Select Comfort puts big SAP project into sleep mode

Bed maker halts work on ERP rollout after being pressured to do so by large shareholder

Bed maker Select Comfort Corp. this week announced a series of cost-cutting moves, including a decision to halt all work on a wide-ranging rollout of SAP AG's ERP applications. But shareholder pressure also may have contributed to the ERP shutdown.

Select Comfort, which makes the "Sleep Number" bed, said in a statement on Tuesday that it expects the cutbacks to save about $15 million annually. In addition to ending the SAP rollout, the Minneapolis-based company said it plans to lay off about 120 employees, which amounts to 22% of its workforce.

On Wednesday, a Select Comfort spokeswoman declined to comment further about the shuttering of the ERP project or the company's future IT plans.

Select Comfort began using Oracle Corp.'s ERP software in 1998. But the Form 10-K filing that the company submitted to the U.S. Securities and Exchange Commission for 2006 says that Select Comfort planned to implement an integrated suite of SAP applications, including the vendor's ERP, CRM and supply chain management modules. The bed maker initially expected to complete the SAP rollout during the first half of this year.

"We believe this SAP-based IT architecture ... will provide greater flexibility and functionality for our growing and evolving business model and be less expensive to maintain over the long term," Select Comfort said in one SEC filing.

But other SEC filings show that Select Comfort officials for months had been pressured to spike the project by an institutional shareholder, a New York-based investment firm named Clinton Group Inc.

In letters sent earlier this year to Select Comfort's board, Clinton Group characterized the ERP implementation as significantly over budget and behind schedule, and criticized the bed maker's leadership as reckless.

"We believe that spending on the SAP system installation should be deferred until an expeditious detailed review of information technology needs is undertaken and completed by an independent consultant," Clinton Group Vice Chairman Jerry Levin wrote in a letter dated March 6.

Levin said that Select Comfort spent $12 million on the ERP project last year and planned to spend at least another $8 million this year. "It is difficult for us to envision, given the size of the Company, that the Company could ever achieve cost savings to justify such a large expense," he wrote.

A second letter dated June 23 was even harsher. "Select Comfort's plan to continue with the SAP rollout using internal resources that have at best limited experience implementing a new enterprise software system is indicative of extremely poor judgment by management," Levin wrote. "Given Select Comfort's financial performance, the implementation should cease immediately."

While Select Comfort's announcement didn't rule out the possibility that the company would revive the implementation, unfinished ERP projects are "more common than you might think and more common than [they] should be," said Frank Scavo, managing partner of Strativa Inc., an IT consulting firm in Irvine, Calif.

"Ceasing an implementation midstream is certainly not a pleasant decision, because assuming that at some point this organization is going to restart the implementation, they're going to have additional costs," Scavo said.

For example, end users might have to be retrained on new business processes that they've already been taught, and any third-party integration firms that have been helping with the project may not be available later on. "But sometimes financial realities are what they are, and companies need to make a decision," he said.

Forrester Research Inc. analyst Ray Wang said via e-mail that the economic recession is undoubtedly having a chilling effect on some ERP projects.

"A number of our [clients] are in the process of conserving cash," Wang wrote. "For some, this means [a] delay on implementing certain modules, reducing costs in maintenance and also renegotiating implementation contracts."

Wang added that ERP users can hedge their bets, at least with systems integrators, by building a phased approach to rollouts into their contracts. "We typically tell customers it's best to budget for a project in good and bad times in order to achieve the best ROI," he wrote. "Delays do impact the ROI. However, when cash is king, you have to protect cash flow, and that will win out."

SAP spokeswoman Natalie Fine said that Select Comfort's decision appears to be an anomaly. "We fully recognize these are truly critical times for our customers," she said. "[But] what we're seeing is this is not a trend. SAP projects are continuing to go forward."

Like other vendors, SAP has announced incentives aimed at helping customers weather the economic difficulties, such as a zero-percent financing offer.

Copyright © 2008 IDG Communications, Inc.

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