Levi Strauss recently blamed a substantial drop in quarterly net income on problems related to its ongoing ERP implementation. Following that report, several observers suggested the company used IT failure as an excuse to deflect attention away from deeper and more significant financial challenges.
Last week I wrote:
SAP implementation problems prevented Levi Strauss from fulfilling orders for a week during the second quarter of this year.
These shipping problems, combined with other economic issues, caused the company’s net income to drop 98% relative to the same quarter in 2007. Levi’s most recent 10-Q SEC filing states that negative effects arising from the implementation “constitute a substantial portion of the decrease in the region’s net sales in the second quarter as compared to the prior year.”
Companies have been blaming poor results on ERP implementations for 20 years. In my years as a CIO, I always found this notion to be a convenient scapegoat for other, deeper corporate issues. My years as an analyst have only deepened that conviction.
Considering this issue in her customer newsletter, Paula added:
How else do we explain how ten apparel manufacturers successfully implement a package, and an eleventh fails to implement the same package, blaming revenue shortfalls on a poor implementation? Perhaps the IT department didn’t gel well with the systems integrators hired to do the implementation. Perhaps the users didn’t document exactly what they did “in the old system.” And maybe even worse, perhaps standard operating procedures had fallen so much into folklore that no one even really knew who did a particular task, and why it was critical to the running of the enterprise. What if all of the above was true? Most likely there were mixed emotions about implementing a new infrastructure anyway.
I suspect there is more to this than meets the eye. Levi anticipated ERP issues to the tune of $18 million so you can’t realistically count that because they took sales credit for those advanced shipments - at least that’s my reading of the Q1 10-Q filing. The company was anticipating a decline in revenues anyway from a variety of other factors, including a substantially weakened economy (in its opinion).
I have no doubt there were issues related to the ERP. But assigning so much emphasis when the company had already anticipated an issue is stretching credulity.
Former auditor, Francine McKenna, whom I quoted in the original piece, focused on possible financial controls issues at Levi's:
Multinationals have long struggled with getting an ERP implementation right in one country on the first go around. When they implement multiple instances in quick succession, they accept the challenge of automating manual processes, adding automated controls to those new processes, and making these new and improved processes conform to the software capabilities and their business objectives. That's almost impossible to get right the first time.
THE PROJECT FAILURES ANALYSIS
Given the frequency of failed projects, it's not surprising some companies blame business or financial issues on IT. Large software deployments are complex by their nature, especially when an organization uses the implementation to change and improve business processes while integrating legacy systems. This complexity leads to high project failure rates and creates the opportunity for scapegoating and misdirected blame.
For private companies, the IT blame game is a political maneuver used by an individual or group to push culpability onto others. Public companies may sometimes use IT scapegoating to shift investor attention away from strategic management or financial challenges toward narrow technical issues.
Francine believes companies can mitigate the problem by improving auditor oversight on their large IT deployments:
[C]ompanies constantly make the mistake of thinking that if the consulting firm in charge of the implementation doesn't consider internal controls as an important part of their implementation, then maybe they don't have to focus on them to the extent that they should be focused to get them right.
In an interview, I asked Paula how organizations can prevent scapegoating. She believes compensation is the key to ensuring successful IT projects. Her newsletter elaborates:
There’s only one choice. And that’s to tie every single involved party’s compensation to the success of a new implementation. Start with systems selection and drive all the way through to post-implementation support. The business executives, the actual line staff, and the IT group should all have skin in the game. Of course, this requires executive level support. The correct word is “mandate.” But it also requires a coalition on the ground. It requires teamwork and willingness. Willingness doesn’t mean “happiness.” As I said, no one really likes to change.
So what really happened at Levi's? Although perhaps we'll never know for sure, Dennis summed up the entire matter nicely: "It is always easier to blame the ERP implementation."
[Image via crosschurch.org]