The ERP mess we're in

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

Dennis Howlett

About Dennis Howlett

Dennis Howlett is a 40 year veteran in enterprise IT, working with companies large and small across many industries. He endeavors to inform buyers in a no-nonsense manner and spares no vendor that comes under his microscope.

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  • The operation was a success...

    An episode of Yes, Minister posited a hospital that had been built, equipped, fully staffed, and maintained. But because of jurisdictional problems no patients had been admitted.

    The hospital received awards for the quality of its operation, and administrators submitted a request for additional monies because of the growing costs of doing what they were doing.

    Without patients.

    That plot line came to mind after reading these paragraphs:

    "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.
    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."

    Another comparison, considering the cost of the investment in ERP (and SCM and CRM):

    When congratulated on a costly victory against the Romans, King Pyrrhus observed that after another such victory he'd have to surrender.
    Anton Philidor
    • As Jonathan Swift observed

      His lordship added, ?That he would not, by any further particulars, prevent the pleasure I should certainly take in viewing the grand academy, whither he was resolved I should go.? He only desired me to observe a ruined building, upon the side of a mountain about three miles distant, of which he gave me this account: ?That he had a very convenient mill within half a mile of his house, turned by a current from a large river, and sufficient for his own family, as well as a great number of his tenants; that about seven years ago, a club of those projectors came to him with proposals to destroy this mill, and build another on the side of that mountain, on the long ridge whereof a long canal must be cut, for a repository of water, to be conveyed up by pipes and engines to supply the mill, because the wind and air upon a height agitated the water, and thereby made it fitter for motion, and because the water, descending down a declivity, would turn the mill with half the current of a river whose course is more upon a level.? He said, ?that being then not very well with the court, and pressed by many of his friends, he complied with the proposal; and after employing a hundred men for two years, the work miscarried, the projectors went off, laying the blame entirely upon him, railing at him ever since, and putting others upon the same experiment, with equal assurance of success, as well as equal disappointment.?
  • The root cause...

    I think the root cause is that IT organizations and their customers continuously avoid identifying the real underlying business problem that they expect technology to solve and then refuse to validate that the solution they put in place had a achieved the benefits assumed in the ROI analysis.

    Some more thoughts on this:
    Erik Engbrecht
  • ERP is What You Make It

    Frankly, I'm tired of all the bad press surrounding ERP.

    As with most things in life, ERP is what you make it. Put little effort into it and you'll get little out. Selection, implement and use it to it's fullest capacity and the true benefits and ROI will be there is every project.

    Rebecca Gill
    Technology Group International
    • So they should

      Rebecca - after 30 years of development, I would hope that package software vendors could get it right. Reality check - they still manage to overcharge for utility functions, still bug fixing. Buyers have a responsibility that's true but please don't try and convince me that software vendors are blameless.
    • I believe the bad press exists for a reason..

      ERP is what you make of it, but the fault does lie with the people purchasing and the people developing it when it fails.

      I've been there and done that when I was an ERP developer with my old company. We never had an ERP implementation fail but the one thing we always went into with was if you're going to use our software we have to have controls and you may have to change some of business practices.

      I believe you are right though in that we did have the people who put little into the effort. Then when push came to shove and we went live with they were scrambling even for something as small as Order Entry.

      But I will agree with the original article in that, in all due respect ERP's are getting to a point where they are beyond complicated. Then again if we're looking at it directly from an SAP point of view? Everyone knows just how complicated SAP is vs many other competitors but in the end it has alot of functionality that the competitors don't have.

      Problem that people in general don't realize with functionality comes complexity and I believe that's the case we're in with ERP's today. They have grown way to complex for their own good.

      Every time we switched someone FROM SAP to our ERP solution they same complaint was always made. To complex and time consuming and very difficult to customize. I'm sure you've heard the same thing as well.
      • But it's not with SAP Tools....

        SAP has done and incredible job of their tools being pretty much plug in. The problem is S&M ventures are weak with SAP. We use ERP (FI, SD, PP, MM, CO, PA, HR...) BI7.0, SCM 5.0, HR, IP, Portal...we are almost a complete SAP shop with 5000 employees, and an IT shop of 90 including infrastructure and help desk. Integrating a module is piece-o-cake. And all modules above have been a success.
    • ERP is What You Make It, PERIOD.

      Rebecca, thank you for the answer. ERP, like any other good idea, is what you make out of it. ERP is nothing new, SOA is nothing new, ITIL is nothing new, etc.. good ideas which can be used well or (very) badly. Me too, I'm tired of this.
      Tuomo Stauffer
      Just a 30 years practitioner of IT/computer systems.
  • It's a complex question

    Some of it is to do with the relationship between business and IT.

    One the one hand customers fail to understand the business issues properly while vendors often make wild claims about what their software will achieve for the business. For example if you haven't thought out how you are going to integrate a sprawling conglomerate from a business perspective then bringing in a software package to do it won't help you much (pretty much a recipe for project failure in fact).

    At the same time contemporary ERP systems look desperately old fashioned in many respects. There are too many things that are done with batch style processing that mirror how things were done in the mainframe days. APIs and SOA will move them forward to where on-line minicomputer systems calling COBOL subroutines were in the mid 1980s, again not exactly state of the art. Soon they will be touting interfaces using XML, the twenty first century's answer to the COBOL file description.

    Also when you look at the database designs you will find some horrific things in there. It wouldn't be so bad if this was just in the older parts of the software (and some parts are pretty old in the big ERP systems) but in fact some of the newest modules are the worst offenders.

    Users misusing database columns is a communication and documentation problem, but having database designs that obscure rather than clarify such issues doesn't help at all. If the database design itself uses the same column for multiple uses (a fundamental design error) then you can hardly blame the users for making similar mistakes.
  • A different perspective

    Having degrees in both business and IT, as well as experience with both, I can say that either side (business vs IT) points their finger at the other and says "It's your fault that we failed."

    Businesses think that IT is a "magic bullet" that can solve all their competitive issues. It's not. IT can certainly help, yes, but if a business doesn't even know a majority of what its drivers are, no amount of IT expenditures are going to help. Most business managers have no idea of the complexities involved with ERP systems; they make their purchasing decisions based upon what they've heard other businesses are using, or by which one costs the least - not based upon how this system is going to meet the needs of the business. Instead of asking "how can IT fix this problem?" business managers should be asking "how can IT help us remain competitive while still giving us the flexibility to grow?"

    IT, on the other hand, seems to think that business drivers can be tossed out simply because they either don't fit well with IT, or IT can't figure out what to do with that particular driver. Most IT departments (and companies) are very hierarchical, with usually with a single manager and several worker bees to take care of everything. (Granted, I know there are several companies that don't work this way, but the hierarchy approach seems to be the de facto standard.) If the IT manager is not very well-versed in business practices (and some aren't), they will not know how to meet the needs of the business.

    I think the bulk of the issue lies in the fact that there is rarely ever clear, concise conversations between businesses and the IT industry.

    A group of people wanted to hire 100m athelete to run in Olympics to win a gold medal. They found a perosn.

    When person came, the people thought that the legs are in the wrong place. So moved the legs to hands and hands to legs; They reversed the head to look backwards. They removed one of the lungs and put it next to the heart; They took the brain out and repalced with sh**;

    Now they expect the person to win the race. The person is dead long time back. ERP is the athelete. None wants to standardize the business process. Everyone wants to collect data and run "reports"; But no one wants to act on the information.

    My view on ERP
  • The problem(s) with ERP

    Many companies fail to reap the full benefit of their ERP system because they refuse to let thier culture integrate along with thier software. Rather, they insist on maintaining siloed departments, each with its own little proprietary databases and spreadsheets. One major contributing factor is the very large expense of ERP implementation causes any kind of "change management" component to be cut before the project even starts. The highly predictable consequence is that MOST of the companies employees fail to understand the true significance of their ERP implementation.
  • ERP is fundamentally flawed as a business system

    Excellent article getting to the core of how business works. Let's start with Paciolli ? double entry in days of yore enabled ?comfort? that a book recorded every entry recognising every action has a reaction which was also recorded so the ?books? squared with the business. This allowed the balance sheet to be readily created. Now let?s remember the P&L account is only an analysis of one number in the balance sheet but is where the business is judged. In fact ?single? entry where the source transaction is recorded is just as effective the ?reaction? happens as a natural consequence and the ?books? should still square. The fact the reaction may not be recorded does not change the facts of the assets and liabilities being constantly created and changed through the daily activities by the people in the business.

    ERP was sold basically as a sophisticated General Ledger as the article suggested an accounting transaction recording system. In the early days the CXO and CFO failing to really understand ?IT? were sold the ?simple? solution to all their recording problems ? a single system to control everything in the business and ensure the books squared. All this seemed too good to be true but their trusted advisors in the accounting profession said it was OK ? and by the way we have ?experts? that can help install! Indeed a shameful episode in the accounting world. And so the journey to the horror stories and ?mess? began. Sound in theory but in practice a costly mistake. What really went wrong is that the big ERP vendors tried to touch every activity in the business and imposed methods of working that were inappropriate to creating business.

    I have some sympathy with Rebecca representing a smaller player as if ERP had stuck with its ?accounting? transaction recording and being a sophisticated general ledger it is a good idea. BUT this is not what has happened. Big vendors have tried to extend the reach (and revenue!) apply the same rigid principles into how the vendor thinks the business should work. This is the fundamental flaw and often the bigger the organisation the more horrific the outcomes became.

    So where are we today? Most organisations now have their ?accounting? recording in reasonable shape with or without ERP. These systems were never designed to be agile nor control the running the business in its daily activities. After 30+ years of this ?ERP? sale we are coming back to fundamentals how business works ? people and their daily work are the source of all information. How that information is created before it hits the ?general ledger/ERP? is now the imperative and this is more a collaborative exercise, which can involve external parties. The historical information contained in the accounting systems is useful to aid people in doing what ever they do BUT this front line activity should remain outside the control of a clunky double entry system.

    The answer is becoming clearer that organisations need to recognise they need to separate accounting records from the dynamic new systems that will make that difference to their business. The ?BPM? movement is a significant step in that direction and with the right tool will eventually put historical ERP into the box of recording history. Whatever we must not extend the mess by extending ERP into this arena where constant change is likely and where with real time information on the daily work by their people will make for better decision making.
    David Chassels
  • ERP can work if the flow of data is understood

    Hi Dennis,

    Andrew McAfee was kind enough to post my reply yesterday to his ???Ducati??? article in which I mentioned your thoughts about the dangers of ???political necessity or ???me too??? ERP envy???, with which I wholeheartedly agree.

    In my experience ERP can work in the right circumstances, and it is the understanding, documenting, and engineering of data flows which is key to managing complexity.

    A more detailed version of my reply to Andrew can be found here

    Opinions and comments are very welcome.
    Paul Wallis