The ERP mess we're in

Summary:Cynthia Rettig's the Trouble with Enterprise Software, published in MIT Sloan Management Review should come as no surprise to those used to commenting on ERP implementations. Ms Rettig draws a gloomy picture asserting that: Whole systems march in lock step, providing synchronized, fully coordinated supply chains, production lines and services, just like a world class orchestra.

Cynthia Rettig's the Trouble with Enterprise Software, published in MIT Sloan Management Review should come as no surprise to those used to commenting on ERP implementations. Ms Rettig draws a gloomy picture asserting that:

Whole systems march in lock step, providing synchronized, fully coordinated supply chains, production lines and services, just like a world class orchestra. From online web orders through fulfillment, delivery, billing and customer service — the entire enterprise, organized end to end — that has been the promise. The age of smart machines would seem to be upon us.

Or is it?

While a few companies like Wal-Mart Stores Inc. have achieved something close to that ideal, the way most large organizations actually process information belies that glorious vision and reveals a looking-glass world, where everything is in fact the opposite of what one might expect. Back office systems — including both software applications and the data they process — are a variegated patchwork of systems, containing 50 or more databases and hundreds of separate software programs installed over decades and interconnected by idiosyncratic, Byzantine and poorly documented customized processes.

I'm not sure I know where Ms Rettig is pointing the finger but her direction is clear:

To manage this growing complexity, IT departments have grown substantially: As a percentage of total investment, IT rose from 2.6% to 3.5% between 1970 and 1980.2 By 1990 IT consumed 9%, and by 1999 a whopping 22% of total investment went to IT. Growth in IT spending has fallen off, but it is nonetheless surprising to hear that today’s IT departments spend 70% to 80% of their budgets just trying to keep existing systems running.

I don't know what's surprising in this. A number of commentators have routinely bemoaned the lack of oxygen for innovation because of the need to keep big ticket SAP/Oracle/IBM systems chugging along. My Irregulars colleague Vinnie Mirchandani regularly talks about this. I confirmed with Mike Krigsman the general IT project failure run rate still hovers around 75%. It's no surprise to find Nick Carr agreeing with Ms Rettig's findings but disappointingly, Carr does not offer a solution.

AndrewMcAfee takes issue with Ms Rettig's position, pointing to his own research:

"ERP doesn’t help" is a testable hypothesis, and some colleagues of mine have tested it. NYU’s Sinan Aral, Georgia Tech’s D.J. Wu, and my friend and coauthor Erik Brynjolfsson at MIT recently published a wonderful paper, titled "Which Came First, IT or Productivity? Virtuous Cycle of Investment and Use in Enterprise Systems." I’ll quote from the paper’s abstract:

While it is now well established that IT intensive firms are more productive, a critical question remains: Does IT cause productivity or are productive firms simply willing to spend more on IT? ...Since enterprise systems often take years to implement, firm performance at the time of purchase often differs markedly from performance after the systems go live. Specifically, in our ERP data, we find that purchase events are uncorrelated with performance while go-live events are positively correlated. This indicates that the use of ERP systems actually causes performance gains rather than strong performance driving the purchase of ERP. In contrast, for SCM and CRM, we find that performance is correlated with both purchase and go-live events. Because SCM and CRM are installed after ERP, these results imply that firms that experience performance gains from ERP go on to purchase SCM and CRM…

What McAfee doesn't say but the research paper makes clear:

Our results demonstrate that ERP adoption strongly influences operational performance (inventory turnover, asset utilization, collection efficiency) and labor productivity but has a negligible impact on measures of financial return or profitability.

You can interpret this many different ways but my sense is that ERP is and always has been a reactive expenditure where the net effect is not one of delivering value but of enabling companies to remain competitive. In his critique of Ms Rettig's work, McAfee goes on to say:

There is plenty of anecdotal evidence to support this pessimistic view, and it even seems that US companies have collectively lost their senses for a bit when presented with a particularly appealing IT-based vision (remember how B2B exchanges like Chemdex were going to change everything?).  But to believe that corporate executives have been sold technological snake oil for the entire history of the IT industry is to believe that these executives are essentially idiots. This belief underlies a lot of funny Dilbert cartoons and episodes of The Office, but it is at odds with any realistic and logical view of corporate decision making.

Now we are reaching the nub. Are CXOs idiots? Hardly. And to characterize them as such is patronizing at best and insulting at worst. Nevertheless, as another colleague, Jason Wood points out:

IT buyers often make buying decisions that defy logic. They are not always rational.

I can agree with that. It often seems that IT buying decisions are made on the basis of political necessity or 'me too' ERP envy or the need to adhere to 'corporate standards' sometimes with scant consideration of the need to match software to business requirements. Throw in a meaty IT project and it is easy to see how CXOs might be swayed. But this still begs the question: what can be done that will allow business to enjoy benefits going into the future?

One answer might be found in the insights of another colleague Brian Sommer. Brian is a fierce buyer advocate whose background at Accenture uniquely equips him to add perspective. In a post entitled Where Software Must Go, he posits that enterprise class vendors:

They no longer remember how to create something really new. Instead, we get marginal innovation. That is, we get new functions, features and capabilities built around the margins of the same old solutions we've always had. Worse, SOA solutions are just re-working the same stuff but allowing us to throw more bolt-on capabilities around the margins...

Luca Paciolli may have come up with the double-entry accounting system many hundreds of years ago, but can't we find something more expansive and more relevant to use to manage firms than this? Businesses have many constituents: regulators, board members, advisors, customers, etc. Do robust systems exist to satisfy their needs? No - not really...

Applications have been all about (accounting) transaction processing. So much so, that almost every screen in every application product out there is an input form waiting for someone to enter data. Yet, what businesses need are systems that advise their ever scarcer mid-management and other workers as to what they should input.

The alternative he suggests sounds to be very much in line with McAfee's 'emergent software' thinking. But before anyone can get there, I suspect we will all have to rethink the mess we're in, considering new ways to deal with transactions while providing the benefits customers are yearning to see. It won't be easy.

Topics: Hardware, Enterprise Software

About

Dennis Howlett has been providing comment and analysis on enterprise software since 1991 in a variety of European trade and professional journals including CFO Magazine, The Economist and Information Week. Today, apart from being a full time blogger on innovation for professional services organisations, he is a founding member of Enterpri... Full Bio

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