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Why ERP systems fail

by Bernie Goldband

Implementing and maintaining large scale Enterprise Resource Planning (ERP) software can require major dollar investments. Yet many companies invest in an ERP system without adhering to the same disciplines applied to other areas of their business.

They typically discard essential steps such as risk assessment, benefit analysis, performance objectives, and cash flows. In their place, they make expenditures based on naive assumptions that the computer will magically transform a company into a paragon of efficiency. This misguided approach sets up a sequence of events that often leads to a failure of objectives. The resulting conclusion is that the ERP software was a bad investment decision.

As a business consultant, I am often asked to review a failed ERP implementation and determine the circumstances that led to its failure. Frequently, company management will conclude that the software doesn’t work or it is too complex to implement in their unique environment. Management further compounds the failure by claiming that the wrong ERP system was chosen, and if they had the “right” software package they could recapture their initiative and achieve their original objectives.

Yet, my experience is that the software itself is rarely the source of failure. In fact, selecting the presumed “right” software package will most likely result in a second failure – this one even more costly than the first.

Best business practices
ERP packages, even those that are industry specific, are designed for a large audience of companies looking to achieve success by following a template of best business practices. However, software often fails to achieve its promise because people who have a vested interest in existing processes are reluctant to change. This leads to costly program modifications to replicate those processes. This, in turn, can result in unnecessary manual tasks and issues of software maintenance, which neutralize the original benefits of the software.

When making your ERP software selection, examine the processes encoded in the software. If you can agree to model your company’s best practices based on those processes, you’re choosing the right solution. If you can’t, continue looking.

Once the ERP system is chosen, it’s not uncommon for management to turn the project over to a subordinate to manage the implementation. The problem is that the subordinate, who is usually chosen from the end-user base or IT department, typically isn’t given the authority to implement necessary business process changes.

Project management is a discipline, if not an art, which requires the ability to delve into detail while keeping a perspective on the original business objectives. The project manager needs to have the ability to overcome impasses through a judicious combination of political guile and management direction.

The most successful ERP projects are led by a member of the management team who has actively participated in both the software selection and implementation efforts. When selecting your project manager, choose the one who has the most to gain (or lose) from the ERP system.

Implementation budget
Once the project manager is selected, many companies tie their hands by under funding their efforts or by limiting the scope through impractical project schedules. It has been my rule of thumb that an implementation budget should be a one-to-three times multiple of the list price of the software package. Budgets are variable based on the size of the organization and the package selected.

Tier 1 packages, such as SAP or Oracle, should be budgeted on the upper end of the range due to their implementation complexity and the size of company that gravitates to that part of the spectrum. Other packages fall elsewhere on the range. Variations can occur as a result of the amount of outside consulting required and the geographical diversification of the company.

At a minimum, five to 10 percent of the implementation budget should be set aside for a project management consultant. Many companies make the mistake of using the software vendor for this role. But the vendor is driven by installing the package and moving on, not by business process improvement. Furthermore, vendors do not have the resources and background to evaluate and recommend business process improvements and do not see this as their job.

The most significant cost of the ERP implementation is not the software, but the cost of the implementation. Budget accordingly.

Project schedule
Project schedules are equally important to ERP initiatives as implementation budgets. Some companies try to back-schedule an ERP project by establishing an implementation go-live date and then attempting to schedule interim (and often unrealistic) milestones. This usually results in insufficient attention to details and carelessly completed tasks.

An effective project plan starts with a kick-off meeting and logically progresses to a go-live conclusion. Tasks should be properly resourced and scheduled, in man-day increments, with no task exceeding 15 days. At the end of each task, a meaningful deliverable should be presented for evaluation by the project manager.

The project schedule is the foundation of a successful ERP implementation; it should be developed and monitored carefully. The schedule should be updated weekly to reflect real-time activity and progress, and regularly reviewed by both the project manager and senior management.

Training and education
The last reason for ERP system failure that we are going to look at in this article is a double-edged sword: lack of training and education. Many companies confuse – and under fund – both tasks.

Traditional training, initially provided by the software vendor, is essential to successful ERP implementations. For obvious reasons, end-users need to have working knowledge of the selected software package to feel confident when performing their jobs.

There are two ways to approach this. One is have the vendor provide all of the training. The alternative is to take a “train the trainer” approach where the vendor trains a few individuals who then train the rest of the staff. The latter approach minimizes the stress on your implementation budget while developing expert users who tend to claim ownership of the process. There are no rules of thumb, however, in time or percentage of implementation budget, to determine how much training is required.

Successful ERP implementations stress staff training. They provide training sessions regularly throughout the project, with special concentration during the weeks just prior to implementation.

Education is different from training and provides staff with the knowledge of the methodology behind their activities. Members of the management team, master production schedulers, shop foremen, or even cost accountants won’t be effective unless they understand the concepts required to do their jobs in an ERP environment.

You can’t rely on the software vendor to perform the task of educating your workforce. In fact, the education step should really begin prior to package selection. This allows key staff to correctly evaluate your company’s processes as they relate to the software requirements and each vendor’s offerings. For companies who miss this early opportunity, education should be completed prior to the new software configuration.

Make the commitment to educate yourself and your staff on how you need the business to perform and consider outside help if needed. For example, successful ERP education programs have been developed in conjunction with professional organizations such as The Association for Operations Management (APICS) and independent consultants who specialize in operations management education.

Taking responsibility leads to success
Now that we’ve outlined some of the real reasons why ERP implementations fail (some say up to 50% or more), it’s time to ask: Whose failure is it?

None of the points discussed here are technical issues related to software. An overwhelming number of ERP system failures are caused by lack of attention to the critical management issues discussed above. Even the right software will fail under similar circumstances. Blaming or changing your ERP system is simply a way to divert attention from the execution mistakes made as a result of human error.

To rescue a failing ERP project, start by taking corrective action. Before throwing out your current system (or worse, letting it spin into oblivion), evaluate what steps were followed (or not followed) to bring you to your present situation. Use the key points in this article to make sure you understand why the system is failing. Be prepared to do whatever it takes to reverse the current course of action.

There are times when the software is not appropriate for a particular environment. Even then, the reason for failure is not the software. Rather, it is the lack of due diligence by the company before buying it. While software mismatch does occur, those instances are not as common as business managers believe.

Bernard Goldband is an executive-level management consultant with more than 25 years of information systems and technology management experience in manufacturing, distribution, finance, planning, and process improvement. He has been responsible for the implementation of IT solutions in both domestic and multi-national companies, with emphasis on technology infrastructure, integration of enterprise-wide business solutions, and applications development. Reach him at bgoldband@ctsguides.com.