Why ERP Is Still So Hard

After nearly four decades, billions of dollars and some spectacular failures, big ERP has become the software that business can't live without--and the software that still causes the most angst. In Part I of CIO.com's analysis of the ERP market, we look at where ERP has been, where it's at today, and why it's still so hard to do these mission-critical projects well.

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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.

Read the Enterprise Software Unplugged Blog for More on ERP Trends and Hot Topics

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 on-premise 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, traditional 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 your garden-variety 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 recent 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.

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