Assessing the Enterprise Resource Planning (ERP) capabilities of a company being acquired has become a due diligence component of most Merger and Acquisition (M&A) or Private Equity (PE) transactions, and rightfully so. Having an outdated or poorly deployed ERP system is, and should be, a red flag and a discount factor for any transaction. A few months ago, a Private Equity client asked me to put together a quick presentation of my experience with ERP systems and the impact they have on companies. A shortened and sanitized version of the presentation is here; but going back through my presentation notes got me thinking;
A pending M&A transaction is not the only time I have seen an ERP project make or break a company or seriously impact its relationship with its customers. Any operator worth his/her salt needs to be intimately familiar with the ERP infrastructure of the company they run and directly engaged in major decisions around it.
If you do a Google search on “Failed ERP Implementations” you get over thirty five thousand hits and – depending of whose data you choose to believe – only between ten and thirty-five percent of all ERP projects achieve 100% of their objectives. Color me purple, but it doesn’t take a math genius to deduce that the remaining sixty-five to ninety percent of projects fail in some way to meet their initial expectations or realize the perilous nature of ERP projects. Statistics like that, and the publicity of lawsuits against major ERP vendors, should make Chief x Officers (CxO – Executive, Financial , Operating, Information) contemplating a large ERP project think twice about their strategy, their plan, their team, their ERP vendor, and their overall assumptions and expectations about the project. And many of them do (and thank you to those who call me for help, Ideasphere Partners appreciates your business)!
Over the last fifteen years, of all the challenges I had to address as a technology and operations executive as well as in my Corporate Renewal, Merger & Acquisition, or interim-executive consulting work, issues and projects around ERP systems are usually the most challenging. There is plenty available research that goes into more detail and offers specific strategies, but for those Do-It-Yourself (DIY) executives who don’t hire any outsiders to help, here are two things you have to do before anything else:
- If your company does not have an ERP system in place already, better make sure the organization will be ready for one, even before implementation planning starts. The quality of your plan will depend on how ready the organization is, and the quality of your implementation will heavily depend on how good your plan is.
An ERP system is at a very high level the operating system (OS) of a company. Just like the OS on a computer, it is the interface between the hardware (business operations) and the software (business strategies), the router of the instructions-for-work to processing centers (customer orders, manufacturing requests, work plans, and schedules), the resource allocation manager (Equipment, service capacity, capital, or people), and the reporter of system performance (financial and operational metrics) to the owners. And just like only simple computers – on-board controllers and special purpose hardware – can function without a complex OS, only small or single purpose companies can function without an ERP system. And if your company has a home-grown ERP system you’ve outgrown, or uses a collection of modules from various vendors to perform the ERP function that can no longer scale and you are considering upgrading, keep reading.
Deploying an ERP system where none existed before is a traumatic experience to the organization. For example, if the company has an each-on-their-own culture and poor cooperation between departments and divisions who are not ready to give up a certain amount of autonomy, accept a level of discipline, and acknowledge organizational inter-dependencies, deploying an ERP system is doomed to fail from the start. To mitigate that risk, before anything else, make sure you have a solid assessment of the organization and its readiness for change and a solid organizational change plan that includes all aspects of the organization, from sales to manufacturing, to senior management. There is of course the special cases where the deployment of an ERP system is merely the mechanism an executive team is using to actually drive change, but that’s another blog for another day. There are many resources on how to effect organizational change, but some of my favored books from my library, not in any particular order, are: Managing Transitions, Influencer, Re-engineering Management, Why New Systems Fail, and Real Change Leaders.
- If your company has an ERP system already deployed, but it is based on antiquated technology, or a collection of loosely connected modules (i.e. an accounting package, a scheduling package, an inventory management custom app, and a shop floor control system) from various vendors and levels of sophistication, in addition to change management, there are technology and integration issues you need to contemplate before pulling a plan together.
All ERP vendors will tell you they can handle any integration issues, but an ERP system, antiquated or patch-work as it may be, if it is functioning at any capacity, it is still analogous to the nervous system in the human body. Just like the nervous system controls organs as well as thoughts and behavior utilizing a synaptic network, so does the ERP system control operations as well as activities and output utilizing a computer network and electronic transactions. And once an ERP system is in place, it enables new connections and facilitates activities that are not immediately obvious. Major ERP changes are like major surgery and you would not want someone to remove or operate on a major organ in your body, without understanding what it would do to you.
Before under-taking an ERP project, start by creating an enterprise architecture map and a system interaction chart that shows the various systems and sub-systems, their connectivity and the types of information they exchange. Creating a simple map will show you the SIPOC (Supplier, Input, Process, Output, and Consumer) relationships that will be impacted when you make a change so you can be prepared. You will be surprised how Julie from accounting is using some report James creates through the inventory system to manually populate a spreadsheet that sales uses to change the forecast, etc. etc. etc. Or, how a division IT team connected a supplier to the system through a back-door integration corporate IT is not aware of so they can improve their parts delivery process. A couple of good books on this area from colleagues I personally know and respect are Enterprise Integration, and Enterprise Information Integration.
And if you don’t think these two first steps are important, drop me a note! I can tell you enough horror stories to change your mind.