Why Nobody Really Wants an ERP project

Welcome to my first blog post on KPMG's website! I look forward to sharing a range of views and - let's be honest - quite subjective attitudes to what works when we talk about digital transformation.

The goal is to try to deliver a range of recommendations, based on the many projects my team and I have delivered over the years. I hope that you, dear reader, can use some of our experience to avoid starting from scratch if you are facing a complex digitisation project.

If you are experienced in the technological and human twists and turns that this type of initiative often gives rise to, then you may be able to recognise one or more points. If not, the internet never forgets and I have wasted your time - oops. Let's grab a beer if you see me in town one day. My treat!

This is an advertisement for KPMG and what we can do and deliver, because we want to enlighten you about the idea of ​​a collaboration. Very likely on this topic.

Have a cup of coffee and sit down. I borrow 15 minutes of reading time from you. Let's get started.

When someone like me at KPMG works with digitization with a wide range of both public and private clients, there is one type of project that often scares an executive or board of directors more than anything else: the ERP project!

The reason is a combination of factors, typically including management's experience from previous similar activities, cautionary examples from consultants, the general press-coverage of spectacular failure implementations and then an intuitive professional understanding that this can be difficult – and expensive!

The horror stories are circulating in the management network, where large-scale but failed ERP projects often lead to layoffs, management changes, massive costs and little or no ROI at all. You thought you would get a smart new IT platform that lifted the organisation to new efficient heights, but instead you were left with a wounded organisation, an overly expensive and complex system and a large bill for suppliers.

The analogy is often that an ERP project is like changing the engine of an airplane at 30,000 feet. And even though it might not be that dramatic in reality, the comparison is not entirely stupid. Because when the projects reach a certain size, it can be both complex and challenging for a company to succeed, on top of everything else you also have to achieve and deliver on.

ERP is the abbreviation for Enteprise Resource Planning and the system is often the digital platform(s) that handle the business's core processes from order receipt to production, warehousing, logistics, and invoicing - with a financial management layer at the bottom that ensures governance, control, and legality. That is, the entire back office of a company. The system can be so integrated into a company's operational model that it can sometimes be difficult to distinguish the 'system' from the 'process'. 

The vast majority of c-suites understand very well what an ERP project entails. And on paper, one can easily acknowledge the many risk factors an upgrade or replacement of ERP can entail. It increases the day-to-day operational risk, it potentially causes delays on other tactical and strategic projects and above all, it is typically expensive and very rarely affects the top line (or bottom line) positively.

If you combine this with the fact that the trend for years has been on a (reasonable) strengthening of the more customer-facing activities such as CRM systems, webshops, strengthening analytics, and maybe even automation through AI/ML or RPA, well then ERP is in a best-case 6-7 place of prioritised strategic digital initiatives.

Therefore, the vast majority of management would like to avoid an ERP replacement on their watch; if possible.

Covid helped to kickstart many companies' too poor digital maturity. When employees had to sit at home and serve customers, the digital value chain quickly took off. If the degree of automation was low and the manual measures high, the customers' response was prompt: They found another place to shop.

Furthermore, the requirements from customer-facing systems have increased the pressure on access to data from ERP systems, among other things, to create the insights that can differentiate a company in the market. At the same time, many years of underinvestment in the core systems, including ERP, have now created pressure to upgrade or update the many fraudulent platforms in Danish and international companies, as the requirements for near-real-time data increase.

Last but not least, the security situation has deteriorated. Not only because of decidedly major political crises but also because the threat from well-organised cybercriminals is rising almost daily. An outdated platform, with a lack of vendor support and security updates spinning in a corner of a local data center, is suddenly not so attractive. 

There is simply a business requirement that the ERP system to a much greater extent interacts effectively with other best-of-breed systems around it, in a coherent and connected digital value chain, based on a secure, scalable platform.

And yes and then SAP, Oracle, and Microsoft (and a host of other vendors) have introduced new cloud-based platforms that promise exactly that they can deliver the above. In combination with the expiry of support for several large volumes of ERP systems, there is now 'the perfect storm' for ERP projects.

Now I put the matter at the forefront - and the picture is of course more nuanced - but exaggeration promotes understanding. Roughly speaking, there are two types of companies:

1. Those who have continuously monitored and invested in their core technology platforms keep pace with business requirements and technological development
2. Those who have invested up-front and then focused more on IT as a cost center for too many years with a more ‘ad-hoc approach’ to updating and maintenance.

Category 1 has thus had a conscious strategy to ensure that its core systems are always up to date. And lives up to not just the current but also more strategic requirements from customers and business.

Category 2 has been more or less proactive in ensuring that the basic updates are in place but has not timely challenged the core system's place and relevance in relation to where the market and customers have moved. Perhaps a very large initial investment has given rise to a need for many years of depreciation. Or there just hasn’t been ‘time’ to get it uncovered and updated.

Are you in category 1? Congratulations. You are part of a rare minority. A possible new ERP project may still need the advice later in the series of posts, but you are ahead on points!

There are far more companies in category 2. And it is the type of company that also typically stands with one or more ERP platforms (or other core systems) that have accumulated technical and functional "debt" over a number of years.

This means that they are very much facing an internal maturation process towards the readiness necessary to succeed with a new ERP system.

Many business strategies still skate elegantly across the active stance digitalisation demands about old IT. It can e.g. happen with phrases in the strategy such as "It is required that there is ongoing investment in technology that proactively supports the business's must-win battles".

Double-clicking on that sentence rarely hides a detailed assessment of one's existing IT system landscape or the (often quite massive) investments needed to clean up and lift the digital platforms to the level the strategy justly demands.

It may also be that there is no real strategy other than 'sell more goods - make more money. Or the Business Strategy does not at all contain a sufficient stance on digitisation and technology.

I still experience that you make IT (Technology) and Business Strategies separately and then try to bridge these with soft formulations or assumptions on the back end. It just does not work when you discover too late that the level of ambition in the Business Strategy simply can not be met until you have revisited a large number of assumptions you have skipped too easily in your strategy definition.

In my opinion, there is no difference between technology and business strategy. It is the same case.

A self-defined IT strategy can therefore stand as a strange cost-driving monolith to be defended, rather than an embedded part of the overall strategy. And it is often in an IT strategy that ERP upgrades are allowed to live. IT typically knows well what time it is. A long time ago.

So you end up in category 2 unless you have an articulate, well-founded, strategy and a coherent plan for how to ensure your technology platforms are continuously at the level that customers and business demand.

When it comes down to it, many companies, therefore, face the realisation that their core platforms need to be modernised or completely replaced when they open Pandora's Box and look inside.

The general speed with which technology is developed can also easily hit an otherwise well-maintained platform, so a good strategy and plan takes the volatility of technology into its premise.

Of course, it is working - and sometimes the only thing right. If you as an organisation have chosen to extend the life of your old ERP system, then it is hopefully based on conscious, factual analyses of whether the system can meet your requirements for business support, operational capability, and legal requirements well into the future.

It is even perhaps inscribed in the overall strategy? (See above).
Old systems are often well-established in the organisation (you know what you have), tailored to the business over a number of years (it works, of course), and preferably depreciated in the accounts (it is paid for).

Furthermore, the system can easily still fit the company both now and for many years to come. So in isolation, it can even make really good business sense to keep the old systems alive if you as a company fit that profile. As long as your company's choices are based on thorough analysis and transparent risks, this can easily be a solid strategy.

But, if it is because you want to save money and not dare open Pandora's Box, then it is not a viable strategy in the long run. 

There will be a large number of companies where life extension is simply not a sustainable approach anymore: 

• It can be difficult to find support for the system, which often depends on single suppliers or even single persons at the supplier
• Internal employees who know every nook of the system (and would have liked to have been involved in coding them) are approaching retirement age
• The old systems have difficulty integrating with new platforms and data sharing with typical sales and supply chain planning lags significantly behind
• Want access to near real-time data to strengthen e.g. customer or management information
• The platform is no longer supported by the supplier's ongoing updates, so it is now in itself an operational and safety risk.
• The aged user interfaces and perhaps lack of opportunity for mobile access plague organisational adoption, especially for new employees
• One or more ERP platforms prevent transparent reporting, perhaps weaken effective integration of new acquisitions or prevent general efficiencies across the company's operational model
• The system is sluggish, slow, or has increased downtime

There may be even more reasons than stated above, but the bottom line is that many companies' ERP system no longer meets the requirements of the business and may even at the same time pose an ever-increasing IT risk.

If you have waited too long and not continuously invested in modernisation of your core application, or you have actually invested continuously to extend its life, but never really addressed the root of the nettle and replaced the system 5 years ago when it was obsolete, then this type of project often comes with a bitter taste of distress.

The ever-growing snowball of technical and business debt is now so great that the time has come for a replacement. 

 Is it as bad as the rumor goes to start a new ERP project? The consultant's answer is both yes and no.

Many factors come into play when assessing the risk and complexity of new ERP projects. The size of the company, the complexity of the business, the geographical spread, the IT integration landscape, the data model, the internal maturity of the organisation, and the requirements of customers, suppliers, and legislation.

But just remember that ERP modernisation can be an ingenious way to lift your organisation's digital foundation and mature areas that have long lacked focus, love, and investment. The modern ERP systems are now so strong, stable, and integrable that they can not be compared to ditto just 10 years ago. So the potential is definitely present.

Every day, good, solid, and business-improving ERP projects are delivered that come to fruition and with a really good ROI.

Some leverage modern technology to automate all or part of complex process domains, rely on skilled vendors or consultants, and simply consolidate, clean up, and harmonize their IT, making them far more robust and flexible to handle new acquisitions, growth, or even divestment.

You just do not hear much about them in the boulevard press. Failure sells more clicks than success.

But what if you know that your business is complex? That one might have to tidy up heavily in suboptimal processes? That one's current level of documentation is low and one finds it difficult to prioritise in an already unmanageable IT landscape. Overall, as a company, you may not feel well enough dressed for the entire ERP show?

There are plenty of both software vendors and consulting firms that can offer accelerators, pre-defined packages, and smart technological gadgets that can all make the activities and phases of a project easier and ensure a good start and a more manageable project.

But here's my claim: Nothing beats your good preparation.

My recommendation is absolutely simple. Do your homework first.

Every carpenter knows that you measure twice before sawing. And everyone knows Mr. Møller's principle of due diligence. Sun Tzu says that the wise general does all his calculations in the temple, not on the battlefield.

I could go on, you know what I mean. There is a lot of wisdom to be gained in old virtues and this also applies to an ERP project.

Few companies have a team of ready-to-start resources sitting around waiting for an ERP project. They need to be taken ‘into operation’ and will typically eat up the total capacity and are not necessarily quite up to the beat with the latest technology or how to run an ERP project ashore.

So you can be on the verge of ‘quick fixes’ where suppliers or consulting houses promise that you can dramatically compress and accelerate all or part of the preparation. Or even worse, feel tempted to make extremely rigid contracts where you try to place the entire responsibility for success with the supplier ("You are the experts"). 

Here I have to emphasise that no matter who you get to help you and no matter what methods and means are brought into play towards a choice of a new platform and a subsequent implementation, the recommendation still applies:

Prepare. Do your homework. The responsibility for the project ultimately lies with you. In your business. No matter how you screw up the contract, no matter who helps you, a failed project and shattered expectations will hit you hardest.

Just like a house built with the left hand rarely hits the contractor as hard as the family who hoped they would move into their dream house where it is raining down through the roof and there is mold on the floor.

As a customer, you must prepare properly and take a high degree of co-responsibility, which does not mean I advocate for exemption from liability of your suppliers. On the contrary. They must be 100% at the top and involved in the responsibility for an ERP project. They must have the right skills, the right profiles, and the right time. Expectations must be high! Everything else is poison for a project.

However, as a company, you can not renounce the responsibility to prepare yourself properly. It makes you sharper, more mature, and far more robust for the piece of work that awaits. You will be asked 1000 questions in the project process and be challenged on a large number of very basic prerequisites, so the better you are prepared, the easier the project will slide. Even when it gets difficult. Because it does.

May I throw you a house analogy again? It is said that it is only at your third time when building a house that you hit the mark. Why? Because you have practiced and are ready for the previous two. Now I do not know very many who can afford to build 3 houses - few can afford one - but the analogy holds, I think.

An ERP project of a certain size and complexity can be considered a real digital business transformation. Behind the buzzword, terminology hides a relatively accurate picture of the changes that are typically necessary to be able to effectively prepare to be able to utilise the possibilities of a new, modern ERP platform and ensure that you are included as an equal, well-prepared customer in an ERP project.

The best and safest way to manage complexity is to know two things as best you can, as early in the process as possible:

1. Where do we start from (what is our current IT landscape and our overall operational maturity to be able to handle the changes that are coming).
2. Where do we want to end up (what are our success criteria, our expected scope, and maturity when we finish the project).

In KPMG, we call the synthesis of these two elements an ERP target image.

The purpose of the goal is to ensure that you can make well-considered, well-established, factual decisions at each of the typical milestones leading up to the start of the ERP implementation project, and to continuously support whether the project delivers on the success criteria and the goal of maturity as an organisation. (Read: ROI).

This is not only an economic business case but also an early definition of the building blocks that must be in place now and the things that must be built along the way to reach the goal. Just to stay in the 'building a house'- metaphors.

So how do you ensure a goal image that is accurate enough to make the right decisions on an informed basis, from early mobilisation to platform choice and into implementation and operation?

At KPMG, we work consciously with an overall concept to define an ERP target image (actually, the process can define all sorts of other digital transformations, but now we're just starting with ERP).
It is a structured controlled process that drives a collection of data, facilities several key decisions, as well as provides several key components to the decision-making process needed in an ERP process.

It defines a clear picture of the following 7 elements, which we call an ERP Target Operating Model (TOM) - or ERP target image:

It defines a clear picture of the following 7 elements, which we call an ERP Target Operating Model (TOM) - or ERP target image:

1. The Big Why: Why launch an ERP project (success criteria and management vote)
2. Functional processes (how do we work digitally with our business processes today and what should the system's coverage be in the future)
3. Technology (what is our current digital landscape, as well as what non-functional requirements must the future platform live up to, for example, code standards, integrations, user interfaces, accessibility, etc. And just as important, what can we turn off when we are done?)
4. Insight and Data (what data models, master data control, and reporting do we want to support our business and legal requirements, and where is our current maturity)
5. Governance (policies, controls, and management models that ensure transparent division of responsibilities and effective risk management and decision-making before, during and after implementation)
6. Delivery model (who needs to deliver which services, from where, and in which organisation, for example through a collection in competence centers or sourcing).
7. People (the competencies, qualities, and culture needed to succeed with the other dimensions, as well as our internal mobilisation - from project to operation).
   

But hey! Is not that what ERP Suppliers also say they do? And does this not happen in a normal system selection process?
No, not to the level required in your operational model - and the selection process typically sets a wide range of basic requirements for a customer's degree of preparation very early (too early I claim).

Remember that the purpose of selection and analysis phases in an ERP process is intended to

1. Define a scope
2. Choosing a platform supplier
3. Choosing a system integrator (typically)
4. Make a contract
5. Make a fit-gap analysis to substantiate the original offer

So the ordinary selection process has already skipped several very significant internal maturation considerations and can in many cases force a company to make decisions on either an uninformed or slender basis.

Very early, you can therefore get into a corner of system platform expectations, optimistic suppliers, and contract negotiations that push a process in progress you are not ready for at all.

KPMG's recommendation is - not surprisingly - that you set aside time before starting the selection to make your organisation as ready as possible. And in fact, an ERP target image can easily lead to NOT starting an ERP implementation project, but simply extending its lifespan. But now with an in-depth, factual decision basis behind it.

And here the ERP target image plays an essential role. Getting ready so you can turn into what is an exciting, fascinating journey: the ERP project! 

In the next blog post, I will review in detail what elements an ERP target image contains and what very precise benefits this gives rise to. So stay tuned to the next section where we become much more concrete.