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ERP success: Mitigating failure risks


July 22, 2010
By Jonathan Gross

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These days, small and medium-sized businesses (SMBs) need enterprise resource planning systems (ERP) to be competitive. ERP helps companies manage their global supply chains and forecast demand. SMBs, though, are advised to approach ERP very cautiously. Casualties from failed ERP implementations are like bodies strewn across a bloody battlefield.

According to some studies, up to 70 percent of all ERP implementations fail. And the consequences of failure can be crippling. An implementation failure reportedly cost Hershey’s 27 percent of its market share. Another failure put FoxMeyer Drug – a $5 billion a year company – out of business. More recently, Waste Management claims that a failed SAP implementation cost it $500 million.

Two of the major causes of ERP failure are runaway implementations and organizational resistance to change.

Failure risk 1: Runaway implementation
According to IT research firm, the Aberdeen Group, cost efficiencies drive most ERP acquisition decisions.

If the implementation reins aren’t held tightly, though, service costs can make this cost efficiency goal unattainable. One reason is that most implementers charge hourly (full disclosure: our firm implements, but on a fixed-fee basis). So the longer a project takes to complete, the more it will cost. To wit, the IRS spent over $50 billion on an out-of-control ERP implementation that took 10 years to complete.

One way to keep tight control on an implementation project is to define its scope relative to the costs and benefits. Without proper definition, the scope can creep like ivy up a building. Scope creep happens when a company decides to "ERP-ize" more business processes than is economically feasible.

Proponents of widening the scope usually make a compelling argument. They say that integrating the additional business processes will lead to greater efficiencies. They also say that implementation is the right time to do the extra work because consultants are on site and the teams are dedicated.

Experience has shown, however, that implementation is seldom the right time to widen the scope (except for dealing with unforeseen items that must be addressed). This is because the incremental costs generally exceed the incremental benefits. These incremental and oft-ignored costs include direct service costs and opportunity costs of delay. With respect to the latter, every unplanned day that an SMB is unable to operate under the new system is a day of lost efficiencies.

Failure risk 2: Improperly managed change
Stakeholder rejection of the new system and the restructured operating environment are risks that should also be mitigated during the planning phase.
A failure to effectively manage these risks could allow certain groups to undermine the project’s success. Opponents of change lurk among all stakeholder groups. Common examples include:
• A union that objects to revised job duties that fall outside of the collective agreement;
• Employees who are afraid of or do not want to learn new processes;
• Managers who object to donating their "A-players" to the implementation team;  and
• Executives who stand to lose performance-based incentives because of short-term disruptions.

By anticipating and addressing possible resistance during the planning phase, an SMB will be better positioned to direct all of its organizational tentacles toward the same goal. In other words, it can focus its efforts on managing the restructuring project instead of having to focus on managing internal conflict.

Project plan: An overview
A good implementation plan mitigates scope creep with a clearly marked and easy-to-follow road map. It mitigates change resistance by nipping it in the bud. At a minimum, the project plan should address a project champion, include project plan documentation, and define the project teams.

A project champion should be assigned to ensure top management’s continued commitment to the implementation project. Countless ERP case studies show that an absence of project championship can be fatal. Commonly, an executive or top manager’s negative views translate into insufficient resources being allocated to the project.

Without proper resources, the project becomes doomed. A project champion is responsible for legitimizing the project among the executives. This person should be a top-level manager who is both fully committed to the project and capable of influencing others.

The project plan is a formal document that sets out the project deliverables on a timeline and allocates a specific budget to each deliverable. Each of the deliverables should be reduced to manageable and measurable tasks.

At the very least, a well-conceived project plan should include: a project charter; a scope statement; target dates and costs; a reporting structure and staff requirements; and subsidiary plans dealing with scope management, resource management and public relations.

A successful implementation also needs to have a strong enabling structure. Project teams should include: a steering committee with executive-level strategic responsibilities; a core team with managerial-level delegation authority; and functional teams with responsibility for implementing the changes.

To ensure interdependence and to facilitate timely communications, our firm cross-pollinates each team with a member from the reporting team directly below. So, for example, we would place the ERP project manager on both the steering committee and the core team, and certain key users on both the core team and a functional team.

With the commoditization of ERP, SMBs can now reap the informational and economic benefits of integration that were historically reserved for the largest of companies. With proper planning, your company can put itself on the success path that most others have never found. _

Jonathan Gross LL.B., M.B.A., is a lawyer and consultant who specializes in aligning business with IT, selecting IT systems and implementing IT systems. He can be reached at jonathang@pemeco.com and followed at http://twitter.com/Pemeco.


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