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Take-Home Lessons from Nestlé’s ERP

1. Don’t start a project with a deadline in mind. Figure out the project requirements, then determine how long it will take you to accomplish them.
2. Update your budget projection at regular intervals. So many things happen during a long project that you will be lucky to stay on target during a particular year, let alone the life of the project. Frequently revisiting your numbers will help minimize troublesome surprises.

3. ERP isn’t about the software. It’s easy to put a new system in place. The hard part is changing the business processes of the people who will use the system.

4. Nobody likes process change, particularly when they don’t know it’s coming. Include in the planning the people whose processes you are changing. Keep the communication lines open while the project is in the works, and measure the level of acceptance before, during and after the rollout.

5. Remember the integration points. It isn’t enough to simply install new systems; you need to make sure that they can talk to each other.

In a similar research report released by Foote Partners, several SAP skills drove consulting salaries up 30% over the prior six months and in some cases up 57% over the last 12 months. The study reviewed the compensation plans for 22,000 IT professionals in the United States and Canada and concluded that despite the lagging economy, there is a growing scarcity for SAP ERP consultants.

According to analysts at AMR Research, companies are having a hard time finding the right expertise when starting some SAP engagements, and if the trend continues, the result could produce costly project delays or troubled projects. “Providers are hard pressed to bring the resources to the client,” said Dana Stiffler, research director at Boston-based AMR. “Even globally, we’re seeing a lack of technical skills.”

ERP Consultants

SAP skills will continue to be in strong demand, Stiffler said. AMR and other research firms have forecasted an increase in ERP spending, particularly in the areas of version upgrades. SAP itself is also fueling demand for software product experts by continually providing motivation and incentives to upgrade to the latest version of its business software.

Consultants are in high demand in several areas, including SAP Exchange Infrastructure, SAP Human Resources, and compliance, according to Azmath Khan, a director and SAP consultant with 3Core Systems Inc. Basis system administrators are scarce, Khan said, and a lot of SAP professionals are not trained or certified on the tools that address governance and regulatory compliance. “What is happening here is that people with a lack of upgrade knowledge or people without post-production skills are falling behind the latest technology,” Khan said. “This puts pain on our clients’ projects but also on us as we accumulate a talent pool.”

SAP is taking a one-size-fits-all approach to ERP software maintenance whereby clients of all sizes will be forced to an Enterprise Support program irrespective of their company size, IT budget or ERP software utilization.

The new program will begin transitioning current customers to the Enterprise Support plan this month (July 2008) at no additional cost, however, pricing will be phased in for service at the rate of 8% annually over the next four years, beginning next year in 2009 and continuing until it reaches the standard cost of 22% of the ERP software license fee.

ERP support costs

According to Mark Cordrey, VP of SAP, Active Global Support clients will pay 18.4% of ERP software license fees in 2009, 19.8% in 2010, 21.4% in 2011 and 22% in 2012. Software industry analysts have suggested that the German software giant is forcing this move because it needs to boost revenue in the face of profit margin pressure from rival Oracle and because of the delayed launch of its software-as-a-service ERP system, Business ByDesign.

Existing SAP clients previously had the option of selecting Standard or Premium support plans. However, SAP announced in February 2008 that it would market only the Enterprise Support program to new clients. The next phase is to push all existing customers to this level of service. While 22% annual maintenance is not considered an excessive figure, there is a concern that this will be more than some SMBs (small and midsize businesses) are willing or able to pay.

In fact, several analysts and market watchers believe that this move could further fuel companies to switch to ERP SaaS (software as a service). Reduced total cost of ownership (TCO) is one of the most commonly cited benefits of SaaS ERP systems.

It’s an important question whether “overall is the industry served by charging an average 22% maintenance cost for enterprise software,” said Josh Greenbaum, principal analyst with Enterprise Applications Consulting in Berkeley, CA. For SMB companies that can only afford basic levels of support, requiring them to enroll in a program “for a 22% maintenance burden is not cost-effective,” Greenbaum added. “These are companies that more and more will be looking at on-demand options for that very reason,” he said.

Forrester Research analyst Ray Wang commented SAP’s move is driven by the increasing complexity of customer’s IT and application infrastructure and by a pressing need to bolster top line revenue. One of those pressing reasons is what Wang said was the “failure of the Business ByDesign (SaaS)launch.” The “inability to scale BBD in a cost-effective manner and delays in moving BBD onto the new NetWeaver 7.1 platform have led to a major loss in potential revenue growth. Most notably, SAP will not reach the 1,000 customer target by 2008 as promised in its Q4 2007 earnings call.” Wang also took note of Oracle CEO Larry Ellison’s statement that his company was pursuing “an overall goal of reaching 50 percent margin and 20 percent earnings annual growth. Oracle’s strategic planning has forced SAP to respond with a comparable profit margin growth plan. Combined with the recent payout to i2 and the pending TomorrowNow legal issues, SAP has been left little choice but to respond with an ERP software maintenance fee increase to achieve its needed double-digit earnings growth.” Wang recommends that SAP customers evaluate third party maintenance providers and prod SAP user groups to protest the price increases.

In late June 2008, SAP agreed to pay supply chain management (SCM) software manufacturer i2 a sum of $83.3 million to settle a patent infringement lawsuit. Oracle is also suing SAP, claiming that its TomorrowNow subsidiary stole copyrighted customer support documentation and code from an Oracle Web site. SAP has reluctantly admitted to wrongful acts by its staff, however, is trying to mitigate the legal liability.

SAP suggests that the cost of Enterprise Support is lower than the average annual ERP software maintenance fees charged by other software manufacturers. Cordrey said that the phased-in price increases will help make Enterprise Support affordable for customers of all sizes. Enterprise support provides a 24 by 7 service-level agreement (SLA), recurring quality checks, support advisories, and advanced support for implementing ERP system enhancements.

Within hours of the Paris SAP finance system implementation making negative headlines, Berlin Ticket Machines entered the spotlight as their ERP extension project and RFID-based electronic access cards failed commuters on London’s public transport network. Not only did the card readers become inoperable, leaving many travelers stranded, but many travelers who swiped their access cards were incorrectly charged a maximum fare while additionally over 60,000 smart cards were made inoperable after being swiped through the readers.

Also in July 2008, the city of Philadelphia is incurring charges of trying to brush under one of the largest US failed public sector business software implementations. The city of Philadelphia has attempted to replace its 30 year old mainframe municipal water billing system for over 20 years at a current cost of nearly $50 million. This cumulative loss is as of the end of the 2007 calendar year and the meter is still running in 2008 (and possibly for much longer). The ERP implementation project, initially branded Project Ocean, started as an Oracle ERP software implementation, however, after the city reached $18.9 million and had little to show the Oracle system was scrapped in favor of a COTS (commercial off the shelf) water billing system from Prophecy International. The outcome of this new enterprise software direction and an ultimate implementation completion is not fully clear.

ERP software implementations fail for a variety of causes and factors in both the private and public sectors. However, according to analyst Tom Foristell, failed government ERP software implementations often exhibit strong negative organizational cultures, turf wars and deep rooted politics which collectively challenge even the most well managed ERP implementations. While software technical challenges generally play a contributing role in implementation failures, the catastrophes are exacerbated by inexcusable executive leadership, insufficient project management and denial of the facts. Philadelphia’s upgraded billing system was on its fifth iteration over a two decade project. After one of many internal audits were performed, in August of 2007, Philadelphia Controller Alan Butkovitz commented that the city “spent money for years of nothing.”

The ERP software giant finally agreed to replace SAP R/3 with SAP ERP 6.0 software as part of a settlement reached in August 2008. The National Federation of the Blind of Arkansas had previously brought a legal claim against the state in 2001 charging that the AASIS system was not fully accessible to blind people. The state of Arkansas then in turn filed a third-party complaint against SAP, blaming the ERP software vendor for not achieving required accessibility. Pursuant to the settlement, the software upgrade must be completed by August. 1, 2009.

In addition to the enterprise resource planning software upgrade, SAP has agreed to provide the state with third-party software licenses, customization services, upgrade consulting and maintenance work required to fulfill the settlement agreement. In a statement, SAP indicated that it “is pleased that all parties have reached a settlement.” The company declined any further comment on the arrangement.

In 1998 the U.S. Congress amended the Rehabilitation Act to require Federal agencies to make their electronic and information technology systems accessible to people with disabilities. Section 508 was enacted to eliminate barriers in information technology, to make available new opportunities for people with disabilities, and to encourage development of technologies that will help achieve these goals. For the past several years, the federal government and most state governments contractually require Section 508 compliance with the procurement of all new information systems.

Attorney Joseph Espo of the Baltimore law firm Brown, Golstein & Levy LLP, who represented the plaintiffs, claimed that SAP failed to develop a software application that would link the R/3 application software to industry accepted accessibility tools, making the AASIS system incapable of converting data on computer screens into synthesized speech or another medium accessible to blind or visually impaired users.

Espo also noted that the state of Arkansas violated its own state accessibility policy by procuring software from SAP that was not fully accessible to blind and disabled persons. The Arkansas Act 1227 of 1999 mandates that IT solutions purchased by the state government for use by employees or the general public must be accessible to and usable by blind or visually impaired persons.

Once the enterprise software upgrade project is complete, NFB representatives or the state government will test the upgrades for up to 14 days in order to verify that the information system is accessible and complies with Arkansas law.

Chris Danielsen, a NFB spokesperson, said that IT manufacturers and resellers must consider the importance of user accessibility capabilities for the blind when designing technology solutions for government customers. “There are blind employees in the workplace. The technology systems in place have to be accessible to us,” Danielsen remarked. He went on to point out, “Obviously it’s easier to build a system like that from the outset than it is to go back and revamp and retrofit.”

The U.S. Navy’s Enterprise Resource Planning software project is the largest SAP public-sector implementation in the world. The ERP system now integrates with a Marine Corps Intranet for all authentication and information security functions as well as 12 related Navy information systems and 18 Department of Defense (DOD) software applications. The ERP application manages accounting, distribution, HR, purchasing and maintenance across the Navy’s aviation, maritime, nuclear and supply chain management business functions. The project implementation timeframe spans from 2004 through 2013 and is budgeted at $1.4 billion.

During the course of the Phase I deployment, analysts performed more than 265 business blueprint workshops, 1,500 product transaction workflow scenarios and 200 custom reports, software interfaces, electronic conversions and application enhancements to the packaged SAP ERP software system. Team members also exercised more than 21,000 test scripts, tracked over 1,500 configuration change requests, converted 52.7 million data objects and uploaded about 13.5 million new data elements while achieving a 99.99965% success rate.

The primary obstacles incurred focused largely on cultural change management and data migration. To prepare for the inevitable change management and user adoption obstacles, the project team published 14 online training tutorials and 65 instructor-led courses which covered virtually every use operation of the new ERP application from multiple vantage points. The project management office (PMO) also garnered active and visible senior command sponsorship along with broad involvement across the Navy hierarchy. Technical obstacles in the data-migration were primarily due to the high number of information systems and the high volume of data for conversion. Recognizing a troubled data conversion could represent an early setback if not proactively managed, project team members conducted early data analysis across all systems in order to verify data quality. This early sampling lead to data cleansing exercises prior to the scheduled conversions. As well stated by Valerie Carpenter, the Navy ERP program manager, “The earlier you start working these preceding issues, the easier it is to adopt the new system and new business processes.” The advanced analysis was instrumental in achieving the massive data conversion according to the original project schedule.

Another surprise which occurred midstream was the change in project management from BearingPoint and IBM to the Navy assuming in-house project management control – while still leveraging the consultants in limited roles. This change allowed the Navy to incorporate new work breakdown structures (WBS), project master schedules and earned value management (EVM) methods. The Navy ERP PMO is primarily run from Annapolis with 55 government employees and as many as 500 consultants.

Following four years of detailed planning followed by two years of carefully scripted pilots, the Navy began their full scale organizational wide ERP system implementation in 2004.

According to Susan Keen, technical director of Navy ERP, the Navy chose to migrate from several custom-built applications to a unified and commercial off the shelf (COTS) ERP system in order to integrate the decision-making processes and enterprise activities in areas such as purchasing, logistics and finance. Carpenter echoed several Navy project objectives and commented, “The Navy needed to modernize and standardize business operations to meet financial compliance law, increase efficiency and improve asset visibility. If we can keep the strategic goals in mind, we can handle the day-to-day challenges just fine.”

Phase 1 has completed its implementation and post implementation measurement review. Phase 2 is scheduled for completion in February 2010 and will include the Navy’s global distribution and supply functions. Phase 3 will add a central system for managing maintenance management activities for aircraft, ships and weapons systems.

When complete, the back office ERP systems will integrate with approximately 50 legacy information systems and over 20 DOD systems. An additional 13 commands and 109,000 users will be introduced, reaching a total user count 185,000. By 2021, the ERP application is forecasted to manage the federal agencies entire budget, replacing the existing Standard Accounting and Reporting System. “The end result is a better equipped Navy that is better able to support the warfighter,” said Carpenter.

While the price delays don’t affect all users and do not reduce existing expense amounts, these efforts stand in stark contrast to the enterprise software makers historical attitudes of not budging when it comes to their annual maintenance revenue streams. For instance, is a recent January interview by Informationweek with Oracle President Charles Phillips, the confident President said the 22% annual software maintenance amount is never negotiable, adding “We are sticklers on that.”

However, in response to both the depressed economic climate and a similar move by rival SAP, Oracle is delaying fee increases for one year that would have started in 2010 on some of its legacy applications. The delay applies to customers transitioning from the premier support plan to the extended program. Oracle customers are transitioned to the extended support program once their version of software has been available for five years. The Oracle E-Business Suite Release 11i10, JD Edwards 8.11 and Siebel Systems CRM 7.8 are now eligible for a year of waived fee increases. PeopleSoft 8.9 is eligible for two years of waived increases. Following the delay period, maintenance rates will rise from 22% to 24.2% for some aging ERP applications.

According to Bill McDermott, SAP President of Global Field Operations, SAP is raising annual maintenance rates from 17% to 22% in order to match market (Oracle) rates. SAP’s phased approach begins in 2010 when it elevates to 18.9% and will continue annual increases until reaching 22% in 2015. In a somewhat transparent effort to associate value with the increased cost, SAP indicates it will achieve ‘key performance indicators’ before each successive rate hike kicks in. The key performance indicators have yet to be identified.

According to McDermott, Oracle would never offer a conditions-based maintenance increase, “They can’t do it because they have a different business model,” he said. “If you listen to Oracle CFO Safra Catz, you hear her say Oracle is doing so well because maintenance fees are liquid gold for them. It’s liquid gold until a customer says, ‘What can SAP do? Let’s give SAP a call to see if they can do better.’”

While the metrics are unclear, SAP customers are hopeful for some true relief. “I will give SAP a ton of credit, because they listened to the feedback of their customers,” Dow Corning CIO Abbe Mulders said. “Enterprise support has been a very controversial issue over the last year, but SAP didn’t have to put those metrics in place. No one else in the industry today has any kind of measures on maintenance dollars.”

In an August 2008 interview by ZDNet Asia, the now famous CEO of enterprise resource planning software maker Lawson Software clearly demonstrates why the old guard guard of ERP software makers were blinded by the SaaS market disruption and why the stagnant ERP software market is overdue for a new breed of customer-focused business software providers.

Questions along with Debes comments include the following:

Q: All the other big players are going on-demand. Is cloud computing the next big thing?
A: This on-demand, SaaS phenomenon is something I’ve lived through three times in my career now. The first time, it was called ’service bureaus’. The second time, it was ‘application service providers’, and now it’s called ‘SaaS’. But it’s pretty much the same thing, and my prediction is that it’ll go the same way as the other two have gone – nowhere. SaaS is not God’s gift to the software industry or customer community. The hype is based on one company in the software industry having modest success. Salesforce.com just has average to below-average profitability. People will realize the hype about SaaS companies has been overblown within the next two years. An industry has to have more than just one poster child to overhaul the system. One day Salesforce.com will not deliver its growth projections, and its stock price will tumble in a big hurry. Then, the rest of the SaaS industry will collapse.

Q: Won’t people avoid the mistakes of prior SaaS incarnations?
A: People are stupid. History has shown it repeats itself, and people make the same mistakes.

Q: But what about your competitors offering SaaS models?
A: Larry Ellison (CEO of Oracle) has the same perspective as I do. He accidentally funded the CRM product and NetSuite. He didn’t really mean to. They’ve had small successes but, overall, they’ve been spectacularly unsuccessful. And SAP’s Business ByDesign is a disaster. SAP said it would have 10,000 customers [for SaaS Business ByDesign] within a couple of years. And yet they have less than 100 today, after all that hype and marketing. We use Salesforce.com, and I like it. But I would’ve bought the product even if it was not SaaS. The success of Salesforce.com, in my opinion, has to do with their product being good, not because it’s SaaS.

Q: Theoretically, the business case for SaaS seems fairly straightforward. A: Yes, but because all your costs are up front, and your revenue is over a five year period, the more you sell, the more you lose. You don’t break-even till the four-and-a-half year mark, but here’s a bigger problem–there’s no guarantee that that customer is still going to be yours in four years’ time. Getting signed up as a SaaS customer is fast, but getting out is just as fast. Whereas traditional software is like cocaine–you’re hooked. It’s too difficult and expensive to switch providers once you’ve invested in one. If it were easier to jump ship, a lot of people would’ve hit the eject button on SAP a long time ago.

Well there you have it. Traditional software is like cocaine —buy it and you’re hooked.

Normally we ignore the self righteousness ramblings of an executive no matter how clueless or comical. However, the Debes’ comments underscore exactly why a new breed of ERP software vendors has seemingly emerged from nowhere, gained global market share and may be poised to displace several of the largest business software manufacturers in the world; a feat that only a few years ago would not have been taken seriously. However, in these last few years while entrenched enterprise software publishers SAP, Oracle, Microsoft and Lawson have cast doubt, injected fud (fear, uncertainty and doubt) and chastised the software as a service (SaaS) movement with ridicule, CRM software Salesfoce.com has become the highest growth business application provider in the world, ERP software maker NetSuite has reached the public markets and yesterday’s start-up SaaS ERP companies such as Intacct and Aplicor have each acquired thousands of customers around the world – all while Lawson’s stock lost about half its value since its IPO and since the release of SaaS ERP solutions approximately seven years ago.

Beyond casting himself in the same role as a cocaine dealer, Debes’ remarks clearly show a material lack of customer understanding, a blinding self absorbed righteousness, an il-advised defensive posture and the effects of a bury your head in the sand approach to business survival. Lawson customers and shareholders take heed.