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.
By Thomas Wailgum
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.”
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  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.
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.)
Making matters worse is that CEOs and CFOs are still trying to wrap their heads around the financial aspects of your standard ERP package, 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 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.”
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.
But the reality CIOs face when synching business processes with those in ERP applications leads to “internal arguments over how we are going to define something simple as a chart of accounts,” Singh says. (A chart of accounts provides an overall view of items such as assets, liabilities and expenses.) Each business organization and unit will have a different view. “So all of the sudden, what looked like a very simple concept has exploded in complexity,” he says, “and now you’re into trying to get some very powerful people aligned behind one vision. In some cases, you can; in some, you can’t.”
All of this can add up to thousands of contentious processes when a company is implementing a traditional, on-premise ERP suite. “That’s something [business managers] discount, and that’s something the vendors don’t talk about,” says Singh, who says the CIO job can be more like a Chief Negotiator role. “Vendors will say: ‘We have an out-of-the-box solution.’ And they do. As long as you’re willing to take what they’re selling, it’ll work. But as you try to deploy it, business leaders will say: ‘We can’t do it that way,’ or ‘That won’t work for me.’ And that out-of-the-box solution suddenly becomes heavily customized.”
The era of mass customization has had a contradictory effect on how packaged software was supposed to positively alter business software. According to Wang, “Packaged software was supposed to be: Let’s all get together, we’ll share requirements and what’s going to happen is that we’re going to have this wonderful mix of software best practices from all these different areas and companies.” In turn, businesses would have to spend far less on keeping IT workers in-house to maintain the applications; and thoroughly enriched vendors would use their R&D capabilities to deliver the best of the best. In this utopia, customizations would negligible.
“It didn’t happen that way,” Wang says. “And that’s why we’re where we are.”
Does ERP Still Matter?
Yes. ERP still matters. Very much so. CIO magazine survey data published in 2008 showed that IT leaders and their companies were completely married to and dependent upon their ERP suites. More than 85 percent of respondents agreed or strongly agreed that their ERP systems were essential to the core of their businesses, and that they “could not live without them.” Interestingly, just 4 percent of IT leaders said their ERP system offered their companies competitive differentiation or advantage.
As the CIO profession has grown up, so too has the CIO’s ability to manage all that comes along with ERP. Jeffrey Keisling, CIO of pharmaceutical-maker Wyeth, is presiding over a massive, multiyear ERP makeover, moving from multiple, global instances of J.D. Edwards to a single-instance SAP ERP suite. “There’s always a lot written about examples of drastic overruns or miscues or re-dos around ERP,” Keisling says. “But generally, the people I know in large enterprises have been much more effective in understanding the levers to pull to mitigate risk in these large programs.”
Most notable among those levers: the ERP implementation has to be a priority for the company—from CEO to users, Keisling says. “If this is something one person is trying to push up the hill or one division or function is trying to push up, we would reject that,” he says. “Without that level of understanding, sponsorship and expectation of value, I wouldn’t take the bait.”
ERP has its place, too. “The measurement stick for me and my team is not how well we did SAP,” he says. “The measurement is: Did we improve the company’s performance or our ability to get products to patients? [Our SAP rollout] doesn’t dwarf the need for innovation for new products and for working with patients to get those products in their hands.”
On the vendor side, the rise of the enterprise software supervendor (dubbed “MISO” by many) has been an unyielding force: Microsoft, IBM, SAP and Oracle have and continue to centralize their positions as software juggernauts. “The traditional boundaries between integrated ERP and best-of-breed vendors have disappeared,” notes a recent Forrester report. “Over the past few years, leading vendors have significantly extended their portfolio via acquisitions and in-house developments to offer both: integrated packages for core enterprise processes and best-in-class horizontal solutions for procurement and sourcing, supply chain management, CRM, and other cross-industry application software,” BI being most notable.
According to Mirchandani, consolidation might actually backfire for the supervendors: Whereas companies might have dozens and dozens of different IT spends with various vendors (which are easier to overlook, since there is not a combined view of the total dollars), a unified Oracle spend could be detrimental to Oracle’s revenue streams. “If anything, Oracle, by consolidating this much, has made itself a target, because now you can have Oracle-wide strategy,” he says. “Previously, companies didn’t worry too much about their PeopleSoft, JDE, Hyperion [spends, because they were separate]. Now they’ve got a big bull’s eye on their back.”
Even so, Mirchandani says, vendors probably aren’t losing sleep over their customers walking away any time soon. “The vendors are counting on inertia,” he says.
So, are CIOs and their companies really, for lack of a better word, stuck with ERP? AMR Research Chief Research Officer Bruce Richardson was quoted as saying, “You do ERP once, concrete it over and hope you never have to dig it up.” Without question, ERP has been a career-enhancing or career-limiting endeavor for many CIOs. Chiquita Brands’ Singh terms the ERP vendor selection process as choosing “the lesser of two evils.”
Altimeter Group’s Wang believes CIOs have figured out the rules of “the ERP game.” But the business side is still confused.
“The business sees the slick demos and possibilities, and then keeps forking over the money for this, and they don’t understand why they are still paying all this money,” Wang says. “Why is it so hard to get a simple report? Why is it so hard to add a new product or build a new product line? Why is it so hard to get consolidated financial information? Isn’t that the whole point of ERP?”