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ERP Gone Bad: Lessons from Real-World Failures

Added 17th Nov 2010

ERP projects are among the most critical efforts IT ever undertakes, as they touch almost every part of essential business operations and are complex technically. Not surprisingly, some fail -- spectacularly. Although ERP has been an enterprise focus for a decade, many companies are still embarking on such efforts, and even more are dealing with ERP redos because of mergers and business changes. Here's what you can learn from the failures of others and put to use on your own ERP projects.

I focus on failed SAP deployments because the details are more commonly available, thanks to SAP's huge presence in large publicly owned enterprises and government, where documents surrounding litigation and major cancelled projects must be made public. But the lessons apply to Oracle and other ERP deployments as well.

What is an ERP project failure? Not mere cost overruns, but an event whose effects are so large that they force a company to restate its earnings or a government entity to cancel a project that is substantially funded.

John F. Kennedy once said, "Victory has a thousand fathers, but failure is an orphan." In the world of ERP projects, the reverse is almost always true: Failure has a thousand causes. These causes almost invariably arise, says Michael Krigsman, CEO of the consultancy Asuret and a well-known analyst of ERP failure, because of a lack of alignment between the three key parties in a project: the customer, the software vendor, and the system integrator.

Customer failures
The lack of alignment often begins with problems on the customer's side of the equation. In its most common form, it consists of lack of proper planning. David Bergen, the former CIO at Levi Strauss & Co. who implemented several SAP projects at the apparel maker, says that most companies are not prepared for an ERP project because the basic steps have not been performed adequately. "Companies are generally not good at change. Additionally, many companies struggle in defining their business processes. Those that struggle with the process redesign will have a difficult time in achieving success and realizing the benefits."

A consistent theme in failed projects is overreaching on the part of the customer. This ambition is often fueled by salespeople from the integrator and the software vendor, who tend to create improbable success scenarios and encourage oversized projects.

A case in point occurred at Shane, a jeweler with $200 million (about Rs.900 Cr.) in sales. In 2006, the company undertook a $36 million (about Rs.162 Cr.) ERP project that was canned after three years. This was a hugely oversized project and likely far too large for the company, says ERP advisory firm Panorama Consulting. Its survey of 1,300 ERP implementations concludes that the average company spends 9 percent of its annual revenue on an ERP project -- Shane spent twice that. Shane filed for bankruptcy in 2009, blaming in part the cost overruns of its incomplete ERP implementation.

However, even once a project is properly scoped out and a validated plan put in place, customers frequently fail to manage the project correctly. Typically, this takes the form of poor decisions, pushing tasks the customer should undertake onto the staff of the integrator, and not holding the integrator to the project plan, timetables, and especially, budgets. When a company with weak project management is teamed with an integrator that doesn't deliver to spec, wholesale disaster can ensue.

One example of this is FoxMeyer, a $5 billion (about Rs.22,500 Cr.) drug distributor -- at the time, the fourth largest in the United States. The management team was an early and vocal supporter of an ERP project to streamline warehouse operations. Despite warnings that the implementation's schedule was too aggressive, the company went ahead and inked a huge drug distribution deal and slashed the price of its products in anticipation of the project's completion.

The project, however, steadily fell behind schedule. The delays were exacerbated by the changed requirements and business processes resulting from the new deal. As matters worsened, consultants to management suggested that the project be scaled back and implemented in phases. But the CEO and CIO, who both strongly supported the ERP conversion, said they had "bet the farm" on the project and instead opted to expand it. This decision accelerated the failure, and within two years, the company was forced into bankruptcy.

A study by Judy Scott (then at the University of Texas School of Business) concludes that FoxMeyer was a failure of management. The use of inexperienced consultants by the lead integrator, Andersen Consulting, was a contributing factor, she reports, but the factor that sealed the project's fate was management's inability to regain control of the project and make the indicated decisions. Successful projects require responsive, thoughtful management.

  • Page 1 : ERP Gone Bad: Lessons from Real-World Failures
  • Page 2 : System integrator failures
  • Page 3 : ERP's complex triad: Getting it right
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