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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