An Experts Guide to ERP Success Chapter Seven

8/14/2019 An Experts Guide to ERP Success Chapter Seven

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An Experts Guideto ERP Success

By Eric Kimberling, Managing PartnerPanorama Consulting Solutions


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3773 Cherry Creek North Drive - Suite 720 - Denver, CO 80209

720-515-1377 Panorama-Consulting.com

Copyright 2012 Eric Kimberling. All Rights Reserved.

Chapter 7. Realizing Benefits and ROI

In todays increasingly competitive business environment, significant investment in information technology (IT)is becoming an important source of competitive advantage and operational efficiency. Companies spend tensof millions of dollars at a time to implement SAP, Oracle, Microsoft Dynamics or other large ERP or CRMtechnologies in hopes of achieving dramatic improvements in their organizational efficiency. However, during

the quests to successfully implement these complex enterprise-wide technologies, many companies fail torealize the full benefit potential that these types of systems afford. Often times, the ERP software gets blamedfor inefficiencies or process breakdowns but the reality is that realizing benefits of technology often has verylittle to do with the software itself. Many of the drivers of and obstacles to technological benefits are relatedto the alignment of staff with each other, with the technology and with the overall strategy. After all, anorganizations employees are ultimately the ones that determine the benefits and overall success of animplementation. By focusing on using ERP as a tool to achieve business objectives, IT and corporatemanagers are able to maximize the potential benefits of any particular system. A comprehensive benefitsrealization program is needed as a part of every IT implementation to ensure that business benefits aremaximized.

This situation presents good news and bad news for CIOs. The bad news here is that not all managersunderstand the primary drivers of technology benefits realization or how to overcome the many obstacles to fulbenefit achievement. However, the good news is that realizing ERP benefits is and should be easier thanimplementing the software.

This chapter discusses the obstacles and drivers of technology benefits realization and focuses on howmanagers can optimize the potential of their existing ERP systems. It also illustrates how most of the time,failure to realize ERP benefits is not the fault of the software but rather the lack of focus on businessprocesses, organizational change management and performance measurement.

An understanding of the topics presented will ensure that managers grasp the organizational challenges ofbenefits realization, how to leverage their people to achieve the benefits promised by technologies, and how tomaximize the return on IT investments within their organizations. Only by understanding these concepts andtools will managers be able to drive their organizations to high performance and maximum operationalefficiency.

The Need for Benefits Realization

There are a number of reasons that companies implement cutting-edge technologies as part of their ITstrategies. Cost pressures, organizational inefficiencies and hype are all common catalysts for the introductionof new technologies. Despite the compelling reasons for information technology, many companies fail torealize the full benefit of these technologies. In fact, our 2012 ERP Report (available online at panorama-consulting.com) revealed that 50-percent of organizations failed to realize at least half of their expectedbusiness benefits.

Given the millions of dollars that many companies spend on IT projects annually, these figures can bedisturbing to management and shareholders. To many CFOs and other managers, it is difficult to swallow thethought of a $5 million to $40 million-plus IT investment without knowing what the exact benefits payback willbe. Many companies develop business cases to justify IT investments to gain budgetary approval, but veryrarely is any type of follow-up analysis done to determine what the actual benefits of the implementedtechnologies are. While many IT projects are positioned to deliver non-quantifiable strategic benefits, it is


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difficult to justify current and future IT spending without a more disciplined approach to such investmentdecisions. Clearly, there are a number of compelling reasons to incorporate a benefits realization approach intoany IT implementation project.

What Is Benefits Realization?

Benefits realization is a comprehensive project approach that focuses on identifying, measuring and ensuring

the business benefits achievable through technology. As opposed to business cases and cost-benefitanalyses, benefits realization breaks down high-level benefits into manageable chunks, measures benefitsafter implementation, and utilizes tools to ensure that the true benefits potential of projects are attained.Benefits realization is a comprehensive and integrated approach that focuses on realizing business value, andit combines elements of a cost-benefit analysis, performance metrics, organizational change management andprocess modeling. In short, benefits realization supplements the technical aspects of an implementation withthe business side of the equation to ensure that potential benefits come to fruition.

The process of realizing business benefits from an ERP system does not end at go-live, even if theimplementation was flawlessly executed. Instead, go-live is merely the first step in the long journey toimproving business operations through technology. Before, during and after the go-live, a third-partyorganization should examine your company to make sure the business processes are going well and

reengineer them for improvement where needed. After go-live, a business also should examine the effect thenew system has on the organization. Are people using the system effectively? Is the software making thebusiness more efficient? Is it adding value to the organization? Is the ERP system keeping pace with increasedsales or expanded markets?

An organization also must ensure it has a solid user-support program in place to supplement the technicalcutover activities. Although pre-go-live training can mitigate many of the risks that organizations face at thetime of cutover, there needs to be additional reinforcement after go-live. As mentioned previously, Core Teammembers (or super-users) should be leveraged to provide general support and answer simple, process- andsystem-focused questions.

An effective benefits realization approach consists of a number of activities beginning at project inception and

continuing through implementation. These activities include the following:

Development of Business Case, Corporate Metrics and BenchmarksOne of the first activities to occur as part of an IT project is the financial justification of the necessarytechnology investment. It is important to identify and quantify the potential benefits of the project and comparethose to the projected costs associated with the proposed information technology.

Organizational Change Management Cultural AssessmentSince most enterprise solution implementations involve large-scale change in terms of end-users learning newtechnologies and processes, it is imperative to assess the companys culture early in the project to identifycultural areas that will need to be addressed. Cultural obstacles can significantly undermine the success of aproject, and this area should be addressed early in a project since implementing cultural changes are long-

term in nature. (Please refer to Chapter Six for additional information about organizational changemanagement.)

Cultural ChangeBased on the results of the cultural assessment, there may be areas that need improvement to enable thelarge-scale changes required of the project. Given the challenging nature of cultural change at manycompanies, it is recommended that managers focus on the largest gaps rather than try to change each and


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every aspect of culture that needs to be addressed.

CommunicationsTo ensure acceptance of the new technologies, it is important to effectively communicate changes to end-users. This should be done through a variety of channels and should be targeted for each audience.

Business Process ReengineeringWhile this may seem intuitive to most, it is often not performed adequately or not performed at all. In order to

realize the full benefits of technologies, business processes need to be modeled and improved to increaseefficiency and to make certain that technology is not merely used to pave the cowpaths.

Development of Operational and Departmental Metrics and Benchmarks

While most business cases effectively develop high-level projected business benefits for an implementation, itis perhaps even more important to translate those metrics into operational numbers that department managersand other middle managers can be held accountable for. High-level benefits are useless if they are notdeveloped in a way in which individual managers can be measured. Therefore, the business case must betranslated to target levels of performance at the departmental level.Organizational Job Design and PlanningJust as processes need to be evaluated and changed to enable forthcoming technologies, job descriptions,

reporting relationships, and work accountabilities all need to be evaluated and redesigned to support newtechnologies. Often new IT systems require change such as shifts in workloads or responsibilities and thistype of change needs to be identified early in the project.

Detailed Process DesignOnce the high-level process modeling is complete, (which identifies who will do what type of work at a highlevel and how that work will be completed), it is important to take the process modeling to the next level anddevelop more detailed models to ensure that individuals are able to clearly understand their roles,responsibilities and individual processes. Many companies effectively model their high-level processes, butthey more often than not fail to develop detailed processes to identify and document how individuals willcomplete their work with the new technologies. Detailed processes also help ensure use cases and othertechnical activities are closely aligned with the overall business strategy. (Also of note is that because process

modeling often is performed independently of key software development activities, detailed process designactivities often help direct training courses used during the technology rollout to end-users.)

Individual Metrics, Processes and Benchmarks

While operational and departmental metrics are useful to hold managers accountable for their contributions tothe potential benefits of technology, individual metrics must be used so that employees understand how theirpersonal performance contributes to the success of the project.

Organizational Job Design Implementation

Once the organization and related jobs have been designed, its time to implement the necessary changes.Simply documenting how jobs and structures will change as a result of new technologies is not enough; thoseideas must be implemented and tracked to ensure that the changes become a part of the new organization.

End-User TrainingUsing the detailed process models developed above, it is important to then develop end-user training that notonly helps end-users understand the new technology but also how to apply it to their new processes and jobfunctions. Many training programs underestimate how much impact the technology has on the daily experienceof an end-user.


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Reward Design and ImplementationUnfortunately, designing new processes, establishing metrics and targets to identify potential benefit areas,and conducting traditional change management and end-user training is not enough to ensure that people aremotivated to make the project succeed. Companies must also incorporate reward systems to ensure alignmentbetween individual performance and project benefits achievement. Establishing new key performanceindicators (KPIs) as part of an annual review process is an effective way of ensuring this level of alignment.

Benefits Measurement

Here is where the real value of benefits realization comes into play. As mentioned, most companies do notmeasure actual benefits after implementation, but a comprehensive benefits realization approach does. It isimperative to compare actual results to projected departmental and individual results in order to identify anypotential benefits gaps. It also enables managers to understand what they are doing well and ensure that theycontinue to realize the benefits in these areas. Unfortunately, no matter how well managers have incorporatedthe activities discussed above into their project plans, there are almost always areas in which full benefits arenot initially achieved.

Root Cause Analysis of Benefit Gaps

Following the post-implementation measurement, it becomes imperative to understand why certain gaps exist.A root cause analysis lends understanding to why people are not becoming more productive with the newtechnology and helps clarify the reasons for the gaps. A common example of a root cause of less than 100-

percent benefits realization is that end-users understand how to use the technology but not the importance ofdoing so, resulting in workarounds and lack of use.

Implementation of Corrective ActionOnce the root cause of benefit gaps have been ascertained, it is then time to implement activities to addressthe root cause analysis for the problem areas. For instance, in the case of not having a thorough processunderstanding of how an end-users work contributes to downstream activities, it may be appropriate todevelop and conduct follow-up training.

Many of these activities are included to some degree as part of overall project plans. Benefits realization in andof itself does not offer any groundbreaking activities that have never been done before. The challengingaspect, however, is ensuring that all of these activities are implemented effectively and in alignment with the

technical aspects of the project. The activities prior to implementation are intended to establish a foundation forbenefits realization potential, while post-implementation activities are intended to measure and ensure that thebenefits come to fruition.

The Value of Benefits Realization

Why should a company implement this type of benefits realization approach? This chapter identifies some ofthe challenges organizations face in terms of measuring benefits, which is one primary reason for including thistype of approach as part of a project plan. However, there are several other reasons that justify the need forthese activities:

Reduces Project RiskBenefits realization focuses on ensuring that the full benefits of technologies are achieved, which reduces therisk of the project failing. In addition, pre-implementation activities all focus on establishing the foundation forrealizing benefits by addressing process and organizational change management issues that would otherwiseundermine a projects success. In short, the approach is focused on achieving quantifiable business value.


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Creates Close Alignment Between Business and Technical ActivitiesThis approach ensures that processes, jobs, metrics and organizational structures are designed to support thetechnical aspects of the project and vice versa. More often than not, business and technical activities are donein isolation of one another and are significantly misaligned. Business activities such as organizational changemanagement and process reengineering are often disconnected when instead they should be very closelyaligned. The most successful projects have a core group of individuals that perform all of the benefitsrealization activities discussed above with involvement from other subject matter experts as needed.

Proactively Identifies and Addresses Obstacles to Realizing BenefitsSince this approach focuses on measuring actual results and addressing benefit gaps, it inherently ensuresthat potential obstacles are identified and addressed early in the post-implementation project life cycle.

Provides More Thorough Understanding of Lessons LearnedSince a benefits realization approach measures results, identifies benefits gaps, and implements correctiveaction to address the gaps, it serves as a wealth of knowledge for future IT projects in terms of what the projectstruggled with, what went well, and what should be improved in the future.

Provides Better Justification for Future IT Project ApprovalsIT managers are far more likely to gain funding for future projects when they can point to the actual financialresults of previous projects. CFOs and other financial managers who approve such expenditures are much

more likely to give the green light when they can analyze and compare the exact costs and benefits of previousprojects. This apparent knowledge and financial discipline also lends a great deal of credibility to key decision-makers.

Clearly, there are a number of ways that an effective benefits realization approach can create value for ITmanagers and companies in general.

Given the above discussion of current IT challenges, it is clear that there is a need to ensure that companiesmore fully realize the potential benefits of technology. Investing millions of dollars in new technology without acompelling justification and validation of this justification is simply not acceptable anymore. By understandingand integrating a comprehensive benefits realization approach into IT implementations, managers will ensurethat their projects are rolled out successfully and that they turn out to be wise investment decisions for the

company.

ERP Software End-Users Can't Get No Satisfaction

One of the more interesting metrics buried in our 2010 ERP Report(available online at panorama-consulting.com) relates to end-user and executive satisfaction. Among companies that have recentlyimplemented enterprise software initiatives, we found that an underwhelming number are at least somewhatsatisfied with the end result. According to the study, 32-percent of executives are dissatisfied with their ERPsoftware. Perhaps not surprisingly, end-users are even more dissatisfied (39-percent) with their enterprisesoftware solutions.

Because companies invest such large amounts of time and money in their ERP software, it is quite interestingthat there is only a two out of three chance that they'll like what they end up with. This data underscores someof the key contributors to ERP software satisfaction and ROI:

1. Companies too often pick the wrong software.Many companies in the study underestimated theneed for a thorough ERP software selection process. As a result of this misstep, organizations oftenchoose and implement solutions that are not good fits for their unique business requirements. It is


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simply not possible to be satisfied with software that doesn't fit your needs.

2. Executive expectations are often misaligned with ERP implementations. The fact that executivesare too often dissatisfied with their enterprise software investments, even though they typically areinfrequent users of the system, suggests that their desires for more visibility and transparency in theirorganizations are not being addressed. Reporting and business intelligence, which are usuallyafterthoughts delayed until the last weeks of an implementation, often determine executive satisfaction.

3. ERP implementations too often go over-budget and miss milestones. When an executive seesthat his or her organization has just sunk an average of 6.9-percent of annual revenue in their ERPsoftware, it better be worth it. Implementations generally take longer and cost more than expected, andexecutives will only be satisfied when they see clear and tangible paybacks on those investments.

4. Employees are often left behind.Best-in-class enterprise software initiatives include effectiveorganizational change management activities to ensure employees are comfortable, efficient andproductive in the new system. However, companies that neglect this important activity are more likely tohave dissatisfied employees. This issue is even more pronounced in today's climate of uncertainty,layoffs and declining employee morale.

One of the biggest problems in ERP software benefits realization is that software vendors and their customers

do not adequately define or understand what it means to go live with an ERP system that deliversmeasurable business benefits. Instead, they often focus on how fast and/or cheap their solution can beimplemented, thereby undermining the benefits potential of the ERP system.

As we have found in our research and experience, companies narrowly define their go-live as the moment thenew core, basic system is up and running. This includes leveraging core functionality of the system, pre-configured industry best practices, and other features to get their new ERP systems active more quickly thanotherwise possible.

However, this is just the first phase of a successful ERP implementation. The core system may get anorganization 30- to 50-percent of the potential business benefits (at best) with pre-configured industry bestpractices. Most organizations fail to achieve expected business benefits, partially because they rely to heavily

on standard out-of-the-box functionality that fails to set them apart from competitors. Most companies are notin business to be just like their industry peers and competitors they are in business to be better, closer totheir customers, and ultimately more profitable than their competitors. Merely getting to this first phase of ERPimplementation does not accomplish these goals, which explains why 72-percent of organizations never getpast this stage.

Instead, companies need to concentrate on moving the finish line to include two more important phases. Thenext phase of an ERP implementation should involve leveraging more sophisticated ERP modules, such asadvanced forecasting, planning, supply chain management, or mobile workforce management. Evencompanies that purchase and go-live with these advanced modules during the first phase of implementationrarely leverage the full functionality right away because they haven't adequately defined their correspondingbusiness processes or sufficiently trained their employees to use the improved workflows. In addition, this

second phase entails identifying third-party bolt-ons, customizing where appropriate, clarifying reporting, andimproving business processes to further integrate the core ERP system into the organization. This phasedramatically increases competitive edge and delivers measurable business results.

The third and final stage is to fine-tune business processes and develop an operational model that relies onsuperior analysis and the ability to achieve more transparent business information and business processes.While most ERP systems provide more functionality, workflows, and reports than companies know what to do


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with, the most successful companies figure out how to sort through these complexities to focus on what willgive them a competitive edge and ROI. Our research shows that only 28-percent of organizations achieve thesecond or third phase of ERP competitive edge, and these are often the leaders in their respective industries.

The second and third phases of a successful implementation begin to shift the focus away from software andits functionality and more toward business process reengineering and organizational change management. Bythis point in the process, relatively little of ERP's success is related to the software itself, but is instead relatedto how jobs are designed, how processes are defined and how performance is measured. It is worth noting tha

the truly successful ERP implementation teams incorporate all phases into their first phase and focus on thesekey areas concurrently. Other companies focus on the second and third only after realizing that the first phasedid not deliver the expected results.

ERP software is a tool and enabler of competitive advantage and ROI but simply going live with the softwarewill not deliver these results. Executives are at times overly concerned about risk and focus too much ongetting the system up and running quickly and inexpensively rather than delivering measurable results. Only byfollowing through with the second and third phases of an ERP implementation will an organization achieve thetrue business benefits and competitive edge it is seeking. These second and third phases have very little to dowith the software itself they are more about building and leveraging business processes and workflows thatallow companies to analyze information and execute more effectively. When planning for an ERPimplementation, it is important to align expectations accordingly and incorporate these activities into the project

plan.

Benefits Realization Tools

While benefits realization focuses on an integrated set of activities, it also entails a number of tools that can beused to effectively perform the tasks:

Business Case and MetricsTraditional financial and cost-benefit analysis is a useful tool for outlining and documenting the high-levelbenefits to be achieved by the proposed technology. In addition, it is useful to examine industry benchmarks togain a more accurate understanding of the potential benefits of technologies. Consulting and benchmarking

firms are often invaluable sources of data regarding the impact of IT on actual performance and metrics.

Organizational Change Management ToolsIn order to measure a companys cultural gaps, it is helpful to conduct an Organizational Change ImpactAssessment, which identifies the actual impacts of the change on different functional areas and enables theseareas to be addressed as part of the IT project. If the large gaps continue after go-live, there will be significantend-user resistance to the associated changes.

Process Modeling Tools

There are a number of approaches that can be used to model and document processes, but the most effectiveapproach used by Panoramas clients has been to use a best-of-breed model as a starting point and then tailorit to fit a companys unique operating conditions. This approach is both more accelerated and more time- and

cost-effective than undergoing complete business process reengineering from scratch.

Skills Gap Matrices

As part of the job and organizational design activities, it is helpful to develop a matrix that identifies therequired skill set for each major job type as a result of the new technologies and processes. This matrix canthen be used to compare required skills to actual skills, which can subsequently act as a catalyst fordeveloping training requirements. It is important to capture both technical skills as well as business process


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skills in these matrices. It is also important to evaluate every major job area that will be impacted by theupcoming changes.

Process and Organizational Change Implementation PlansWhile organizational design and process models are nice to conceptualize and document at a high level, thework must not end there. It is equally if not more important to identify the changes that are necessary toarrive at the to be process and organizational states and to develop corresponding change implementationplans to make the changes actually happen. For example, how might you change the role of customer service

representatives to ensure they use the new technologies? Will you need to work with HR and/or labor unions toimplement the job changes? How will you introduce the new rewards and measurements aligned with theproject? These are the types of questions that need to be answered and addressed with specific timelines andownership for each task.

Benefits Realization ScorecardsOnce projected organizational and individual target performance metrics have been identified, it is useful todevelop scorecards to track actual benefits performance after go- live. These scorecards serve as an effectivecommunication vehicle to disseminate performance results throughout a company.

ERP Post-Implementation Audits

Its easy to forget that successful ERP implementations dont end at go-live. If anything, it is the experiencesafter the system is implemented that achieves or derails the success of the system. However, most companiesfail to conduct a post-implementation audit to see how their ERP systems are fitting in with the business.Inevitably, there will be ongoing changes and adjustments to optimize the way the system is operating and toimprove the way it supports your business so conducting a post-go-live audit is very important.

Post-Implementation Audit Focus Areas

Baseline and post-implementation performance measures.Every ERP project should have a solidbusiness case well before the system is selected or implemented. However, the only way to understandthe level of ERP business benefits is to measure performance before and after go-live. It is important to

establish baseline performance levels and compare those to the performance levels after go-live. Thiswill help identify areas of under-performance and opportunities for ongoing improvement.

Identify additional training opportunities.No matter how well youve prepared and trained youremployees, there will be a decrease in productivity immediately after go-live. The key is to minimize thisdrop and help employees to eventually be more productive than they were before the ERPimplementation. Post-implementation audits should explore areas where employees are under-trainedor could benefit from ongoing training. This will help optimize the business benefits of the ERP systemin the longer-term.

Identify opportunities to improve business processes.Just because you have implemented ERPdoesnt mean that your business processes are going to be perfect. There are always going to be

process inefficiencies and breakdowns that can be improved. By working with employees to identifyprocess pain points and following this up with root cause analyses, you will identify opportunities toimprove your processes and make them more efficient and effective.


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Establishing ERP and IT Performance Measures

To truly realize the benefits of ERP, organizations must develop performance measures at an operational levelMost business cases include high-level corporate performance measures that define potential areas of an IT orERP projects business benefits (e.g., reduced inventory, reduced sales order processing time, reducedheadcount, etc.). The problem with these high-level measures is that the associated benefits do not transpireunless the metrics are pushed from the executive down to the operational levels of the organization.Performance measures at an operational level help drive accountability and visibility to achieve the benefits

outlined in the business case. They also help drive overall ERP benefits realization.

Lets use sales order processing time as an example. Perhaps it was determined that an ERP system couldpotentially reduce sales order processing by 30-percent and create an annual savings of $1 million via reducedheadcount company-wide. This is a tangible benefit, but it means nothing to the mid-level operationalmanagers of a global conglomerate that need to contribute to this benefit. So if you have a Director of Salesand Marketing in charge of Europe, that person should be given a specific target to contribute to this $1 millionsavings so that he or she is held partially accountable for the projects overall ROI. The same should be donefor the directors in charge of other areas of the business until the full $1 million savings target is assigned tothe appropriate people.

Obviously, this process is easier said than done. In order for a performance management approach to

succeed, effective communication is crucial. Ideally, the operational managers that will ultimately beaccountable for project results on the business side should be involved in helping define the business case andpotential savings of an ERP system. In addition, they also should be given support to help identify root causesof anticipated benefits that are not realized. This will help ensure buy-in to the established targets, which is thecenterpiece of an effective ERP benefits realization program.

In short, the only way to achieve the ROI defined in a business case is to cascade target improvements andaccountability out of the boardroom and down to the lower levels of your organization.

ERP Performance Measures and KPIs: Finding the Right Balance

With that being said, in our experience most companies dont adequately address performance measurement,post-implementation audits or benefits realization as part of their ERP projects.

The only problem with performance management programs is that most companies fail to implement themcorrectly. Most business cases for large investments such as IT projects or mergers focus only on high-levelmeasures, which can be difficult to track against and drive employee accountability.

For example, a business case for a large IT project may indicate that headcount can be reduced by 10-percentacross the company because of increased efficiencies enabled by an ERP system. This may very well be anaccurate quantification of the benefits, but the benefits will not be realized unless they are brought to a moreoperational level that will drive accountability and visibility to the benefits. This requires a more detailedanalysis of processes to understand with more accuracy where exactly the process inefficiencies lie and where

the benefits will be achieved.

On the other end of the spectrum, many performance measurement and management programs fail becauseof their complexity and cost. The advent of Six Sigma and Activity Based Management has encouraged manycompanies to go overboard with expensive and time-consuming data collection efforts that are not cost-justified and lack focus. While performance management is extremely beneficial, there is a point of diminishingreturns when organizations go too far in their efforts. In light of todays pressures to reduce short-term costs


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and headcounts, it is far more cost-effective to focus performance measurement efforts on the areas that willproduce the most significant results; managers need not measure and overanalyze every minute aspect oftheir operations to achieve significant improvements.

To be successful in their performance management pursuits, managers need to maintain a balance betweenoperationalizing performance measures and keeping the approach simple. This balanced approach willensure a proper focus on business areas that can provide measurable improvements without spreading costsand resources too thin. This ultimately helps lead to effective ERP benefits realization and a healthy ROI.

Does ERP Really Lead to Labor Cost Savings?

Weve all seen the business cases related to how ERP will save X Corporation $X millions of labor costs in justa few short years. But how real are labor cost savings in ERP implementations?

The answer is, It depends. Most companies fail to go back and measure their post-implementation businessresults, so its likely that these companies are not realizing the benefits that they projected in their businesscases. After all, if it isnt measured, people probably arent being held accountable for the results.

Labor savings is one of the toughest costs to realize. Even if and when ERP improves business processes and

makes employees jobs more efficient, the dollar savings dont just magically appear. To realize the savings,organizations have to reduce full-time staff and do more work with less people. This is the hard part.

FTE reductions and the correlating cost savings dont necessarily require mass layoffs. Companies with agingworkforces typically have a high number of employees eligible for retirement. Many companies have significantturnover due to employee attrition. Some organizations have opportunities for employees to fill jobs in otherdepartments.

When building the business case, it is important to identify how labor cost savings will be realized. Will staff bereduced by reassigning them to job vacancies or simply by not replacing employees as they resign? Or, will theorganization be more aggressive and institute layoffs? Whichever approach the company takes, it is importantto clearly understand how it will realize labor cost savings. This requires tough decisions, as well as a thorough

analysis of where the exact cost savings will be achieved.

In addition to identifying and realizing the reductions in staff, it is important to identify how remainingemployees jobs will change. How will their workloads change? What are the expectations in their newenvironment? Why are the job reductions necessary? These are all questions that should be addressed as parof an effective organizational change management program. Ensuring that remaining employees are clear ontheir roles and expectations is even more important than the cost savings realized from reduced staff.

Achieving Benefits the Wrong Way: Things to Consider Before You Cancel Your Annual MaintenanceContract

ERP software companies make their money charging their customers maintenance fees. This is their cashcow. This is where theyll fight the hardest. Sure, theyll give you a huge discount on the list price of thesoftware when they sell it to you, but just try to negotiate the price of maintenance. Good luck getting anydiscount whatsoever. They simply do not budge on annual maintenance fees.

Companies typically spend 15- to 20-percent of their software license fees on maintenance and support eachyear. In fact, according to a recent survey on Panoramas website, 69-percent of companies spend at least 15-


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percent per year for ERP support and maintenance. On the other hand, eight-percent indicate that they are nolonger paying support for their systems. Given the ten- to 15-year average lifespan of ERP investments,license costs are often eclipsed by maintenance costs in the long-term. So it's understandable that companieswould want to reduce these costs.

However, there are some risks to consider before canceling your ERP software maintenance contract. Hereare three reasons to think carefully:

1. Inability to upgrade your software.Once you cancel your maintenance contract, your organizationgenerally will be ineligible for automatic upgrades. ERP vendors spend significant sums of money onR&D to improve their software functionality incorporating best practices from their client bases, so theremay be opportunity costs and lost business benefits associated with canceling a maintenance contract.

2. Business operations become frozen in time.Because upgrades and support stop when themaintenance contract is canceled, it becomes very unlikely that an organization will be able to changethe system to keep up with its own evolution. As a result, business needs are likely to becomemisaligned with the functionality of the software. This misalignment may accelerate the need tocompletely replace your ERP system, which can be more costly than the savings achieved from thecancellation.

3. Proliferation of workarounds. Because of the first two reasons, users are more likely to becomefrustrated with the system and start adopting their own business processes outside the ERP system.This will generally decrease user satisfaction with the system and undermine business benefits.

Canceling maintenance may seem like a cost savings but expect the ERP vendor to play hardball with youshould you need any upgrades, fixes or regulatory updates. You will no longer have any access to these thingsand your ERP vendor will not be sympathetic in any way. Youve affectively chosen to severe all ties with thevendor and you need to realize the vendor will view it as such.

What about third-party providers? Sure, theyre relatively cheap, provide a lot of services and have customersupport analysts and developers to make modifications and troubleshoot, but third-party vendors do not haveaccess to the ERP vendors proprietary source code, knowledge base or system architects. Should you find a

bug in your ERP system after contract cancellation that only the vendors developers can fix, youll find yourERP vendor no longer cares about fixing it for you. The provider may be able to code a workaround, but if youhave more than a handful of these, they can get very difficult to maintain over time. Code becomes out of dateand difficult to manage and sometimes it takes reworking a large chunk of the proprietary code to make it right.

If you go with a third-party provider, remember that the must find a reputable and forthright third-party providerand make sure you follow the rules of your license agreement. Panoramas recommendation comes down tothis: If you cancel maintenance, do so knowing that youll be on your own. Your ERP vendor will simply notrespond to your requests for help. If this is acceptable to you, then go for it. Panorama experts stronglysuggest that you do this only if your system is completely stable, you dont plan to upgrade in the future andyou have no regulatory changes to be made. And dont expect your vendor to welcome you back into the foldonce you leave. (And, if they do, expect to see that 18-percent fee structure become 25-percent or more.)

The key to this question is risk. Can you assume all the risks that are associated with having no maintenanceand no parachute to fall back on should something happen? You may be the corporate hero when the savingsappear, but you will also be the fall guy when your ERP software is unable to ship, invoice or even run a report

Take some time to sit for a minute, clean the moss off your server, and think hard about coming up withanother option for cutting costs. This one is not nearly as good as it seems.


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Case Study: ERP Benefits Realization in Action

In order to better understand the value that an ERP benefits realization plan can add to your organization, it ishelpful to look at a mid-size gas and electric utility company that employed these tactics to optimize theirbenefits. This particular company, which we will call Upstate Gas and Electric, services 300,000 customers inthe northeastern U.S. and invested over $10 million in a leading ERP package to replace their mostly manual,paper-based processes. Upstate quickly realized, as most organizations do, that there are many obstacles in

the path to ERP benefits realization.

The Importance of Organizational Change Management

Early in the project, Upstate and its team of consultants conducted an organizational readiness assessment toassess the current level of buy-in to the project, as well as to identify potential resistance to change. Upstatequickly realized that there was an enormous resistance to (and lack of buy-in surrounding) the planned ERPproject. Its employees were unionized, very tenured and extremely uninterested in switching to a new system,even though it would automate and streamline many of the complex manual processes they were performing.

It seemed that the resistance to change displayed by Upstate employees was merely a symptom of a muchdeeper problem: over its very long history, the companys culture had fostered a command-and-controlenvironment with very little respect for employee input. As a result, it became clear that Upstate would need toimplement activities to begin overhauling its corporate culture to encourage more employee involvement indecision-making. Since this culture was rooted in over 100 years of doing business, this was a very difficulttask. The culture would not be changed overnight or even in the two years it took to implement the ERPsystem.

However, the team identified high-impact organizational change management activities that leveraged the ERPproject as a catalyst for initiating change to the corporate culture. For example, executive stakeholders focusedon developing a network of change agents and subject matter experts with heaving involvement in keyproject activities. In addition, the team also conducted training classes to teach managers how to delegate andempower employees to make critical business decisions.

Measure, Measure, and Measure

Not only did Upstate have a command-and-control culture that would be difficult to overcome, it also had nohistory of measuring performance or holding managers accountable for achieving business metrics. The teamrealized that this too had to change if it was going to realize tangible and measurable improvements as a resultof the ERP project. Therefore, it deployed a comprehensive performance measurement and managementprogram based on the balanced scorecard.

First, Upstate and its consulting team developed a high-level scorecard based on corporate objectives,including reduction in SGA, minimization of customer outage time and improvement of customer responsetimes. Once these high-level metrics were established, they were operationalized by assigning executivesand mid-level managers responsibility for the measures needed to build out the metrics. These measures werethen incorporated into the companys annual performance review, salary and adjustment process. Thisensured that managers had ownership of performance targets that would enable ERP benefits and alsoallowed them to share in the success of the project.

The Importance of the Post-Implementation Audit

Upstate had high hopes for its ERP project, so the team had a natural fear of measuring against key metrics


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after the go-live. However, the team also understood that the only way it was going to actually realize thebenefits and improvements was to measure and make adjustments where needed.

The initial results were discouraging: three months after the go-live of the first module (work management),Upstate only had realized approximately 20-percent of its projected benefits. However, the good news was thatcorporate leadership knew it had a long way to go and was prepared to keep pushing.

The companys next step was to conduct a series of focus groups and work sessions to identify the root

causes for why the other 80-percent of benefits were not being realized. It quickly found that users did not fullyunderstand how to use the system and were reverting back to their manual processes. It also found that mark-ups of work drawings from the field were not being sent back to the office for updates in the system, which wasa key process breakdown that the system itself couldnt fix.

As a result, Upstate implemented corrective action to improve its performance. First, it provided refreshertraining and additional online documentation for employees to make them more comfortable with the system.Second, it redefined the business process for field drawing markups to ensure that office staff received themquickly. These two activities alone had an immediate impact on business benefits and within three months,Upstate was realizing over 60-percent of its projected improvements to its business. Within another threemonths, that figure was close to 85-percent.

Additional Lessons Learned from the Front Lines of ERP Projects

While the above case study highlights just a few of the key aspects of Upstate Gas and Electrics ERP benefitsrealization program, the project also resulted in a host of additional lessons learned.

Organizations should be realistic in projecting ERP benefits.Upstate made the common mistake ofbeing too aggressive in defining improvements they expected to see, which made them very difficult toachieve. Benefit projections should be challenging but not impossible.

Ensure involvement and representation from all key areas of the business. Too often, companiestry to implement ERP without involving key stakeholders and employees in the decision-making andimplementation process. Upstate learned early in its project that it needed to involve employees to begin

changing its rigid cultural history.

Link the business case to the operational metrics.Often times there is a disconnect between thedollar savings quantified in ERP business cases and the operational metrics and targets. While it iseasier said than done, it is important that there is an apples-to-apples linkage between the two.

Dont get too caught up in as-is processes.While there is value in defining and documenting currenstate processes, the real focus should be on future state processes. Many ERP project teams have foundit useful to begin the analysis with high-level current state documentation to better understand pain pointsand benefit opportunities, then spend a majority of time on how the processes will look in the future in thenew environment.

Given the nature and risk of ERP projects, it is clear that there is a need to ensure that companies more fullyrealize the benefits of this rewarding technology. Unfortunately, investing millions of dollars in technologywithout a compelling justification and validation is just not acceptable. By understanding and integrating acomprehensive benefits realization approach into ERP implementations, managers will ensure that theirprojects are rolled out successfully and that the projects translate to wise investment decisions for thecompany.


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About the Author

After 15 years of ERP consulting at large firms including PricewaterhouseCoopers and SchlumbergerSema,Eric Kimberling realized the need for an independent consulting firm that really understands both ERP and thebusiness benefits it can enable. He currently serves as managing partner of Panorama Consulting Solutions,

the worlds leading independent ERP consultant.

Eric began his career as an ERP organizational change management consultant and eventually broadened hisbackground to include implementation project management and software selection. Erics background includesextensive ERP software selection, ERP organizational change, and ERP implementation project managementexperience.

Throughout his career, Eric has helped dozens of high-profile and global companies with their ERP initiatives,including Kodak, Samsonite, Coors, Duke Energy, and Lucent Technologies to name a few. In addition toextensive ERP experience, Eric has also helped clients with business process re-engineering, merger andacquisition integration, strategic planning, and Six Sigma. Eric holds an MBA from Daniels College of Businessat the University of Denver.

Documents

An Experts Guide to ERP Success Chapter Seven