials. Companies must be aware of the potential risks of the errors and take proper steps, such as monitoring the transactions and taking immediate steps to rectify the problems should they occur. They must also have a formal plan of action describing the steps to be taken if an error is detected. A proper means to communicate to all the parties who are victims of the errors as soon as the errors are detected is extremely important. Consider the recent example of a manufacturing company that implemented an ERP package. It suddenly started experiencing a shortage of manufacturing materials. Production workers noticed that it was due to incorrect bills of materials, and they made necessary adjustments because they knew the correct number of parts needed to manufacturer. However, the company did not have any procedures to notify others in case any errors were found in the data. The domino effect of the errors started affecting other areas of business. Inventory managers thought the company had more material than what was on the shelves, and material shortages occurred. Now the company has mandatory training classes to educate employees about how transactions flow through the system and how errors affect the activities in a value chain. It took almost eight weeks to clean up the incorrect bills of materials in the database.
Companies implementing electronic supply chains face different kinds of problems with integration of information across the supplychain companies. The major challenge is the impact automation has on the business process. Automation changes the way companies deal with one another, from planning to purchasing to paying. Sharing and control of information seem to be major concerns. Companies are concerned about how much information they need to share with their customers and suppliers and how to control the information. Suppliers do not want their competitors to see their prices or order volumes. The general fear is that sharing too much information hurts their business. Regarding controlling information, companies are aware that it is difficult to control what they own let alone control what they do not own. Companies need to trust their partners and must coordinate with each other in the chain. The whole chain suffers if one link is slow to provide information or access. The management also must be concerned about the stress an automated supply chain brings within each organization. For instance, a sales department may be unhappy that electronic ordering has cut it out of the loop, while manufacturing may have to adjust to getting one week's notice to order changes and accommodate those changes into its production orders.
ERP Consultants
Because the ERP market has grown so big so fast, there has been a shortage of competent consultants. The skill shortage is so deep that it cannot be filled immediately. Finding the right people and keeping them through the implementation is a major challenge. ERP implementation demands multiple skills -- functional, technical, and interpersonal skills. Again, consultants with specific industry knowledge are fewer in number. There are not many consultants with all the required skills. Since the ERP market in the United States started approximately five years ago (and is growing at an astronomical rate), there are not many consultants with three or more years of experience. This has sent the compensation for skilled SAP consultants through the roof. One year's experience brings in $70,000 to $80,000 annually. Three to five years' experience could command up to $200,000 annually. One might find a consultant with a stellar reputation in some areas, but he may lack expertise in the specific area a company is looking for. Hiring a consultant is just the tip of the iceberg. Managing a consulting firm and its employees is even more challenging. The success or failure of the project depends on how well you meet this challenge.(n10)
Implementation Time
ERP systems come in modular fashion and do not have to be implemented entirely at once. Several companies follow a phase-in approach in which one module is implemented at a time. For example, SAP R/3 is composed of several "complete" modules that could be chosen and implemented, depending on an organization's needs. Some of the most commonly installed modules are sales and distribution (SD), materials management (MM), production and planning, (PP), and finance and controlling (FI) modules.
The average length of time for a "typical" implementation is about 14 months and can take as much as 150 consultants. Corning, Inc. plans to roll out ERP in ten of its diversified manufacturing divisions, and it expects the rollout to last five to eight years.(n11) The length of implementation is affected to a great extent by the number of modules being implemented, the scope of the implementation (different functional units or across multiple units spread out globally), the extent of customization, and the number of interfaces with other applications. The more the number of units, the longer implementation. Also, as the scope of implementation grows from a single business unit to multiple units spread out globally, the duration of implementation increases. A global implementation team has to be formed to prepare common requirements that do not violate the individual unit's specific requirements. This involves extensive travel and increases the length of implementation.
The problem with ERP packages is that they are very general and need to be configured to a specific type of business. This customization takes a long time, depending on the specific requirements of the business. For example, SAP is so complex and general that there are nearly 8000 switches that need to be set properly to make it handle the business processes in a way a company needs. The extent of customization determines the length of the implementation. The more customization needed, the longer it will take to roll the software out and the more it will cost to keep it up-to-date. The length of time could be cut down by keeping the system "plain vanilla" and reducing the number of bolt-on application packages that require custom interfaces with the ERP system. The downside to this "plain vanilla" approach is conforming to the system's mold, which may or may not completely match the requirements of the business.
For small companies, SAP recently launched Ready-to-Run, a scaled-down suite of R/3 programs preloaded on a computer server. SAP has also introduced AcceleratedSAP (ASAP) to reduce implementation time. ERP vendors are now offering industry-specific applications to cut the implementation time down. SAP has recently outlined a comprehensive plan to offer 17 industry-specific solutions, including chemical, aerospace and defense, insurance, retail, media, and utilities industries. Even though these specific solutions would able to substantially reduce the time to implement an application, organizations still have to customize the product for their specific requirements.
Implementation Costs
Even though the price of prewritten software is cheap compared with in-house development, the total cost of implementation could be three to five times the purchase price of the software. The implementation costs would increase as the degree of customization increases. The cost of hiring consultants and all that goes with it can consume up to 30 percent of the overall budget for the implementation. According to Gartner Group, total cost of an outside SAP consultant is around $1600 per day. Going for in-house SAP-trained technologists creates its own worries. Once the selected employees are trained after investing a huge sum of money, it is a challenge to retain them, especially in a market that is hungry for skilled SAP consultants. Employees could double or triple their salaries by accepting other positions. Retention strategies such as bonus programs, company perks, salary increases, continual training and education, and appeals to company loyalty could work. Other intangible strategies such as flexible work hours, telecommuting options, and opportunities to work with leading-edge technologies are also being used. Many companies simply strive to complete the projects quickly for fear of poaching by head-hunting agencies and other companies.
ERP Vendors
As there are about 500 ERP applications available and there is some company consolidation going on, it is all the more important that the software partner be financially well off. Selecting a suitable product is extremely important. Gartner Group has BuySmart program, which has more than 1700 questions to help a company choose a suitable ERP package. Top management input is very important when selecting a suitable vendor. Management needs to ask questions about the vendor, such as its market focus (for example, midsize or large organization), track record with customers, vision of the future, and with whom the vendor is strategically aligned. For a global ERP rollout, companies need to be concerned about if the ERP software is designed to work in different countries. Also, the management must make sure the ERP vendor has the same version of the software available in all the countries the company is implementing the system. Vendor claims regarding global readiness may not be true, and the implementation team may need to cross-check with subsidiary representatives regarding the availability of the software. Vendors also may not have substantial presence in the subsidiary countries. It is important to evaluate if the vendor staffers in these countries are knowledgeable and available. If there is a shortage of skilled staff, bringing people from outside could solve the problem, but it would increase the costs of implementation.
Selecting the Right Employees
Companies intending to implement an ERP system must be willing to dedicate some of their best employees to the project for a successful implementation. Often companies do not realize the impact of choosing the internal employees with the right skill set. The importance of this aspect cannot be overemphasized. Internal resources of a company should not only be experts in the company's processes but also be aware of the best business practices in the industry. Internal resources on the project should exhibit the ability to understand the overall needs of the company and should play an important role in guiding the project efforts in the right direction. Most of the consulting organizations do provide comprehensive guidelines for selecting internal resources for the project. Companies should take this exercise seriously and make the right choices. Lack of proper understanding of the project needs and the inability to provide leadership and guidance to the project by the company's internal resources is a major reason for the failure of ERP projects. Because of the complexities involved in the day-to-day running of an organization, it is not uncommon to find functional departments unwilling to sacrifice their best resources toward ERP project needs. However, considering that ERP system implementation can be a critical step in forging an organization's future, companies are better off dedicating their best internal resources to the project.
Training Employees
Training and updating employees on ERP is a major challenge. People are one of the hidden costs of ERP implementation. Without proper training, about 30 percent to 40 percent of front-line workers will not be able to handle the demands of the new system.(n6) The people at the keyboard are now making important decisions about buying and selling -- important commitments of the company. They need to understand how their data affects the rest of company. Some of the decisions front-line people make with an ERP system were the responsibility of a manager earlier. It is important for managers to understand this change in their job and encourage the front-line people to be able to make those decisions themselves. Training employees on ERP is not as simple as Excel training in which you give them a few weeks of training, put them on the job, and they blunder their way through. ERP systems are extremely complex and demand rigorous training. It is difficult for trainers or consultants to pass on the knowledge to the employees in a short period of time. This "knowledge transfer" gets hard if the employees lack computer literacy or have computer phobia. In addition to being taught ERP technology, the employees now have to be taught their new responsibilities. With ERP systems you are continuously being trained. Companies should provide opportunities to enhance the skills of the employees by providing training opportunities on a continuous basis to meet the changing needs of the business and employees.
Employee Morale
Employees working on an ERP implementation project put in long hours (as much as 20 hours per day) including seven-day weeks and even holidays. Even though the experience is valuable for their career growth, the stress of implementation coupled with regular job duties (many times employees still spend 25 to 50 percent of their time on regular job duties) could decrease their morale rapidly. Leadership from upper management and support and caring acts of project leaders would certainly boost the morale of the team members. Other strategies, such as taking the employees on field trips, could help reduce the stress and improve the morale.
CONCLUSION
ERP solutions are revolutionizing the way companies produce goods and services. They are a dream come true in integrating different parts of a company and ensuring smooth flow of information across the enterprise quickly. ERP systems bring lot of benefits to organizations by tightly integrating various departments of the organization. Even though ERP solutions have been popular in Europe for some time, North American companies have been using them for only about five to six years. Some of the factors that have contributed to ERP growth are the trend towards globalization, Year 2000 problems, and mergers and acquisitions.
ERP systems are very large and complex and warrant a careful planning and execution of their implementation. They are not mere software systems; they affect how a business conducts itself. How a company implements an ERP system determines whether it creates a competitive advantage or becomes a corporate headache. The top contributor for a successful ERP implementation is strong commitment from upper management, as an implementation involves significant alterations to existing business practices as well as an outlay of huge capital investments. The other important factors are the issues related to reengineering the business processes and integrating the other business applications to the ERP backbone. Upper management plays a key role in managing the change an ERP brings into an organization. Organizational commitment is paramount due to possible lengthy implementation and huge costs involved. Once implemented, an ERP system is difficult and expensive to undo. Since no single ERP solution can satisfy all the business needs, organizations may have to implement custom applications in addition to the ERP software. Integrating different software packages poses a serious challenge, and the integration patchwork is expensive and difficult to maintain.
Selecting and managing consultants pose a continuous challenge due to the shortage of skilled consultants in the market. ERP vendors are bringing out industry-specific solutions and newer methodologies to cut the length and costs of implementation. Organizations could reduce the total cost of implementation if they reduce customization by adapting to the ERP's built in best practices as much as possible. Selecting the right employees to participate in the implementation process and motivating them is critical for the implementation's success. Finally, it is important to train the employees to use the system to ensure the proper working of the system.
References
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