ERP: How and Why You Need to Manage It Differently

Kennametal, a $2 billion maker of construction tools, has spent $10 million on ERP maintenance contracts during the past 13 years and not once could the company take advantage of upgrades, says CIO Steve Hanna. The company's implementation was too customized: The time and effort needed to tweak and test the upgrade outweighed any benefits, he says. But Hanna kept trying. Late last year, he priced the cost of consultants to help with an ERP re-implementation and was shocked by estimates ranging from $15 million up to $54 million.

The major ERP suites are "old and not as flexible as some newer stuff, and they can't build flexibility in," Hanna says. "Modifying it takes our time and money and training." His ears practically steam from frustration. "You tell me: What am I missing here?"

Kennametal is like many companies when it comes to ERP. The software is essential, but unlike when it was new, it now offers scant opportunity for a business to set itself apart from its competition. It certainly doesn't help bring in new revenue. And running it eats up an increasing share of the IT budget. Yet longtime ERP users aren't pitching the technology. Companies still need it for managing supply chain, financial and employee data.

As Hanna and other CIOs are finding, however, behemoth ERP systems are inflexible. Meanwhile, high-priced maintenance plans and vendors' slowness to support new technologies such as mobile and cloud computing mean that without careful management, the ERP technology woven through your company can become a liability.

Your ERP system probably won't collapse if you do nothing; it's not like legacy mainframe applications were a decade ago. But just as you had to adapt your approach to managing mainframes in order to maintain their value in an age of faster, cheaper Web-based apps, you now need to do the same with ERP. And so it's time to rethink business processes, drive a harder bargain on maintenance fees and find ways to marry ERP to emerging technologies. Achieving an ERP system that delivers future value means managing it differently here and now.

The New Legacy System

New ERP license revenue dropped last year by about 24 percent, according to Forrester Research--one effect of the general decline in software spending during 2009. This means vendors enter 2010 hungry for new business. They'll offer software deals to tempt CIOs who had put off upgrades or who want to install completely new systems to get the latest capabilities.

Yet CIOs need to tread carefully: What used to be a good deal may not be anymore. Steve Stanec is vice president of information systems at Piggly Wiggly Carolina, a privately held supermarket chain with 105 stores, most in the southeast United States. Stanec says he and other CIOs must depart from the traditional ERP script, where, after lengthy negotiations, vendors hand over software and charge hefty ongoing fees. CIOs must avoid falling into the same ERP traps they once did, he says.

Buying and installing ERP was never a cakewalk. In the 1990s, in courthouses across the country, lawyers told tales of intractable disputes between vendors and customers, of how ERP actually ruined some companies. No doubt ERP projects forced the CIOs of many others onto blood-pressure meds. But as the years rolled by, ERP vendors and CIOs worked out their problems and companies began to install these multimillion-dollar systems to make sense of their complicated operations. In doing so, they were able to run better and faster than the competition--at least until the competition caught up.

Today, though, ERP is the Jack Nicholson of software: Its repertoire hackneyed, the old and expensive dog finds it hard to learn new tricks. It's become a legacy technology, and CIOs are now finding new ways to manage ERP projects and the ongoing upkeep. Their best advice: Draw a clear project map and modify the software only as a last resort.

Haworth, a $1.7 billion office furniture manufacturer, will use tools from iRise to visually plan its rollouts of SAP systems in its major offices on four continents. The iRise tools simulate how the finished SAP system will look to employees, to get them accustomed to changes before rollout. The company also uses a sales compensation application from Vertex because SAP doesn't support the complicated, multitiered compensation model Haworth uses to pay its salespeople, says CIO Ann Harten. These choices stem from Harten's decision to make no custom changes to the core SAP code. The idea is to streamline the implementation project, which started in 2006, and to make future upgrades easier.

Modifying the core is expensive both when you do it and as you live with it, she says. "Next time the vendor does a version upgrade or a patch, your testing requirements are increased severalfold," she says. "You want to avoid this at all costs."

ERP of the future is as plain-Jane as possible, agrees Hanna, the Kennametal CIO. The fact that it can take an army of developers to build new features into ERP suites slows the vendors down. But it's also an obstacle for customers. The 6,446 customizations--Hanna counted them--that Kennametal made to its ERP software over the years prevented the company from taking advantage of new technology its vendor did build in. "We couldn't implement one single enhancement pack ever," he says. He declines to name the vendor.

So even if he could pay up to $54 million for integrators and consultants to help Kennametal move to the latest version of the ERP suite, he doesn't want to. Instead, he plans to turn Kennametal's old ERP management strategy on its head by putting in as vanilla a version of SAP as possible. He and CEO Carlos Cardoso are willing to change Kennametal's internal business processes to match the way SAP works, Hanna says, rather than the other way around.

Kennametal will also take on the implementation itself. He hired IBM to consult about requirements definitions and to identify business processes that must be revamped to conform to SAP's procedures. Meanwhile, Kennametal staff will do the legwork. Hanna and Cardoso have committed to the board of directors to have the job done by November, he says, implementing at least 90 percent of the SAP software unmodified. The project is so important to Kennametal that it must succeed in order for the company's leaders, including Hanna and Cardoso, to achieve their performance goals for the year. "I'm going to make it work," says Hanna.

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No More Maintenance

Because Kennametal's ERP system has been unable to keep up with changing technologies, Hanna says the company never benefitted from the millions in maintenance fees it paid to cover upgrades. "We paid maintenance for nothing."

Not all CIOs feel that way; nevertheless, IT leaders have been frustrated with ERP maintenance costs for years. Recent budget cuts and hiring freezes have brought the issue to a head, making relationships with ERP vendors more tense than ever. The tension has risen in part because, with so many IT projects still on hold, big ERP vendors have been "forced to live off maintenance contracts," says Paul Hamerman, an analyst at Forrester Research. In one well-publicized example, the $113 billion Siemens reportedly challenged the fees of its longtime ERP vendor, SAP, then worked out an undisclosed deal.

The major vendors have made some gestures to quell such uprisings. For example, SAP is addressing customer complaints about maintenance by delaying the start of planned price increases and stretching them out over seven years, according to Janet Wood, the executive vice president of Maintenance Go To Market. SAP has also worked with large user groups to devise ways to measure the value of enterprise support, Wood says. Oracle maintenance is a flat 22 percent of licensing fees and the vendor rarely negotiates.

Still, some CIOs say that for ERP to have a viable future inside their companies, stretching out price increases isn't enough; they have to change drastically how much it costs to maintain it. Some are enticed by discount third-party maintenance providers.

Choice Hotels, for example, is considering Rimini Street to replace maintenance from Oracle, says Carol Galonis, vice president of corporate information systems at the $642 million hotel chain.

"Right off the bat, they start with a model of 50 percent off" what Choice Hotels pays Oracle, Galonis says, "and the service levels seem to be richer." She expects to raise the prospect of switching maintenance vendors in negotiations with Oracle and make a decision by June.

Doug Tracy, CIO at Dana Holding, researched analyst firm estimates about where maintenance money actually goes and found that 90 percent of those fees are pure profit for the vendor. For Tracy, there is no more time or tolerance for vendor games.

The $8.1 billion auto parts supplier has in recent years fought a hostile takeover attempt as well as been in, then emerged from, Chapter 11 bankruptcy protection. Then the auto market tanked, and Dana's sales reflected the 30 percent to 70 percent decline. The company had to scale back some ERP projects and Dana wanted its vendors to work with them to reduce fees. He declines to name Dana's main ERP vendor, but says he wasn't getting the deal he was looking for.

Dana's vendor didn't lie down. To try to persuade Tracy that maintenance fees are valuable, the vendor analyzed Dana's use of its support, he says. The findings: Dana made 21,000 requests to the vendor between January and September last year. About 98 percent of them didn't involve human intervention; they were automated look-ups on the vendor's knowledgebase. "We're not getting much," Tracy concluded.

So he stopped making maintenance payments to his main ERP vendor as of December 31. "That's a risky strategy, though not as risky as vendors would have you believe," he says.

Risks to any CIO who decides to stop paying maintenance include being hit with penalties assessed by the vendor for breaking a contract and being left without technical support in an emergency. With Dana's lawyers, Tracy studied the company's contracts and felt comfortable that it would not be violating any terms by stopping maintenance payments. Then Tracy and his IT team explored ways to get support for the ERP system in question through other avenues. They found many, including online user forums, books and consultants.

One result of the move away from provider support is that Dana's internal IT people have to be more savvy about the ERP systems the company relies on--able to fix what may go wrong. But, he says, there have been no technological show-stoppers in years because ERP, like other legacy systems, is mature and reliable. Plus, there's plenty of ERP talent.

Eliminating maintenance saves money, because Dana is no longer paying for a service of questionable value, and it sets a precedent with the company's other ERP vendors. "You have to show value every step of the way," Tracy tells his suppliers. "If you try to hold us hostage, I will call what I see as a bluff and just stop payment."

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New Technology Tricks

ERP isn't much different today than the technology early adopters installed 15 years ago. But new technologies make traditional ERP seem dated. "The concept of ERP is not dead, but the technology under it is," says Bill Brydges, managing director of the ERP practice group at the consultancy MorganFranklin.

Cloud computing, mobile applications, social knowledge sharing and predictive analytics present trouble spots for CIOs trying to move ERP systems into the future. The pay-as-you-go, elastic economics of cloud computing are coaxing CIOs to question how ERP should be delivered. They also wonder, with other parts of the enterprise becoming accessible via cell phone, which parts of the ERP system can and should be available in the palms of users' hands. And there's a screaming need for better analysis tools to make sense fast of the data generated by ERP suites (Read "A New Source of ERP Value," for more about ERP-based analytics).

With their significant investment in existing code base, ERP vendors can't keep up, Brydges says. It's a classic problem: They have a legacy core to tend and it's not like every module in an ERP suite can be smooshed onto a Blackberry or an iPhone.

"Technology has gotten out ahead of them," he says, forcing the vendors to open application programming interfaces to let newer tools from other suppliers fill gaps. Integration, however, falls largely to CIOs.

Cloud computing looms as one of the "interesting disruptions" in IT now, and ERP is no exception, says Clayton Christensen, professor of business administration at Harvard and an expert on disruptive innovation. Christensen warns ERP vendors that many companies in industries such as automobile and steel have gone down at the hands of low-cost competitors, but what's trouble for ERP firms could present an opportunity for CIOs.

Some CIOs are looking for cloud services from their ERP vendors to get out from under the upgrade-and-compatibility testing grind. But so far there's no option to put mainstream ERP systems in the cloud, causing customers to miss out on a way to cut the cost of operating their biggest, perhaps most basic systems. Newer vendors, particularly those whose business model is software as a service, may be able to pick off parts of the ERP market by offering specific cloud-based modules, much the way Toyota began to peck away at U.S. carmakers decades ago, Christensen says.

General Motors looked at Toyota's subcompacts and said it didn't make sense to compete to defend the least profitable segment of the market. "So they kept giving away those least profitable tiers one by one as Toyota grew," he says. "Where are they now?" Harten, the Haworth CIO, would like to add mobile functionality to her SAP ERP system. Haworth provides interior solutions for customers, including furnishings, raised access floors and modular walls. To speed the process, Harten explains, Haworth employees or outside dealers and installers could use mobile devices during walk-throughs to record "punch-list" items to be corrected, ordering them in real-time via an interface into the company's SAP system. Except they can't. The software doesn't exist. "Should SAP not provide the necessary APIs to accommodate our time line, we will need to develop alternative solutions," Harten says. "My number one request is that SAP head in that direction." SAP, Oracle and others have said building APIs to popular mobile devices is on their agendas, but their time frames are vague.

Choice Hotels has used PeopleSoft Financials for 12 years and PeopleSoft Human Resources for eight. Now the hotelier wants more Web functionality from both. So many resumes and other information from job applicants are processed online that converting Web forms to work in the existing human resources software bogs the process down, says VP of IT Galonis.

Specifically, she is considering SaaS or cloud-based products for talent management, recruiting and succession planning from vendors other than Oracle, which owns the PeopleSoft line of software.

Getting these capabilities via cloud computing would let Choice Hotels shed on-premise infrastructure and redeploy IT staff currently caring for those servers and software to more valuable roles, she says. Being selective is critical, though, because she wants to be sure that new software and services work with the core PeopleSoft systems. Choice Hotels also plans to refresh its employee intranet to promote more knowledge sharing and interactivity among users via wikis and blogs. Galonis may bring in Microsoft Sharepoint for these features, she says, to fill in what's missing from the PeopleSoft applications.

Galonis will decide which way to go this year. Changing and customizing ERP software is a big task. But supplementing her core ERP systems with individual packages or services from other vendors would let her IT department serve employees and job candidates better, she says, supporting the company's plans for growth. "We would be able to move more quickly and react to demands."

The Once and Future ERP

CIOs have to take charge of what the future of ERP is going to be. Treating ERP as legacy IT may be hard for some who have invested so much time and energy planning, implementing and tweaking these systems. But adopting this mind-set will help CIOs move ERP--and their companies--ahead. Modifying the base applications judiciously, if at all, will minimize expense and time devoted to software that now provides the most basic functionality. Everyone does accounts payable, notes Stanec at Piggly Wiggly, so don't waste time customizing it.

A solid stance on maintenance--forcing vendors to sell you on its value, rather than just sell you a deal--will push customers ahead financially, says Tracy at Dana Holding. Other CIOs may want to consider dropping maintenance fees to primary ERP vendors if they, too, feel other resources can fill the gap, using instead a wealth of resources available online. Unlike vendors, he says, "People love to share their knowledge."

Meanwhile, Christensen advises, CIOs need to keep making noise about bringing in upstart vendors that offer the technology the big guys don't. CIOs Galonis at Choice Hotels and Harten at Haworth are doing just that as they pressure their current vendors to hurry up with new capabilities.

Further out, Stanec, for one, dreams of seeing ERP vendors develop packages that help companies generate revenue. "Then," he says, "we'd have something interesting to negotiate."