Why ERP Is Still So Hard

Steve Berg knows what intense pain feels like: The man has been Tasered, in fact-not because he ran afoul of the law, but as VP of IT at Taser International he's partaken in a corporate rite of passage. "It's the worst five seconds of your life," he says. "You cannot move."

Like other IT execs, he also knows pain and suffering as it relates to ERP-from vendor selection and licensing negotiations, to implementation and change management, followed by upgrades and integration. And as he and many other IT leaders have come to know, ERP-induced pain can last much, much longer than a mere five seconds.

Taser's attempt to wrap an ERP package around its corporate processes sounds eerily similar to most companies' experiences. The "before" picture: A mélange of disparate systems that didn't talk to each other and a good deal of "paper pushing" between the systems, Berg says. "When you don't have a centrally managed technology environment," he says, "things can get overly complicated very quickly."

Executives had sought a unified system so that Taser "could do a complete workflow throughout the company without having to run redundant systems that don't communicate," he says. That was 2004. Microsoft's Dynamics AX was eventually selected. And again, like many companies, Taser decided to customize its chosen ERP package to meet the business processes that it already followed. "So rather than take an ERP system-which supposedly out-of-the-box has, say, an accounts receivable [process], with best practices that are inherent to the system, we decided...to modify AX to work like this other application because users were comfortable with it," he says, "and they didn't want to change."

But a funny thing happened on the next upgrade: Naturally, all of those customizations done to the initial AX rollout-which were "plentiful," Berg says-were going to have to be upgraded in 2009. Taser decided it didn't want to go down that road again. This time, Taser ERP users would change, demonstrating that vendor-purported "flexibility" has been both ERP's blessing and its curse.

"We're going to get rid of these customizations and go back to what the [Microsoft] AX best practices and recommendations out of the box," Berg says. "If we're going to be able to grow the company-we're at $100 million now and if we want to be a half-billion company in four years' time-the current processes are not allowing us to get to that point."

The upgrade took longer than expected: Testing and training issues, as well as certain customizations that were unavoidable, complicated progress along the way, Berg reports. Executive sponsorship and interest never waivered, though. "It seemed like all eyes were on this upgrade and all eyes were on IT to make sure nothing could go wrong," he says. "Everybody understood the long-term benefits, but there will always be some teething pain at the beginning. We went live in May [2009] and now we're in July, and things are running smoothly. But May and June were pretty tough."

Taser's tale probably seems commonplace to IT vets. But the fact that Taser's story is so common, so expected, so universal, after nearly 40 years of all things ERP, makes it all the more significant.

ERP Pain, By the Numbers

The preponderance of corporate pain lurking throughout the lifespan of an ERP suite is unequivocal. To wit: ERP projects have only a 7 percent chance of coming in on time, most certainly will cost more than estimated, and very likely will deliver very unsatisfying results. In addition, today's enterprise has a little better than a 50 percent chance that users will want to and actually use the application. Poor application design just adds to the turmoil. In sum, "ERP success" has become a very subjective metric.

As for costs, an ERP system from a Tier I provider isn't cheap: Total cost for an average SAP install runs nearly $17 million, Oracle at $12.6 million and Microsoft is relative bargain at $2.6 million. (Tier II ERP providers average in at $3.5 million.)

For all of that investment, today's enterprises surely must be basking in the glow of their fully modernized ERP backbones? Hardly. A Forrester Research survey of more than 2,200 IT executives and technology decision-makers in North America and Europe found that modernizing key legacy applications is the top software initiative for businesses in 2009.

Making matters worse is that CEOs and CFOs are still trying to wrap their heads around the financial aspects of ERP, a most unusual piece of the corporate pie: the licensing, implementation, customization, annual maintenance and upgrade costs. (More on that later.) Not surprisingly, ERP has consistently remained among the top IT spending priorities in large corporations, growing at the rate of 6.9 percent each year and set to top the $50 billion mark globally in 2012, according to Forrester Research data.

Summing it up in an understated yet perfect way is Ray Wang, a former Forrester analyst and now a partner for enterprise strategy at Altimeter Group: "Business software is just not easy."

But, as far too many people have lamented over the years: Why does it still have to be?

Dawn of New Computing Era

To understand where we are today, it's critical to recall ERP's ascendance. In brief: Systems Applications and Products in Data Processing (SAP) forged the market in 1972. Businesses and their leaders in the 1980s and '90s bought into SAP's vision of a computerized mechanism to connect finance, operations, supply chain, HR and sales information. "You were going to be able to be more efficient, effective and also lower your overall costs-that's pretty much what everybody was aiming for," says Manjit Singh, CIO of Chiquita Brands International. The market boomed. Other software vendors joined the mix. Oracle came along and bought up many ERP players, though SAP remained king.

Expectations for IT's omnipotence soared in the mid- to late 1990s. Credit flowed like the Mighty Mississippi, and companies thought nothing of spending millions on ERP installs-some of which were integrated, most of which were siloed. As Y2K approached, fears of worldwide catastrophe created a panicked IT group desperate to replace all non-compliant systems. Companies were at the mercy of their ERP vendors and consultants-and both of those parties made a killing.

"There was a mass rush to implement these things, and therefore consultants were expensive and software wasn't discounted that much," recalls Vinnie Mirchandani, a former Gartner analyst and founder of Deal Architect, which consults with companies purchasing software. Companies bought suites of ERP apps-lock, stock and barrel. "This was pretty bad," Mirchandani says. "It was an almost irrational buying pattern."

The turn of the millennium ultimately proved two things: 1. Y2K was a non-event because IT did its job; and 2. Companies were now locked in to their ERP providers-not with a competitive advantage but with a competitive similarity-for the foreseeable future.

But now, businesses change at a pace at which ERP systems have trouble. "If business was still the way it was in 19-whatever, yeah, [ERP] wouldn't be a big deal," observes Wang. A CFO Research Services study of 157 senior finance executives succinctly addresses the situation:

"Companies grow and change, acquiring new business lines and divesting themselves of others. They open new facilities or consolidate operations, add partners or outsource functions, centralize or decentralize the back office. Reporting requirements increase as regulatory bodies heighten oversight and as companies expand across borders.... In short, businesses change, and as they do, so do management's information needs." Of course, ERP applications can change. But it'll cost you. In customizations. In change and process management. In upgrades. A typical company, notes the CFO study, will spend an average of $1.2 million each year to maintain, modify and update its ERP system.

ERP Costs Still Tough to Understand

The fine print and financial legalese contained within ERP application contracts can be alternately mind-numbing and head-scratching for the uninitiated.

"Of all the assets that an enterprise acquires, enterprise software brings with it the most unusual, onerous and restrictive set of constraints," writes Wang in a June 2009 Forrester report on software licensing. "In most cases, licensees may not resell, reuse or share their license. Licensees often encounter numerous grievances across the software ownership life cycle from selection to implementation, utilization, maintenance and retirement."

Oracle, for instance, will heavily discount license pricing upfront but will, rest assured, make that up on the backend-from its 22 percent maintenance and support fees, on which it does not negotiate. Oracle President Safra Catz told analysts on a conference call that maintenance is "very profitable part of our business, and as the number gets bigger and bigger it's really impossible for us to actually spend our way through it, and so in general that's the sort of overriding thing that guides our margins." Closing its most recent fiscal year, Oracle achieved nearly 90 percent profit margins.

Chiquita Brands' Singh understands and explains ERP this way when it comes to $1 million-plus purchases: "Your management team needs to understand that $1 million is not really $1 million. There are significantly higher costs as you look at the average lifespan of the purchase as well as resource implications," he says. "The CFO and CEO need to know that because they're going to see IT costs go up as a result. And you don't want them constantly asking the question: Why are year-over-year costs going up?"

That's all assuming ERP implementations are reasonably successful. Not surprisingly, with all the risks and all the multimillion-dollar projects, ERP implementations, when they do fail, can be spectacular events.

ERP, it seems, in one technology area in which a dose of Moore's Law does not apply. "It's sickening how ERP continues to be very expensive and very risky," says Mirchandani. "There is no reason why it should be. The software should be heavily discounted to start with. The maintenance [plans] should have several different options, offered both by the vendor and third parties. And the implementations should be more brain-dead implementations."

ERP and CIOs: Complicit or Complacent?

The Chief Information Officer's slow rise to prominence inside enterprises is undeniably intertwined with ERP's climb. A significant part of tech leaders' career trajectory-from data processing to MIS to IS to IT-is the manifestation of ERP's impact on the wholesale digitization of the innerworkings and processes of businesses, governments and nonprofit organizations. In other words, there would likely have been no Chief of IT in the 1990s if there was no ERP-just an IS manager responsible for e-mail.

In that vein, some ERP analysts lay partial blame for ERP's spiraling costs at the feet of CIOs, who have aided and abetted vendors' addiction to maintenance fees, for instance. "I don't blame the vendors: They're doing what the market is telling them to do," says Wang. "And they're doing what inherently the customers are telling them to do, and it's got them to this point. The problem is that just about everyone's been kicking the can a little farther, and I don't think we can kick it anything farther than now."

Maintenance and support fees, in particular, have drawn the ire of businesses scrutinizing balance sheets and trudging to make it through the 2008 recession. SAP's redesigned Enterprise Support plan would have increased its maintenance fees, but it wisely negotiated a détente with its global user groups who were up in arms over the proposed fee increases.

CIOs, too, can play a starring role in limiting costly customizations, by educating and imploring business managers and users why customization, in the long run, is often not the better route. But that task is never easy. Singh contends that every company thinks its processes and products are so different that customization is absolutely necessary. "While in reality, there is no good, solid rationale behind that in the vast majority of cases," he says.

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