Select Comfort: home-grown IT failure

Sleep Number bed and mattress retailer, Select Comfort, has abandoned its SAP implementation mid-stream, raising serious questions about the company's present and historical IT strategy. Select Comfort has not blamed SAP or any other third-party vendor for its problems.

According to Select Comfort's December 16, 2008 press release:

Actions being taken include a workforce reduction of approximately 120 positions within headquarters, or approximately 22 percent of the corporate workforce, which includes general and administrative and customer service positions. In addition, the company will immediately cease all activities associated with the implementation of SAP-based IT applications.

The company's 2006 SEC 10-k filing describes reasons behind the SAP implementation:

We have recently undertaken plans to implement an integrated suite of SAP-based applications, including enterprise resources planning, customer relationship management, supply chain management, product lifecycle management, supplier relationship management, human capital management, strategic enterprise management, business intelligence and enterprise portal systems to replace many of our current systems. We believe this SAP-based IT architecture, along with best-practices-based processes and higher concentrations of off-the-shelf, packaged solutions, will provide greater flexibility and functionality for our growing and evolving business model and be less expensive to maintain over the long-term.

The company took an "asset impairment charge" of $5.4 million after abandoning software acquired and developed before its SAP implementation. The 10-k explains:

We depend upon our management information systems for many aspects of our business. Our current information systems architecture includes some off-the-shelf programs as well as some key software that has been developed by our own programmers, which is not easily modified or integrated with other software and systems and limits the flexibility and scalability of our information systems.

Select Comfort has a history of purchasing, and then abandoning, major enterprise software systems. The company started using Oracle software in 1998, adding a Siebel system in early 2006. By late 2006, Select Comfort began replacing its Oracle software with an SAP system. In addition to a revolving door for enterprise software systems, Select Comfort's IT organization was run by three different CIOs during the critical change period of June, 2006 to February, 2008.

In a June, 2008 letter to the Board of Directors, Vice Chairman of institutional shareholder Clinton Group, Jerry Levin, questions the rationale behind the SAP deployment and expresses lack of confidence in the company's IT strategy:

We believe that spending on the SAP system installation should be deferred until an expeditious detailed review of information technology needs is undertaken and completed by an independent consultant, particularly in light of the departure of the Company's Chief Information Officer. It appears that the SAP implementation is behind schedule and is significantly over running its original cost estimates. There are several alternate SAP implementation approaches and given the smaller than anticipated current size of the Company, the approach to SAP software originally adopted may be outsized for the Company's needs. It appears to us, after reviewing the Company's recently filed 10-K, that in 2007 the Company spent $12 million on the SAP implementation and anticipates spending another $8 million in 2008, assuming no additional costs. It is difficult for us to envision, given the size of the Company, that the Company could ever achieve costs savings to justify such a large expense.

A March, 2008 letter from Levin says:

Select Comfort's plan to continue on with the SAP implementation, particularly using internal resources rather than qualified external consultants, is a waste of resources and puts the entire company's operations at risk from a poor implementation. Implementing an enterprise software system is challenging for any company, even when using qualified experienced outside consultants. Select Comfort's plan to continue with the implementation using internal resources that have at best limited experience implementing a new enterprise software system is indicative of extremely poor judgment by management. Select Comfort's management has never articulated why it needs to spend tens of millions of dollars on implementing an enterprise software system, and given Select Comfort's financial performance the implementation should cease immediately.

THE PROJECT FAILURES ANALYSIS

On the surface, this case appears straightforward: a company stops its over-budget implementation due to economic pressures arising from the recession. However, a more detailed examination reveals that Select Comfort made serious strategic blunders independent of either technology or the current economic slowdown.

These strategic mistakes appear to have included implementing, replacing, and abandoning major IT systems without proper justification, planning, or cause.

I asked forensic accountant and financial blogger, Francine McKenna, for her impressions:

It doesn't appear that there were any issues with the prior Oracle ERP installation. As recently as early 2006, Select Comfort was still expanding the scope of its Oracle relationship. In addition, the company's 2006 annual report didn't specify any concerns with IT or the Oracle software.

In June, 2006 the company hired Maytag's former CIO to run IT. He dumped Oracle, brought in SAP, and hired an implementation team comprised of internal resources. Initiating an ERP implementation with internal resources is risky for any company, but especially for one without a history of such large, intensive projects and the corporate culture needed to support the team over the long haul.

The CEO seems to favor sexy, showy, PR-type activities. He started a vanity SAP implementation when the existing Oracle software seemed to be perfectly fine. The former Maytag CIO is now gone and the SAP project stopped. What else remains?

My take. This situation reflects several strategic failures:

• Select Comfort replaced a working Oracle system without apparent justification
• It implemented SAP with in-house resources, an inefficient strategy for a company of this size and IT maturity
• A splashy CEO, rather than a hands-on CIO, appears to have developed IT strategy

In summary, an unhealthy rip-and-replace attitude prevailed during a period when Select Comfort shifted marketing strategy. The new marketing plans did not produce expected results, creating severe financial pressure. The 2008 recession was the last straw, forcing Select Comfort to stop the in-progress SAP implementation to save money and allow time to reevaluate IT strategy.

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In researching this post, I emailed Select Comfort the following questions:

• Why did Select Comfort change systems several times since 1998?
• Going back to March, what caused delays on the SAP implementation?
• Why did the company decide to pull the plug on SAP now?
• To what extent did the company use external consultants on the SAP implementation?
• How is IT inside the company organized -- is there one person with CIO level accountability?

The company's response: "After reviewing your list of questions I can tell you that right now we’re not in a position to comment on our IT strategy beyond what has already been made public through our press release."

I also left phone messages for each of the three present and former Select Comfort CIOs. None of them returned my calls.