I wrote an article back in August entitled “Is There a Cloud in Your Future?” Just in case you missed it, here’s a link to it.
The purpose of that article was to begin demystifying the cloud a bit in terms of form factors and deployment methods. I also pointed out the enormous forecasted growth potential of the cloud, potential benefits and risks to users, and who the early adopters are likely to be.
A lot has happened in the last 3 months and chief amongst them is the fact that the race to the cloud is clearly on. There is so much money, people resources, communication, and hype being thrown at the cloud that the buzz is almost deafening. In many cases, the race course has not even been laid out yet, but we are racing anyway. Needless to say, it is simultaneously very exciting and very scary.
The vision for the cloud is that it will enable deployment and access to trouble free robust applications, infrastructure, data storage and protection, and integrated web services for a low monthly usage fee. And the dream calls for accessing this powerful mix of technology and services from virtually anywhere and via virtually any device. Upgrades will be transparent as they will occur seamlessly and continuously, perhaps even without your knowledge.
Think of your electric utility and how easy it is to access electrical service in your business or home. Essentially all you have to do is open an account and pay for the amount of electricity used during the billing cycle. You don’t have to build power generators, power distribution networks or regulating devices in order to tap into the service. You don’t have to pay extra when a service person is dispatched to replace a transformer hit by lightening. Nope – just sign up and pay your monthly usage bill because everything is already factored or bundled into the electric utility service.
Now think about accessing all of your technology needs for business and personal use from the cloud in much the same way you access your electric utility service today. Do away with the large capital investments for servers, workstations, software applications, data backup and protection, and professional services. Since the infrastructure is in the cloud instead of on your premises, feel free to go anywhere and access the services from your work station, laptop, iPad, Windows 7 Phone, or your automobile’s dashboard. Just sign up, plug in, meter your usage as needed, and pay your usage bill each month. That is the Promise for the consumer!
The technological complexity of delivering the promise of the cloud is enormous. Many of the software applications need to be re-written and optimized for cloud deployment versus traditional on premise deployment. Legitimate bullet-proof flexible data protection and restore technologies and strategies need to be made available. Broadband needs to ratchet up and become ubiquitous.
As a provider of technology and cloud services, the challenge of creating the optimum business model and associated economics to enable long term viability is equally daunting. It will require great creativity, smarts, and access to capital to invest in the necessary infrastructure, software licenses, systems integration, security, sales and marketing, and administration to make it all run successfully. The potential may be enormous, and so is the task. The voice Ray Kinsella kept hearing in Field of Dreams comes to mind.
In addition to the investment described above, for local service providers like ourselves, there is the fact that the existing business model needs to be reexamined, and likely stood on its head. The way we generate opportunities, sell infrastructure hardware and software, sell application software, package and sell services, manage deliverables, and perform contract administration and billing will all change dramatically. It is not clear where and when the payback occurs. That is the Challenge and the scary part for the provider.
Like any competitive race, there is great hope and promise, great challenge, and great excitement. The race to the cloud embodies all of that and then some. The excitement for the consumer is obvious – who wouldn’t jump at an opportunity to have what is touted to be the best of all worlds, requires little or no capital investment, allows you to have as much or as little as you want, and only requires a small monthly fee for your actual usage.
There is excitement from the perspective of the publishing provider as well. Certainly organizations such as SalesForce.com and NetSuite have pioneered the way for cloud based application software offerings. Microsoft has seen the light and is now “all in” as they are making multi-billion dollar investments in cloud components including strategically located data centers, Microsoft CRM Online, Office 365 (formerly BPOS), Windows Intune, and Windows Azure.
As a local and regional service provider, I am excited by the potential of the cloud to open up new opportunities for us, to lower the barriers of entry for more customers, to transition from a big sales pop and one-off difficult project methodology to a utility/annuity model that embraces bundled offerings and more repetitive cookie-cutter type projects. Theoretically, the utility based cookie-cutter offering coupled with the annuity based billing engine represents a much easier business model to forecast and manage once all the pieces are in place.
I have shared the Promise, the Challenge, and the Excitement of the cloud from my perspective. What remains of course is a discussion around the Reality of the cloud. That of course, as always, is the Bottom Line. As we gain real life experience with the cloud roll out, stay tuned for the next chapter in this evolving story. And as always, I would welcome your feedback and perspective on the cloud and what it means for you.
Gartner, Inc., the highly respected researcher, predicts that the worldwide cloud services market will surpass $68 billion in 2010. Gartner and other technology pundits have been talking about and forecasting explosive growth in this market for several years now. But when you put some specificity to it, such as $68 billion, and 16.6 % year over year growth, it tends to get people’s attention. In fact, through 2014 they are predicting cloud services revenue to reach nearly $149 billion. Most of the growth and deployment to date has occurred in larger enterprises. Can the small and medium size business be far behind? And if so, what’s it going to take to attract us all to it?
As we all know, a cloud by its very nature can be nebulous and ever changing. And the cloud we are talking about is no different. So let’s start by examining the landscape and clarifying some terms. First of all, we are referring to a public cloud as opposed to a private cloud. A public cloud would generally be defined as services and functionality provided by a third party which are located off premise and outside your corporate firewalls. The services are predominantly provided on demand and on a pay-as-you-go basis.
There are many layers to cloud services. Some of the more common layers include the following.
- SaaS (Software as a Service). This is the most commonly referred to layer and it deals with applications. Horizontal applications with common processes amongst distributed virtual workforce are the current sweet spot of cloud services. Sage CRM is an example of this service. https://www.sagecrm.com/
- PaaS (Platform as a Service). This is the application development layer where developers can use these services to develop and test new applications. The Microsoft Windows Azure Platform is an example of this service. http://www.microsoft.com/windowsazure/windowsazure/
- IaaS (Infrastructure as a Service). This layer provides computing capacity and Amazon Elastic Compute Cloud (EC2) is an example of this service. http://aws.amazon.com/ec2/
- SIaaS (Software Infrastructure as a Service). This layer provides common infrastructure application services such as email, fax, SharePoint, and IP Telephony. Some examples include the following.
- Web 2.0 services. This is more difficult to define precisely, but it is essentially the ability for you to interact via a browser with another application or between applications.
There are many attractive elements to cloud services, or at least the promise of cloud services. Chief among them is cost reduction, scalability and flexibility. While these terms are easy to toss around and create an allure, they are not so easy to deliver as it is very complex from a provider’s perspective to deliver and manage cloud services. However, with the financial challenges businesses have faced in the last two years, anytime there is an opportunity to deploy necessary IT functionality at a reduced cost, it is going to get serious consideration.
Cloud services are not a panacea as there continue to be concerns. Security remains a primary concern, as does the availability of the services and the response time associated with the services. The viability of the providers and the maturity of their offerings are also of some concern. In addition, a persistent high cost per user and lack of customization capability remain a concern. The good news is that progress is being made on all these fronts. For example, there is now a SAS 70 certification for transaction processing controls. This is an example of a point solution for a given situation, but indicative of the lack of a holistic solution for the entire cloud environment. However, five years from now, most of these concerns will likely be all but forgotten about.
Financial services and manufacturing industries are the largest early adopters. Communications, high tech industries, and the public sector are also eagerly seeking to take advantage of cloud services. As stated earlier, the majority of the adoption so far has been at the large enterprise level. I suspect the lag in the small and medium business (SMB) sector is primarily because many of the applications and services needed by this group simply have not been readily available yet, and/or they have been too complex to take advantage of without lots of extra IT resources. For example, many of the fundamental accounting and business management solutions that are the lifeblood of a SMB organization have not been re-architected yet for the cloud. But they are coming, along with many of the other ancillary products and services that will round out the complete offering. As the gaps become filled in, the costs will come down and become more in line with the promise.
We are committed to staying on top of the cloud and its development. As it marches forward and evolves, we will be bringing new offerings to your doorstep when they become ready for primetime and can make an impact on your bottom line. And that’s the bottom line!
We are all familiar with the standard tools for measuring the performance of our business; namely the balance sheet and the income statement. And if we are a halfway decent backyard mechanic at working on the business, then we also pay attention to our bank balances and free cash flow. And if we are a journeyman, we might be using any number of balance sheet ratios for analysis. However, all these tools are akin to the rear view mirror in our car. They tell us what is behind us, or in other words, what has already happened. Now don’t get me wrong, the rear view mirror is an indispensable tool, particularly when you put the transmission in reverse.
I am assuming however that all of you want to keep your business moving forward, and therefore have your transmission in drive, or perhaps even overdrive. That being said, the front windshield is a much more valuable tool for navigating the vehicle where you want it to go than is the rear view mirror. And the same can be said for our businesses. The windshield enables you to see where you are headed, judge when you might get there, and make any course corrections that might be necessary. We should be relying on the windshield to guide us at least 90+ percent of the time.
What’s the condition of your business windshield? Is it crystal clear and revealing? Or is it cracked, scratched, and caught in a torrential downpour with worn out wipers? If it’s the latter, then common sense says it’s time for immediate corrective measures.
What are some corrective measures that can be used to improve your windshield’s vision so that you can see where the business is headed? The first place to start might involve identifying the leading indicators for your specific industry and business. Following are a few examples.
What are the key processes and actions in your business that drive profitability and produce the results on the balance sheet and income statement? Perhaps it’s any number of these common activities.
Are there correlations, indexes, trends or statistical measures that impact your business directly or indirectly? If so, how much warning do they provide and what impact do they have? Can your industry associations provide insight to these leading indicators? If not, there are also organizations that specialize in analyzing and forecasting trends in a variety of industries. As an example, check out the Institute for Trend research at http://ecotrends.org/ .
Regardless of where you find your early indicators, identifying and measuring them can frequently enable you to not only take early corrective action if need be, but can also shed light on what the real critical drivers and contingencies are in your business.
The odds are that your ERP or business management system is currently producing some of these metrics. However, the reality is that many of the critical measures for your business are probably not being reported. The good news is that your ERP system is likely tracking many of the core data elements necessary to provide meaningful information. However, it might be necessary to create additional reports or KPIs (Key Performance Indicators) to extract the correct pieces of data and present them in a context that provides clear visibility as to where the business is headed. In order to maximize the power of this information, you will want to ensure that the various key roles in your organization have access to the critical indicators needed for their specific scope of responsibility.
Once you have identified your specific leading indicators for the key roles in your business, give us a call at 425-820-6120 and we can help you find and unlock the critical information in your ERP system to help guide your business down the freeway toward a stronger bottom line.
As I talk to a variety of client and prospect organizations about their business and what they are trying to achieve, I always find it fascinating to hear the different perspectives and tactics being deployed. Frequently even more intriguing is the view of the business model and the investment strategy to fuel that model.
When the conversation turns to business models, it can suddenly become labored as clear and concise descriptions of one’s business model seem to be very difficult to articulate. Not surprisingly, an Accenture study found that when 70 key executives from 40 companies were asked to describe how their company made money, 62% of them had difficulty clearly describing how the process was accomplished.
You might be wondering why a complete and accurate description of a company’s business model even matters. Or you might be wondering what the heck a business model is? Both are great questions that deserve answers. Given how frequently the term is used in business publications and discussions, I expected to find the definition chiseled in granite on that famous street in Lower Manhattan.
A little research however quickly uncovers the fact that there is no consensus amongst the experts as to exactly what constitutes a business model. There are of course some recurring themes and components, but there is not a rock solid take-it-to-the-bank foundation for understanding. It’s no wonder then that discussions become murky in search of an anchor point.
Some of the more frequently referenced areas of business model definition include those in Mark Johnson’s new book entitled “Seizing the White Space: Business Model Innovation for Growth and Renewal”. In it, he defines the four-box business model and their underlying and interlocked components as follows.
Customer Value Proposition. First and most important, a successful company is one that has found a way to create value for customers — that is, a way to help customers get an important job done. By job we mean a fundamental problem, in a given situation, that needs a solution. The best customer value proposition is an offering that gets that job–and only that job–done perfectly. The lower the price of the offering and the better the match between the offering and the job, the greater the overall value generated for the customer. The more important the job is to the customer, the lower the level of customer satisfaction with current options, and the better your solution is than your competitors’ at getting the job done, the greater the value for your company.
Profit Formula. The profit formula is the blueprint that defines how the company creates value for itself. People often think that profit formulas and business models are interchangeable, but how you make a profit is only one piece of the model. It consists of the following:
- Revenue model (price × volume)
- Cost structure (assets; direct and indirect costs; and a model of how, and whether, scale affects costs)
- Margin model (How much does each transaction need to net to cover the cost structure and deliver target profits?)
- Resource velocity (How much revenue do we need to generate per dollar of assets and per dollar of fixed costs, and how quickly?)
Key Resources. The key resources (or assets) are the people, technology, products, facilities, equipment and brand required to deliver the value proposition to the targeted customer. The focus here is on the key elements that create value for the customer and company, and the way those elements interact. Every company also has generic resources that do not create competitive differentiation.
Key Processes. Successful companies have operational and managerial processes that allow them to deliver value in a way they can successfully repeat and increase in scale. These may include such recurrent tasks as training, development, manufacturing, budgeting, planning, sales and service. Key processes also include a company’s rules, metrics and norms.
When the four-box model and all its components are fully identified, it is designed to answer these questions:
- Why would someone want to buy something from you, and only you?
- How will you make money selling it?
- Precisely, what are the important things you must do to execute the plan and meet the stated objectives?
Johnson repeatedly makes the point that the degree to which a company gets the components of these four boxes clearly understood, articulated, and interlocked can spell the difference between a huge success and an also-ran left to fight for scraps. He goes on to make the point that if you find yourself struggling for survival, perhaps your business model needs a makeover. Perhaps it even needs to be reinvented. Here is an entertaining short 3 minute video illustrating some noteworthy reinventions.
The high tech industry has always evolved at breakneck pace with regard to new products and functional innovations. The industry itself is now undergoing tremendous change. As a part of that industry, Integrated Computer Systems needs to continually evolve and re-examine our place in it. And most importantly we need to evaluate our own business model to ensure that we are nailing the Customer Value Proposition and the other three box components that follow it.
We would love to hear from you as to what that one and only job is that you need us to do perfectly. I am betting that we might all be surprised and enlightened by the responses. I would guess the same would hold true for many of your businesses if you were to ask your customers a similar question. The future holds equal parts promise and challenge, and just think of what we can all learn together.
This is the last installment in a series that has been discussing a problem plaguing many businesses today, and that is the situation of ERP or IT projects being aborted midstream before they accomplish their stated objectives. In the last issue, we discussed the means by which the project’s financial impacts would be assessed and projected. In this issue, we will summarize those projections with some commonly accepted evaluation formulas accompanied by the closing arguments for the project.
5. Get Out Your Calculator. We have explored the need for completing a thorough justification process and the strategic business imperatives that are driving the initiative. We have also discussed some of the potential benefits and costs to examine when conducting your justification. What remains is to simply tally up the projected value of your benefits and costs in a worksheet. You should then be able to determine the Net Dollar Value of Benefits with the following formula. With today’s extremely cash conscious business environment, I would focus more on the shorter term horizon measurements. In other words, focus on items that will have an immediate positive impact on the cash position.
Net Dollar Value of Benefits = Total Value of Benefits – Costs of Implementation
As the business climate and available credit improves, a longer term horizon measurement such as a simple Return on Investment may be appropriate.
ROI = (Net Dollar Value of Benefits/Costs of Implementation) x100
Different organizations use different perspectives to evaluate potential investments so I can’t tell you whether ROI is an accepted metric in your organization or not. However here are a few other measures you may find used to evaluate an investment.
A) Internal Rate of Return (IRR). This can be useful in comparing one investment opportunity in an organization vs. another. For example comparing an ERP system investment vs. a new factory investment.
B) Payback period. A simple determination as to how many months it will require to earn your investment back,
C) Net Present Value (NPV), this involves a bit of black magic so you may want to leave this to the finance folks
D) Total Cost of Ownership (TCO), simply looks at costs while ignoring value and benefits
6. Wrap it Up. You have now completed a thorough analysis of the strategic elements that are driving the organization to consider this investment. In addition, you have outlined the chain of events, symptoms and potential problems that are occurring in your existing environment. You have evaluated the various categories of value and benefits to be derived by the organization, along with supporting details. On the flip side, you have calculated all the projected costs over a fixed period of time. Assuming the numbers pencil, you have all the numbers to show that this project has been carefully analyzed for a positive business impact.
What remains now is to present your business impact analysis to the appropriate decision makes and stakeholders. When done properly, this process will not only justify the organization’s decision to move forward, but much more importantly provide a solid footing for the project to launch and sustain critical momentum when you get lost in the woods or the occasional storm surfaces on the horizon.
In our last issue we discussed the rationale and importance of developing a comprehensive business case for your ERP or IT project to ensure that it presses forward to completion and does not fall victim to the countless threats that swamp many projects. We also discussed the methods for determining why change, and in fact the project, is needed. In this issue, we will discuss how to determine the dollars and cents of the analysis.
3. Assess the Value. You should recognize that there are financial benefits and non-financial benefits, as well as tangible savings and intangible savings. Financial benefits and tangible savings are fairly easy to identify. While the Intangible savings will certainly require more digging to be able to quantify, don’t overlook them as they could be more significant than the tangible savings.
Possible benefit categories might include time savings, increased productivity, improved quality, employee quality of life, improved customer service, and reduced inventory. Each of these categories can be further analyzed for specific projections of financial savings. For example, reduced inventory is a tangible financial benefit that should also result in reduced carrying costs (reduced storage, less time handling inventory, reduced inventory obsolescence, reduced insurance expense), reduced freight expense, and improvement in working capital. There are very real financial benefits associated with each of these and you need to project those values.
Improved customer service would likely be considered an intangible financial benefit. However there are several sub elements, including increase in market share, decrease in customer complaints, decrease in returns or warranty claims, decrease in uncollectable AR and write-offs that could be projected to produce tangible savings.
4. Estimate the Costs. Identifying and quantifying the costs is more straight forward than tracking the benefits, but mistakes can still be made if you are not careful. First recognize that there are costs associated with the initial acquisition of the system (hardware and software), as well as installation costs. In addition, there are onetime costs and recurring costs.
An all too common mistake is to underestimate the costs, resulting in an over budget project. Why does this repeatedly happen? There can be a variety of reasons but the primary ones are indicated below.
- Costs are understated at the outset due to looking at projections through an overly optimistic scenario. Rarely do best case scenarios materialize. And when you consider the odds of best case becoming reality when it involves multiple people, processes, and deliverables from multiple organizations – well let’s just leave it at almost never and call it good.
- Costs are understated due to a lack of understanding of complete project requirements. The firm providing the ERP system may not fully understand the scope of requirements and therefore underestimates the costs. Or perhaps they low balled the estimate in order to win the business. Alternatively, the organization purchasing the ERP system may not have fully evaluated their requirements and capabilities, and thus has incorrectly identified the project scope.
- Costs are understated because the organization purchasing the ERP system is anxious to trim implementation costs and thereby takes on responsibility for self-performing much of the work, or simply eliminates what are deemed to be discretionary services such as training or report writing. It is a rare organization that is able to pull off a significant self-perform effort successfully. Consequently this will generally lead to a severely challenged project that is both late and short on deliverables, and ultimately over budget when the tasks are reassigned outside the organization.
- Costs are purposely underestimated in order to get a project approved with the thought that additional funding will be sought later once the project is off the ground. Thankfully we don’t see this approach often but it does surface in certain types of organizations.
- Costs are understated due to ignoring internal labor costs and diminished productivity during the implementation. Productivity suffers merely as a result of having to learn new systems. In addition, organizations will generally look at the wages for existing employees as sunk cost and not fully realize that every moment taken away from their primary duties results in incremental operating costs for the organization. This happens when normal productivity suffers due to spending significant time on non-core tasks, such as implementing an ERP system. The problem can be exacerbated by electing to reduce money spent on expert consultants (obvious incremental cost), and instead assign extra tasks to existing employees (less obvious incremental cost) that might be able to complete the task in a given period of time. Aside from the very real incremental cost of having the employee pick up the extra tasks, is the danger that the task won’t be completed on time or at satisfactory levels and now you may start incurring additional costs as other areas are impacted.
In the next issue, we will discuss the means for pulling all this hard work together into a credible and meaningful set of recommendations that demonstrates thorough analysis and provides the means to launch the project, and most importantly, complete the project.
In the last issue, we discussed an extremely costly syndrome that plagues many businesses, namely that of projects that get launched with great intentions and then quietly run out of steam without producing tangible results or meeting stated objectives. I see this frequently with regard to ERP or IT projects.
Fortunately, there is plenty that can be done to avoid this wasted effort. However it requires a significant undertaking, careful analysis, clarity and organizational resolve to see it through. It requires lots of short and long term assumptions, as well as countless questions to be answered. When completed and properly documented, it results in a comprehensive business case for the project. This document is a critical tool used to justify the long term investment of organizational assets (people, time, money) to select and successfully implement an ERP system. It also serves as the foundational rock to guide and encourage the organization to continue pressing forward through the murky process.
Several suggested steps for a successful ERP software selection process are outlined below. Notice I said successful ERP software selection as opposed to successful ERP software review. After all we are focusing on ways to complete the project rather than getting halfway through and aborting it.
1. Determine to Justify. The first thing you’re probably asking yourself is whether the formal business case justification exercise is really necessary. After all, isn’t it common knowledge throughout the organization that the existing system is dysfunctional? If so, then why waste time documenting what is already known? Can’t we just get on with it and begin the shopping process? Sure you can, but in all likelihood you will end up regretting it. The reason is that you do not have a clear business imperative to proceed. What I mean by that is that you must understand the short and long term business reasons for embarking on the project. This will likely include the strategic objectives and vision of the company ownership and stakeholders. You should also consider the organization’s track record on difficult projects, and what other competing short and long term priorities might exist. In addition, you will need to identify the goals and benefits to be achieved, the measures to be used, and the problems to be overcome.
Conversely, if you are simply focused on certain functions that need improvement, you are looking at this more as a computer or IT project, as opposed to a critical business project. If it’s cast primarily as an IT project, your bullets will not be nearly potent enough to slay the dragons that lie on the ERP system path. Those dragons frequently come in the form of undesirable trade –offs, higher than anticipated costs, ambiguity and unclear outcomes.
Having a well organized and clearly documented business case will provide strong support from management and employees when the going gets tough. Without it you are merely relying on hope and faith to carry the day. Based on my experience, I can tell you that faith can go out the window when the challenges start mounting. The difficulty and risk involved in an ERP project is significant, and therefore in order to assume that risk, there must be clear and compelling reason to do so, and more importantly organizational resolve from top to bottom to succeed.
2. Quantify the Need for Change. Now that you have determined the value of a thorough business case justification project, the question is how to do it. At its most fundamental level, you are attempting to quantify the value of the benefits to be gained, versus the cost to attain those benefits. You are examining these benefits and costs over the perceived life of the ERP system, bearing in mind the timing of when specific costs and benefits are likely to occur.
It is admittedly difficult to determine concrete value from a new ERP system implementation. But far better to do it now, rather than after the money is spent. Credibility must be a critical overarching objective in the finished document. This requires soliciting feedback from several key people and departments, while frequently erring on the conservative side in your estimates.
Most organizations can readily identify functions in their existing ERP system that are not working well. However, a deeper inspection will frequently reveal several events occurring in the organization that may be symptoms of a bigger problem. For example, you may discover a chain of events similar to that illustrated below.
profits are down
→ sales are down
→ orders are not being fulfilled
→ excessive stock outs
→ excessive inventory obsolescence
→ poor demand and supply chain visibility
→ wrong inventory items being replenished ↑
You can see from this example that even though there are a variety of problem events taking place, the likely root cause is that the organization has poor insight relative to their demand and supply. So they are essentially operating blind in the replenishment area and ordering too much of what they don’t need and too little of what they do. If they could address that single issue, a number of other issues would disappear or become less of a problem.
Make a list of all your events and then determine which seemingly unrelated events are in fact actions or reactions to another event in your list. Being able to address and manage the root cause event more effectively with a new ERP system should yield a cascade of financial value.
In the next issue we will look at ways to quantify the tangible and intangible financial values and benefits of your project as well as the myriad of costs that will need to be borne.
Have you ever worked on a project that started off with boundless exuberance and fan fare, yet failed to deliver the anticipated results? Sometimes it’s a result of a head on crash with completely unforeseen events. More often than not however, it is usually more a matter of the project losing inertia for one reason or another. It might be due to the project running out of money or resources, but frequently it is due to the project not having the foundation of a well documented and well justified business case to fall back upon. Common symptoms that can derail a project are things such as competing corporate goals and objectives, and poorly understood or shifting priorities.
I see evidence of the aborted project all the time in my industry. Predominantly, an organization decides one day to replace their existing business management system (referred to as ERP system) and thus rushes headlong down the path of reviewing various business management software packages and providers only to run out of steam a few months later and ultimately make no decision. This results in much wasted time and money for the organization as well as the ERP system providers. How and why does this happen so often?
First of all, the initial decision to replace their system could be based on any number of factors, but it usually stems from deficiencies in their existing system as it relates to being able to perform certain functions. After some period of awareness and discontent, the decision makers give the go-ahead to someone, usually in the accounting or perhaps IT department, to start looking for a replacement ERP system. You might recognize this as the “let’s just do it” syndrome. The lucky recipient of the edict from above, armed with not much more than a short list of functional capabilities that need to be improved, sets off in search of the perfect solution. It doesn’t take long to discover an array of ERP systems (at last count, approximately 350) and multiple providers of these packages.
If the person leading the ERP software review process is lucky, they will find several offerings that appear to address their functional requirements to a greater or lesser degree. It quickly becomes apparent however that the review and selection of a new ERP system is a daunting task filled with lots of risk and uncertainty. As the review process continues, more questions than answers frequently arise, until at some point the project just stalls out due to lack of clear organizational imperatives and mounting gray areas.
As an organization dedicated to helping companies successfully select and implement ERP systems, when the project is aborted like this, we call it “Losing to No Decision”. The ironic thing is that a conscious decision to abort the project rarely occurs, rather it just flat runs out of gas because there is not enough organizational clarity and determination to grapple with the difficult tasks and overcome the speed bumps. As you can imagine, this is ultra frustrating for everyone involved as it wastes time and resources and results in no progress being made against the initial objective.
Fortunately, there is plenty that can be done to avoid this wasted effort. Stay tuned for the next issue as we lay the ground work including step-by-step instructions for ensuring that your project does not become part of the carnage.
I suspect that most, if not all of you, have heard the term ERP system. And some of you may even know that the acronym stands for Enterprise Resources Planning. That’s a mouthful that on the surface doesn’t seem to mean much. But since an entire industry has been developed around ERP systems, and since just about every legitimate business has one these days, there must be something to it. Let’s take a look and see if we can unravel the mystery.
Tracing ERP’s Ancestors
To understand where ERP got its birth roots, we need to go back to the 1960’s. That is when an approach called MRP (Material Requirements Planning) was born to handle specific processes for certain types of businesses. You will note that both ERP and MRP had the concept of planning in common. But aside from that, one seemed to focus on material requirements, while the other focused on enterprise resources.
Simply stated, the purpose of an MRP system was to assist manufacturers plan and manage inventory (material requirements) so as to meet demand for end finished goods. In order to do this, it was necessary to know current inventory levels of component parts and raw materials, replenishment schedules, and the total demand being placed on all these items.
While MRP was somewhat effective in meeting its stated objectives, it was also quite limited in reach. In fact, it was a closed loop that dealt with a very finite set of factors. When you consider that a typical manufacturing organization has many functional needs and departments apart from the manufacturing process itself, such as A/P, A/R, G/L, customer service, order entry, forecasting, purchasing etc., there were lots of planning and processing needs not being met by MRP. Consequently, the late 1970’s and early 1980’s saw the birth of Manufacturing Resource Planning (MRP II).
You can see with the transition to MRP II, we were no longer focusing on simply material requirements planning, but now had broadened the focus to include all of the manufacturing resources planning utilized in a manufacturing organization. MRP II systems did a reasonably good job of performing the necessary functions associated with buying materials, producing goods, selling the goods, and following the movement of money associated with all of those transactions.
ERP is Born
As time passed in the latter 1980’s and early 1990’s, it was discovered that MRP II was all fine and well if you were a manufacturer. But what if like the majority of businesses in North America today, you were not a manufacturer? In that case another approach was required, and thus ERP (Enterprise Resources Planning) was born. The ERP system set out to expand beyond just manufacturers and encompass the needs of all enterprises regardless of their industry, and the resources required to plan and operate those enterprises.
As ERP systems have evolved over the last couple decades, these systems have embraced and added functional areas such as those shown below.
|R & D
||Manufacturing Execution Systems
|Customer Relationship Management (CRM)
|Supply Chain Management
||Logistics and Distribution
||Advanced Planning and Scheduling
|Sales and Operations Planning
||Lean and Full JIT Support
As you can see from the table above, lots of potential complexity has been heaped upon the ERP system stack. In a highly functional ERP system deployment, the ERP system represents a set of sophisticated tools whose reach is deep and wide, yet tightly integrated across all departments and functions so that there is a single set of high integrity cohesive data available for all users.
Unfortunately, all too often, ERP systems are viewed purely in the context of software functionality. But the real measure of success in terms of an ERP system is the user’s usage experience with the ERP system. Given that, the notion of people is the other very critical element required in the ERP system discussion. To what degree does an ERP system recognize and embrace the importance of people and their roles in an organization? To what degree does it adapt or facilitate varying roles? To what degree does the ERP system empower the people with the right information at the right time in the right place to make and support informed decisions affecting the organizations tactical and strategic needs? It’s only when we have successfully incorporated the all important people component of the equation with the software functionality, that a successful process is identified. The combination of many successful processes constitutes a real ERP system.
ERP Maturity Model
We have just covered the last forty years of ERP product evolution at hyper speed, and even though we have barely skimmed the surface, it is probably plenty deep enough for this discussion. There is one other important concept however that should be considered in an ERP system discussion and that is what is referred to in some circles as the ERP Maturity Model. The ERP Maturity Model is a means of identifying the various levels of sophistication of an ERP system along with the level of value that it brings to an organization. While the number of levels can vary from one model to the next, the typical scenario goes something like this.
||Sophistication and Value
|1. Data Management System
||Data is collected and organized, but may not be valuable enough to be classified as information. There may be many sets of data at play at any given time.
|2. Shared Database & Multiple Software Modules
||Data is shared from a single source across multiple functions and/or departments. While all users have access to the same data, they may not have control over the data, and therefore may not place significant value on it.
|3. Operational Perspective
||There are common rules and procedures used for planning, executing, controlling and reporting actions in the system. Two-way feedback loops exist between the execution elements and the planning elements of the organization. Tactical and operational components are in harmony.
|4. Business System
||Incorporates all of the elements of the previous level, and in addition includes exceptions for all to see, as well as more strategic planning elements. The organization relies on the system information to guide and direct it toward its goals.
|5. Continuous Learning & Knowledge Management
||The ERP system contains a significant historical knowledge base of information, trends and requests. The organization embraces the knowledgebase as a catalyst for continuous learning and improvement. Executive level decisions and daily employee level decisions are made and supported based upon the information in the system.
The purpose of the model is to determine where your organization is on the scale. You may want to ask yourself one or more of the following questions.
- Are you where you thought you were?
- More importantly, are you where you want to be?
- Is there value to be derived for your organization by going to the next level?
- Could major problems be solved or strategic goals achieved by getting to the next level?
Perhaps you liked what you saw after looking in the mirror, and then again maybe you didn’t. If not, then you should know that there are plenty of options avaiable for addressing the concerns. The real question is what action are you going to take to make it happen? As they say, a journey begins with the first step.
Where’s the Elephant?
I concluded the previous post with the notion that there was a large elephant in the room and that we best find it soon before we startle one another. The obvious elephant in the room for me is the question of which came first? The ERP system best practices or the best-in-class companies? In other words, does fanatical discipline and commitment relative to ERP system best practices lead an organization to achieve best-in-class status? Or does a best-in-class company simply exhibit similar champion-like execution and management relative to their ERP system, just as they would in any other element of their business?
This Aberdeen report does not attempt to answer the chicken or the egg question. However based upon my 20+ years of working with ERP systems, and what the report does reveal, there are some reasonable conclusions that can be drawn. In my belief, best-in-class companies exhibit the following characteristics with regard to their businesses, their ERP systems, and their other investment assets.
- They plan well in advance
- They take the long term view.
- They systematize and integrate practices, processes, and procedures wherever possible.
- They establish objectives in advance and constantly measure against those objectives.
- They set the bar high, keep raising it whenever possible, and hold people accountable.
- They adapt to change rapidly and avoid getting boxed in a corner.
- They face touch challenges head on and make tough decisions quickly.
- They reinvest continuously in their systems and their people.
- They recognize the value technology can bring to their business and they aggressively use it to their maximum advantage.
In other words, they avoid the duct tape patch jobs and do things right the first time whenever possible.
Looking in the Mirror
We have examined several of the critical factors relative to the way best-in-class companies manage and utilize their ERP systems. But as you might expect, we have just scratched the surface in terms of the ERP system best practices exhibited by best-in-class companies. My hope is that some of the data provided herein may enable you to assess your particular situation and the correlation that your ERP decisions are having on your overall business performance so that you can move the needle in the desired direction. I would love to know whether you agree with the preponderance of the Aberdeen data or do you think it misses the mark in some way?
President & CEO
ICS Support, Inc.