It's time to take control

Jerry Hale is giving the cold shoulder to the big consultancies that want to help him run his most important software projects. "I refuse to turn over the leadership of my [enterprise resource planning (ERP) project] to consultants," says Hale, vice president and CIO of Kingsport, Tenn.-based Eastman Chemical Co., which has 6,000 users of SAP AG's R/3 ERP software. He says he felt burned by a consultant-led ERP project in the mid-'90s that went over budget, over scope and far beyond the original project schedule. So when the time came to replace that system with a new one, Hale decided to use his own people to do the project, along with a few handpicked consultants brought in to do small, specific tasks.

David Johns, senior vice president and CIO at Owens Corning in Toledo, Ohio, doesn't rely on consultants either. He and his IT staff now run Owens Corning's big software projects themselves, using consultants only for certain tasks.

Hale and Johns aren't the only CIOs breaking with the way enterprise software projects were handled in the past, with armies of consultants from the so-called Big Five accounting firms. Many CIOs are now dividing these massive projects into smaller chunks, spreading them out over longer periods and either demanding more from, or doing without, the Big Five altogether.

CIOs are taking back control in large part because they have no choice. These consultant-intensive megaprojects have a painful history of failure. In a Conference Board Inc. survey of ERP project managers released last year, 40% of respondents said they failed to achieve their original business case even after being live for a year or more. More than 20% shut down their projects before completion. For all companies, even the ones claiming success, costs were on average 25% over budget and annual support costs went up by an average of 20% over the supposedly inefficient jumble of legacy systems they replaced. Another survey, by Alexandria, Va.-based consultancy Robbins-Gioia LLC earlier this year, found that 51% of companies were unhappy with the results of their ERP projects.

And now companies are beginning to see a replay of the ERP debacle with customer relationship management (CRM). A recent survey by Edison, N.J.-based Fujitsu Consulting found that two-thirds of the companies that had installed CRM software failed to become any more "customer-centric."

Though there are many reasons why projects fail, CIOs are concluding that much of the fault lies with the pricing and delivery models of what used to be the Big Five accounting firms: Accenture Ltd. (formerly part of Arthur Andersen), Deloitte Consulting, Ernst & Young (now Cap Gemini Ernst & Young), KPMG International and PwC Consulting. In a recent survey of IT and business leaders conducted by Peerstone Research Inc. in association with CIO magazine, none of the Big Five rated better than a C in terms of the respondents' willingness to recommend them.

That isn't good news for the Big Five. Their revenue growth has slowed in recent years (to 11% for PwC Consulting, 8% for Deloitte Consulting and 3% for KPMG in 2000), while IBM's IT consulting division, which trailed them all in 1999, now has nearly 50% more consulting revenue than its nearest competitor, Cap Gemini Ernst & Young, according to "Global IT Consulting Report," a Fitzwilliam, N.H.-based newsletter. Cap Gemini Ernst & Young's growth came mostly from combining operations in 2000, according to the newsletter. Of the five firms, only Accenture maintained the growth rate that the Big Five had come to expect in the '90s. Plano, Texas-based outsourcer Electronic Data System Corp.'s consulting division, though much smaller than IBM's, is also gaining fast on the Big Five, according to the newsletter, growing by 72%, to $650 million in IT consulting revenue. Their customers are happier, too. IBM received an A-plus rating in recommendations in CIO's survey; EDS got a B-minus.

The resentment against the Big Five runs deep. Respondents to the Peerstone survey and IT executives interviewed by CIO claim that the Big Five send them undertrained, underqualified people and bill customers at high rates. There is high turnover among these junior consultants, causing major disruptions in projects. CIOs also accused consultants of constantly adding new work and blowing budgets and schedules. IT executives, it appears, are fed up with the way consultants get paid for every hour they put in on the project, regardless of whether the project is on time, on budget, or yields positive results.

With the Enron Corp. scandal forcing the Big Five accountancies to spin off their consulting divisions, the very survival of those divisions may be at stake. IBM is broadly diversified, EDS and Accenture are firmly rooted in outsourcing, but the rest of the former Big Five consultancies still rely on big engagements for a living. "There is a wholesale examination going on at these firms of the underlying principles that they operate under," says David Caruso, vice president and research fellow of Boston-based AMR Research Inc. "That's the result of incredible push-back from users."

One thing is clear: The way these projects have gone in the past cannot continue if companies have any hope of getting a return on their vast investments -- $40 million to $240 million for a typical ERP project in a Fortune 500 company, according to AMR Research. Even the consultancies agree.

"Western companies spent north of $300 billion on ERP since the mid-'90s, and if you put your hand on your heart, you can't say they got that back," says John Parkinson, chief technologist for the Americas for Paris-based Cap Gemini Ernst & Young. "You look at it and say, 'I'm not sure that was the best thing to do -- at least not the way it was done.'"

A good deal, but not for you

In the early days of consulting, a few experienced consultants would sit down and noodle business strategies for their clients. They would charge high hourly rates and expenses -- known as time and materials in the business -- but only for a limited period of time. Then big IT came along, bringing enterprise software projects that were huge in scale, fuzzy in scope and seemingly endless. Armies of consultants were unleashed on Fortune 1,000 companies to install the systems and redesign work methods.

Such contracts have become the golden apple for consultancies because they mean big deals, and big deals mean many consultants at the customer's site, all usually working on a time-and-materials basis. The archaic time-and-materials billing method does nothing to help control the scope or length of these projects. The consultants get paid for every hour they put in on the project, regardless of whether the project is successful or on time.

The Big Five depend on these enormous open-ended projects to preserve their profit margins, which typically run anywhere from 20% to 40% or more. "Consulting firms make more money and get better margins by selling big deals," says Christine Ferrussi Ross, an analyst at Cambridge, Mass.-based Forrester Research Inc. "The more people you have on one deal, the more your cost of sale goes down. You're not out there having to look for another deal."

Consultants are also rewarded for selling follow-on work to customers so that once the company gets its foot in the door, it can stay there as long as possible. KPMG calls this its client-for-life strategy, according to Mark Lee, senior vice president of product solutions at KPMG in McLean, Va. "Our intention is not to get into the client and stay forever on the project," he says. "It's building a strong relationship where the client looks to us to be a trusted adviser."

But customers have lost patience with the foot-in-the-door approach, according to Denny Wayson, vice president and chief analyst of enterprise solutions at Dataquest Inc. "We don't think that vendors that use that approach are going to survive," he says flatly.

Worse, many of the consultants who arrive at a customer's door don't have the experience one would expect. "You get a mixed bag," says Craig Coggins, financial systems supervisor at Wacker Siltronic Corp. who worked with Deloitte Consulting on a recent SAP installation at the German semiconductor manufacturer's U.S. factory in Portland, Ore. "You get some people who are very experienced and talented, and others who are intelligent, articulate people but don't really know the software and are learning as they go along."

Insiders call this the school bus effect. Born out of a drastic shortage of qualified people, the big consultancies began hiring young people fresh out of school. Though all big integrators hire youthful and less experienced consultants, Andersen Consulting was best known for the practice. Eager to work the often egregiously long hours that these projects demand, the young consultants are trained quickly and armed with an explicit methodology -- a sort of consultant's instruction manual -- to help them get up to speed on enterprise software efforts.

Eastman Chemical's Hale says that inexperienced consultants were part of the reason his first ERP project was late and over budget. He felt the consultancy he hired was training its people on Eastman's time and dime.

Every big consultancy spoken to for this story says it has scaled down the percentage of fresh-faced consultants assigned to enterprise implementations. According to James Hall, managing partner of technology and research at Hamilton, Bermuda-based Accenture, 70% of its current consultants have prior project experience.

The yes men

Even the most experienced and highly rated consultants have trouble delivering the changes in work methods that they promise at the beginning of these big enterprise software efforts. And when this transformation -- promised first by the software vendors and seconded by the consultants -- doesn't happen, customers are left embittered.

"We've invested $200 million in SAP so far, and we don't have much to show for it," says Derek Dyer, manager of global e-business at Deere & Co., a Moline, Ill.-based farm equipment manufacturer. Dyer doesn't blame the SAP software for Deere's lack of return on ERP. He singles out one of the consulting firms on the project, IBM Global Services, for criticism.

IBM Global Services was brought into Deere in 1999 to help make SAP the ERP standard across the company (some prior installations already existed). As part of the standardization process, IBM was asked to help transform some of Deere's more antiquated work methods. But when Deere managers resisted the changes, IBM Global Services backed off, according to Dyer. "In some cases, we wound up mapping SAP to our current lousy manual processes, which made things even worse," he says.

In areas where the broken work methods were left in place, the new system performed worse than the rats' nest of old spreadsheets it replaced, says Dyer. "The managers ran the shop floor on an Excel spreadsheet before SAP, and if something didn't look right in the data, they'd just go in and change it," says Dyer. "Well, SAP doesn't let you do that. It's tightly integrated, and if you try to doctor data, it won't flow correctly through the system."

In November 2001, Deere halted its plans to roll out R/3 across the company and fired IBM. Deere's new plan is to install ERP only "where it is absolutely needed," says Dyer. (IBM Global Services didn't respond to repeated requests for comment.)

All of the consultancies we spoke to for this story acknowledged that business process improvements are the weakest link in big software projects. But they say that's often because their clients don't believe they need it or don't want to pay for it.

"A lot of times, the client just doesn't want to do it," says Jeff Balentine, global leader of Deloitte & Touche's technology, media and telecommunications group in Dallas. "They see it as touchy-feely stuff, and they don't want to pay for it." But these companies are often the ones that complain about their projects when they are done, he says. "They get it done fast and cheap, and then they say, 'Where's the wow?' We as consultants need to stand our ground and say we need to do the process improvements."

But to improve processes, you have to reorganize the company, and that creates tremendous internal resistance. "These projects create winners and losers inside the company," says Dave Duray, global SAP leader at PwC Consulting in New York. "Everyone signs on, and then when you start to deploy it, the individual managers see that their administrative staffs are going to be taken away and centralized and they say, 'I don't want that.' That's when management has to step in and be tough, and I don't think they have been. At that point, [consultants] should stop and say, 'We're not going to do this. You're wasting your money.' "

But consultants won't walk out. "If the client insists on something that's a bad idea, then we'll do it," acknowledges Parkinson. As a result, he acknowledges, "I don't know of any engagement where we were allowed to do everything necessary to guarantee the client's success."

Time to push back

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