Unlocking the Value of ERP

Standing on this side of the whole Y2K thing we may sometimes feel a little silly. Y2K, the great business imperative driving the implementation of Enterprise Resource Planning (ERP) systems, was, in hindsight, wonderfully uneventful. But if you are beginning to second guess your extraordinary efforts, late nights, and sometimes difficult ERP projects, think again. That effort invested in implementing new business processes and technology may have equipped you well to accelerate your company’s move into the connected economy.

But first, let us briefly review some of the research which underscores the current situation. Rest assured that if you feel that you have not yet received the full benefit of your ERP system you are not alone. To better understand the current situation, Ernst & Young surveyed 31 CFOs of predominantly Fortune 1000 companies. The research indicated some startling results: 48 per cent reported that returns from their ERP project were lower than expected while only 17 per cent reported gains which exceeded expectations. However, keep in mind that 76 per cent of all respondents report not having done a business case for their ERP projects. The reason most cited for not doing a business case was that Y2K pressures made the project a “must do”. Digging deeper into the survey results, we find insights and lessons learned from which we can improve the current situation:

• Over 42 per cent indicated that additional user training, better skilled people, and/or change management are required to fully leverage ERP;

• 32 per cent indicated that changing or standardizing processes, organizing differently, changing the work culture, or “adapting to the power of ERP” are necessary to leverage ERP; and

• 32 per cent indicated that full implementation, better integration, or economies of scale are necessary.

If you are part of the group whose expectations of ERP are not yet satisfied, rest assured that you are not alone. Many of those in the same boat are revisiting their ERP projects with a view to optimizing their systems and processes. Before you go forward with a bold plan, it is important to know where ERP stands on your Executive’s agenda. Whether it is backlash from the ERP era which focused on the back office, or it is driven by the Internet craze, you may find that ERP is out and Customer Relationship Management and e-commerce are in. Lets step back and discuss what this means to the custodians of newly delivered ERP systems.

The value behind the ERP wave was integration. We implemented ERP systems to get parts of our business talking to one another and working together seamlessly. If we implemented our ERP systems effectively and were willing to challenge traditional ways of doing things we probably made out quite well. But the competitive heat continues to be turned up, and the flow of information within your company is no longer enough by itself. We must now extend our view of our business and assure that our processes and systems reach out and support the other parties with whom we interact. Those parties include suppliers, partners, customers, employees and shareholders. The Internet and CRM can provide technology solutions to help us to reach out to those interested parties. But to quote management guru Dr. Michael Hammer, “Putting a Web front-end onto bad systems and processes only advertises to the world how bad your systems and processes really are.”

To avoid this folly and to truly gain competitive advantage in the new connected economy we will have to go further. We will need to integrate the convenience and marketing appeal of the Internet and CRM with the proven back-end transactional processes supported by your ERP system. To illustrate the point, consider an example of an imaginary manufacturing firm that has chosen to enhance warranty and maintenance services for its products. Using the new system, customers will be able to log onto a password-protected Web site to look at parts catalogues and service notices. The site may also provide information about the location of service centres and phone numbers for order desks through which to place an order for spare parts. If the company is to take the next step and allow for the completion of a transaction, in this case ordering a part via the Internet, there are a host of additional systems that require consideration: is the part available? (parts inventory system), what shipping arrangements can be made? (logistics and distribution systems), is the customer’s credit good? (accounts receivable and order entry systems). Chances are your ERP system was implemented to automate these not-so-sexy-but-oh-so-important back-office functions.

In order to guarantee success with your e-commerce and CRM projects, be sure that you are starting on solid ground. To determine where you stand, ask yourself the following:

• Has your ERP system changed the way you do business?

• Are the users comfortable with the new system and have you retired the ones it was meant to replace?

• Have you implemented enough of the system to assure integration across lines of business?

• Do you have a defined action plan and structured approach to maximizing value from your ERP system? (If not, see the following ERP Innovation Action Plan)

When you can answer “yes” to several of these questions you are ready to leverage your investment in the back office to truly help the front office.

So if you feel that you spent the latter half of the 1990s implementing an ERP system which few appreciated, feel free to speak up when those around you want to “get closer to the customer” and “get on the Web”. Some of the toughest work may be behind you. And if you approach the e-commerce and CRM opportunity with the lessons learned from your ERP experience, you will be sure to succeed in the connected economy.

Unlocking Value Through the ERP Innovation Action Plan

As many CIOs struggle with obtaining full value for their ERP implementations, here are the recommended steps necessary to move towards a more value-based and business-focused ERP system:

Phase 1: Develop a Market Perspective and Target Value Opportunities

Timeframe: 2 weeks

In order to understand where you should be headed, you need to know how you measure up both internally and externally against other similar companies. First, analyse your current performance against external reference models and benchmarks. The analysis should focus on key financial measures available to the public such as Inventory volumes and turns, Cost of Goods Sold, and Sales growth. By comparing your company’s measures to your competitor’s measures, opportunities for improvement are easily identified. Compile a list of these potential improvement opportunities.

Next, determine the criteria by which you will want to evaluate your portfolio of opportunities. These criteria should be obtained through interviews with key executives and through an understanding of your company’s priorities. They should, at a minimum, reflect the strategic vision for your company. For example, if your company decided to significantly change it’s direction to becoming a life sciences company, one of the evaluation criteria should be the ability to support the new change in direction.

The identified opportunities are quickly assessed and ranked against the prioritization criteria. Shown below is an example of a completed Opportunity Prioritization Matrix.

Looking for an opportunity to demonstrate success? Develop an initial subset “quick hits” list of those opportunities that represent potential high-value gains and are reasonably easy to implement. Due to their ease of implementation and high business value, these “quick hit” projects could be initiated immediately and in turn generate a large amount of credibility for your optimization program.

Phase 2: Develop Value Proposition and Business Case

Timeframe: 2 weeks

For those value opportunities that are identified, detailed value propositions and business cases should be developed. As you are doing this, a tracking mechanism should be put in place to ensure that all increased value is measured. The first step in developing a value proposition is to ensure that the opportunity is clearly scoped out and understood. Next, the impact of the solution to your company’s business model and organization must be determined. You should understand clearly how to measure the desired performance improvement as well as how to convert the proposed improvement to changes in the company’s financial structure. You must understand the linkage between project improvements and enterprise value drivers and you must classify the improvements as one-time or recurring. Mistakes can often be made when trying to determine financial value or timing. Below are some tips on how to avoid them.

Phase 3: Developing the Roadmap

Timeframe: 1 week

By now you have developed a prioritized portfolio of improvement opportunities, along with the supporting value propositions and business cases to support the major projects. The roadmap is the final phase of the journey to unlocking ERP value. It is a high-level plan for sequencing and implementing the proposed solutions. It works towards the creation of a multi-year cross-company agenda of initiatives for the organization.

Sequencing and prioritizing the solutions is the first step. As you might expect, understanding interdependencies and time requirements are key to this activity. Secondly, a project charter should be developed for each project. These charters should include a description of the project, scope, dependencies, resource requirements, major milestones, timeframes, and project risks. In addition, the value measurement tracking approach identified previously should be refined, now that you have a view of your final portfolio composition. This includes making sure that you have a robust means of measuring and collecting the data required for measuring the value obtained by the project. The business case may need to be refined based on the sequencing of the projects. Finally, reporting mechanisms such as a project or program dashboard will need to be established to ensure that your positive results are well communicated.

Common Pitfalls When Determining Financial Value and Timing

• Double counting value obtained from related impacts

• Not considering increases in cost associated with obtaining the solution benefits, as well as increases/changes in working capital

• Not checking the reasonableness of value estimates

• Reluctance to make assumptions

• Not clearly stating assumptions

• Not determining performance indicators prior to attempting to quantify value

• Not validating peer choices for comparative analysis

• Not considering benchmarks or KPIs from other industries and non-peer companies

Robert Scott is Senior Vice President, Ernst & Young Consulting Services Inc. He is responsible for the firm’s Canadian ERP team and local champion for ERP InnovationSM, Ernst & Young’s structured approach to leveraging ERP investment in the Connected Economy.

Jane Diercks is Senior Vice President, Ernst & Young Consulting Services Inc. She specializes in directing large-scale ERP implementation and optimization projects for North American Fortune 100 companies using the ERP InnovationSM methodology.