Reasons For and Against Enterprise System Adoption

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Reasons For and Against Enterprise System Adoption

• Enterprise Architectures Conference
• David L. Olson
• Stockholm, 28 October 2004

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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

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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)

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Millman (2004)

• ERP is notoriously over-sold and under-delivered
• ERP is the most expensive but least-value derived
  kinds of implementation (Scott Phares,
  VP-business services, Business Engine)
• When a lot of ERP investments are made, there
  wasnt a business case built (Brian Zrimsek, The
  Gartner Group)

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Notable ERP Failures

• 1999 Hershey Foods Corporation had 19 drop in
  3rd-Quarter 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 4th-Quarter 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)

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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

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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

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Business Process Reengineering

• Millman (2004)
• Brian Zrimsek, The Gartner Group
• The value isnt in the system, but in what you
  change.
• Mitch Spitzer, VP GreenPoint Financial Corp.
• It wasnt Oracle that got us the savings, but
  rather the reengineering of existing business
  processes, most through elimination of systems,
  reduction of headcount, streamlining processes.

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BPR Problems Reported4 Cases
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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

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FederalismDavenport (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

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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.

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Tradeoff

• Federalism vs. Customization
• Federalism provides flexibility to meet local
  needs
• Multinational subsidiaries have local
  requirements
• CUSTOMIZE
• Customization is very risky expensive

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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

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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

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Supply Chain BenefitsGoutsos Karacapilidis
(2004)
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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

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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

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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)

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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

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Beulen Ribbers (2003)

• Asian discrete manufacturing
• Locally managed subsidiary of European country
  5-year 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

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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

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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

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Lessons Learned
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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

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Survey of ManufacturersMabert et al. (2000)
Olhager Selldin (2003)
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Critical Success FactorsReimers (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

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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 dont leave
• (the source of ERP savings)

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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

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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

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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