Why Are There ERP Failures?

When companies buy ERP software they have usually gone through some type of evaluation process.  They have developed their needs list, identified a short list of vendors, and seen demos of how those needs can be satisfied.  So why then do we continue, after all these decades, to have so many ERP failures?

Two major causes for ERP failures:

1. The lack of education of the buyer.  Most companies buying ERP may have little significant recent knowledge that will help them in this effort.  They have either never done this before or if they have it was only once and possibly years ago.   Maybe it was a success or maybe it was a failure.  But the reasons they believe it was a success or failure might not be accurate or might not be relevant today.
2. The software vendor team  being “not exactly honest” about the cost and effort to do the implementation.   I’m not going to call it lying.  But it’s not being overly truthful either.

In the early years in ERP it was the Wild West.  Creative demos skipping over major product flaws and rosy projections of coming functionality were common.   But now things are a bit different.  Most ERP packages have been around for decades, and they typically do most of what someone needs to do in some fashion or the other.  If they don’t, the vendors at least know which industries to steer clear of so they don’t waste their time on deals they are not a good fit for.  Most ERP vendors no longer need to exaggerate their products capabilities.  The problem isn’t the software functionality it’s the project cost, project effort, and the large changes needed to the customer’s organization.

Many customers want to believe that all they have to do is buy a software package, pay some money to the consulting firm to install it, train their people, and then they are done.  Nothing could be further from the truth.  The organization will have to spend significant money on consultants and many hours of its key peoples time to ensure its done right.   There is no shortcut for the many hours spent figuring out how to utilize the software to fit the customers’ business processes.  And in many cases modifying the business processes to fit the software.

One of the biggest problems is the resistance to change by people in the customer’s organization.  People are inherently resistant to change.  Take our own congress for example.  We keep re-electing the same people even though we don’t approve of what they are doing.  In a recent study, 10% of people approved of the work our congress was doing.  But the re-election rate for our congress is 90%.  This is great example of most peoples built in resistance to change.  Imagine then the effort involved in putting in an ERP package that may require extensive changes to current business processes.   The new system will change virtually every area of the business.  It’s a massive effort and one truth is that the consulting firms really don’t know what it will eventually cost.  They can look back at their experiences and come up with a ballpark but it still may not be close.

Factors for a successful ERP implementation.

• – The software is a good fit
• – The consultants know the software well
• – The customer provides its best people to the project
• – The customer and consultant teams spend enough time on the project

Why do ERP projects fail?

One primary reason is the implementation cost proposal.  Customers need education on what it takes for success in an ERP implementation.  But they must also be open to the facts.  If the vendor tells them it will cost 1.5% to 3% of revenue to do an ERP implementation and they want to spend 0.5% of revenue then we have a problem.  In this example we will refer to the vendor as the software company that wrote the software.  The consulting firm is that vendor’s partner who is independent but certified by the vendor to implement the software.

This is how it may play out.  Customer asks how much the implementation is likely to be.  Consulting firm asks the customer what their budget is.  Customer doesn’t want to tell the budget number, he wants to hear the estimate first.   Consulting firm tells him 3% of revenue.  Customer picks himself up off the floor and insists it can’t be that much.  Consulting firm says, well, if you do much of the work yourself and accept our standard business practices then maybe it can be done for less and we are sure we can get 80% of what you need for this cost.

The customer really needs the ERP package so they bump their budget up to 0.75% of sales and the vendor comes in with a matching number, making everyone happy.  If the consulting firm does not come in with a matching number he knows full well one of his competitors will.  He won’t be in business long.

The consulting firm in these examples is an independent consulting firm and not the software vendor’s internal implementation services team.  Generally the software vendors prefer someone else to sell the implementation since its where much of the risk is.  The vendor can write the software package, write documentation that describes what the software does, and leave the implementation part up to someone else.  If things go bad the software vendor can always say their responsibility is that the software does what the documentation says it will do.  And they are right about that.  However if you are the software vendor and your partners higher quotes regularly lose you sales,  you may be interested in bringing in a partner who will be more” in line” with the  competitions prices.

The consulting firm can minimize its risk by writing a contract that requires the customer to put forth sufficient human resources to do much of the work the consulting firm would normally do.  Then require the customer to use the standard business processes as defined by the vendor.   All of this might work if it could be done.  But frequently will not work because it can’t be done.    Eventually the customer may come up with more money for consulting help and accept the higher cost to get it done properly.  Or they can keep fighting to keep within budget.  Giving the appearance to management that it is within budget while ignoring the warning signs of the eventual failure to come.   The end result is many times determined by the customer’s relationship with the consulting firm and their overall view of the project.  A key factor is whether the project is of tactical or strategic importance to the customer?

Customers need to educate themselves as much as possible on the realities of ERP cost and the effort involved.  Especially the amount of time required from their key people and realistic cost projections for a successful project.