When ERP is botched, CFOs must act

Problems are amazingly costly, giving finance an equal role with IT in finding the prescription

Companies long have grappled with glitches in their ERP (enterprise resource planning) system implementations -- a situation that the recent botched-rollout record suggests won't get better any time soon. While ERP projects go awry for many reasons, each incident reveals its own set of troublesome repercussions, financial and otherwise.

IT, of course, is the first to get the call for repairs. But the CFO is rarely far behind.

"All roads lead to finance," said Mark Gandy, a partner at b2bcfo.com, a firm that offers finance-chief services to businesses. "The CIO typically has been involved with the technology issues ... but CFOs have a broad understanding of the entire business." (Gandy also works with Focus.com, a business professional social network whose members offer advice on a range of IT and business topics.)

Where once SAP was at the root of most ERP complaints -- and Gandy recalled how in the 1990s the common complaint reflected "failed SAP implementations" -- customers are plagued now by unrealistic claims from a host of ERP sellers, said Forrester Research analyst China Martens. And muddled messages from companies looking to upgrade add to the confusion caused by the stories of troubled rollouts.

"It's like the company and the vendor have been speaking two different languages, and then things go wildly off track," she said. "Sometimes ERP vendors oversold it and are promising things it can't do. Other times the company hasn't been very clear on what it's trying to do."

And at that point, CFOs who are involved in the ERP selection and deployment process can help mitigate the issues that may jeopardize operations and revenue generation. Further, they can bring a vital, enterprise-wide perspective to the process, since they understand how each department in a company operates and contributes to the bottom line.

Three examples among the many failed, and costly, deployments of 2011 help demonstrate the current ERP situation.

Montclair State University in New Jersey sued Oracle after the vendor allegedly fumbled the installation of software to replace the school's legacy systems. Montclair State may need to spend around US$20 million to finish the job, according to its lawsuit.

CareSource Management Group is seeking $1.5 million in damages from Lawson Software, according to a lawsuit the health care plan administrator filed. CareSource claimed that Lawson's software was not the system the vendor promised and never advanced past the testing stage.

Ingram Micro, a technology distributor, attributed consecutive quarterly income losses to issues setting up an SAP system in Australia. The company's first quarter profits fell to $56.3 million from $70.3 million in 2010's first quarter. Second quarter income tallied $59.7 million, compared to $67.7 million in the second quarter of 2010.

Gandy joins the list of executives who recently faced challenges setting up ERP software. His client purchased ERP software, and then brought on Gandy, who, after working with the company, discovered that a specific ERP system was needed. The company hired their second choice systems integrator to rollout that system after their main candidate passed on the job because it was too busy. After having an "awful" experience with the systems integrator, that firm was fired and Gandy turned to a company to complete the job.

Had Gandy been involved from the beginning, he would have made sure that the company first considered its long-term business needs and selected an ERP product that met these objectives.

"Typically you're moving from a system you've outgrown, to a system that can scale and provide more immediate feedback," he said. "There need to be very clear cut goals, because you need to think of this as being the last system you'll ever need."

Nailing this long-term business perspective is especially important to CFOs, given that the ERP system should grow to meet the company's future fiscal goals, said Martens. A shortsighted approach might force a company to prematurely retire an ERP system, she said and could lead to the CFO questioning why another multi-million software dollar investment is needed. Gandy concurs, saying that businesses should not have to replace a five-year-old ERP system.

The software a company needs to remain productive should be the driving force behind any ERP suites that it looks into, said Gandy. Considering a vendor because business executives heard chatter about its offerings, or assuming that a software's tie-ins to Microsoft products must make it a good, he said, "are all the wrong reasons."

Knowing the details of how your business functions is required when weighing ERP suites since every software package needs tailoring to fit each business' operations.

"There is going to be a gap between what ERP software can offer and what a company needs," said Martens. Companies want "to minimize that gap as much as possible" but also need to "be realistic about what has to happen to fill that gap," which may require spending additional money to customize the product, she advised. Conversely, businesses also want to avoid too much customization. That leads to buying software that goes unused and angry CFOs who want companies to use purchased technology, Martens said.

Beyond examining their internal workings, businesses shopping for ERP software should review some of a vendor's completed projects. Visiting a few companies --- rather than just one -- can expose possible problems with the software and eliminate vendors from the running, said Gandy.

"Will it keep a problem from happening? No," he said. But such shopping around "can certainly minimize problems and might even keep you from picking that ERP solution."

Said Martens, "Vendors come in and promise the moon." But if you talk to other customers, seeking unbiased reviews, you can "get a sense of the product because they'll tell it straight."

After selecting a vendor and moving on to contract negotiations, avoid hourly charges for the work it does, added Gandy. "I hate the billable hour," he said. "You're not paying for seats. You're paying for results." Instead, set up a payment plan based on reaching project goals determined by the vendor and company.

That offers a "very solid timeline of what work would be done and when, and the remedies if we didn't hit these deadlines," he said. Paying by deliverables, he has seen, allows the company to have projects completed and running before cutting the vendor a check.

Competition from cloud computing, though, has forced traditional ERP sellers to offer new  deployment strategies. And finance chiefs may like the new offerings, said Martens. ERP vendors introduced packages that cover all components of a deployment for a set price, a counter to software as a service and its claims of offering cheaper and easier deployments.

"They try to package something up that is the software, the services, the training and commitment to implementation and try to hit various mast ends," she said. "The idea is that everyone sits down, you map things out and there is a fixed price," she said.

Martens cautioned, however, that companies get what they pay for. When two ERP companies were pitching all-in-one deployments to her client, they both cut the contracts' cost by scaling back on services included in the implementation.

For Gandy, when weighing the benefits and drawbacks of various ERP suites, overall functionality, not cost, is the deciding factor. He will increase his budget slightly if the extra investment means a return that benefits the company years later.

"If I have to spend an extra $10,000 on a really good system," he said. "I'm going to talk my client into getting the best solution, because we're going to live with it for the next 10, 15 or 20 years."

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