ERP Software Packages May Not Fit the Business Strategy
ERP packages are still developing in front office functionality, particularly in customer care. Those who buy now may have regrets down the road when they see what`s available later.
By Tami Cissna, Associate Editor
Enterprise resource planning (ERP) software applications make up the largest portion of many electric power utilities` IT budgets today. Many utilities are deploying ERP applications as a means of reengineering business processes in order to gain competitive advantage.
“Some have had fantastic results. The failures are equally fantastic,” said C.D. Hobbs, META Group`s Energy Information Strategies Practice vice president and director, at last November`s AGA/EEI Information Technology conference.
“There are many reasons integrated suites are deployed that are not the right reasons,” Hobbs said. “Sometimes they are looked upon as a safe solution, a panacea. But can they become an anchor in a rapidly changing industry?”
ERP suites are designed to allow a business to use one software package with many integrated modules, rather than multiple, conflicting systems with different languages and data formats. With an integrated model, for example, a user in materials management can access the same data on his or her screen as someone in finance or sales.
According to AMR Research, 39 percent of large companies and 60 percent of smaller companies have deployed ERP systems or are in the process of implementation. Top ERP vendors include SAP AG, PeopleSoft, Baan, J.D. Edwards and Oracle (see figure). These companies, which account for 64 percent of the ERP market revenue, grew last year at the pace of 61 percent, according to AMR Research Inc.
Hobbs said key reasons utilities are implementing ERP packages include:
globalization of the electric power industry, creating the need to integrate systems on a global basis;
competitive pressure to become a low-cost producer;
installation of strategic application to become more competitive;
motivation to change the utility culture–fast; and
fear that another`s “world-class business processes are better than my homegrown processes.”
John Anderson, Public Service Electric and Gas Co.`s (PSE&G) CIO, said his utility implemented SAP`s ERP suite to gain speed by adding consistency across the corporation. The utility also felt a need to make dramatic changes to remain competitive. It began implication focused on achieving an integrated system. “We then changed our focus to business results,” Anderson said at SAP`s users conference last September.
Virginia Power chose to implement SAP`s ERP package as a two-fold solution–to enable business reengineering, and to assist with its Y2K remediation project, said Lynn McDermid, Virginia Power`s CIO. The Y2K-ready package replaced many of its legacy software systems.
Virginia Power went live with SAP`s financials component September 1997. The utility needed to manage cost differently to help prepare for competition, McDermid said. The ERP software “brings accountability to every level,” she said. “We let SAP do the actual re-engineering process for us.”
In general, CIOs are satisfied with the performance of ERP suites, Hobbs said, but many conclude after a few years that their old processes weren`t so bad. He listed several disadvantages of implementing an integrated suite:
time required to implement;
loss of flexibility; and
business strategy conflicts, in some cases.
Both Sides Now
Hobbs said there is good news and bad news associated with integrated suites–and it`s the same. “The good news is, it`s integrated. The bad news is, it`s integrated.”
There is, no doubt, value in back office integration, especially in the administrative space and the supply chain. But packages are still developing in front office functionality, particularly in customer care. Integrated packages also still have emerging functionality in supply chain management and work management.
“Sales functions in fully integrated suits are not complete,” Hobbs said. “Do you still prefer the fully integrated suite? There is not complete customer relationship management (CRM) in any of the vendors. Some new ones will be emerging that are extraordinary. If you buy now, you may have regrets two years down the road when you see what`s out there later.”
Utilities must choose between two strategies–they can go with a single vendor for greater integration; or they can partner in software packages in order to get better functionality, and retain better flexibility to quickly respond to change. “Integrating the back office and front office involves major drawbacks. You may not get adequate functionality in every space in the integrated chain,” Hobbs said.
Other drawbacks associated with integrated packages include: training, follow-up support, capitalizing on new functionality, reporting (a pervasive problem), change management and personnel retention.
Executives often underestimate the training cost associated with ERP software installation. A rule of thumb is that only 20 percent of a project`s costs come from buying hardware and software–internal development and deployment consume the rest, according to CSC Index, a management consulting firm and unit of Computer Sciences Corp.
Brave New World
McDermid said, in retrospect, this is an area Virginia Power would have prepared for better. “We would have planned for turnover and brought in more depth. There are a lot of people preying on IT staff,” she said. “We also would have extended the payroll a little longer.”
Many companies misjudge how tough it is to overcome internal resistance to such monumental change. PSE&G recognized this and measured employee readiness for ERP implementation while moving forward. “We found it was not too difficult to get the organization to understand the good of implementation,” Anderson said. “It was more difficult to get them to understand what good it would do for individual areas. There was not instantaneous resistance. But we found as reality set in and when we got to the heart at some packets of functionality, we faced some resistance.”
PSE&G also struggled with knowledge transfer after implementation. “It`s a brave new world after going live,” Anderson said.
CSC Index advises users to recognize what ERP software can do and what it cannot–and deal decisively with the limitations. Users need to develop their own customized software in some areas or work with the vendor to cope with the product`s limitations.
In today`s business environment, Hobbs said successful IT organizations will:
create a technical infrastructure with adaptability to business processes (which are changing faster than ever before);
provide the applications and architecture for quality CRM; and
minimize IT costs per unit of product service across all regulated and competitive lines of business.
Executives should evaluate change in light of the impact on all other processes, and especially the business strategy–obtaining competitive advantage and market leadership, Hobbs said. “How do you choose to differentiate yourself? How effective is the fully integrated suite in reaching your goal?”
Everyone will need an integrated back office, Hobbs said. But the key in the business strategy is the customer relationship. “Don`t bog down your time and money elsewhere. Protect your capability to differentiate and brand. This is an area where you can`t afford to be slow,” he said. n