February 22, 2011 by Jonathan Gross
As we move deeper into 2011, it’s important to reflect on the good, the bad and the ugly of 2010.
The good: Demand for North American goods has picked up steam. With increased bookings and prospects, many businesses have taken the opportunity to invest in their ERP infrastructure.
The bad: In 2010, many companies made hasty ERP decisions. They rushed through ERP selection projects and tried to sprint through ERP implementations projects.
The ugly: 2010 bore witness to a high volume of ERP failure stories. These stories plastered headlines, and not just of tech publications. Some made the national, mainstream news. Westjet Airline’s implementation failure, for example, made headlines in both the Wall Street Journal and The Globe and Mail. 2010 might as well be dubbed the “Year of ERP Failure.”
Now, back to the good. For 2011 and beyond, I foresee a turning of the tides. Companies will shift their focus from ERP failure to ERP success. To help them achieve their goals, I have outlined four sets of actions that can turn potentially failure-inducing situations into successful ERP projects.
Action #1: Consider vendor restructurings in the selection process
Situation: The ERP market is mature. Competition is strong, prices are dropping and ERP software products are becoming increasingly commoditized. In 2011, we expect ERP vendors to continue to try to differentiate their software with enhanced functionality and SaaS/cloud deployments. Thus, in 2011, look for some of the bigger ERP vendors to go acquisition hunting to quickly fill strategic gaps in their product repertoires. Also, look for M&A activity among some of the smaller players who are simply trying to remain competitive.
Implication for ERP buyers: When an ERP vendor restructures its business, it’s trying to fix something that’s broken. Oftentimes, ERP software solutions get caught in the crosshairs. For example, a vendor might divert R&D funding from an underperforming software line. It could also merge two software lines or even discontinue a software line entirely. Buyers, therefore, run the risk of making a long-term commitment to software whose future isn’t as bright as is hoped.
Success-driving actions: When making a purchase decision, ERP buyers should consider the effects of corporate restructuring and strategy shifts. Is the vendor the subject of M&A rumours? Have there been any recent management changes? Has the vendor recently closed or opened any offices or R&D facilities? Does the vendor outsource development or support for that product? ERP buyers should also research the importance of the prospective software to the vendor’s corporate strategy. Is the software a flagship product? Does the software generate a significant portion of the vendor’s total software revenues? Does the software have a strong, established user base? Has the user base shown recent growth or contraction? Though research can’t provide an ERP buyer with certainty, it can help the buyer make a better informed ERP selection decision.
Action #2: Formalize the ERP selection due diligence process
Situation: The “Year of ERP Failure” saw many companies invest in ERP systems that were incapable of supporting their key business requirements. This led many to experience protracted implementations, cost overruns and reduced benefits.
Implication for ERP buyers: In 2011, ERP buyers will likely prove less tolerant of the types of selection mistakes that were made in yesteryear. Boards of directors and executives will be more inclined to hold individuals accountable for their ERP decisions. In other words, more jobs will be put on the line.
Success-driving actions: To bolster the odds of success (and to protect their jobs), ERP selection team members should formalize the selection project. Formalization should start at the team composition stage. Companies should staff project teams with both executives and departmental leaders. Executive participation is critical for both decision-making and organizational buy-in reasons. Functional representation is critical to help the company identify the key departmental business processes that the system should support. Next, the ERP buyer should use a formalized project management methodology. For example, a company might consider instituting a checkpoint-style methodology. Under this type of approach, a project is broken down into discrete and measurable phases. The conclusion of each phase is marked by a checkpoint. At each checkpoint, the project team evaluates the preceding phase against defined test criteria. Satisfactory test results are a prerequisite to progressing to the next phase. For example, consider a checkpoint that one of our manufacturing clients had inserted at the end of its software demonstrations phase. To progress to the next phase, at least one vendor had to show that its software was capable of supporting certain pre-scripted business processes. If none of the demonstrated systems had passed the test, the client would have had to restart the phase with a different batch of vendors. The client inserted this checkpoint because it had certain business processes that it wouldn’t compromise.
In summary, formalizing the selection process allows a company to walk an incremental and clearly defined path to success. This type of approach goes a long way in mitigating the risk of selecting the wrong-fit system.
Action #3: Focus on internal project management
Situation: The “Year of ERP Failure” was also rife with stories about failed ERP implementation projects. In many of the lawsuits, the plaintiffs – i.e. the disgruntled ERP buyers – claim that the vendors’ substandard project management caused their ERP projects to fail. The vendors, meanwhile, raise a pretty good argument in defence. They point to the terms of freely signed contracts, which generally assign project management responsibility to the buyer.
Implication for ERP buyers: According to the terms of most standard ERP contracts, buyers are on the hook for managing their ERP projects. Project management, though, is much more than a legal requirement. It is a critical determinant of project success or failure. It is also a critical determinant of ultimate operational and financial performance. Given what’s at stake, ERP buyers should not abdicate their project management responsibilities.
Success-driving actions: A company should have a full-time ERP project manager whose sole responsibility is to drive a successful ERP implementation project. This person needs to be capable of influencing people, needs to have an impeccable ERP implementation track record and needs to understand the company’s business processes. If the implementing company does not have a strong internal ERP project manager on staff, it should retain one on a contract basis.
Action #4: Rebalancing of contractual inequities
Situation: Vendors draft implementation services agreements in ways that protect their right to get paid and shield them from future liability.
Implication for ERP buyers: Standard form implementation services agreements do not provide vendors with an incentive to deliver successful projects. Arguably, they do the opposite.
Success-driving actions: ERP buyers should take it upon themselves to negotiate a deal that provides incentives to both parties to deliver. One way to do this is to link pay and performance. Under this type of scenario, a buyer’s obligation to pay would only be triggered if the vendor successfully delivers on key implementation deliverables. Another way is to broaden the vendor’s exposure to liability, both in terms of scope and quantum. The bottom line is that the buyer should use the contract as a tool to align both parties’ interests with project success.
As 2011 rolls on, we hope that ERP buyers will show a renewed focus on ERP project success. Success, though, won’t come easy. It will require hard work and commitment. It will also cost more in the short-term. However, the incremental short-term costs of success immeasurably outweigh the long-term costs of failure.
Jonathan Gross is vice-president of Pemeco, Inc., a consulting firm specializing in ERP implementation. He can be reached at email@example.com.