According to a recent McKinsey report, today’s workforce spends 61% of their time managing work rather than doing it. This despite many of the ‘best’ companies spending millions upon millions on integrated ERP solutions.
There are two strategic questions that have to be answered on this. Were these investments in ERP strategically the right ones to make? More importantly, could these organizations have avoided these costs almost entirely AND improved their overall financial reporting and organizational productivity?
There are five strategy evaluation questions to ask in any strategic decision:
- Consistency: Is this consistent with the culture and direction of the organization? Does the expected Return on Investment meet the companies’ standard?
- Consonance: Is this consonant with the market and technological advances?
- Competitive advantage: Does this decision offer a significant form of competitive advantage?
- Feasibility: Is the total cost and change to the organization feasible in the planned time-period and budget?
- Risk: What are the inherent risks involved and how can these be minimized? Can the organization afford a delayed or failed project?
In Profit Impact of Market Strategy (Buzzell, Gale) there are two factors that stand out as being controllable linkages to profitability. These are quality of product and/or service and the level of capital investment, the latter of which relates to this issue. “The average rate of return for the most capital intensive businesses is less than half that earned by low capital intensity SBU’s.” There is thus clearly a disincentive to invest large capital amounts in times of rapid technological development and lower margins.
One of the fallacies of ERP solutions is that they will make life easier for all. My experience has shown that there are two huge factors that are ignored by the Corporates who enforce this decision.
Firstly, the chances are that each division or SBU has a system that works and is inexpensive. Few SBU’s will have the same operational drivers that dictate which software optimizes their operational efficiency, productivity and customer performance. To my knowledge ERP’s cannot offer different functional capabilities under the same roof. They try to sell a ‘one size fits all’ which can only apply in selective instances. Operational functionality is often lost while increasing indirect costs over and above the new exorbitant cost of implementing and maintaining an ERP solution.
Secondly, an ERP system is usually controlled by the corporate body. The lack of ownership and decision-making at SBU level in relation to operating systems can be a significant demotivator. ‘Our’ system becomes ‘your’ system and the ownership of set-up and maintenance of ongoing financials becomes blurred, leading to delays and inaccuracies. It represents that classic examples of a clash of cultures and the determination of a “control system” to push forward regardless. If the SBU has systems that work well and meet the strategic criteria of productivity, accuracy, and high standards of customer service levels, then there is no reason to change this.
“They tried to impose a centralized solution onto just an enormous geographic and political base. It was a massive undertaking filled with political differences and technical failures, and in the end it serves as an example of what not to do.” This is a common sentiment. (Read Biggest ERP failures)
High Risk of Failure
This decision alone can cripple an organization in terms of time and cost overruns, not to mention cultural conflicts inherent.
From a strategic perspective ERP solutions per se cannot adequately meet ANY of the five evaluation criteria. The Standish Group research showed that 31% of these projects are cancelled before they get completed. Further results indicate 53.7% of projects will cost over 189% of their original estimates. This excludes lost opportunity costs. According to the Robbins Gioia Survey covering 232 respondents, ”51% viewed their ERP implementations as unsuccessful.” (See Stats of Failure Rates)
Forget the alluring panacea of ERP solutions.
Sunk Cost Error
On a last note, it might be worth pointing out the fallacy of ‘we’re in it now’. ERP projects are renowned for overrunning their planned implementation times, typical of large projects. The common ‘go-no go’ project milestones are seldom reviewed at a strategic level because of the sunk cost error.
“Rational decisions should be based on comparisons between future gains and future costs, not their original price.” (Russo, Schoemaker) The principle of sunk costs is commonly forgotten in Boardrooms where good decision process is lacking, and emotions and egos obstruct good business sense.
So what is the alternative?
The need for an experienced, principled strategy facilitator to guide your company’s strategic planning is ever more obvious. JSPF will show you how to lower that ongoing cost of 61% wasted time to below 10%, meeting ALL five of the strategy evaluation criteria, without having to risk an ERP solution.