Editor's Note: Selecting an enterprise resource planning (ERP) system is one of the most challenging projects a CIO ever performs. Les Johnson, CIO at a western wholesale electrical distributor, is going through that process. In this and the coming months, Les will chronicle his journey as he evaluates providers, visits users and installs the new system.
Last August our ERP provider of 20 years ceased to exist. So did a four-year-old project that would have brought our business system into the 21st century. So did our relationships with former product managers, support staff and executives. A new company with new faces took over, promising things would be like before, only better. Most importantly, it promised to support our current software, a vintage COBOL/C-ISAM program from the 1970s.
That support was a relief, but it wasn't a long-term strategy. It was time to shop around.
We had considered a move once before. Two years earlier, the owner of my company, a midsized wholesale electrical distributor, popped into my office. He smiled as he asked, "So Les, what do you think of SAP?" We had already discussed dumping our existing ERP provider to get new features and functionality. But we hadn't gone ahead because of the training and implementation costs.
After an awkward silence, I leaned forward and said, "If we went with SAP, it would cost us at least $6 million and take at least three years to implement. At the end of the project, you'd be unhappy and would fire me." I paused for a moment and then said, "Why don't you pay me $2 million dollars now and save yourself some money?" He laughed. I'm still waiting for the money.
Horror stories of failed Fortune 500 ERP projects costing companies in excess of $150 million swirl like urban myths. Giants like Gore-Tex, Weyerhaeuser and Whirlpool have swallowed budget-crippling expenditures after aborting their ERP projects.
But like a scream from the bottom of a pool, midsized ERP project failures go unnoticed by the financial media, even though they're no less frequent. Three of the top 100 companies in our industry have terminated projects after spending 2% or more of their gross revenue -- in an industry that averages less than 5% after-tax net income. Lawyers are smiling everywhere. Consultants aren't.
Thus, a lot was riding on my decision. My company, a midsized wholesale distributor operating between Fairbanks, Alaska, and Phoenix, is considered progressive in an industry that spends less than 1% of annual revenue on IT. We're budgeting 2% of our revenue just for this project. Except for real estate and acquisitions, this will be the largest decision my company has ever made.
Because we are, like many midsized enterprises, family-owned, we can make big decisions quickly. In a meeting not long ago, I presented a one-page summary of our options, including estimated costs. After two minutes of sticker-shock silence, we discussed the options. Then we decided to go ahead.
Midsized companies are often referred to as the growth engines of American business. The large ERP providers seem to agree and see this market as untapped, but only vertical solution providers have shown they have the domain knowledge -- and prices -- necessary for niche vertical market segments like mine.
Electrical distribution is a small community and a great source of information. Thus, to build my first list of ERP candidates, our search team -- which included the vice president of operations and functional area specialists for sales, purchasing and operations -- talked with contacts at industry associations, other distributors and our largest vendors. We found a guide listing the 22 largest providers of enterprise software for distribution companies.
In the end, I sent simple requests for information to all of those 22 providers, and 18 responded. We pared the list down to three by asking two questions:
- Does the company do business with distributors we know?
- Does the company have a history of working with our associations and vendors? Customers, vendors and processes unique to our industry impose requirements that most ERP companies don't understand.
Then the real work began.
Getting Down to Business
We've started to further evaluate the vendors by looking for answers to seven other questions:
Does the ERP vendor's financial strength and culture match our company's expectations? This is the Holy Grail. If we could find a company that has the financial strength to thrive and matches our company's culture, success would be (almost) inevitable.
Our company is fairly progressive. We see IT as a tool that can not only save us money but can also bring us more business, and serve as a differentiator for us in our market. Because we're a regional company, we have complicated vendor relationships and large customers who demand that we present unified solutions for all their locations. The ERP vendor we deal with has to be able to understand that and work as a partner. It must be able to step up to the plate, be flexible and make changes in the software to accommodate business issues as they change.
How confident are we with their implementation processes? A failed implementation of the world's best product can cost several times more than the project itself and take years to find acceptance inside the corporation. Thus, we're scrutinizing the project plans described in the vendors' RFPs. How detailed are their training strategies? Are they reasonable? How disruptive would the project be? We need to understand how the company would approach and handle these issues.
How easy is the system to use? With an ERP system, you're changing the way almost all employees work. And if they get confused, they know your telephone extension. But seriously: Improving the efficiency of our inside sales staff alone by 5% would pay for the project in less than two years. Missed deadlines, shipping errors and pricing mismanagement would make the company less profitable than before.
Does the product have all the necessary functions and features we need? This is the can of worms where we'll spend most of our search time and money. We want knockout features and killer apps, but we need to examine every business procedure to get there.
How much does it cost? Within reasonable limits, say 20% of the median, price shouldn't be a deciding factor, but you need to know what you're dealing with. Be sure to extrapolate all measurable costs out for five years and agree on how to manage the variable costs of implementation.
What's the breadth and quality of the vendor's support and services? We'll ask what percentage of their revenues they spend on support, services and development -- the higher, the better.
Where are they on the technology spectrum? This is where IT can be geek sexy, where we climb out of the data center and start applying technology to untouched opportunities. This is also where the Sirens can lure you on to the rocks. The ideal is a company with new-generation technology that's been out there long enough to be stable, with satisfied customers who will talk about it.
This is the recipe that we're using to select our new ERP partner. Partnerships with ERP providers last longer than most marriages. Time and patience are required to make the right decision, and we're expending plenty of both.
Next: We earn enough frequent flyer miles making site visits to take our families on a dream vacation -- if only we could find the time.