ERP Risk Mitigation
Transcript of ERP Risk Mitigation
Ramco Systems Corporation
ERP Risk Mitigation
An Overview May 2005
Ramco Systems Corporation
3150 Brunswick Pike, Suite 100
Lawrenceville, NJ 08648
Tel: 609.620.4800
Fax: 609.620.4860
http://www.ramco.com
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Table of Contents
INTRODUCTION ....................................................................................................................... 3
WHAT RISKS CAUSE SUCH FAILURES?.............................................................................. 4
FITMENT RISK.........................................................................................................................................4
Fitment Issues during Selection............................................................................................................5
Fitment Issues during Implementation .................................................................................................6
Fitment Issues post Implementation.....................................................................................................7
PROJECT RISK .......................................................................................................................................9
HOW CAN THESE RISKS BE MITIGATED?......................................................................... 10
CONCLUSION......................................................................................................................... 13
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INTRODUCTION
Implementing standard ERP products and
other standard Enterprise Applications is
risky. Industry statistics show that more than
60% of ERP implementations fail1.
The most common reason that companies
walk away from multimillion-dollar ERP
projects is that the purchased software
product does not support one or more of their
important business processes. At that point,
they have two options:
1. Change their business processes to fit the software, which will mean deep changes in “long-established ways of doing business” that often provide competitive advantage in their markets. Additionally, roles and responsibilities in the organization need to be re-looked to fit the software architecture and functionality.
[OR]
2. Modify the software to fit the process. This will delay the project, introduce defects into the system and make software upgrades extremely difficult. Customizations will need re-coding to work with the new version.
SOME FACTS
The average ERP implementation takes 23
months to complete and results in a negative
ROI of $1.5 million2.
� 33% of implementations took “somewhat
longer” than expected and 26% took
significantly more time to complete.3
� 35% of implementation costs were
“higher” than expected and 20% were
“significantly higher” than expected.3
Many IT executives are dissatisfied with their
IT solutions and solution providers.
� 30% of the IT executives polled felt
“trapped” by their IT choice (indicating
that they did not feel in control). 4
� 23% had little intention of continuing their
relationship with their enterprise
application vendor4
A $5 billion drug distributor went bankrupt and blamed this setback on a failed ERP
implementation.
1 Richard Ligus Global Logistics & Supply Chain Strategies article In February 2004
2 A Meta Group Report
3 A Financial Executives Institute Report
4 Study by the research company Walker Information
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Other high profile failures of ERP implementation include:
� Leading US car rental provider’s abandonment of its ERP project ($50-58 million).5
� Failed ERP project ($112 million) at a top US provider of confectionery products resulting
in shipping delays and deliveries of incomplete orders.5
� A multi-billion dollar paper product distributor that wrote off $168 million.5
� An international pharmaceutical conglomerate that spent 7 years and over a half a billion
dollars trying to implement an ERP system.5
� UK based furniture chain issued a profits warning after the botched rollout of an ERP that
led to customer orders being sent out incomplete; the problem cost $55 million to correct.6
The cost of a failed implementation is higher today than before. Supply chains are tight and
companies carry minimal inventory. For instance, surplus buffers to offset any system failure
are non-existent. In such tight supply chains, any implementation failure can be catastrophic.
WHAT RISKS CAUSE SUCH FAILURES?
ERP systems fail because they do not fit business needs (fitment risk) and the consequent
efforts to configure or customize the product affect the project schedule and costs (project
risk).
FITMENT RISK
5 A ZDNet article November 10, 2004
6 Andy McCue in Silicon.com, September 2004
The critical priority is therefore to mitigate risk when selecting and implementing
an enterprise application.
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Fitment issues may arise during Selection, Implementation or Post Implementation.
Fitment Issues during Selection
Typically, enterprise application selection involves listing the required features, preparing
feature-function matrices and shopping for systems that comply with these features. The
vendor with the highest level of fitment is preferred.
However, this may not always ensure selection of the right solution, as the selection process
may have flaws such as:
a. Unique & critical processes could get overlooked
Feature-function matrices may be an inadequate yardstick. The vendor may have a ‘good
features rating’, but may not satisfy certain unique processes that differentiate the
organization. These critical processes should become "critical requirements" during a
software selection process. If the software vendor fails to meet these requirements, they
become "fatal flaws”7 that will adversely affect the implementation.
The selection process at a distribution-oriented company revealed that drop shipment was a
major issue. The primary focus of drop shipment in this enterprise was the financial
transaction resulting from the material shipment process and the rebates from volume
purchases to be realized by the distributor from the supplier. During the selection, the
company failed to consider the impact on the financial systems and only reviewed the actual
transactions supporting the transfer of materials.
Although material flow was important, the fatal flaw was the processing of rebates tied to the
financial transaction. The selection team did not realize this until the later phases of the
implementation. By missing a fatal flaw, the enterprise had to create custom code to handle
the financial transaction and the rebate cycle.
This ultimately more than doubled the initial cost of the application license. In addition, each
time the company needed to upgrade the ERP application, they would incur costs associated
with this custom code. The company estimated that this requirement adds another 25 percent
to the cost of each upgrade.7
7 Yvonne Genovese and Brian Zrimsek, April 2004, Gartner
Companies that invest in expensive ERP systems run the risk that the
selected application may not meet targeted business objectives due to lack of
fitment of the application with unique business needs, resulting in a failed
implementation.
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b. Vendor responses are subject to interpretation
First of all, it is challenging to accurately describe solution needs in a feature/function RFP
listing. The problem gets compounded when requirements and desired features are
interpreted differently by vendors.
A “yes” response from vendor ‘A’ to a feature/function requirement has built in bias and
interpretation towards the capabilities of that vendor’s product. Likewise a “yes” response
from vendor ‘B’ has similar bias to its product. Yet, the two products may exhibit completely
different behaviors (screen sequence, work flow, data entry, etc.) as to how they execute
those functions. The true “functional fit” (or lack thereof) is only realized when the software
product is being implemented.
Further, overzealous vendor sales persons may sometimes try to present a level of Fitment
that is higher than reality!
c. Focus on features could ignore broken processes
The vendor may not satisfy all activities along an “end to end” business process chain,
despite demonstrating a high degree of fitment to features. This will prevent the company
from completing the business process with the selected enterprise application and force
customization or bolt-ons to third party applications, again increasing implementation risk.
d. Products force lock-in to the set features
Products are not readily amenable to change. Organizations therefore get ‘locked-in’ to the
chosen solution and vendor, and are forced to live with the reduced fitment – unless they opt
to customize the application, a difficult choice under most circumstances.
Fitment Issues during Implementation
Organizations may therefore select a solution with less than adequate fitment to business
needs. However the issue does not end with selection as fitment may continue to fall during
the implementation process due to requirements growth:
a. Requirements are a “moving target”
Enterprise Application implementations run anywhere from a few months to a few years.
However, user requirements change by around 2% every month8. This creates a situation
where the fitment may have deteriorated by the time the solution is implemented and goes
into production.
8 Capers Jones
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b. New requirements are discovered at “go live”
Further, due to the use of an incomplete or inaccurate selection yardstick in feature/function
matrices, users may discover solution requirements at the “go live” point that were not
originally identified.
A fabric manufacturer wound up making extensive, unexpected (and expensive) modifications
to its ERP package because the company discovered that the system could not handle the
fact that the company priced the same bolt of cloth in two different ways: one price for
domestic consumption, another, four times higher, for export.9
c. Process Templates reduce fit
Another factor that reduces fitment is the use of process templates for speedy
implementation. Although templates may speed up taking a solution into production quickly,
they promote over-generalization and consequent fitment risk.
So even if the solution seemed like a good fit at the time of selection, the actual fitment on
completion of implementation may be much lower. The solution would therefore be perceived
as unsatisfactory by business users, leading to a partially or fully failed implementation.
Fitment Issues post Implementation
Technology investments are normally written off over a period of five to seven years.
Organizations therefore seek to buy solutions that can support their business needs over this
period. However, predicting fitment over the long term can turn out to be a risky endeavor.
Fitment issues increase over time as:
a. Change is a constant
Once the solution is implemented and running, business process changes may occur due to
changes in strategies or business models, new markets expansion, increase in competition,
new staff coming aboard with different ideas, regulatory change (for instance Sarbanes
Oxley) and so on. All these lead to further erosion in solution fitment to business needs.
9 Derek Slater in the CIO magazine February 1999
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b. Modifying solutions to manage change is challenging
Organizations may then need to modify the ERP system to react to change and restore
fitment. However ERP systems are notoriously difficult to change once the initial design is
complete as most systems are parameters-driven. Once parameters are set, it is not possible
to change them anymore without far-reaching and unforeseen consequences for the
implemented processes in the various modules. A related consequence of this inflexibility is
that many sensible change initiatives get de-prioritized or cancelled, and companies can find
it difficult to react quickly to rapid changes in the business environment.
This may call for additional customization of the ERP product by modifying the software code.
However standard ERP products are not designed for extensive customization which
introduces errors and prolongs implementation. Most vendors of standard ERP products
discourage customization and levy hefty charges for customization.
Moreover the process of defining the exact scope of customization is also subject to the
“inadequate yardstick” error. Customizations are typically discussed on a “white board” and
then implemented in the product. Customizations thus implemented may not always match
the actual solution changes needed.
c. Upgrades exacerbate the difficulty with solution changes
This problem gets further compounded during the implementation of upgrades of the ERP
package to the next release. Customization changes need to be retrofitted to the new version
of the product. This complicates the upgrade process and prolongs the lead time to
implement upgrades. Moreover, ERP vendors’ de-support deadlines for current releases force
customers to upgrade, going through the pain of applying the customization to the new
release.
d. Finally solutions become unusable
The diagram shows how the fitment gap increases over time due to growth in requirements.
At some point, the gap becomes so large that the product becomes unusable. This may force
the company to buy a new product or implement a major release. This new purchase may
close some of the gap, but implementation lead times and further growth in requirements
cause the gap to again begin to widen.
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Lack of fitment caused a failed ERP implementation at a midsize food manufacturer. This
specific ERP product was focused on the needs of the Food Industry and incorporated
several “industry best practices”. However it did not fit the unique business needs of this
organization. This company had certain key unique processes that were not met by the
standard Food industry ERP product. The ERP implementation project ran into serious
difficulties, impacting both the schedule and cost. Ultimately the company was forced to
discard the ERP solution.
PROJECT RISK
Unexpected fitment issues and consequent need for customization cause project schedules
and costs to deviate from the plan. An ahead-of-schedule product replacement need would
stress corporate budgets.
a. Projects get delayed
Customization adds work, consumes additional resources and affects the project. Another
factor that affects ERP implementation is the added complexity of product configuration.
Products are designed on the basis of a “one size fits all” assumption. Products are therefore
made feature rich for use across diverse industries or diverse organizations within an
industry. This calls for additional set up time to deselect unwanted functionality and configure
the behavior of the chosen system. It may not be possible to always accurately estimate the
time and cost for configuration – this could present unexpected challenges and throw the
project off track.
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Complexity of product configuration was a likely cause in the failure of the ERP
implementation at a US manufacturer of confectionary products. The company had trouble
pushing orders through the new system, resulting in shipment delays and deliveries of
incomplete orders.10
b. Costs go out of control
Companies often estimate project costs inaccurately during the selection of the ERP system.
Usually, the focus is on initial costs - solution, implementation and other hardware/software
costs. Initial costs may be misleadingly low, but the total cost of ownership over the lifetime of
the solution may be much higher than budgeted.
Cost elements that may be missed out in the initial estimate include:
� Integration and testing with other applications that need to co-exist with the ERP
� Migrating data from legacy systems to the new ERP system
� Training users on the new processes
� Customizations that need to be made
� Rolling up customizations during upgrades
� Forced upgrades just to keep up with vendor support
HOW CAN THESE RISKS BE MITIGATED?
a. It is the process
ERP systems exist to support the organization’s business processes. Organizations often
ignore the need to define an optimal process and then use the technology as an enabler for
the process.
In many instances, organizations either try to adopt a process that is inherent in the ERP
solution, even if it does not fit their business requirements, or they try to shoehorn their legacy
processes into a software package that is not designed to support their processes. In both
cases, they sub-optimize the capabilities in the technology and fail to take advantage of the
opportunity to streamline their business process – the entire point of technology
implementations.
The road to success lies in defining optimal business processes and then implementing an
enterprise application that mirrors targeted processes. Further, change should be managed
by identifying corresponding business process changes and making those changes to the
application.
10 Craig Stedman in ComputerWorld October 1999
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b. Need for agility
This requires flexible and agile enterprise applications that are driven by business processes,
and that can be changed when processes change. Implementing the solution in terms of
“loosely coupled” services with service-oriented architecture provides a good solution
alternative.
c. VirtualWorks - an agile platform
For example, the Ramco VirtualWorks® platform enables such agility with personalized
enterprise solutions that are assembled from existing and new software components. Existing
components offer industry best practices. Personalized and new components address unique
processes. VirtualWorks enables a business process driven approach to solution definition
and deployment - on a model based platform. VirtualWorks turns business process models
into software. Customization of components is at the model level and not at the level of
software code. Software is generated automatically from the model through the use of code
generators.
The platform supports changing the implemented solution “on demand” as solution changes
can be made anytime by changing the associated application model.
d. Mitigating risk with VirtualWorks
This approach mitigates risk as:
� The business process driven approach helps overcome the constraints of features and
functions lists.
� VirtualWorks turns specified processes directly to software. Solution fitment is therefore
greatly improved.
� The solution can be quickly visualized via personalized previews that help users confirm
scope and functionality.
� Every organization gets a personalized solution as Ramco maintains a unique model for
each client. Customization is no longer an “evil” but is encouraged to enable
organizations to obtain a solution that meets their unique business needs.
� VirtualWorks supports Change-On-Demand. Organizations are not therefore locked into
the initial solution.
� The maintenance process is executed via Change-On-Demand. Instead of vendor-
determined upgrades, vendors get personalized upgrades on demand.
� VirtualWorks has a layered architecture where business processes are separated from
the technology layers. This enables organizations to change the technology platform
when needed without having to replace the complete solution.
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By turning specified processes into agile enterprise applications with Change-On-Demand,
VirtualWorks ensures continual fit and reduced risk.
e. Continuous alignment of the solution
A closed loop approach enables a systematic method of improving the solution over time and
ensuring sustained fit. This comprises four distinct stages:
� Design business processes (ProcessWorks): design efficient processes that combine a
company’s unique processes with industry standard practices
� Enable business processes (VirtualWorks): turn business processes into software that
mirrors desired processes
� Operate your application: the organization operates the application and enjoys its benefits
� Assess business processes (DecisionWorks): analyze business processes that are
executing in various applications, understand weaknesses and provide input to improve
business processes.
� Change-On-Demand: adapt the application to meet changing business needs
Organizations therefore take control of their enterprise solution and adjust it to
meet their unique business needs.
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CONCLUSION
ERP and other enterprise applications implementation is risky due to the lack of fit between
the business processes anchored in the product and the business processes that the
company needs to run. This often leads to a scenario where organizations need to customize
the Enterprise Application to suit business needs. Customization helps companies realize
targeted business processes and achieve business objectives.
However due to the “one size fits all” design of products, customization makes product
maintenance challenging. Customizations need to be redone on new releases making the
release management process difficult. Vendor de-support deadlines force customers to
upgrade and go through the pain of applying the customizations to new releases. On the
other hand, if organizations adopt the vanilla processes embedded in the product they run the
considerable risk of losing their differentiating processes and achieving a solution that does
not meet targeted objectives.
A different approach is required that calls for agile and flexible enterprise applications that are
business-process driven. The Ramco VirtualWorks platform turns specified processes into
software, with the ability to change the solution on demand (Change-On-Demand).
VirtualWorks helps companies to retain unique business processes and manage change. As
the resulting solution exactly matches desired processes, solution fitment is dramatically
improved. Change-On-Demand ensures that incomplete or changing business requirements
are no longer a stumbling block, but only call for adjustments to be made to the application
model.
Risk is mitigated, as organizations take control of their enterprise software, with
the exact processes and changes they need – at the time they need it.
Ramco Systems Corporation www.ramco.com 3150 Brunswick Pike, Suite 100 Phone 609.620.4800 Fax 609.620.4860 Lawrenceville, NJ 08648