Wednesday, May 19, 2010
Reasons For Failure of ERP
ERP systems have the capability of integrating virtually all business processes by installation of program application modules for sales, marketing, accounting, finance, production and materials management, and human resources. These systems use a common database for all accounting and operating information instead of relying on separate master files found in batch applications. ERPs are usually client-server networks that operate across multiple platforms. Major vendors of ERP systems include SAP, Oracle, PeopleSoft (now part of Oracle), Baan, and J.D. Edwards. Because of the advantages of integrated processing and a common database, companies frequently implement ERPs prior to implementations of other major applications such as customer relationship management systems (CRMs), supply-chain management systems (SCMs), and data warehouses.
ERP implementation is by no means a purely technical system implementation, and also includes Business Process Reengineering (BPR). It has been found that the mismatch between ERP and organization can have significant impacts on organizational adoption, and this could be the main reason causing the ERP implementation failure.There have been many instances of unsuccessful ERP implementations which include inability of Hershey to ship candy at Halloween, Nike losing shoe orders, and Foxmeyer’s failure to process orders. Numerous surveys report that 70% of ERP implementations did not achieve their estimated benefits. In other studies, the percentage of ERP implementations that can be classified as “failures” ranges from 40% to 60% or higher, and failures of ERP system implementation projects have been known to lead to problems as serious as organizational bankruptcy. Failure has been defined as an implementation that does not achieve a sufficient Return on Investment (ROI) identified in the project approval phase. Using this definition, it has been found that failure rates are in the range of 60 - 90%.
We have compiled various reasons for the failures of ERP systems and classified them into Pre-implementation, implementation post implementation and other reasons. Some of the reasons are over lapping with each other and also trigger some of the elements of ERP failure.
Broadly the ERP failure chart appears as under.
Pre Implementation Phase
• Lack of Top Management Support
The top management engages in the activity of selecting the ERP and forming a steering committee but does not there after take any active interest in monitoring the progress. The top management delegates responsibility for implementation of the ERP to lower level management. The lower management may not have the expertise and the commitment to carry out the implementation process. It is generally observed that the lower management does not take things seriously which the top management does not support. In many cases there is no steering committee to monitor the progress and implementation of the ERP resulting in lack of co-ordination of the implementation effort and having the necessary resources for the implementation.
• Inadequate Requirements Definition
Surveys have shown that inadequate definition of functional requirements accounts for nearly 60% of ERP implementation failures. This is simply a matter of not comprehensively and systematically developing a quality set of functional requirements definitions. This leads to the other greatest cause of ERP implementation failures: poor package selection. E.g. there are certain statutory reports which need to be generated from the system are not defined during the requirements phase resulting in duplication of work.
• Poor ERP Package Selection
Poor package selection occurs when a company has inadequately developed functional requirements definitions. It also occurs when staff members assigned to ERP projects do not take the time to run thru the screens of the new system, as they would during their daily work tasks, to find out if the software package features are adequate for their needs.
The ERP system is selected without defining functional requirements. Major blunders are created by selecting a package at the top levels of a company without intimately knowing its characteristics. This often results from this is the ERP package doesn't fit the organizational needs, or that the package selected takes longer to process daily work tasks.
E.g. – Certain packages are suitable for auto industry may not fit the pharmaceutical companies.
• Inadequate Resources (Time & People)
The fourth greatest reason for ERP implementation failures is inadequate resources. Many companies attempt to save money by doing everything on an overtime basis, whether or not there are adequate skills within the company and extending individual workloads. The financial and emotional drain of what seems sometimes to be perpetual extensions, reschedules and delays of implementations takes its toll. People burn out after having put in extensive hours over a long period of time.
• Inadequate Training
Another of the biggest causes of ERP implementation failure is inadequate education and training, which are almost always underestimated. ERP-related training is crucial, as most employees must learn new software interfaces and business processes which affect the operation of the entire enterprise. Training material and user documentation are often found to be too brief and unhelpful by the users. Project team members find knowledge transfer process ineffective and the project team members and project manager could not acquire sufficient knowledge or skills to use, maintain and support the ERP system.
• Lack of employee support / Resistance to change
The human tendency to resist change is a big barrier in implementation of ERP. Employees are often resistant to change due lack of competency, fear of failure, risk of downsizing, inadequate communications, viewing ERP as another method of management control, implementation of BPR resulting in change of duties, etc. A lack of buy-in often results from not getting end users involved in the project from the very start, thereby negates the authorship and ownership of the new system and processes. Due to a limited knowledge of formalized business processes and ERP systems, as well as work overload during the implementation process, users resistant to change.
• Inadequate User Acceptance Testing
Due to tight project schedule and insufficient knowledge in testing ERP systems the UAT is conducted in a rush. ERP testing result indicate the readiness of the ERP system to “go live” (from the perspectives of examining IT infrastructure capacity, correct configuration of ERP system, people (including users and project team) were equipped with sufficient knowledge and skills, and data was of good quality). This leads to problems after the systems goes live, as problems become more complicated than predicted. Further this increases workload of project team members and users to fix the problems and cope with daily operations.
• Business processes not reengineered
The installation of an ERP system requires significant shift from existing business practices. The business process reengineering leads to segregation of duties, downsizing of staff, change in roles of existing personnel, documentation, paperless processes, etc. The existing business processes and personnel need to mould in new environment. However it is observed that an unclear vision of why or how to conduct BPR, leads to ambiguity and confusion in organization. This further leads to resistance to change and lack of employee support as employees fail to adjust in the new environment.
• Inadequate change management practices
The ERPs require constant changes to be made to the package due to changes in business environment, regulatory requirements, new products / services, addition of locations in multiple countries, etc. Such changes done without considering the likely impact can affect the ERP functioning. These may not cause ERP failure but it can impact the functioning and objectives of the ERP. The lack of a change management approach as part of the program can prevent a program from succeeding.
• Lack of Post implementation review / audit
In the post implementation era the organizations tend to be averse to the idea of post implementation audits of an ERP. Organizations tend to rely more on user feedback and requirements after the implementation instead of ERP reviews by an independent auditor. This may cause more system disintegration as some changes may tend to be disruptive, non-standard and incompatible to other modules of the ERP. A post implementation audit can add lot of value to the ERP and optimizing processes.
• Implementation does not match with standard specifications
This often is result of numerous errors in the past such as inadequate requirement specification, poor ERP package selection, inadequate resources, tight project schedule, heavy customization, business process not reengineered and inadequate user acceptance testing. Any of the above reasons can cause a mismatch with the expected performance and actual results delivered by the ERP.
Another significant cause for ERP implementation failure is the unrealistic expectation of benefits and return on investment. Software providers are notorious for overstating the benefits in terms of ROI, when the total costs of the project have been understated. Top management assumes that ERP implementation could provide great solutions without considering the complexity of the ERP system, the possible implementation process complications and the associated risks. This gives the whole project team and users unrealistic expectations. This misconception also leads to superficial project planning and an underestimation of budget and resource allocation, and resulted in a failure of ERP implementation from a project management perspective.
• Heavy Customization of ERP package
Due to software mismatch, heavy customization was required in the areas of program customization and report customization. Customization could cause project delays, overspent budget and an unreliable system (due to poor quality of customization, unresolved system bugs and insufficient testing). Customizing the ERP to fit with business processes might lead to sacrificing "best practices" embedded in the ERP system.
• Ad hoc Cost Cutting measures
Another of the key causes of ERP implementation failure is ill-advised cost cutting. In an effort to avoid temporary conversion costs, some companies take a very risky route and go live at multi-locations simultaneously, subjecting all plants or some plants to a total shutdown. Others attempt to unrealistically compress the schedule in order to save on expenses, only to eventually run over both schedule and budget. The ROI should take a "back seat" when upgrading an important part of a company's infrastructure: the information system.
• Tight project schedule
Top management and the project manager would like to reduce the budget of the ERP project, and thus they set too tight a project schedule. Implementation activities are conducted in a rush (e.g., project planning, BPR, training, testing and so on) in order to meet the project deadline. The project team and users were overloaded. This can lead to higher resistance to change, exhaustion and poor knowledge transfer.
The fifteen reasons identified for the failure of the ERP are all interconnected in some way and usually the failure on one count may trigger other issues for failure of ERP. For example poor ERP package selection may trigger other things such unrealistic management expectations, heavy customization, lack of BPR, etc. The management should therefore start carefully select the ERP package which satisfies its business requirement, ensure that the employee’s are taken into confidence, necessary resources are acquired, processes are reengineered as per the plans and people are trained to use and maintain the system. In addition a post implementation audit should be performed to check the deficiencies in the system are identified and corrected.
Finally an ERP is like a nervous system in human body, if implemented incorrectly it can result in complete failure for the organization systems.
• Inadequate Requirements Definition
Surveys have shown that inadequate definition of functional requirements accounts for nearly 60% of ERP implementation failures. This is simply a matter of not comprehensively and systematically developing a quality set of functional requirements definitions. This leads to the other greatest cause of ERP implementation failures: poor package selection. E.g. there are certain statutory reports which need to be generated from the system are not defined during the requirements phase resulting in duplication of work.
• Poor ERP Package Selection
Poor package selection occurs when a company has inadequately developed functional requirements definitions. It also occurs when staff members assigned to ERP projects do not take the time to run thru the screens of the new system, as they would during their daily work tasks, to find out if the software package features are adequate for their needs.
The ERP system is selected without defining functional requirements. Major blunders are created by selecting a package at the top levels of a company without intimately knowing its characteristics. This often results from this is the ERP package doesn't fit the organizational needs, or that the package selected takes longer to process daily work tasks.
E.g. – Certain packages are suitable for auto industry may not fit the pharmaceutical companies.
Implementation Phase
• Inadequate Resources (Time & People)
The fourth greatest reason for ERP implementation failures is inadequate resources. Many companies attempt to save money by doing everything on an overtime basis, whether or not there are adequate skills within the company and extending individual workloads. The financial and emotional drain of what seems sometimes to be perpetual extensions, reschedules and delays of implementations takes its toll. People burn out after having put in extensive hours over a long period of time.
• Inadequate Training
Another of the biggest causes of ERP implementation failure is inadequate education and training, which are almost always underestimated. ERP-related training is crucial, as most employees must learn new software interfaces and business processes which affect the operation of the entire enterprise. Training material and user documentation are often found to be too brief and unhelpful by the users. Project team members find knowledge transfer process ineffective and the project team members and project manager could not acquire sufficient knowledge or skills to use, maintain and support the ERP system.
• Lack of employee support / Resistance to change
The human tendency to resist change is a big barrier in implementation of ERP. Employees are often resistant to change due lack of competency, fear of failure, risk of downsizing, inadequate communications, viewing ERP as another method of management control, implementation of BPR resulting in change of duties, etc. A lack of buy-in often results from not getting end users involved in the project from the very start, thereby negates the authorship and ownership of the new system and processes. Due to a limited knowledge of formalized business processes and ERP systems, as well as work overload during the implementation process, users resistant to change.
• Inadequate User Acceptance Testing
Due to tight project schedule and insufficient knowledge in testing ERP systems the UAT is conducted in a rush. ERP testing result indicate the readiness of the ERP system to “go live” (from the perspectives of examining IT infrastructure capacity, correct configuration of ERP system, people (including users and project team) were equipped with sufficient knowledge and skills, and data was of good quality). This leads to problems after the systems goes live, as problems become more complicated than predicted. Further this increases workload of project team members and users to fix the problems and cope with daily operations.
• Business processes not reengineered
The installation of an ERP system requires significant shift from existing business practices. The business process reengineering leads to segregation of duties, downsizing of staff, change in roles of existing personnel, documentation, paperless processes, etc. The existing business processes and personnel need to mould in new environment. However it is observed that an unclear vision of why or how to conduct BPR, leads to ambiguity and confusion in organization. This further leads to resistance to change and lack of employee support as employees fail to adjust in the new environment.
Post Implementation
• Inadequate change management practices
The ERPs require constant changes to be made to the package due to changes in business environment, regulatory requirements, new products / services, addition of locations in multiple countries, etc. Such changes done without considering the likely impact can affect the ERP functioning. These may not cause ERP failure but it can impact the functioning and objectives of the ERP. The lack of a change management approach as part of the program can prevent a program from succeeding.
• Lack of Post implementation review / audit
In the post implementation era the organizations tend to be averse to the idea of post implementation audits of an ERP. Organizations tend to rely more on user feedback and requirements after the implementation instead of ERP reviews by an independent auditor. This may cause more system disintegration as some changes may tend to be disruptive, non-standard and incompatible to other modules of the ERP. A post implementation audit can add lot of value to the ERP and optimizing processes.
• Implementation does not match with standard specifications
This often is result of numerous errors in the past such as inadequate requirement specification, poor ERP package selection, inadequate resources, tight project schedule, heavy customization, business process not reengineered and inadequate user acceptance testing. Any of the above reasons can cause a mismatch with the expected performance and actual results delivered by the ERP.
Other Reasons
• Unrealistic management expectationsAnother significant cause for ERP implementation failure is the unrealistic expectation of benefits and return on investment. Software providers are notorious for overstating the benefits in terms of ROI, when the total costs of the project have been understated. Top management assumes that ERP implementation could provide great solutions without considering the complexity of the ERP system, the possible implementation process complications and the associated risks. This gives the whole project team and users unrealistic expectations. This misconception also leads to superficial project planning and an underestimation of budget and resource allocation, and resulted in a failure of ERP implementation from a project management perspective.
• Heavy Customization of ERP package
Due to software mismatch, heavy customization was required in the areas of program customization and report customization. Customization could cause project delays, overspent budget and an unreliable system (due to poor quality of customization, unresolved system bugs and insufficient testing). Customizing the ERP to fit with business processes might lead to sacrificing "best practices" embedded in the ERP system.
• Ad hoc Cost Cutting measures
Another of the key causes of ERP implementation failure is ill-advised cost cutting. In an effort to avoid temporary conversion costs, some companies take a very risky route and go live at multi-locations simultaneously, subjecting all plants or some plants to a total shutdown. Others attempt to unrealistically compress the schedule in order to save on expenses, only to eventually run over both schedule and budget. The ROI should take a "back seat" when upgrading an important part of a company's infrastructure: the information system.
• Tight project schedule
Top management and the project manager would like to reduce the budget of the ERP project, and thus they set too tight a project schedule. Implementation activities are conducted in a rush (e.g., project planning, BPR, training, testing and so on) in order to meet the project deadline. The project team and users were overloaded. This can lead to higher resistance to change, exhaustion and poor knowledge transfer.
The fifteen reasons identified for the failure of the ERP are all interconnected in some way and usually the failure on one count may trigger other issues for failure of ERP. For example poor ERP package selection may trigger other things such unrealistic management expectations, heavy customization, lack of BPR, etc. The management should therefore start carefully select the ERP package which satisfies its business requirement, ensure that the employee’s are taken into confidence, necessary resources are acquired, processes are reengineered as per the plans and people are trained to use and maintain the system. In addition a post implementation audit should be performed to check the deficiencies in the system are identified and corrected.
Finally an ERP is like a nervous system in human body, if implemented incorrectly it can result in complete failure for the organization systems.
Friday, November 27, 2009
Post Implementation ERP Review
By Chandan Chourasiya
In today’s world of business it’s tough to imagine any organization without Information Technology systems. IT has graduated from business support to a business enabler. The organizations have IT applications in some or the other form. E.g. - ERP system, payroll applications, CRM, inventory management and other numerous applications running performing various functions performed earlier manually. An entire organization comes to a standstill in case these critical applications go down.
The IT deployments such as ERP have been in the organizations for more than a two decade now. The basic idea behind the ERP implementations was optimization of business processes to create a silo of activities which creates ease in maintenance and management of inventory management, customer relationship management, supply chain management, payables, receivables, material resource planning, financial and payroll. There were numerous ERPs implemented across the globe which includes SAP, Oracle Financial, Baan, JD Edwards, PeopleSoft, etc. The ERP implementation has indeed created a chain of interdependent processes which assist in production planning, management of inventory, payables, receivable and accounting.
The implementation of ERP is a herculean task which consumes organizational resources such as manpower, cost, time, requires upgrade of IT systems, reengineering of business processes, changes in reporting lines and segregation of duties. The business process reengineering specially creates new hierarchy, reporting lines and job profiles. Numerous surveys in the past have indicated 55 %-60% rate of failure of ERP implementation. There are several common risks associated such with implementation of ERP which include:
- Lack of management support
- Lack of employee support
- Time and cost overrun
- Operational bottlenecks
- ERP not meeting the promised expectations
- Inadequate education and training to employees
- Reputation risk among vendors and customers
- Lack of post implementation reviews
The ERP implementation involves commitment of resources such as costs, time and personnel. The failure of ERP leaves a big hole in the pocket and wastage of organizational resources. This creates a major problem especially in post implementation era.
One of the common factors for post implementation failures is lack of implementation audits of an ERP. Organizations tend to rely more on user feedback and requirements after the implementation instead of ERP reviews by an independent auditor. This may cause more system disintegration as some changes may tend to be disruptive and non compatible to other modules of the ERP. There are numerous questions, the answers to which can indicate inefficiencies in the implementation of ERP.
• Does the system meet the needs of your daily activities?
• Is the system efficient to use?
• Was the functionality promised at the start of the process delivered?
• Have business processes changed?
• Are there any spreadsheets or databases in use?
• Are there any old systems in use?
• Is there data to show that the new system has delivered business benefit?
• Could further training improve your utilization of the system?
• Are available functionality and features are utilised to the fullest?
• Has system resulted in saving the resources of the company?
• Does the system provide all or most of the information you needed to perform your job?
• Level of manual interference post implementation stage?
The answers to these questions will represent
• System issues- which provide an indication that the system implementation is not as per the specified criteria, certain required features disabled, and excessive resources consumed for processing, etc. E.g. - Interface errors between inventory and production scheduling resulting in difference between work in progress and completed inventory.
• Functional gaps- A module not adequately functioning resulting in underutilization of the system and alternate procedures. E.g. - Accounts receivable is not configured for generating ageing statements resulting in manual processes followed for the same.
• Inadequate training- Many surveys in the past indicate that more than 80% of the ERP problems arise because employees are inadequately trained to understand functionality of the ERP. E.g. - Check processing done manually when actually these can be printed from the system.
• Processing gaps- Inadequate process resulting in use of certain manual processes. E.g. - Use of reconciliation for AR balances.
The analysis of gaps using these criteria can help in leading to solutions for improving the efficiency and productivity of the ERP. The post implementation audits can help Organizations achieve the underlined objectives of implementing the new system. Further a survey by Big four accounting firm in 2005 indicates that 62% post implementation audits have actually saved an organization from scrapping the ERP project and went a long way in making the implementations successful.
The post implementation audit of ERP would result in following advantages:
• Mitigating Risks such as processing gaps, segregation of duties, interface errors, security features, etc.
• Efficient use of resources such as manpower, time and system resources.
• Identifying and address training requirements. The audits can indicate certain areas where user training is required.
• Ensuring effective compliance processes. The newer versions of ERP ensure certain reporting for the purpose of compliance such SOX. The ERP can be automated to produce certain automated reports which can be utilized for the purpose for compliance.
• Optimizing processes for effective utilization of ERP capabilities.
Thus the post implementation ERP audit can go long way in ensuring organizational objectives of implementation have been achieved. It can also benefit the organizations which have successfully implemented the ERP as the Audit can help in augmenting the existing features and enhancing the capabilities of the system. The audits help in saving time, provide right direction on implementation, resolve security issues and optimize the business cycles.
In today’s world of business it’s tough to imagine any organization without Information Technology systems. IT has graduated from business support to a business enabler. The organizations have IT applications in some or the other form. E.g. - ERP system, payroll applications, CRM, inventory management and other numerous applications running performing various functions performed earlier manually. An entire organization comes to a standstill in case these critical applications go down.
The IT deployments such as ERP have been in the organizations for more than a two decade now. The basic idea behind the ERP implementations was optimization of business processes to create a silo of activities which creates ease in maintenance and management of inventory management, customer relationship management, supply chain management, payables, receivables, material resource planning, financial and payroll. There were numerous ERPs implemented across the globe which includes SAP, Oracle Financial, Baan, JD Edwards, PeopleSoft, etc. The ERP implementation has indeed created a chain of interdependent processes which assist in production planning, management of inventory, payables, receivable and accounting.
The implementation of ERP is a herculean task which consumes organizational resources such as manpower, cost, time, requires upgrade of IT systems, reengineering of business processes, changes in reporting lines and segregation of duties. The business process reengineering specially creates new hierarchy, reporting lines and job profiles. Numerous surveys in the past have indicated 55 %-60% rate of failure of ERP implementation. There are several common risks associated such with implementation of ERP which include:
- Lack of management support
- Lack of employee support
- Time and cost overrun
- Operational bottlenecks
- ERP not meeting the promised expectations
- Inadequate education and training to employees
- Reputation risk among vendors and customers
- Lack of post implementation reviews
The ERP implementation involves commitment of resources such as costs, time and personnel. The failure of ERP leaves a big hole in the pocket and wastage of organizational resources. This creates a major problem especially in post implementation era.
One of the common factors for post implementation failures is lack of implementation audits of an ERP. Organizations tend to rely more on user feedback and requirements after the implementation instead of ERP reviews by an independent auditor. This may cause more system disintegration as some changes may tend to be disruptive and non compatible to other modules of the ERP. There are numerous questions, the answers to which can indicate inefficiencies in the implementation of ERP.
• Does the system meet the needs of your daily activities?
• Is the system efficient to use?
• Was the functionality promised at the start of the process delivered?
• Have business processes changed?
• Are there any spreadsheets or databases in use?
• Are there any old systems in use?
• Is there data to show that the new system has delivered business benefit?
• Could further training improve your utilization of the system?
• Are available functionality and features are utilised to the fullest?
• Has system resulted in saving the resources of the company?
• Does the system provide all or most of the information you needed to perform your job?
• Level of manual interference post implementation stage?
The answers to these questions will represent
• System issues- which provide an indication that the system implementation is not as per the specified criteria, certain required features disabled, and excessive resources consumed for processing, etc. E.g. - Interface errors between inventory and production scheduling resulting in difference between work in progress and completed inventory.
• Functional gaps- A module not adequately functioning resulting in underutilization of the system and alternate procedures. E.g. - Accounts receivable is not configured for generating ageing statements resulting in manual processes followed for the same.
• Inadequate training- Many surveys in the past indicate that more than 80% of the ERP problems arise because employees are inadequately trained to understand functionality of the ERP. E.g. - Check processing done manually when actually these can be printed from the system.
• Processing gaps- Inadequate process resulting in use of certain manual processes. E.g. - Use of reconciliation for AR balances.
The analysis of gaps using these criteria can help in leading to solutions for improving the efficiency and productivity of the ERP. The post implementation audits can help Organizations achieve the underlined objectives of implementing the new system. Further a survey by Big four accounting firm in 2005 indicates that 62% post implementation audits have actually saved an organization from scrapping the ERP project and went a long way in making the implementations successful.
The post implementation audit of ERP would result in following advantages:
• Mitigating Risks such as processing gaps, segregation of duties, interface errors, security features, etc.
• Efficient use of resources such as manpower, time and system resources.
• Identifying and address training requirements. The audits can indicate certain areas where user training is required.
• Ensuring effective compliance processes. The newer versions of ERP ensure certain reporting for the purpose of compliance such SOX. The ERP can be automated to produce certain automated reports which can be utilized for the purpose for compliance.
• Optimizing processes for effective utilization of ERP capabilities.
Thus the post implementation ERP audit can go long way in ensuring organizational objectives of implementation have been achieved. It can also benefit the organizations which have successfully implemented the ERP as the Audit can help in augmenting the existing features and enhancing the capabilities of the system. The audits help in saving time, provide right direction on implementation, resolve security issues and optimize the business cycles.
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