A recipe and ingredients for ERP failure

Ernest Madara
Introduction
An Enterprise Resource Planning (ERP) system covers the techniques and concepts employed for
the integrated management of businesses as a whole from the viewpoint of effective use of
management resources, to improve the efficiency of an enterprise. They have many advantages
both direct and indirect. The direct advantages include improved efficiency, information
integration for better decision making, faster response time to customer queries etc. The indirect
benefits include better corporate image, improved customer goodwill, customer satisfaction, and
so on.
Many organizations and businesses in the world today as part of their strategic development plan,
advocate for ERP solutions which would help to re-engineer their business processes in order to
accomplish their long-term goals.
The ERP market is very competitive and fast growing market, which is attributed to three primary
factors:
a) ERP vendors are continuing to expand market presence by offering new applications such
as supply chain management (SCM), sales force automation, customer relationship
management (CRM) and human resource.
b) To sustain their rapid growth, ERP vendors sell more licenses into their installed base.
c) While ERP originated in the manufacturing market, ERP usage has spread to nearly every
type of enterprise including retail, utilities, the public sector and healthcare organizations.
Among the industry players include SAP (Systeme Anwendungen Produkte), Oracle, QAD, SSA,
Jenzabar, Datatel, Peoplesoft, Baan, JD Edwards, Scala, Navision, Sungard just to mention but a
few. Even within themselves they categorise each other into High-end and low-end range. In
Kenya a cross section of companies are indeed on the warpath of undertaking or planning to
invest in an ERP business solution. The future will see fierce battle for market share resorting to
mergers and acquisition for strategic and competitive advantage.
There is much hype when the vendors are out to move their products, and will always sell and tell
you about their success stories and how you will leapfrog into your vision. They never tell you of
any failures of such ERP projects, and there seems to be no attention paid to lessons learnt from
the famous FoxMeyer Corporation scenario, which lead to its bankruptcy and the lengthy legal
battles in the courtrooms with their consultants thereafter. My basic principle is that you dont
make decisions because they are easy, you dont make them because they are cheap, you dont
make them because they are popular but you make them because they are right- Theordore
Hesburgh.
If not properly planned for, the investment may drive you out of business. The epicenter for the
problems that rock the corporate world as far as ERP or in general IT project failure is concerned
has remained the same over the years.
The following examples are typical of the projects that failed from statistics available from The
Standish group CHAOS database
The Hershey foods ERP system implementation failure lead to massive distribution
problems and loss of 27% market
The FoxMeyer drug ERP system implementation failure lead to the collapse of the entire
company
The IRS project on taxpayer compliance took over a decade to complete and cost the
country unanticipated $50 billion
The Oregon Department of Motor Vehicle conversion to new software took eight years to
complete and public outcry eventually killed the entire project
State of Florida welfare system was plagued with numerous computational errors and
$260 million in overpayments
AMR Corp, Budget Rent A Car, Hiltons Corporation, Marriott confirm project crumbled
having spend over $125 million over four years
Snap-On Inc project to convert to a new order-entry costed the tools company $50 million
in lost sales for the first half of 1998
Greyhound Lines Inc. Trips reservation and bus-dispatch system failed having spent $6
million
Norfolk Southern Corp. Systems integration with merger target Consolidated Rail Corp.
failed having lost more than $113 million in business
Oxford Health Plans Inc. New billing and claims-processing system based on Unix
International and Oracle Corp. databases resulted in hordes of doctors and patients angry
about payment delays and errors.
Universal Oil Products Project Software for estimating project costs and figuring
engineering specifications resulted in unusable systems
IT projects regularly fall short and quite few are abandoned entirely. Many IT failures have to do
with perceptions and expectations rather than absolute bankruptcy of purpose. Most of the so
called failures are better classified as discouraging successes events wherein the major purpose
is accomplished, but not without a good deal of frustration and inefficiency and a sour taste in
the mouth of many users.
Project risks
The FoxMeyer Corporation Delta III project had the following project risks
i. Environmental- the management had little or no control. They depended 100% on
consultants and vendors who obscured them from gaining control. The focus of the
project dramatically changed prompting the projects costs to escalate
ii. Execution- the project lacked skilled and knowledgeable personnel. FoxMeyer did not
have the necessary skills in-house and was relying on Andersen consulting to
implement SAP R/3 and integrate it with an automated warehouse system from
Pinnacle. Over 50 consultants were inexperienced and their turnover was high.
iii. Scope- FoxMeyer was an early adopter of SAP R/3. After the project began, FoxMeyer
signed a large contract to supply university health system consortium (UHC). This
event exacerbated the need for the unprecedented volume of transactions on their HP
servers which they could not cope
iv. Customer mandate the commitment from the top management and users. This was
not the case for some of the senior management. There was a morale problem among
some of its warehouse workers. The pinnacle warehouse automation integrated with
SAP R/3 threatened their jobs. With the closing of the three warehouses, the
transition to the first automated warehouse was a disaster. Disgruntled workers
damaged inventory, and orders were not filled, and mistakes occurred as the new
system struggled with volumes of transactions
Project Factors
Factors that attribute to escalation of costs include but not restricted to
a) Project factors there was a perception that continued investment could produce a large
payoff. FoxMeyer expected a saving of $40 million annually.
b) Psychological factors the consultants had prior history of success that encouraged them
to continue the project. we delivered an effective system, just as we have for thousands
of other clients (Computergram international 1998). This created the impression that the
project would radically improve the companys critical operations. FoxMeyer bit more that
what it could chew but embarking on a fast track project with unskilled staff.
c) Social factors the consulting company did not externally justify the project. De-
escalating the project through abandonment would have meant bad publicity
d) Organization factors The advocates for the project later were forced to resign because of
the delays in realizing the projected savings. A change in management was needed in
order to control the increasing costs which was too late.
Recipe for failure
When the management is not controlling the scope of the project especially when you
expect the consultant to provide a magic bullet, is a recipe for failure.
Changing the sails in midstream, by certain deliverables expected within a third of the
documented times and volumes is a recipe for failure.
By engaging in other corporate projects competing for the meager finances midway, is a
recipe for failure
By not having proper change management policies and procedures, is a recipe for failure
By going for consultants without prior experience or ERP solutions in which you are the
only company within your industry, could be a recipe for failure
If you do not have a knowledge transfer inscribed in the consulting contract, is a recipe for
failure
If the vendor does not understand your business, is a recipe for failure
If the project has no clear phases, deliverables and quality control components, is a recipe
for failure
If you have not re-engineered your business processes to be compatible with the
capabilities of the technology, is a recipe for failure
Having multiple vendors within the one project, is a recipe for failure
Not having an external project audit committee, is a recipe for failure
Not having a clear end-user training program to transfer skills to employees, is a recipe for
failure
Having the project run as a one-man show, is a recipe for failure
Having the management over- committed (excessively ambitious, prompting unrealistic
deadlines), is recipe for failure
Team member not being accountable for actions, is recipe for failure
Low morale within team, is recipe for failure
Unclear statement of requirement, is a recipe for failure
In no standard implementation methodology use, is a recipe for failure
Inadequate requirements definition (current processes are not adequately addressed), is a
recipe for failure
Poor ERP package selection (the package does not address the basic business functions of
the client), is a recipe for failure
Inadequate resources employed by the client, is a recipe for failure
Internal resistance to changing the 'old' processes, is a recipe for failure
A poor fit between the software and users procedures, is a recipe for failure
A bottom up approach is employed (the process is not viewed as a top management
priority), is a recipe for failure
The client does not properly address and plan for the expenses involved, is a recipe for
failure
If any functional gaps have not been identified (GAP analysis), is a recipe for failure
If the implementation does not take into account future technological convergence, is a
recipe for failure
Conclusion
The lessons learnt from the failed ERP projects should be a wake-up call for corporations currently
in ERP projects or contemplating to go that way. The lessons learnt can as well, serve as a
harbinger for failure or bankruptcy by serving as the jetty for launching the rocket to propel you
out of the business orbit. The experiences highlighted provide a litmus test on how to avoid ERP
failure. There is one final aspect to be considered in any degree of project failure. All success is
rooted in either luck or failure. If you begin with luck, you learn nothing but arrogance. However, if
you begin with failure and learn to evaluate it, you also learn to succeed. Failure begets
knowledge. Out of knowledge you gain wisdom, and it is with wisdom that you can become truly
successful.
References
Alexis Leon, ERP Demystified, 2000
Judy E Scott, The FoxMeyer Drugs Bankruptcy, 2004
Kim Watch Future Watch, 2000
Lloyd Rain IT Project Failures, 2005
Computerworld Top 10 Corporate Information Technology Failures, 2000
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