Extreme ERP Makeover
- 09 December, 2003 11:43
- Why single-instance ERP is now feasible
- What business drivers should factor into your decision
- How companies are determining their integration strategies
The grand ERP vision of one application and one database for everything your company does may finally be achievable. But does that mean you should rip out all your systems and replace them with a single instance?
Here's how to decide.
For the better part of three days last June, Bill McDermott, president and CEO of SAP America, sat at the head of an oversized conference table in an out-of-the-way third-floor meeting room in the Orange County Convention Centre in Orlando, Florida. CIOs and other executives from some of the country's leading companies attending the software giant's annual Sapphire trade show paraded in and out, happy for face time with the head of the company to which most have either given or are about to give millions of dollars. In a meeting with a CIO reporter, McDermott stares out the tinted glass wall overlooking the bustling convention floor and then dives into the same pitch he gives the pilgrimaging executives.
"You have ERP," says SAP's CEO. "The next step is to expand it to CRM and the supply chain." The idea, he says, is to control all the data in a company by standardising on one system for the front end and using one data source for the back. His pitch reaches its climax when McDermott sounds the message SAP has been trumpeting all week:
It's time to move to a single instance.
In other words, McDermott is telling CIOs to forget the multiple systems their companies use today, rip them out, and replace them with one ERP system - with one data store - that serves the entire company, no matter how diversified or geographically spread out it is. That, he says, is how to get the most bang for your IT buck.
"I hear it all the time," says Larry Shutzberg, CIO of Rock-Tenn, a $US1.4 billion packaging manufacturer. "The vendors are pounding down my door."
By now, most companies - especially those in the $US1 billion to $US5 billion range - have heard the knocking. And so far, they seem to be listening. In a recent study on the US government's new financial reporting requirements, AMR Research found that 65 per cent of the companies it interviewed were considering ERP consolidation, a percentage that analyst Bill Swanton thinks is representative of the market as a whole. "Only a small per cent of companies did single instance the first time [they implemented an ERP system], maybe 10 per cent," Swanton says. "Easily 50 per cent of the rest are considering it over the next two years."
The Siren Song of Single Instance
What deploying a single instance boils down to is getting rid of your existing ERP and other best-of-breed systems - such as purchasing and CRM - and replacing them with a single monolithic system from a single vendor. Everything your company needs - financials, order entry, supply chain, CRM - would come from SAP, Oracle, PeopleSoft, whomever. There would be one giant database, one application that does everything.
And there are some compelling reasons to undertake such a project now. For starters, the Sarbanes-Oxley Act, the US government's post-Enron accounting legislation, requires that financial reports have a verifiable audit trail. With a single instance, all of a company's financial data will live in one application and will originate from one source, eliminating consolidation errors and greatly reducing the time it takes to close the books.
Having a single data source could also create new revenue opportunities and cut costs. Companies would be able to run reports that show cross-promotion opportunities, places where they could reuse equipment or leverage purchasing power. Also, AMR estimates that companies budget $US4.3 million for a single-instance order management module versus $US7.1 million for multiple instances.
But despite these benefits, rip-and-replace is a difficult pill for CIOs to swallow, many of whom are just shaking off the multiyear, multimillion-dollar hangover of their first ERP project. And they're wondering if there isn't another cure for their integration headaches: Web services, those plucky little XML-based applications that are currently being held up by multiple standards organisations often working at cross-purposes (see "The Battle for Web Services", page 88). Web services could allow CIOs who have invested in best-of-breed solutions to integrate their stand-alone systems without either shelling out millions for single instance or tying their company's future to a single vendor.
Essentially, single instance and Web services are two ways to get to the same place, and CIOs will need to choose which path to lead their company down.
"There's no right answer," says Shutzberg. "Every situation is different. You have to follow your specific business drivers until you find a compelling reason to do it one way or the other."
Haven't We Heard All This Before?
Does McDermott's pitch sound familiar? It should. After all, ERP vendors today are singing the same song that got them through the corporate door in the first place: one system for everything (see "Sometimes a Great Notion", page 76). But as almost everyone who tried to do an ERP project in the mid- and late 90s learned firsthand, the melody was off-key.
There are a couple of reasons single instance was almost impossible to achieve. For starters, databases large enough to serve entire enterprises just didn't exist - at least not at prices most could afford. On top of that, connecting to that single database from faraway locations was almost impossible. It was a simple matter of physics, says Cap Gemini Ernst & Young chief technologist for the Americas John Parkinson. There wasn't enough bandwidth to get to the data. "The result was a bottleneck," he says, which forced geographically dispersed companies to install regional ERP systems.
Those uber-ERP projects weren't just victims of immature or inadequate technology; they were also sabotaged by bad timing. The primary driver for the ERP projects of the 90s was Y2K. Companies rushed into the projects so that they could remediate old systems before the date change reduced them to rubble. But as the millennial deadline approached, CIOs had to reduce the scope of their projects to get them done on time. What suffered was process change - getting everyone to work the same way.
"Rather than resolve the ways different operating units worked, they threw in a system in France, one in the UK, and one in North America," says AMR's Swanton. Each of those systems wound up customised, which meant that they couldn't interact without an integration layer, which most people didn't bother with. Consequently, each system ended up a separate instance. The result, according to a 2003 Hackett Group survey, is that the average company now has 2.7 ERP systems. Some have more, such as $US1.1 billion Esselte, an office-supply company, which has 22. (Esselte is currently trying to move to a single instance.)
But a single instance is now more realistic than it was in the past. Storage is much cheaper than it was five years ago and, thanks to the evolution of the Internet, connecting, even across oceans, is no longer a significant problem. Furthermore, there's no longer a Y2K hovering overhead like a sword of Damocles. There have been other advances too. For example, ERP vendors offer modules, such as supply chain or product lifecycle management, that they didn't for most of the 90s, and other modules have been improved.
Of course, it all takes time and money. AMR predicts that moving to a single instance will cost companies $US7 million to $US12 million for every billion of revenue, and that projects will still take from one to three years. But experts, analysts, consultants and CIOs all agree: Single instance is finally doable.
Who's Doing What and Why
No one does an IT project just for the sake of doing it, especially not in the current spending clampdown. For a company to undertake a single-instance project, there has to be a compelling reason. The CIOs interviewed for this story named three: financial reporting, cost control and competitive advantage.
Financial reporting. Esselte has three divisions and operations in 120 countries. It has 22 ERP systems. Until now, the business units were encouraged to be independent even though they sell the same products that, for the most part, come from the same factories. Consequently, it has been impossible to make sense of the information coming from the various systems, says CIO Lani Spund, because they use different terminology for the same things. "We couldn't get consistent information," he says. "It's not that the information wasn't good; it was that we didn't know if it was good or not. We couldn't trust it."
Currently, it takes weeks for Esselte to close its books. It also takes an army of expensive accountants, climbing mountains of spreadsheets, to reconcile all the different terms. In order to get things under control, Spund is in the process of replacing 18 of the 22 systems with a single instance, Microsoft's Axapta (the remaining four have been consolidated into a single SAP system, which Esselte will retain for the foreseeable future). In four years, when all the old systems have been replaced, says Spund, Esselte will be able to record transactions in the general ledger as they happen. It will, he predicts, let them close their books within days at the end of a quarter.
Total cost of ownership. Multiple ERP instances and multiple data stores require multiple support teams. Each best-of-breed point application also has to have its own support group, user training and, in most cases, hardware. Getting rid of those costs was the primary reason that ViewSonic, a $US1 billion manufacturer of plasma TVs and LCD computer monitors, replaced its three ERP instances with one.
In 1997, ViewSonic deployed Oracle ERP systems in the Asia-Pacific region; Europe, the Middle East and Africa; and the Americas. Each had its own data store and used different operating systems, says vice president for information services Robert Moon. There were more than 500 customisations among them. In other words, while they were all Oracle, they functioned as three entirely independent systems.
"It was causing huge problems," says Moon, not the least of which was that ViewSonic was writing three separate and large support cheques. In May 2001, the company began replacing the old systems with a new single instance of Oracle (it was cheaper to stay with Oracle since Moon was already paying for the licences, which never expire).
To date, Moon reports that he has decommissioned a million dollars' worth of hardware and cut his annual maintenance fees by $US150,000. He's also reduced his Oracle support staff from 26 full-time employees to nine. None of these savings, he says, would have been possible without consolidating on one system, and ViewSonic has become an Oracle reference customer.
Competitive advantage. Up until last year, Ensco International, a $US700 million offshore oil drilling company with 56 rigs and offices around the globe, had separate best-of-breed applications for each functional area, like finance and purchasing. And each rig had its own customised parts and maintenance databases.
"If we were notified by a vendor that there was a problem with a particular type of valve," says Tom Chapman, Ensco's director of IT, "we would have to e-mail each rig and ask: 'Do you have this valve? And, oh, by the way, have you had a problem with it?'" The information was out there, but it was trapped in each rig's system, and in each rig's proprietary data format.
Ensco's single instance of PeopleSoft went live in the first quarter of 2003 for all its offices and rigs, and now all its inventory information is in one place. If a rig off Venezuela needs a particular piece of equipment, instead of buying it from a supplier, Ensco can check to see if another rig has it sitting in inventory. The single instance allows Ensco to visualise its purchasing habits and hence maximise its purchasing power. In fact, the company can now run reports on anything it likes.
One area that is particularly useful, says Chapman, is analysing maintenance trends. Each rig is essentially just millions of pieces of equipment thrown together. "The amount our customers pay us on a daily basis doesn't allow for too many failures," says Chapman. By doing a detailed analysis of all of its equipment, Ensco can figure out the optimal time for preventative maintenance, reducing both downtime and equipment failures. Chapman believes that this translates into a competitive advantage.
Why They're Waiting for Web Services
Proponents of the single-instance approach, everyone from CIOs to vendors, recognise that what they're gaining in integration they are sacrificing in functionality. An inventory module from an ERP vendor simply won't have all the features that one from a vendor of inventory software will. For Chapman, it was an easy sacrifice to make; he says that Ensco's point applications weren't that good to begin with. But for other CIOs, that may not be the case. For them, cost, functionality and the ability to collaborate with partners dictate that either they integrate their existing systems using today's XML-based integration tools or they wait until Web services matures (see the Special Report on Web services, starting on page 88).
Costs. Many companies have made substantial investments in best-of-breed software that they don't want to write off. When, for example, big oil companies were first moving to ERP packages in the late 80s, Holly, a $US1 billion oil refiner, looked at the big vendors before deciding to build its own ERP-like system for financials, called Trafx. Over the years, Trafx grew to include crude-oil purchasing, joint-interest and product billing, and project accounting, evolving to the point where it had one data store. But Trafx doesn't do everything the company needs - for example, asset management and enterprise reporting. "We looked at several ERP solutions, and they could perform all of the new functions we needed," says Holly CIO and vice president of IT Tommy Guercio. "But the problem was that if we wanted the full benefit, we would have had to buy their financials, purchasing and billing as well. We couldn't have gone in and just done the areas that we needed."
To Guercio, replacing Trafx didn't make sense. It would have cost a bundle, and it would have been a tough sell internally - people don't want to go through the trauma of change when the current system is working, he says. Instead, he decided to augment his existing system with best-of-breed solutions, which, he asserts, have more functionality than systems from ERP vendors. Guercio integrated the solutions using a variety of methods ranging from point-to-point to XML. This strategy has allowed him to preserve his company's core investment in its home-grown system.
Guercio says that Holly has had more success with the point integration than the XML, both because the company lacks familiarity with the newer technology and because XML tags generate a tremendous amount of data, which slows down overall performance.
Eventually, he believes, Web services could solve that problem.
Functionality. For some companies, a single ERP system is simply too generic to fit diverse or highly specialised business needs. For example, one Rock-Tenn division makes cardboard supermarket display boxes for products such as batteries and toothpaste. This unit needs to track the location, inventory level, lot number and expiration date of the products that will ultimately fill the displays, as well as the customer location and shipping date of finished displays - all in case of a product recall. Another division makes 2-ton cardboard rolls. Rock-Tenn needs to track each roll's weight, width and dimensions in linear feet and square feet. "There is no ERP system that does that," says CIO Shutzberg.
For Rock-Tenn, "trying to adapt an ERP system to fit our business process is stupid", he says. "And customising ERP is even more stupid." Instead, the company has had to find the best ERP-type solution for each of its six business units. Shutzberg is in the middle of a two-to-three-year project to integrate each unit's system.
"It's no panacea," he admits, but it's the best solution available to him. Besides, the systems that each business unit now has work, and, he says, "the worst thing to do is throw away what's working in order to get to the end-of-the-rainbow utopia".
Today, Rock-Tenn's integration is largely application to application, although there are some Web services at the middleware level. That's the plan for the short-term future as well; Shutzberg says that there hasn't been enough development within the Web services community to convince him that Web services integration will be practical in the next year or two. "I like the concept," he says, "but I have to wait and see it mature."
Collaboration. A third reason that companies are banking on Web services rather than choosing a single-instance option is that Web services would allow them to connect with business partners regardless of the partners' ERP system. That's the case for $US37 billion British American Tobacco. "The same rules apply to [your partner's apps] as they do to your own," says Gabor Makkos, CIO of the company's Mexican division. "I don't have to ask my provider to change their app architecture, and I don't have to change mine to collaborate."
British American Tobacco's ERP is SAP R3, with best-of-breed applications for specific processes; integrating with it used to require point-to-point connections. That means that when something changed - a supplier's application or its CRM system - the whole integration had to be redone, says Makkos. An integration layer built with XML-based messaging queries is immune to that problem.
What's Best for You
There are no rules for which approach to integration companies should take. There are, however, some trends.
Companies with fairly straightforward business processes without a lot of specialisation are good candidates for a single-instance project. So are companies that don't consider themselves IT leaders - maintaining best-of-breed solutions takes more programming skills than doing a single-instance project.
On the flip side, companies that feel as though either best-of-breed applications or their programming skills give them a competitive advantage should consider going with (or waiting for) Web services. They should also consider going with Web services if they have business units whose processes would be difficult to conform to a traditional ERP system.
It's worth noting, however, that no matter what path a company takes, its CIO will most likely have to do a little of both. Andrew Macey, a vice president with IT services company Sapient, compares integrating best-of-breed applications to cleaning out a closet; it's an opportunity to decide which applications to keep and which to get rid of. Similarly, it's unrealistic to imagine that you will be able to rely on a single ERP instance for every business need. In fact, most ERP vendors partner with smaller specialty vendors for such tasks as tax calculation. "You are going to wind up with some integration chores no matter which path you go down," says Macey.
Web services-based integration and single instance are comparably sized projects. Each will cost millions of dollars and take at least a year. The nature of your business will determine which one you choose. "There are pros and cons to both paths," says Macey. "There's no easy answer."
SIDEBAR: A Cautionary Note on Web Services
Whether you take the plunge or wait for standards to emerge, the costs and risks will be the same.
Most integration efforts today don't employ Web services. Rather, they work with more established XML-based messaging middleware, such as MQSeries and ActiveWorks. But there is general agreement among experts that Web services is a viable long-term integration answer. In fact, Web services is already popping up in some companies, inside the corporate firewall. But Cap Gemini Ernst & Young chief technologist for the Americas John Parkinson says that these projects to date have mainly been small pilot-type projects, and that while they were challenging, they were nowhere near as challenging as integrating core applications is going to be. "People have an overly optimistic view of Web services," he says. "Companies are underestimating how complicated it's going to be."
Companies that start a Web services-based integration effort today are assuming more risks (see "Calculated Risks", page 96). They're basically coming up with an idea of what they think a Web services architecture will look like in two to three years and aiming for it, says Parkinson. If they miss their guess, they may have to do it all over again if they can't make changes to what they've developed.
The alternative is to wait for standards and best practices to emerge. By waiting, the project will be cheaper and follow a more prescribed path. But you may miss out on a couple years of benefits.
Parkinson expects that the ROI on both approaches will ultimately be the same, with the quicker return of the latter (waiting) making up for the increased cost of the former (taking the plunge). The bill for both, he believes, could be similar to a single-instance ERP project.