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.

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 expectations

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.