DESCRIBES THE FAILURE OF AN ERP SYSTEM IMPLEMENTA

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DESCRIBES THE FAILURE OF AN ERP SYSTEM IMPLEMENTATION INITIATIVE

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This case report is about Business Communications (BC) company (a pseudo-name) that is located in the South East of Melbourne city, Australia. BC is a leading provider of document formatted information, print outsourcing, and data based marketing. BC designs, manufactures, and delivers business communication products, services, and solutions to its customers. The company serves over 20,000 business customers in Australia. BC has 1000 employees and its corporate head office is located in Melbourne CBD. In 2008, BC company had an annual revenue of A$1.5 billion. The company manages one manufacturing facility (Dandenong, Victoria) and several distribution facilities in three state capital cities (Sydney, Melbourne, and Adelaide) in  Australia.  At  present,  the  company has  no  aspiration  to  extend  its  business operations beyond Australian borders. Managers of BC company generally follow a rigid culture of strict adherence to company policies and guidelines for business decisions and operations. The company also follows a bureaucratic norms and adopts a top-down centralised decision making process. Ms Pamela Hinrichsen served as the Chief Executive Officer (CEO) of BC from 2007 to 2012.

 

BC is a conservative company as it does not embrace “bleeding edge” information and communication technologies (ICTs) to obtain a competitive advantage. The company has been in existence for many years and depends on a good reputation with its customers and a positive “word of mouth” recommendations to attract and maintain its customer base. The company follows a declared business strategy of maintaining leadership in its industry segment based on a cost leadership aspiration. The strategy requires the company to focus on satisfying customers’ needs by offering a range of products and services at the cheapest price. Hence, BC wants to deploy proven ICTs that will help satisfy customer requests and expectations at a marginal profit by removing inefficiencies in its business processes. This in turn reduces extra cost-overheads. BC utilises highly efficient mainframe systems to store centralised production data and serve the core applications of the business as well as client-server technologies for development and daily operations such as e-mail, file transfer, web access among others.

 

BC has a centralised IT department with 50 IT staff. In 2011, it was headed by Mr Steven Shanks (CIO) who reported to Ms Maryam Wilson, the Chief Financial Officer (CFO) of the company. Ms Wilson is very cost conscious, strongly supports company’s philosophy of avoiding investment wastage and maximise investment decisions. She thus strictly controls every dollar spent on IT, and is very conservative when making decisions on IT capital investments and approving IT operating budgets. Several operational systems like customer ordering and online marketing applications have been outsourced to well-known IT vendors. This helps IT staff to concentrate more of their efforts on other key activities requiring their involvement with managing useful strategic systems. Outsourcing further helps BC in reducing its extra cost overheads which facilitates the implementation of its chosen business strategy of competing with rivals at a cheaper price. The IT department also heavily relies on electronic connectivity with its suppliers and customers for maintaining and strengthening relationships. The marketing systems too receive considerable attention from the IT department. Mr Shanks (CIO) views IT function to have lesser importance to the senior management because of three factors: a) CIO cannot report directly to the CEO, b) unappreciative attitude of CFO towards IT, and c) lack of inclusion of CIO in the meetings of the Board of Directors.

 

BC was under-performing according to its CEO (Ms Pamela Hinrichsen), CFO (Ms Maryam Wilson), and Board of Directors. Business performance of BC was alarming as its annual revenue declined to A$1.2 billion in 2009 and A$1.05 billion in 2010.

 

The Directors of BC argued that drastic improvements were needed. Through a number of meetings and consultations involving the Board of Directors, CEO and CFO, it was decided that reengineering the fundamental business processes (considered as BPR) of BC was the correct path to undertake. Mr Steven Shanks (CIO) was then instructed by Ms Maryam Wilson (CFO) to share his views in support of the management decision. Based on CIO’s suggestions, the senior management (involving the Directors, CEO and CFO) agreed that the BPR efforts would be enormously facilitated by a data-centric ERP software. Mr Shanks (CIO) believed that the power of ERP would complement BPR efforts. The name of the ERP software vendor is known as HPT (real name is masked). As BC is conservative in terms of IT investments, it thus chose an ERP software that had been in existence for over 10 years with  a worldwide  name recognition.  The ERP  vendor assured  the senior management of BC that the chosen ERP software would facilitate automation of redesigned processes while improving overall system performance in terms of increased information sharing, process efficiency, standardisation of IT platforms, and data mining capabilities. The senior management hoped that the ERP system would address the inefficiencies of business processes and in doing so would bring a considerable reduction in maintaining overhead costs of the company.

 

The ERP software implementation project was approved in early 2011 with an initial cost of A$8.5 million and an estimated completion time frame of 10 months. The project go live date was set in mid-January 2012. The chosen ERP system was expected to replace internal legacy systems at BC. Project costs included all areas of expenses including training costs of BC employees with ERP, ERP consultants’ fees, software licence costs, among others. However, one year after implementation ERP costs escalated to A$11 million, frustrated most employees whose work drastically increased, and failed to match the business process of BC. Hence, many segments of the company viewed the ERP system as a total failure.

 

Although the HPT ERP investment (A$8.5 million) was very significant, senior management of BC (involving CEO, CFO and Board of Directors) felt that it was a good decision. Senior management however made the ERP software investment decision largely on ERP vendor’s (HPT) promises, market share of the ERP software in its market niche, name recognition, and Mr Shanks’ (CIO) strong and carefully articulated endorsement. However, no effort was made to obtain opinions and feedback from employees at the process level or those engaged in existing systems development and maintenance. Moreover, the state of legacy systems and processes were never considered as a factor in the decision.

 

In short, BC management attempted to solve its business performance (i.e. reduction in annual revenue) problem with a costly ERP system that claims to help BC to drastically improve its business processes. However, there appeared to be a communication breakdown between what the senior management wanted and the decided course of action because the original intention of the members of the senior management was to complement BPR with ERP, not to solely depend on the ERP solution to solve the business performance problem. The CEO (Ms Pamela Hinrichsen) mandated the plan to use the ERP software without interactions with other managers and process workers. Furthermore, BC made no attempt to seriously analyse the potential impact of business process changes that could be caused by the chosen ERP software. Furthermore, little consideration was given to examine whether redesign of existing business processes of BC would match the procedures supported by HPT ERP softare. The nature of the BC business is communication services. Hence,  the  business  of  BC  demands  on  technology  in  order  to  facilitate  data

 

collection, storage, migration, reporting and communication, among others. Computers are critical in facilitating day-to-day operations as well as data-centric problem solving. Computers are important because they store the business data of the organisation. However, the ERP system has created a major problematic situation at BC. According to Mr Shanks (CIO):

 

“The idea of ERP systems is that what someone does helps someone else down the line and that information is fed to them. However, this is not always the case. Our biggest problem was that we were not willing to change our business processes. When we got an ERP, we ended up trying to modify the ERP software to fit our processes which was a horrible approach. We did not change anything and, at the end, we ended up bolting on hundreds of different systems because no one was willing to change and they wanted to keep doing the same process.”

 

Sadly, BC programmers were not allowed to alter the ERP system to match their existing business processes. This is not uncommon when purchasing an ERP software. ERP source code is proprietary in nature and is therefore not open or shared. HPT vendor thus forced compliance to their rules as terms of the purchase.

 

HPT has what it calls “best practices” that are however too generic. BC is in the communications business and its best practices should be based on the best performing organisations in its industry, not on those dictated by the ERP vendor (HPT). Senior management of BC decided to implement an ERP software without consideration for: a) the existing business processes, b) how existing business processes could be redesigned, and c) the match between the ERP software’s view of best practices and the best practices of the industry within which BC operates. Process workers of BC knew that there was a mismatch between their business processes and the ones dictated by the ERP vendor (HPT). They were however powerless to resist the mandates from the senior management (CIO, CFO and Board of Directors).

 

The ERP software was adopted to streamline BC business processes and standardise databases on one platform. However, the “best practices” built into the software did not match the existing business processes of BC. The result is that legacy systems are still in place to handle many processes that are unique to BC. ERP system is not flexible enough to handle customisation of BC’s business processes. Instead of improving process flow, the ERP system actually doubled activity because it is running and the legacy systems still have to operate as they have always done. The bottom-line is that the ERP system did not work as expected by the senior management of BC.

 

The ERP system is not user friendly which frustrated the BC employees to learn and use the system. It also has a tremendous learning curve. The time commitment of the BC employees and managers to learn how to use the ERP system and apply it to the existing processes of BC are prohibitive. There are over 20 modules in that ERP system. Just one part of one module takes tremendous time and practice to master and gain expertise. Further, mastery does not guarantee that the best practice will work for a given business process. That is, once a module is mastered, it may not be useful for automation of a process that does not fit the rules of the best practices provided by HPT vendor. In short, the ERP system supplied by HPT is not easily customisable to satisfy users’ preferences. The vendor forces its idea of “best practices” on an organisation regardless of industry or business.

 

As BC already invested over A$8.5 million in HPT supplied ERP over the past two years, its senior management (Board of Directors, CEO, and CFO) wanted to see

 

meaningful results. However, senior management had no real experience with BPR and data-centric ERP software, even though they have a good understanding of their business and industry within which BC competes, but they did not understand the fundamentals of ERP-enabled process flow redesign.

 

Although the existing accounting, management reporting, and production systems of BC were working pretty well, the ERP system replaced them. A dozen of HPT consultants were brought onsite to implement the ERP system. Over time, it was found that the ERP system was not working as promised by HPT vendor. Hence, the number of HPT consultants was then drastically reduced and BC is now actually moving back to its legacy systems and upgrading them. That is why, BC is trying to phase out HPT supplied ERP system.

 

One major problem now BC is facing is a change of its leadership. The current CEO (Ms Sherah Jones) is the third one hired in the past three years. She was therefore confronted  with  the  problems  created  by HPT  supplied  ERP  system  when  she assumed office in 2015. She had two choices: she could continue to support ERP or she could phase it out. Ms Sherah Jones has decided to embark on a cost-cutting strategy. Considering the lack of ERP effectiveness even with considerable amount of spent resources; her decision to phase it out was not unexpected. Prior to Ms Sherah Jones, Mr Stephen Hawkings (second CEO who stayed at BC for only a year by replacing the first CEO Ms Pamela Hinrichsen in late 2012) never looked at the state of the existing business processes of BC. There was never an assessment made concerning which business processes were working well and which were not. Further, there was never any rigorous analysis of business processes across divisions of BC. That is, there was never any concern for differences in business processes from one division to the next. Generic processes like accounts payable are pretty much the same, but other processes are very different. The previous CEO (Ms Pamela Hinrichsen who served as CEO from 2007 to 2012) who originally bought in HPT supplied ERP system eventually had resigned because the system was draining money from the organisation with no visible results because annual revenue continued to decline even after 2011.

 

HPT supplied ERP system was bought into BC to facilitate enterprise integration. Senior management of BC however failed to grasp the essence of the problem. ERP represents a technology solution that may be appropriate for some organisations, but it is not flexible enough to allow customisation. Furthermore, business processes should be engineered based on business objectives prior or at least in conjunction with ERP implementation. It appears that HPT vendor did nothing to facilitate enterprise integration for BC context using their ERP software. The ERP software actually worsened the situation because it eventually drained A$20 million (from 2011 to

2013) from BC which could have been put to better use. Moreover, ERP systems implementation continued to over three years despite agreed upon one year time frame.

 

Several divisions of BC have effectively abandoned HPT supplied ERP system and gone back to the legacy systems they used before the ERP system was adopted. It appears that the ERP system did absolutely nothing to increase enterprise integration for the BC context. BC experienced strong reluctance among its employees who offered resistance to changes brought in by the HPT consultants for supporting process reengineering initiative. The ERP system was in fact forced upon all divisions without inputs from BC employees. Furthermore, best practices were imposed by the consultants, but no real support was given from senior management to enforce them. Resistance to changes was therefore very strong.