The KISS Principle – Keep it Simple

You know, I have been playing competitive bridge for almost 40 years now (since I was two!), and we talk a lot about the K.I.S.S. (keep it simple, stupid) principle. Every time I step out and try to do something fancy (read overcomplicated), I get in trouble. All of this has gotten me to think more about the idea of “keep it simple” as it applies to business systems. Let me continue with a few more anecdotes.

In the mid-80s, I had the pleasure of working with a guy named Ed Mahler at DuPont. Ed was a great thinker in the world of artificial intelligence (AI) and ran the AI lab at DuPont. One day I asked Ed to describe the kind of software he liked. He then described a term called “inspection usable.” He said that inspection usable systems were just what they sound like – once you start the application, you kind of know what to do.

“Amadeus” is one of my favorite movies. In a scene, someone tells Mozart that his new work has “too many notes.” He replies quite curtly – “this piece has neither too many notes, nor too few notes. It has just the right number of notes.”

So, that’s how I think about business software. It has “just the right number of notes,” and it is inspection usable.

What does it mean for a software module to have the right number of notes? First of all, we need enough notes to solve some pretty complex problems. For example, your company could have 2,000 suppliers, eight factories, 12 warehouses and serve 5,000 customers around the world with a large number of different products (SKUs).

Well, the first observation is that this is a pretty complicated problem. So, keeping it simple has nothing to do with the complexity of the problem. Keeping it simple has to do with simplifying the approach to solving a complex problem.

Let’s go back to the factory problem. One way to keep things simple is to separate different functions. So, there might be separate “symphonies” for production management and advanced planning and scheduling. Keep it simple and have modules do what they really do well. Now, let’s consider a module. The module shouldn’t have “too many notes.” So, keep it to production planning. If you want advanced Monte Carlo Simulation with reverse Fibonacci series, you probably have too many notes.

OK, what about inspection usability to solve complex problems? Well, it means clear intuitive screens, the ability to know the unique values of fields to update transactions, ties to business intelligence, etc. You can tell the user interface is simple when the staff members are smiling when they arrive at work. You can tell the user interface is simple when the department manager is smiling. Why? Because not only are more (and error-free) transactions flowing through the system, but the manager is able to perform the necessary analytic functions to run the department effectively.

Bottom line: It’s all about doing hard things simply.

How Do You Know When It’s Time for a New ERP System?

Don’t Lose Sleep Over It – The Decision Is Easier Than You Think

Today’s blog is presented by my guest author Dick Kuiper, who is a senior business consultant with Lawson. He has 40 years of experience in the ERP arena helping hundreds of companies make wise decisions about information systems.

Investing in a new ERP system, whether it’s purchasing a brand new one as a replacement or upgrading to the latest version from your current software vendor, is a “significant event” – both in effort and money.

And as the old adage goes, there’s never a good time to spend money. And, there’s always a hesitancy to spend money on new things. This is not only true with consumers, but also with companies, even though companies realize that investing in new things such as product development, process improvement, new technology, etc. are wise for the long term.

Investing in new application software presents a tough decision for many companies because the cost vs. benefit analysis often includes many gray areas, and the stories of failed implementations are highly publicized.

So, what’s a C-level executive to do about this dilemma? Do we stick with what we’ve got because we know it works, or do we move to a new ERP package to reap the benefits we keep hearing about?

This sounds like another issue that keeps the CEO up at night. This is such a daunting challenge that too many companies keep putting off dealing with it until either the system is so antiquated that it’s not keeping up with the operation anymore, or that the competition has moved to a new system that has enabled them to bite off a bigger market share – or both.

Here is the scenario that occurs more often than not. The frequency of complaints about the aging ERP system has been growing for more than a year, and the IT department bears the brunt of these complaints.

In addition, the folks in the IT department have been keeping up to date with the features and functions being constantly developed by the software and hardware vendors.

So, the IT director decides it’s time to take action. He or she puts together a document jam focused on the technical imperatives for migrating to a new or upgraded ERP system. Unfortunately, the document contains just enough technology buzzwords to put the CEO to sleep (we all know he needs it), and the document sits on a shelf in the executive suite.

Then, one quarter later, the handwriting on the wall becomes too prominent to be ignored – something has to be done about this antiquated ERP system because it’s become an anchor that’s slowing the business down. Remedial action is finally taken – hopefully in time to avoid disaster.

There is, however, a fairly straightforward way to proactively avoid falling into this common trap. And it’s a technique that the business managers themselves can embrace to periodically (perhaps once every 12-18 months) determine whether a new ERP investment is warranted – without having to have a technology background.

The technique is simply a matter of taking a look at current industry best practices that are supported by ERP systems. This is a whole lot easier than perusing a list of over 1,000 feature/function goodies and getting overwhelmed by the massive size of the decision.

It is usually best to bring in a consultant armed with a current list of ERP-related best practices. Then, with the help of the consultant, the management team narrows down the list to those best practices that hold the most promise for reducing costs and/or increasing revenues.

That “wish list” is then compared with the capabilities of the current system to see what’s missing. And, don’t forget the “shelfware” – those software modules that were purchased long ago but never implemented. Those forgotten software modules could likely contain some real gems that the company was not ready for at the time of initial implementation.

Once that list of missing pieces is evaluated and estimated for potential bottom line profitability enhancement, you have the benefit half of the cost-benefit analysis. From there, it’s fairly easy to calculate the cost of moving to a new system.

If the profitability impact outweighs the cost of the project, it’s probably time for a more detailed evaluation. If not, put the issue to bed for another 12 months and get some sleep yourself, knowing that you’ve just had an annual physical check-up for your ERP system.

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My ERP or Yours?

Some years ago, a friend of mine was studying for a final exam in criminal procedure. There was one question on the exam: “A hits B – discuss.” In life, as in ERP, the simplest questions to pose are often the most difficult to answer.

The question I want to pose today is: Company A buys Company B. Let’s suppose that Company A is running one ERP system. Company B is running a different ERP system.  

With respect to its ERP system, what should Company B do (be asked to do) as part of the merger?

Let’s consider some key dimensions of the analysis:

What is best for Company B: Without the merger, was Company B happy with its ERP system? Can they prove that the ERP system continues to provide quantifiable benefits for reasonable cost? If so, it is generally best to leave Company B’s ERP system in place for a period of 12–24 months after the merger.

Then further analysis is required. Suppose that Company B had an outdated ERP system. The relevant questions are: What would be best for Company B on a standalone basis? Is the best solution for Company B the same as the best solution for all of Company A (including Company B)? This will take more discussion. 

“Hi, we’re from Corporate and we’re here to help you.” Face it, the ERP team from Company B may not always embrace Company A personnel with open arms. That is not to say that Company B shouldn’t be required to switch to Company A’s ERP. But, there are political and cultural issues to be considered, and Company A must be well-prepared for the discussion. Perhaps it’s like your wife telling you that she would like to invite her old boyfriend over for dinner.  

Vertical Integration: Suppose Company A is a car manufacturer, and Company B makes fan belts for the cars. This would be a clear case for vertical integration, as the fan belts are required as part of the final assembly. The greater the vertical integration, the more the requirement for integrated ERP (notice I said integrated ERP – not necessarily one ERP). We will come back to this thread later too. 

Product market analysis: If both Company A and Company B each manufacture separate products (but probably related across a common theme), we need to examine the geographies they sell into, and the overlap in customer base, if any. If there is an overlap in customers, is there a unified sales force selling into these countries, or are their separate sales forces by product line? Most companies operate with separate sales teams. 

Netting out the analysis:

• In general, Company A will want Company B to switch its ERP. This will be the last thing that Company B will wish to do.
• Some companies maintain a dual strategy – one ERP solution for larger companies in their portfolio and a second solution for smaller companies. This is a reasonable approach as long as the number of ERP vendors is kept to two or three.

Some long-term considerations for the CIO and business leaders of company A to ponder:

• Cheaper: Will it be less expensive to have Company B switch? What will happen to the day-to-day operating expenses of Company B? Will the overall infrastructure be cheaper? Can Company A manage training for Company B? Can Company A run a help desk across geographies?  Faster: Will results be available more quickly if both companies are on the same ERP? No doubt the books can be closed faster (once Company B settles on a new ledger)? But, how much faster? And, is it worth it?
• More effective: Vertically integrated companies may lean toward a single ERP system. And, if customers are managed globally across product lines, the same might be true. But, today, with the power of networks, middleware and data warehouse technology, companies that wish to be integrated are integrated, no matter what the dispersion of ERP systems.

I wish you all happy mergers!

The Hidden Cost of ERP or “Ah, ah, ah, ah, staying alive”

Most of the buzz around the cost of ERP has revolved around the cost of implementation, especially the consulting costs. Sure, there are famous stories of runaway ERP implementations that have hurt companies.

But, even when projects get out of hand, and the consulting costs of ERP are three to four times the software costs, most companies eventually go live.

And, while we believe that large companies can go live for 1 percent of revenues (e.g., a $1 billion company might spend $10 million to go live), some companies do spend 4 to 5 percent to complete an implementation.

But post-implementation costs matter a great deal. Let’s do simple math, based on the experience of a hypothetical $1 billion company.

• Company size $1B in revenue
• Cost to go live $10M
• Annual cost to stay live* $2M
• Average lifespan of a live ERP system 15 Years
• Total post go-live costs over 15 Years $30M

*Around 0.2 percent of annual revenue is considered a best practice

So, for the example above, it costs about three times as much to stay live as to go live. But, what if the annual costs to stay live are $3 million?

This adds a whopping $15 million to the overall cost (raising it to $45 million). There are two points worth making:

• For companies selecting an ERP vendor, pay attention to both the costs to go live as well as the costs to stay live. Post-implementation costs are best judged as a percentage of annual revenue. A target of 0.2 percent of revenue is a good one.

• For companies that are live with ERP, post-implementation costs need to be carefully managed.

But, what are these costs? They fall into two major buckets:

• Traditional IT costs: These would include ongoing hardware costs (network, servers, storage), backup, recovery, database administration, security, help desk, bug fixes, etc. These costs are related to the ERP application, but are not centered on a particular application.
• Application-centered costs: These are related to staff (often IT) who are supporting specific users of applications. These costs include ongoing UI design, configuration, customization, documentation, training, interface work, business process management, data warehouse development, report building, and dashboard creation. All the work in this area allows one or more users to run applications more effectively.

Bottom line: Going live is the first day of the rest of your ERP life. Watch the costs.

Making the “seamless vs. “unseemly” solution

The seamless vs. unseemly decision or . . . there is no free launch. 

Many companies have a portfolio consisting of ERP applications as well as commercial off-the-shelf (COTS) applications bought from different vendors, and perhaps integrated to the ERP backbone.

As new application requirements surface, companies must decide whether to source these applications from their ERP vendor or from a third party application vendor. From the ERP vendor’s perspective, one can call this the “seamless” vs. “unseemly” decision. 

• Seamless – Buy the new application from the ERP vendor, and enjoy the same process model, data model, support, etc. 
• Unseemly – Stray outside the fold, and integrate the new application back into the ERP stack. 

So, when might you pick the “unseemly” choice? There are times when the COTS vendor has much better functionality than the ERP vendor. If that is the case, the decision is made. As the application decision becomes less clear, there are cases where the application vendor may have superior talent around a certain algorithm (e.g., complex pricing), a certain vertical (e.g., complex services  management) or even a certain region of the world.

This could lead you to an “unseemly” decision. As you do the analysis, check with your ERP vendor around their business partner program. It just might be the case that a “certified” business partner could help get the job done. As the functionality gap shrinks between ERP and COTS, you just need to do the math: 

• Integration: You will need to determine the number of integration points between the COTS application and ERP. You should estimate $25 - $50,000 per integration, with another $5,000 per year for maintenance.
• Business Intelligence: You must consider your new reporting, portal, dashboard, exception and reporting needs between the two systems, and estimate how you will create the right level of business intelligence integration. 
• Support: You will require support from both vendors, and you should strive to understand how to manage problem resolution. 
• Consulting: As you install the new solution, ideally you can find consulting support from the COTS vendor, the ERP vendor or third party vendor, to make this all work. 

Bottom Line for applications: Making the ERP vs. COTS decision is complex. When the gap in functionality is in the “maybe” zone, it is important to do the math and figure out the best strategy for your companies. At the end of the day, there is no free launch.  

ERP: competitive advantage and benefits

Does ERP, by itself, provide a sustainable competitive advantage to companies that deploy it? Not really. If an ERP vendor is really proficient at a vertical (e.g., consumer packaged goods, health care), customers will flock to that vendor’s ERP software. Then, if 10 companies are all running the same software, where is the competitive advantage?

You know, it’s like the company BASF used to say (or perhaps still does) – “We don’t make your carpet, we make your carpet better.” The same is true of ERP software. A company must determine what its sources of competitive advantage are, and then determine how the ERP package can help the company sustain its competitive advantage. Clearly, strategic competitive advantage is a good thing.

I have always been a big fan of the approach laid out by Treacy and Weirsema in their book: “The Discipline of Market Leaders.” To be a leader, they say, you must be brilliant in one of the following three areas (and quite competent in the other two):

• Product differentiation: You win because your products are perceived to be highly differentiated in the marketplace. Harley Davidson might be a good example of a company in this area.
• Customer service: You win because you provide outstanding service to your customers. FedEx might be a good example here.
• Operational efficiency: Your products may be commoditized (you might manufacture aluminum), but you manage costs well. Consider mining companies, steel manufacturers, etc.

So, what does this have to with ERP? Once you determine a strategy, you select ERP software to help you with the strategy. And, in so doing, you determine benefits (as I said in my first blog – ERP is all about TCO, time to benefits and benefits achieved). So, let’s look at some examples from Lawson’s customers.

• Product differentiation: Lawson M3 gives us the ability to process high volumes of order lines quickly every day. It also enables us to bake the right products as close as possible to the moment they are delivered, and in the correct volumes to avoid waste (Schulstad Bread). I suppose you could also argue for customer service. But, Schulstad has a real quantifiable benefit here, and should measure its net advantage in the marketplace.
• Customer service: With Lawson M3, we have total visibility over every product and its physical location. GBC has been successful in improving service to customers, delivering the correct product on time and, just as importantly, invoicing correctly (General Binding Corp.). In the rental business, visibility can lead to competitive advantage.
• Operational Efficiency: Saved $30 million in supply chain costs during initial 18-month period; $50 million in cumulative savings from 2001 through the end of 2003. Reduced supply cost per adjusted discharge ratio to 14% below national average. Reduced supply cost compared to net revenue to 21% below national average. Maintained consistent capture of vendor discounts (Advocate Health Care). Procurement-related benefits are often the easiest to obtain and quantify.

Bottom Line: Understand what drives your company, tie benefits to the ERP implementation, figure out which processes need to be implemented first and quantify, quantify and quantify.

It Ain’t Just TCO

It is generally accepted that a bicycle has a lower total cost of ownership (TCO) than a station wagon. In most cases, however, station wagons yield more benefits over time for getting the kids to the soccer game, hauling groceries, etc.

In point of fact, you would never do a TCO analysis to make the bicycle vs. car decision for your family’s transport needs.  The same approach should drive the selection of ERP (enterprise resource planning) and other business application software. To put it bluntly, TCO is irrelevant without analyzing benefits as well.

I don’t mean to imply that some ERP solutions are bicycles while others are station wagons, but the economic concepts are identical. At the end of the day, what matters is the amount of value derived (read benefits) per dollar of investment (read TCO). So, as the title of this posting states, “it ain’t just TCO,” as it relates to selecting and implementing ERP software. What matters, of course, is what you get (and when you get it) for the money you invested. There are many situations where a customer would be better off implementing an ERP solution with a smaller benefit stream. Again, it all depends on what it cost you to earn those benefits. Does this make it easy to do the analysis? Unfortunately not. But, if we focus on benefits derived per dollar invested, we can begin to bring the analysis under control. For the rest of this blog , I want to set the stage by focusing on some of the variables that drive the analysis. 

Cost 

• Software: Both license fees and maintenance. If you require other software to make ERP work (e.g., middleware, business intelligence), it should be included here.

•  Hardware: Servers, networks, desktops, etc. Many companies minimize cost here when they ride on top of a “free” corporate network. Costs should be allocated proportionally.
• Professional services: This is generally the largest cost, and the quality of the consulting firm (and how they are managed by the customer) can make or break a project. If there are significant reengineering costs before ERP selection begins, don’t include them in the cost analysis.

• Internal staff: For project implementation, internal staff costs tend to be about 50 percent of professional services costs.

• Post-implementation costs: Some number of full time staff will be required to both maintain the software as well as support business users. These costs are often overlooked in the analysis.

 Time 

• Time to go live: Actually, only of modest interest. Of course, we can’t achieve benefits until we go live.

• Time to benefit: For those keeping score, this one really matters. To compute any type of financial return, we need to know when good things start to happen, by benefit.

 Benefits 

This area is enormously complicated and most companies ignore it, or spend too little time on the analysis up front. For now, let’s highlight the major areas: 

• Savings in time, full time equivalents: Savings in time translates to real dollars ONLY if a). Positions are eliminated, or b). The staff is redeployed to other money- making activities. Systems that save employees 15 minutes/week are only good for the employee.

• Savings in IT costs: Quite possible, if a number of legacy systems are retired, freeing up both license and maintenance costs.

• Operational savings: These are the best results to have, and could include things like more inventory turns, faster time to product development, ability to sell to more customers, etc.

Bottom Line: Make sure that the ERP vendors help you understand “benefits achieved per dollar invested.” The more examples the better.  Stick to simple breakeven or ROI calculations, going out no more than three years from when the last benefit is attained.

The Analyst Who Came in from the Cold

How strange life can be! I spent 10 years as a META Group analyst, in charge of ERP and business applications. Now, I am the vice president of business strategy at Lawson Software. What is strange about this you might ask? 

When I was at META Group, all red-blooded ERP vendors would “manage” the communications with analysts. So, we could publish as much as we could, based on a). Imperfect information from the ERP vendor, but b). With good information from the vendors’ customers. 

So, now that I have joined Lawson, and I am afraid that many of my friends in the analyst communities think I went over to the “dark side” and won’t talk to me ( I think I am now on the “light side”). But, here is the irony. I have perfect information about Lawson software, but can only share it selectively.  

So, why am I blogging? Over the past 10 years, I have developed numerous models, frameworks, ideas and anecdotes about the ERP world. It was a great beat at META, as I always believed that ERP was rife with intrigue. You may think so as well. So, in my next post, we’ll start off with one of my favorite topics – TCO.

Barry