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Why the Controversy Over the ROI from ERP?
by R. Michael Donovan

 
   
 
   

In past articles I have emphasized what should be done to make ERP a good investment in the overall business.  However, it is very common for companies to take a big leap of faith with ERP and Supply Chain Management systems.  And, unfortunately, the vast majority - 90% plus - of companies who have implemented ERP have not had a truly successful implementation the first time around.  However, despite the recent rash of articles about the limited ROI from ERP, it does not mean that the ROI potential is not there.  The caveats are:

1. ERP must be driven by the right strategic and tactical process improvement objectives with documented assumptions and valid ROI expectations and metrics, and 

2. The new processes and ERP must be implemented right, and quickly to meet the ROI expectations and become positively measureable.

Yet, while these two points may sound like a confirmation of the obvious, ERP and Supply Chain Management are rarely approached in this manner the first time.  As a result, it almost always means that many problems will arise during and worse, after implementation.  This usually necessitates a re-implementation effort or, at least, a major tune-up. 

Inarguably, the ROI comes from the process improvement ERP supports, not from new ERP software.  What is the difference?  ERP software alone, no matter how good, makes little impact on improving business performance.  If you continue to follow the same pre-ERP business processes after implementation you can expect the same or possibly worse performance results. However, ERP software can enable and support many new processes, but not without the organization deciding what they are and accepting their use.

What's Been Happening?

With the implementation success rate so low and positive ROI often non-existent, many now think that ERP systems are expensive, wasteful exercises.  There are companies who have ignored ERP and pursued a non-ERP strategy and have exclusively focused on cutting inventories, cycle times, costs, etc. through the application of Demand-based Flow Manufacturing.  Eventually, the organization begins to learn ERP can serve many valid and necessary purposes such as:  storing product definition data, processing sales orders, planning  material needs, paying and issuing invoices, etc.  The list goes on, but the point is ERP and Flow are not mutually exclusive.

I have long been an advocate of reducing cycle time and utilizing flow production techniques.  However, cycle time reduction and flow are not solely about changing production processes.  What many companies overlook is that information must flow before material starts to flow effectively and quickly.  If the information system is full of queues and/or bad data, and they often are, then cycle times will be longer.  Also, it is true that some traditional ERP scheduling logic is ill-suited to flow manufacturing and Supply Chain Management, but other aspects of ERP are quite supportive.

ERP implementations have been plagued by a long list of other afflictions.  The following list is definitely not exhaustive nor prioritized, but are very commonplace problems.

  • ERP software was installed to mirror a set of existing, inadequate business processes.
  • The high expense of fixing legacy systems for Y2K was the predominant driving force to replace old systems with new ERP software.
  • Organizations were painfully ill-prepared to conform to "best practice" process templates chosen by the ERP systems integrator.
  • Answering the question of "How do we want to run our business and why?" was not done by management and therefore, maximizing performance through significant business process improvement did not occur.
  • Implementations were often done by inexperienced consultants/system integration personnel with limited understanding of how a manufacturing enterprise could and should run.
  • Pre-implementation preparation activities were not understood and done.
  • Executive sponsorship and active, on-going involvement with the ERP implementation were lacking and, as a result, lots of political bickering and barriers to success surfaced which ultimately became more and more difficult to overcome. 
  • IT personnel were all caught-up in beauty contests of technical wizardry and, as a result, their concentration was not totally focused on helping the business to become a higher performing company in meaningful terms.
  • IT personnel were subjected to the "slam and cram" of new technology without having the time and training to transition from the old legacy system technology to the new.

The ERP ROI Debate

Expectations  vs. reality has been a hard-learned lesson of disappointment with most new ERP system implementations needing significant amounts of clean-up if any positive ROI is ever to be achieved. Many ERP implementation failures were caused, at least in part, by Y2K being the driving force behind the project rather than defined business performance improvement objectives.

With Y2K as the driver, ERP became a software replacement project and after expenditure approval management often stepped aside and let information technology and systems integrators take over the installation of software.  In cases like this, there are no meaningful strategic and tactical objectives and therefore, by definition no business performance oriented metrics can reasonably exist nevermind performance improvements.  Yet, too often management wonders why the expectations, realistic or not, that were set for them by others are no where near being achieved. 

There are managers depending upon their function and position that are comfortable working with expense and profit numbers and others who are equally comfortable working with revenue and marketshare.  The typical ERP system justification is so often driven by functions such as manufacturing, finance, materials and information technology which are functions that are generally more comfortable working with so-called "hard" or tangibles such as expenses, profit, inventory investment and the like.

Some are of the opinion that many aspects of ERP ROI are so well-hidden that they can not be reasonably measured.  The not so obvious benefits, which some like to call "soft" or intangible, are where people really get hung-up and very little to no time is spent trying to predict the economic impact.  In companies where the CEO is strategy oriented these numbers are not considered "soft" (read squishy), but are specific targeted objectives guided by action plans that have specific metrics to gauge the expected incremental performance improvement.  Simply put, if you can develop and apply reasonable metrics to the often thought of intangibles such as: customer satisfaction, communication, decision cycle time, decision-making quality, cycle time, delivery performance, etc., then, it is very likely the economic impact can be reasonably predicted.

Unfortunately, many of the executives associated with the activities of increasing revenue and marketshare are not involved enough in ERP and Supply Chain Management system planning and implementation.  As a result, the top line numbers for justification are "soft", even though they shouldn't be, and worse, implementation focuses on the various hot buttons of the moment in manufacturing, accounting, engineering and information technology.  The fact is, strategy and its implementation are too often not considered in ERP system planning and implementation and therefore, ROI from strategic improvements do not materialize. 

ERP's Strategic Drivers

One of the most important issues is how more effective Supply Chain Management can improve revenue and marketshare as well as lower costs.  With management compelled by commonsense and the desire to achieve and maintain an edge in the marketplace, Supply Chain Management has become the collaborative extension of internal operations between customers and suppliers.  The concept of one set of numbers for everyone has been around, at least in theory, for some time.  The objective being a better coordinated management team that's all on the "same page".  However, the concept of one set of better numbers brings a much expanded and very important meaning to coordinating customers needs with production scheduling and supplier requirements in a collaborative Supply Chain Management. 

Today, most every management needs to frequently review and revise its Supply Chain Management strategy in the pursuit of achieving and/or maintaining a competitive edge.  Companies that are considering a new ERP system, as an enabler to more effective Supply Chain Management, need to get to the heart of the ROI early in the planning process.  Management needs to ask some challenging, broad ranging questions, seeking answers that demonstrate tie-in to the company's overall goals and objectives.  For example, asking tough questions and making sure the answers are solid and as fact-based as possible should help to clarify many issues and priorities.

  • Will ERP help us to improve customer satisfaction?  How? How much and when?
  • Will ERP contribute to increasing our marketshare? How? How much and when?
  • Will ERP decrease our operating expenses? How? How much and when?
  • Will ERP help to increase revenue? How? How much and when?
  • Will ERP decrease our inventory investment? How? How much and when?
  • Will ERP shorten our order-to-delivery cycle time? How? How much and when?
  • Will ERP help keep pace with or surpass our competitors? How? How much and when?
  • Will ERP shorten our time-to-market? How? How much and when?
  • Will we be able to reduce our material costs through improved supply base management? How? How much and when?
  • Have we appropriately defined responsibility and accountability for these business performance improvements?
  • What are the metrics for measuring performance improvement in both tactical and strategic areas?

In this writer's opinion, strategic benefits, with actual results not available for a few years, should be based on solid time-phased assumptions of outcome and reasonable estimates of likely results.  It is much more appropriate to scrutinize ERP up front by establishing realistic objectives and performance measures before any significant commitments are made.  Without appropriate performance measurement, realistic accountability (answerable for results) is just not possible.  To achieve your objectives, you must know the route you are taking and the time it will take to get there or you will never be sure you reached your intended destination.

There should be no controversy about ROI if you cover both the tactical and strategic issues of how ERP can or cannot support improvements in your business performance.  Everyone in the organization needs to understand that positive ROI comes from changing the way business was performed in the past to more streamlined, faster and lower cost processes that better serve the needs of the customer.  If you do that very well, it will be a win.


     
   
     
   

The Author

 

R. Michael Donovan is a management consultant based in Framingham, Mass.  Readers may obtain a copy of the book Strengthening Manufacturing's Weak Links, and other educational materials through www.rmdonovan.com.

     
   
     
   
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Copyright 2000 by R. Michael Donovan. All rights reserved.

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