What did you get from ERP and what can you get? Many corporations are still looking for a meaningful return on all their investments in enterprise resource planning systems. While it's easy to blame the vendors, a company's approach to implementing the technology appears to be a common problem.

For many large companies in the late 1990s, faced with the pressures of the looming Y2K and Euro compliance, enterprise resource planning (ERP) systems looked like a quick fix, a kind of panacea, knitting together far-flung systems and different vendors and promising new levels of speed and control. Then, when the compliance deadlines passed and people began to ask what value they'd really gotten for the money they'd spent, the fix too often started to look like a marginally useful placebo.

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"I think that a lot of companies wasted their IT investment dollars," says Garry Lowenthal, CFO of Viper Motorcycle Co. and chairman of FEI's Committee on Finance and Information Technology. You hear it over and over again: companies racing against a Y2K or compliance clock installed technology that they didn't need, never really figured out how to use effectively and all too often customized it to fit processes they'd have been better off abandoning.

While the fad days of ERP have peaked, systems are still running in thousands of companies around the world--many of them still intent on trying to boost their returns on all the dollars spent on the technology. Now, ERP platforms are getting another chance to prove themselves, this time in situations that may have little to do with making a business run more effectively.

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"We've seen a lot of people upgrading, and one of the biggest drivers is corporate governance. In the U.S., it's Sarbanes-Oxley, and in Europe and Asia, it's the International Accounting Standards," says Fred Studer, vice president of ERP applications marketing at Oracle. As a result, after a couple of years of depressed revenues, ERP vendors are looking forward to a return of something more like the good old days.

But it's not exactly deja vu all over again. ERP itself is maturing, and vendors are under pressure. Says Ken Stoll, a partner at Accenture, "In negotiations, when there's value, it's easier to keep your pricing point higher, but when value erodes, it's a difficult sell. That's what we see happening. Price points are starting to erode because the value is not unique value. Initially, an ERP vendor could say, 'You're getting unique value--you're the first in your industry to receive the value of ERP.' They can't say that any longer because everybody has it."

The evidence leaves little doubt that for most companies, ERP has failed to meet expectations or deliver on its value promise. It's hard to find an expert who thinks otherwise. "Based on our data, only a select few companies have gotten value out of their ERP implementations, and those are the world-class companies. The value for the average company is still many years away," says David Hebert, who leads The Hackett Group's business advisory services program in application ROI.

The latest annual survey of financial executives by FEI and Computer Sciences Corp. found that "only a small minority, 10 percent, believe they are achieving a high return on technology investments." Scott Phares, vice president of business services for the application software firm Business Engine says, "I hate to beat up on ERP, but it has the most visibility as the most expensive but least-value-derived kind of implementation. There are tons of partly implemented or partly used products out there."

To be sure, the rap on ERP isn't entirely one-sided. Peter Greffe, senior vice president for finance at the Bank of Montreal (BMO), says, "When you implement something new like this, it will relocate profitability to a certain extent. Anybody that gets a positive impact will love the system, and anybody that gets a negative will not."

Prior to taking his post at the Bank of Montreal, Greffe spent seven years at another BMO Financial Group subsidiary, Harris Bank in Chicago. At Harris, Greffe oversaw an ERP implementation that replaced a patchwork of existing systems. "When you added them up, they equaled three times the bank," he quips. "So we decided to get a financial system that would reconcile everything."

Better information led the bank to re-price some products and change the way some loan contracts had read. "That gave us a fair amount of money, so we're recovering the cost of the system in about two years," Greffe says.

But there's no doubt ERP vendors owe a huge debt of gratitude to Senators Sarbanes and Oxley, who have provided the best incentive program any industry could hope for. So what if some critics say that ERP vendors have over-promised and under-delivered, earned premium margins for a commodity product or practiced upgrade-or-abandon brinkmanship by threatening to discontinue support for old (i.e., before the most recent release) software? Corporate governance legislation is driving customers to ERP anyhow.

As British literary lion Samuel Johnson once noted, nothing concentrates the mind so wonderfully as the prospect of being hanged in a fortnight. The CFO of one major international financial firm, speaking on condition of anonymity, noted that his company had not seen a compelling business case for ERP and had held out against investing in the software until Sarbanes-Oxley came along.

"These things are really expensive to put in place, and how much value do you get? I haven't seen that demonstrated yet. What's going to drive the train is Sarbanes-Oxley and accelerated closing," he says. His firm is now rolling out an enterprise-wide solution, but cautiously, in stages, and with a weather eye on their return on investment (ROI).

To be sure, if more firms had taken that approach during the first ERP investment fad, there might be a lot less crying over spilled milk going on today. The fact that businesses didn't get value out of ERP doesn't mean that they can't. But the process is a little like quitting smoking or losing weight--it takes discipline, and most who try seem to fail.

"Issue number one is that when a lot of ERP investments were made, there wasn't a business case built," says Brian Zrimsek, research director at The Gartner Group. "They had something other than business value as the driver. Issue number two is that these systems are notoriously oversold and under-delivered. Issue number three is that there is a misimpression that when you put in a system, you get value. In fact, the value isn't in the system, but in what you change."

One of the biggest mistakes that companies made was customizing software to fit their processes when they'd have been better off changing their processes to fit the software. "They paved the cow path," says Zrimsek.

Companies that customized ERP software not only spent far more than planned or budgeted, they wound up locked in. They couldn't upgrade without spending the money to re-customize; if they tried to change the process, they had to spend money to un-customize. "We recently focused on that issue and found that more than half of companies are not even measuring what level of customization they truly have," says The Hackett Group's Hebert, "We found companies over 25 percent customized."

Accenture's Stoll relates, "I have a client I can't name that went into an ERP project thinking they were going to spend $6 million and ended up spending $26 million, with $20 million being customization. It took a while for people to recognize that you can apply the technology out of the box. You may have to change the process in your organization, but your business would be better for it, frankly."

In fairness, that's a case that ERP vendors have been trying to get business to accept for years. In his 2003 book Software: An Intimate Portrait of Larry Ellison and Oracle, author Matthew Symonds shows the Oracle founder trying as early as 1999 to persuade businesses that they could get 80 percent of the value of technology by using it as it came instead of customizing it--this despite the fact that customization put money in Oracle's pockets. While early versions of ERP may have needed a lot of tweaking to meet business needs, that's no longer the case.

"We run into lots of customers who ask us to automate a bad process. It's a real challenge," says Rakesh Shukla, cofounder of 170 Systems, a firm that streamlines ERP systems. "ERP vendors know what the best practices are, and that's what comes out of the box, typically."

Experience at firms large and small confirms Shukla's point. Mitch Spitzer, a vice president of the New York-based bank holding company GreenPoint Financial Corp., says, "We used Oracle, and we did no customization whatsoever. It wasn't Oracle that got us the savings, but rather the reengineering of existing business process."

Prior to the 2001 ERP implementation, Spitzer explains, GreenPoint had three accounts payable areas and roughly a dozen different accounting and reporting systems, with associated technical support groups. With the move to Oracle, GreenPoint centralized the A/P function in New York and eliminated most of the different accounting systems, reducing headcount, streamlining processes and thereby realizing value from ERP. Later, he discovered 170 Systems and added its imaging technology to the Oracle platform, realizing further savings and reducing headcount even more. "My experience has been that the only way you're going to obtain the benefits is by using best practice--and best practice usually means changing processes," Spitzer says.

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At Dow Chemical Co., global finance director Paul Janicki sees some strong similarities between the ERP decision and the outsourcing decision. "You're not only trying to overcome technical barriers, but also social and process barriers," he says. Dow was one of the first companies to adopt SAP, customized it extensively and continued to run an older release even after the rest of the world had long upgraded.

Dow recently had to face a tough decision, because SAP is discontinuing support for its older, highly customized version. Says Janicki, "You're basically given a choice between a couple of alternatives, none of them pleasing. You can stay with what you have and try to keep it supported yourself, or you can churn the whole organization again. Part of the decision is economic, the cost of upgrading, but more serious is the possibility of disruption of service."

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Disruptions aren't unknown. In 1999, the Hershey Foods Corp. had problems with a new ERP system that disrupted deliveries just before the busy Halloween season, costing the company over $100 million in sales and damaging retailer confidence. "Continuity of service is the first priority, and the other issue is, what do you think the future is going to be like?" Janicki says. "If you keep the backbone intact and don't change it, you should be able to ride it longer, just worry about the interface. Our intent is to do this and buy us time until we get to a new architecture."

Industries are developing new standards, such as the Chemical Industry Data Exchange (CIDX). A major investment in new ERP might be premature, at least until the standards are clear. Moreover, the world is offering new opportunities, such as outsourcing, which Janicki and others see as a potential alternative to ERP.

"What's the point of SAP and Oracle if your payroll is done by ADP and your HR by Exult?" he asks. In this view, ERP is akin to outsourcing, a way of reducing costs while improving information flows and streamlining the organization. Like outsourcing, it requires companies to standardize their operations and clearly define their information requirements.

"Whether I outsource by buying an SAP payroll system or using ADP becomes a decision based on my specific economics, the size of my company, what kind of information I need, and so forth," Janicki says. In fact, some suggest that the choice is a lot clearer for smaller companies, because only the largest organizations are positioned to realize the full economic benefit of ERP. They can afford to negotiate firmly with vendors and to center their shared-service or other facilities in such low-labor-cost venues as India. For smaller competitors, the only way to the reap those fruits of globalization may be through an outsourcing arrangement.

What about companies that did the unthinkable, pouring millions into ERP systems and millions more into customization, with the result that they're now sitting on high-tech white elephants? Viper's Lowenthal says, "It's okay to start over. It's okay to reevaluate, leave the ego at the door and find a new way to do something."

Indeed, the new requirements of Sarbanes-Oxley have forced companies to rethink their technology anyway, because most of it wasn't designed for the new corporate governance rules. The best outcome will come to the companies that focus first on the customer and the business needs, define and adopt best practice processes, identify the tools that best serve those needs, then go forward from there with discipline and commitment.

RELATED ARTICLE: GM Says 'No' to Customization

Even at firms where processes may already be state-of-the-art, taking a firm line on customization is one of the most effective ways to control ERP cost and maximize value. At firms like General Motors Corp., customization is a taboo. "We refuse customization. We want it out of the box, and if it's not going to come out of the box, we want the vendor to put it into the box," says Tim Reed, Global Process Information Officer for Human Resources at GM and a member of the FEI Committee on Finance and Information Technology.

For example, Reed notes that People-Soft's 8.8 release included Web-based and self-service capabilities that GM wanted to see. "Rather than build that on our own and do a lot of customization to the old 7.5 platform, we worked with People-Soft to put the capability into the 8.8 upgrade so it becomes part of the standard footprint," he explains.

Sometimes, Reed says, pressure for customization comes from a business unit; sometimes it comes from the IT area. Usually it's driven by a sense that a particular capability that isn't part of the ERP platform is necessary. "An ERP platform may never have total reach for any process, and where it doesn't have a capability the business unit demands, one path is to customize," Reed explains. "But when you customize, you're stuck with it for life. The other path is to go into the market and look for a best-of-breed package and do a bolt-on and say it's a bridge, and we'll only use it until we get the ERP vendor to put it in their platform."

The value of ERP technology comes from its standardization; GM demands that technology lend itself to being re-used and applied globally, Reed says. But the purpose of the software is to help the business better serve the customer, so while GM shuns customization, it accepts the fact that ERP won't do the whole job. "Our world is much too complicated to say that ERP is the end-all solution," Reed says. "I really believe it's ERP-plus, or some integrated solution."

Gregory J. Millman is a freelance business writer in New Jersey and a frequent contributor to Financial Executive. He can be reached at [e-mail].