Enterprise business solutions: so where's the value.
Imagine all the people and all the functions of your company connected to one seamless company-wide system where everyone from accounting, planning, sales, production, and distribution operates with the same accurate information, and any change in activity in one area is instantly reflected throughout the organization. Many firms engage in enterprise resource planning (ERP) systems in order to help them make better and more timely decisions. Some discover belatedly that the implementation of such a business system is based more on faith than sound judgment. Some companies have gone to great lengths and dug deep into their pockets only to find that the task was beyond them and they had to scale it back. One study found that 62 percent of the implementation issues relate to people, training, staff adequacy, and change management. Another 16 percent center on process concerns, and only 12 percent relate to technical issues such as software functionality.
Building a sound business case and having metrics in place is a cornerstone of any business systems undertaking. according to participants in the following roundtable held in partnership with Andersen Consulting. Having clearly understood and defined goals is crucial, say participants, who are at various stages of implementing their own schemes. Enterprise business systems can lead to streamlined purchasing, financial reporting, and timely analysis of sales, manufacturing, and customer information. They can cut costs, but cost benefits are frequently overshadowed by greater enterprise integration where customers and suppliers can become integrated in a fully linked supply chain.
Nonetheless, pursuing computing's holy grail can prove frustrating. Many CEOs now realize that such an undertaking is a strategic initiative-not merely an IT project. Any such system will require its users to think and act differently about their jobs and the flow of information. Having a "business case guardian" is recommended so that the system itself doesn't become the enemy. CEOs also stress clear accountability to the business units on the part of senior managers. Often these managers do not recognize how much the core business process needs to change before any new system can be successfully implemented.
THE SEARCH FOR VALUE
J.P. Donlon (CE): Eileen, where do we find the payoff with enterprise business systems?
Eileen Basho (Andersen Consulting): I believe that there are two aspects to this, You have core capabilities and infrastructure that you need to put in your organization, and that's typically going to be your finance, your accounting, your basic HR. And then you have your competitive capabilities. What's been going on in the marketplace is a lot of investment has been put into the core capabilities. But a lot of the payoff comes on the competitive side. And I think the key is to balance the investment in core and the investment in competitive.
You need a business case to measure against - something that says why we are doing this, how much we are going to spend, and how quickly we are going to get it done. If you don't have that right up front, No. 1, you can't measure the results; and No. 2, you can get very confused along the way as to why you're doing it. It's very easy to get sidetracked along the journey.
On some of our larger projects today, we are looking to have what we call a "business case guardian" as part of the project team. That's a person who keeps the entire team very, very focused on achieving the results we started out to achieve. It's not just managing cost, but also focusing on the return that you get on the investment. It's balancing your time, your speed, your cost. That's one of the traps that some of the earlier projects fell into - analysis paralysis and spending way too much time on things that didn't matter, never getting to a solution.
Ara Hovnanian (Hovnanian Enterprises): Part of what's driving us is the need to make things less expensive or more profitable. But the other part is to offer things for the customer. For our company, the dollars we're spending are significant. We have 25 people, 20 of whom were already employed by us, who we brought into the team. They've taken over a floor in our corporate headquarters, and they've been joined by five outside people. On top of that we've got a dozen or so consultants. On top of that, our IT group has added five or six people, and our training group has added three people. And I suspect our 10-person training department is going to be devoting 70 percent of its time to this five months from now. So if you measured what our cost is going to be, it's very significant. We're taking a leap of faith - we'll spend $20 million getting the measurements in place for some of the key things we want to improve. And we'll spend some time trying to develop a reasonable business case. And one of the keys is looking at how many homes [built] per employee as a prime, easy measure. But in the end, it's a leap of faith, and we're hoping that it's going to have a payback. And it's almost a requirement of business from a cost and customer standpoint, and we just have to go with it.
Donlon: What are some of the metrics involved in this? If you are looking at competitive capabilities, do you need different kinds of metrics?
Karl Newkirk (Andersen Consulting): The early metrics were efficiencies, effectiveness, cost control, the ability to grow without adding cost, reduced working capital, etc. But that was kind of round one; the real metrics are around effective decision making. Because you now have a tool - a tool that's an order of magnitude better than the tool that companies used to have. So now, it's how well your people can use the tool that really separates things. It's not the efficiencies and effectiveness; it's decision making.
Thomas E. Payne (VF Services): We found out that you've got to set very aggressive, very strong targets that pull people to make use of the tools and the backbone that you've given them, without knowing exactly how they're going to get the results. So we've got to support 10 percent growth a year in volume. We're going to try to cut 30 to 40 percent out of our speed to market. And we're going to try to cut our total cost by 5 percent, which is in the hundreds of millions of dollars. Our budget for this thing is in the $200 million-plus range. So you can't pay for this with $5 million here and $2 million there, so you'd better go after some real strong targets.
T.J. Dermot Dunphy (Sealed Air): We have a whole bunch of targets. And, of course, some of our people say, "We can't get the connection between what we're doing and your target." But I say, "We've got to work on it, find the connection." We have a whole series of things in terms of lead time, inventory turns. It all ties into an ROI calculation. You can't just say the connections aren't there. It's the old story: If you set targets, they become self-reinforcing, and people find ways to edge towards them.
Bobby V. Abraham (Paragon Trade Brands): We started into this thing basically trying to improve customer service. We started in looking at the supply chain and then came to the conclusion that we needed to do something about it. We launched into the SAP mode. And so far I'll say I don't think we've gotten the benefits out of it, but I feel confident that we will.
Payne: In our case we really couldn't afford to wait. I guess we're the largest publicly traded apparel company. The minute we signed up, about 26 guys signed up behind us. Unfortunately, a good part of that several hundreds of millions of dollars was built for the benefit of our competitors. So that's one of the questions I ask myself Monday morning: Why did we do this? But we really had no choice. If you don't do anything, you die with custom code. And we wanted to get out of the technology business. We had 17 different platforms and more than 600 developers. So we had to do something; we had to take the lead on it.
Nicola Arena (Mediterranean Shipping Co.): About three years ago, we recognized that our system was not integrated. We basically had five different systems not talking to each other, and there was a big problem. So I started talking to my friends in the industry, and to my surprise, most of them spent between $15 million and $100 million dollars to have a fully integrated system. Then I called some major shippers and asked them, "If I come with this sophisticated system, would you pay $50 more per container?" Their answer was "No way." [Laughter] So we decided to go the other route. We called a consultant, we sat down, we looked at our business processes. It took eight months, and we stuck with the essentials - what was our core business, what is indispensable to our customers? Now, after two years, we have a pretty decent system.
Art Dahl (Northwestern Travel Service): We have benefited from our version [of an integrated system]. Seamless is good - it is both driven by and drives process and process change. I agree that these kinds of efforts will not stand up to rigorous ROI analysis; there's too much that's unquantifiable. From a consumer and marketing standpoint in our industry, if you execute something like this superbly, it gives you a significant competitive advantage; if you don't do it at all, you're dead.
Barry N. Naft (Environment International): I think, from my perspective, it would be a leap of faith. The costs for us would be considerable. And the potential returns are, in a lot of cases, I think, very soft. We're looking for the industry to take another step or two - in essence, the medium-size businesses are hopefully going to go to school on the larger businesses, who are able to front the resources to perfect this product so that it can become more affordable for people like us. I don't think at this point it is, and I believe that we're not even going to look at it seriously until well after the year 2000.
Dan Robinson (Placid Refining Co.): Well, I think ERP is certainly the utopian idea of where we ought to be. If this would work as well as we envision it working, who wouldn't want it? The question in my mind is whether it works equally well for everyone. I think that for the middle-size business with a simple supply chain and a single plant operation, the best-of-breed software that's well-supported anti Y2K compliant is very, good for the time being. But there is going to be dynamic development in SAP and these types of systems over time. That train's moving down the track, and the question is, at what point do we jump on? I think if we jump on it now we could get flattened, because I think it's too expensive, and for the medium-size companies the economies of scale are not there yet. At some point in the future, that may change, and we remain open and vigilant as we watch and listen to everybody else's experiences.
Peter N. Larson (Brunswick Corp.): Continuous improvement is probably a fact of life, and at the end of the day, we've reached the point where there is nothing left to do that is easily done. I think it's a marvelous idea to quantify as much as you can in terms of the targets. But I certainly wouldn't walk away from nonquantifiable things or try, to drive them into quantification merely to satisfy a group of accountants sitting in the basement, as differentiated from thinking about how this improves my competitive position overall. Because it really can deliver competitive advantage if you do it right.
SHAPING THE SOLUTION
Larson: I think the way we have talked about ERP is as if it's some messianic vehicle that arrives on a collection of tablets, and you pass them out and everybody follows. I think there's another view that says that this whole thing really started with value-chain analysis, in which people went back in and looked at their internal business and the extension of it out into their customers' warehouses, stores, whatever. And I think out of that came supply chain management, and out of supply chain management came ERP. And the idea was that if you were going to integrate and manage the supply chain as a whole, then you had to have a system that was common throughout. I think that far too often we don't spend enough time looking at the business process and end up putting the burden on the system to change our business processes.
I think there is a strong argument for sequentialism, in which you change your business processes so that at least the momentum is in the direction of the software, prior to the time that you then go out and make a software decision as to whether you're going to take system A, B, or C. Then you get a system that is closer to your business practice.
Basho: Clearly you have to go after this from the business-process view. I don't think you can re-engineer your business processes in a vacuum today, because time is working against you. I believe that if you can, do the two in parallel. I'm not suggesting that you should arbitrarily change your business to meet off-the-shelf software, but I think that doing the two in parallel gives you the opportunity to pull in best practices.
Hovnanian: Part of what we're facing is that while we'd like to have the process change lead the technology change - and that would make the technology implementation easier - you need the technology to get that process. There are certain process changes we'd like to do, but we cannot do them with the technology we have. So we almost have to do them together.
Payne: The dirty little secret is that ERP won't do everything. It just won't. So you've got to know what it is it won't do before you do your gapping. For example, it won't do advanced planning; it won't plan most people's businesses. And we went through about probably a year's mapping of just finding out what it is that the system would do and what it wouldn't do. No ERP solution really worked for us as it was, because we're in a multidimensional business, which means style, color, size. We found out that none of the systems were really architected for our business from a data handling and processing standpoint. So we actually had to go to SAP and joint venture with them. But they did a great job for us; they really did.
Basho: There are quite a few ERP packages out in the marketplace today. based on your industry and an understanding of your business, you can't go too wrong with any of those packages. So spending a lot of time on software selection today, in my mind, is probably time not very well spent, because there's a lot of capital and assets available out there.
I think you have to stop and say, "I've got these core capabilities. I'll be able to run these in this package: What are those things that make me different? And I think you have to look at where the ERP backbone is going to play in your overall solutions roadmap. In some industries it might be 80 percent of your solution; in another industry it might be 50 percent. Then, are you going to custom-build, are you going to put bolt-ons? Look at that overall map, and let that drive your business case. And then you can keep dropping down into a level of detail on your processes and subprocesses.
Where's your pain and where's your competitive advantage? They're the things that have to drive this. So I believe that when we talk about basic processes, we're going to reach a point where you're going to buy them from a pipe, because you can't afford to make them. If you're looking at your core capabilities and you're putting infrastructure in place, you need to minimize the time and cost to get there.
George Heilmeier (Telcordia Technologies): That puts a premium on systems that have open interfaces, well-documented interfaces, and some provision for gaining access to source codes. And those are very difficult things to negotiate, by the way. I think one of the things that a lot of people get fooled on is the definition of integration. Everybody says that they have an integrated suite of products. And when you start digging as to what the definition of integration is, you'll find that it's not going to do what you thought it was going to do - namely, give you those well-documented, open interfaces with a common data model.
Naft: Working through the Internet, we have found that, first of all, the cost of that is zero incrementally. You can do real-time manipulation of a lot of data files, and spreadsheets, and all kinds of things. That is the trend I see. I can't believe we're going to be able to get away from a major commitment to the Internet. The technology is changing very quickly, And that bothers me in terms of these SAP-type solutions.
Newkirk: With electronic commerce you will still need a consolidated internal database about your customers, your products, your raw material, your suppliers, your employees. You want that all in one place, you want it to be accurate, and you want it to be real-time. That's what the ERP is all about. But what we see now is just the beginning. Because you're going to start connecting your systems with somebody else's systems - hooking up your supply chain information with their supply chain information. But you've got to have that good backbone first.
Martin P. Doolan (Value City Department Stores): The thought of a seamless system managing the supply chain in my business would be absolutely frightening. We are trying to use the best-of-breed in all the software that we use to manage the various core competencies of the business. But our supply chain is driven by the opportunistic buys that we make from retailers that are failing, resources that are backing up with inventory because of the mismanagement of inventories by others. A $70 million opportunity for inventory might arrive at my doorstep tomorrow that we'll buy at eight cents on the retail dollar. We can't plan these events. How would you deal with that in that environment under an ERP system if it's totally seamless?
Newkirk: As it stands today, an ERP does not fit all kinds of companies. In general, ERPs were first created for companies that are in the product business - that make and distribute products from some sort of a distribution channel. Now, they're busily eyeing new markets. They're looking at retailers right now. So they might have a "classic retailer" system. But you're not a classic retailer, so you won't be supported for some time. Maybe in two or three years, they'll have something.
MAKING THE CHANGE
Richard J. DeAgazio (Boston Capital Services): Let me throw another piece into it, and that is, how do you get the people to buy into it? I mean is this just a top-down, "This is the way it is, folks," approach? I found that if you don't get your team to buy in, it ain't gonna happen.
Basho: Typically, what happens when you go live with an ERP system, the first thing you do is you go down into a "valley of despair" because of the degree of change that you bring into your organization. In my opinion, you can come out of that very quickly in a period of months, or it can take a long time. And it has a lot to do with the readiness of the organization to change.
Heilmeier: When you go into an organization, what do you tell the CEO about how much he should budget for training in the total of implementation?
Basho: That number is increasing - I'd say at least 30 percent.
Newkirk: I would agree. But it's not even so much training, because what happens is training gets construed as having a training book or training vehicle. The question is, how much do you budget for change? That's the budget that's really missed - getting ownership from you on down to your organization, and getting people ready to run an organization differently.
Dunphy: We've got a 30-person [project] team. It's a global team, which makes it much more demanding. They're all people who were taken out of their regular jobs. To answer the question as to who's now doing the work they were doing - well, that's a wonderful thing: When you take people out of their regular jobs, you just sort of find ways to say, "You really don't need to replace this person: figure out a different way." That's called re-engineering. [Laughter] So, by and large, we haven't replaced them.
I'm a bit nervous, because we're now recycling people [on the team]. Some can't stand it for too long, so we're getting new people on. But then you get another payoff. Everybody who's on these teams becomes a really knowledgeable master of damn near every aspect of the basic business. They're also becoming global people; they're learning other cultures. So, it's true there are a million hidden costs on this training thing. But there are also a lot of benefits that should also be weighed in it. So I feel like it's worth it.
Heilmeier: One of the key questions in getting started in all this, it seems to me, is the process for establishing the agenda-setting themes that on the one hand might drive the business into new directions or to another level; and on the other hand, might change the business. For example, one of the things that drove us was a theme centered around the question of how do we change customer service from being a cost center to being a center for growing the business? When people reflect on that, they begin to understand that all the metrics have been cost-focused, and that's not what the customer's really interested in. That begins to focus people and rally support from the standpoint that people don't know how they can do that without some significant changes in the system environment. You may only have to establish three to five agenda-setting themes, and that's enough. People recognize pretty quickly that the old ways and the old infrastructure aren't going to get this done.
Dunphy: You can't just tell everybody in all truth that it's going to be better. In some cases it's not going to be better for the individual, but it's going to be better for the whole company. You've also got to get the four or five people on the top committed. That's key. And some of them won't understand, or they'll be set in their ways. But you can't get rid of them yet; they're still doing a good job. You've got to tell them, "Look, repeat after me..." [Laughter] Because after about a year you'll hear, "Do we really want to do this?" So, you have to at some time say, "Look, you've got to sign on here - we're going to do this with you or without you, and we hope it's with you, but we're going down the road."
Heilmeier: I think that if the CEO isn't dedicated to this, and if the CEO is not output-oriented, this is doomed to failure. And the CEO's going to have to deal with people who would like to do this job in-house. The CIO will think that this is job security: we have to do it in-house, we're different. The CEO needs to step back and ask, "How's that going to change the output? How's that going to change the schedule? How's that going to change the cost?"
Payne: The problem with this whole ERP thing, I found, is that you can't be good at just one piece of it. You've got to be really excellent at process design, gapping, testing, stress testing, new work force arrangements. You can't be sloppy in any of those things. We found that, from just an acceptance standpoint, we had to sell this thing top-down. I don't think this is something you can ever sell bottom-up. It's just too expensive, and usually you'll find that ERP systems won't look as good to any of your users. A user will look at it and say, "this isn't as good as my custom system. I can do this in one screen, and now you're asking to do it in three screens." They just don't have the vision to deal with that. So, the key thing is getting your top four or five people absolutely locked arm-in-arm on this thing. Otherwise you'll get picked off one by one, because it's real tough.
Larson: On the term "management commitment," I would change that to "knowledgeably committed." If you don't know what you're engaged in, and therefore the management is on this kind of slippery slope where leadership is very hard to produce, then that continuity or discontinuity is going to float down to the project team into the people. If all you do is get a "Yes, sir, I will do that," then you are buying yourself trouble at some indeterminate point downstream. Spend the time up front to get the management to understand what the task is that they're undertaking and how great the gap is between current practices and systems as they're being implemented. If you don't do that, then your odds of being successful, I think, are cut dramatically.
LOOKING AT THE LONG HAUL
Arnie Pollard (CE): It appears that EBS is like everything else that's a strategic, major, irreversible move for an organization. You just have to really think it through and have a good strategic business perspective on what you're doing and why you're doing it, and manage the change process very, very carefully.
Arena: It seems clear to me that as chief executives we can't afford not to get involved in information technology. I believe that both technology and information are perishable commodities. Our business constantly changes. Our core business has to be adjusted. And so the key words are cost, money - and flexibility.
Newkirk: You don't want to get trapped into buying your ERP solution based on what it has to offer today. This is a long-term strategic decision. So when you convert your ERP system and you celebrate and have your party, the project has just begun.
Larson: Back when I had a group of people who were responsible for designing and implementing systems, we would give the user Version A, and we locked into that a collection of switches that gave us added capability that we judged the user would want to have once they figured out this new world. I think that when you implement a new system, it's like climbing part way up the mountain, and you then see a whole bunch of other things that you'd like to have from this higher, better perch. And the question then is, are you buying a set of software that has enough flexibility to emulate those switches, and to give you more capability so that the system doesn't become the enemy after you've put in all of this effort to implement this thing?
Dahl: in the mid-'70s, travel management companies were automated by the airlines, so all of our transactions could be done by computer. So in a very real sense, all of our stuff has been seamless for 20 years. And since that time, we have added data warehouses, for example, and lots of bells and whistles. And I have some bad news for everyone, and that is that it never stops. No. 1, the first attempt will not be economic. No. 2, as soon as the first attempt is completed, there will be a new version, or a new bell and whistle, or a new module, and that will be expensive; and, No. 3, after the third new module, the company that supplied you with the software will stop supporting the original software and you'll have to upgrade that. It's never the end. So it's valuable, it's kind of necessary, and it's never going to end.
A Who's Who Of Roundtable Participants
Bobby V. Abraham is chairman and chief executive of Norcross, GA-based Paragon Trade Brands, a $561 million manufacturer of disposable private label diapers and training and pull-up pants, as well as products for feminine care and adult incontinence.
Nicola Arena is president and chief executive of New York City-based Mediterranean Shipping Co. (USA), a $1.7 billion container carrier.
Eileen Basho is a partner in Enterprise Business Solutions for Andersen Consulting, a $6.6 billion global management and technology consulting organization.
Arthur Dahl is president of Minneapolis, MN-based Northwestern Travel Service, a $450 million travel service company.
Richard J. DeAgazio is president of Boston-based Boston Capital Services, a $560 million financial services firm.
Martin P. Doolan is president and chief executive of Columbus, OH-based Value City Department Stores, a $1.6 billion off-price retailer.
T.J. Dermot Dunphy is chairman and chief executive of Saddle Brook, NJ-based Sealed Air, a $2.7 billion manufacturer of specialty and protective packaging products and systems.
George Heilmeier is chairman emeritus of Morristown, NJ-based Telcordia Technologies (formerly Bellcore), a provider of telecommunications software and professional services with over $1 billion in revenues.
Ara K. Hovnanian is president and chief executive of Red Bank, NJ-based Hovnanian Enterprises, an $800 million real estate developer.
Peter N. Larson is chairman and chief executive of Lake Forest, IL-based Brunswick Corp., a $6.3 billion outdoor and indoor active recreation products company.
Barry N. Naft is president and chief executive of Potomac, MD-based Environmental International, a private company which manufactures products from recycled waste materials.
Karl Newkirk is global managing partner of Enterprise Business Solutions for Andersen Consulting, a $6.6 billion global management and technology consulting organization.
Thomas E. Payne is president of Greensboro, NC-based VF Services, the corporate IT services division of $5.2 billion VF Corp., an apparel company.
Thomas R. Pledger is chairman and chief executive of Palm Beach Gardens, FL-based Dycom Industries, a $440 million telecommunications and electrical services companies.
Dan Robinson is president and chief executive of Dallas, TX-based Placid Refining Co., a $450 million petroleum refining company.
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|Publication:||Chief Executive (U.S.)|
|Article Type:||Panel Discussion|
|Date:||May 1, 1999|
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