Reasons For and Against Enterprise System Adoption

1. Reasons For and Against Enterprise System Adoption Enterprise Architectures Conference David L. Olson Stockholm, 28 October 2004

2. 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

3. 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)

4. 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 wasn’t a business case built(Brian Zrimsek, The Gartner Group)

5. 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)

6. 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

7. 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

8. Business Process Reengineering Millman (2004) • Brian Zrimsek, The Gartner Group • “The value isn’t in the system, but in what you change.” • Mitch Spitzer, VP GreenPoint Financial Corp. • “It wasn’t Oracle that got us the savings, but rather the reengineering of existing business processes, most through elimination of systems, reduction of headcount, streamlining processes.”

9. BPR Problems Reported:4 Cases

10. 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

11. 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

12. 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.”

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

14. 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

15. 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

16. Supply Chain BenefitsGoutsos & Karacapilidis (2004)

17. 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

18. 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

19. 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)

20. 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

21. 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

22. 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

23. 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

24. Lessons Learned

25. 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

26. Survey of ManufacturersMabert et al. (2000); Olhager & Selldin (2003)

27. 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

28. 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 don’t leave (the source of ERP savings)

29. 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

30. 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

31. 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