Don’t Replace, Transform!

Don’t Replace, Transform!

          
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Don’t Replace, Transform!

A Better Approach to ERP Optimization
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    This piece is part of BCG’s Spring 2011 issue of IT Advantage, which offers a collection of articles aimed at ensuring that a company’s IT capabilities and organization are optimized and firing on all cylinders.

    • Companies’ enterprise resource planning (ERP) landscapes inevitably grow more cumbersome over time as their business objectives change and they adapt and accumulate ERP systems—the average number for large corporations is 17.

    • Building an entirely new ERP template can take years and cost millions of dollars—to say nothing of the complexity, risk, and potential downtime.

    • A targeted transformation of the ERP landscape—focusing on the handful of areas whose improvement will generate the lion’s share of business value—can be a superior approach.

     

    As their business objectives change, companies tend to adapt and accumulate ERP systems—the average number of such systems in large corporations is 17. But building an entirely new ERP template can take years and cost millions of dollars, to say nothing of the complexity, risk, and potential downtime. A targeted transformation of the ERP landscape, on the other hand—focusing on the handful of areas where improvement will generate the lion's share of business value—can be a superior approach.

    Inevitably, companies’ enterprise resource planning (ERP) landscapes grow more complex over time. Companies customize their ERP systems to adapt to increasing demands as business objectives and market conditions change. Many companies also accumulate systems—a recent study indicated that the average number for large corporations is 17—through M&A, through new implementations due to expansion into new regions and business lines, and through other factors. This creates a high degree of complexity in companies’ ERP landscapes, with secondary effects on different practices and parts of the business, and makes adaptation of ERP increasingly challenging. But companies continue to try, spending billions annually on upgrading, maintaining, and consolidating existing applications to ensure that they can keep up with the business’s needs.

    Many companies eventually reach a point, however—typically driven by a business transformation opportunity—at which they decide that a piecemeal approach and incremental improvements are not enough. Instead, they need to make a bold move that leads to a significant upgrade in their ERP capabilities. Typically, the recommended solution at this point is a massive overhaul of a company’s ERP landscape—at considerable expense and replete with complexity, risk, and potential downtime.

    And the investment is indeed sizable. A consumer and industrial company seeking to harmonize its HR data and consolidate its systems, for example, was told that it needed to build an entirely new ERP template, with an expected project duration of three to five years. An energy firm seeking to reorganize itself along value-chain lines and unify its finance, reporting, and HR processes was also advised that it needed a new template, which would take more than 300,000 man-days to complete. A beverage company seeking to optimize its supply chain and reduce the number of its plants received the same counsel; the project took between three and four years to complete and came in at twice the original budget.

    Given the major parts of companies’ value chains—including procurement, production, order processing, and financial functions—that are embedded in their systems, an optimized ERP landscape can provide the agility necessary to quickly and efficiently seize business transformation opportunities that emerge, such as mergers and acquisitions, divestments, and the launch of new business models. It can also enable a range of other advantages, including the implementation of more-global operating models, the efficient sharing of best practices across the organization, and the ability to quickly roll out product and process improvements.

    If the greenfield approach were the only way to achieve a significant upgrade in ERP capabilities, the investment would be worthwhile. But there is an alternative approach, one that could prove to be a better way for many companies.

    An Alternative Approach—ERP Transformation

    A targeted transformation of the ERP landscape—focusing on the handful of areas whose improvement will generate the lion’s share of business value—can be superior to the traditional greenfield approach to optimization in a number of respects. Foremost among them are greater speed, lower cost, and reduced risk. The narrower scope of the transformation approach can mean more rapid project completion: a targeted transformation can take less than half the time of the traditional approach. Executed well, the transformation can also accelerate the point at which the benefits become visible. Indeed, many of the benefits can be realized during the transformation, in contrast with the traditional, large-scale “rebuild and migrate” approach, where in most cases few benefits materialize until the project is fully complete.

    A shorter time to benefit realization can translate into a number of direct and indirect advantages. For example, financial breakeven is reached sooner and the return on investment is higher. Business agility is also significantly improved, because “spec freeze” periods are shorter and the ERP landscape is ready sooner for implementing new business requirements.

    Transformation can also be far cheaper than the traditional approach to optimization. The ability to predict accurately—and early—how much the effort will cost, what efforts will be required, and how long the project will take is also much greater, because there are far fewer assumptions necessary at the outset and hence far fewer surprises down the road.

    ERP transformation can also bring far less risk than the traditional approach because it operates on, rather than replacing, existing systems, thus preserving historical data and running processes. This avoids downtime and disruptions to business continuity caused by the unloading, changing, and reloading of data sets, as well as the potential loss of historical data. The targeted approach also removes the threat of a loss of maintenance coverage from the ERP vendor, which can be triggered if data are manipulated on a database level.

    An additional potential advantage of targeted ERP transformation, though one that is harder to gauge directly, is that it can enhance a company’s ability to translate data into competitive advantage. Companies today are deluged with data that could yield valuable insight. But those data often exist in incompatible formats or are redundant (for instance, companies keep duplicate representations of customer information on their systems, which can distort the analysis of the total sales for that customer) or contain faulty or outdated information, such as addresses, codings, and classifications. This compounds the challenge of knowing which data are critical to the business and how best to collect, shape, and interpret the numbers. ERP transformation drives the standardization and cleanup of operational data and helps ensure the ongoing integrity of those data. This is a mandatory precondition for companies to be able to internally benchmark performance, detect and validate patterns, and respond quickly and efficiently. (See “Signal Advantage,” BCG Perspectives, February 2010.)

    ERP Transformation in Practice—an Illustration

    A comparison between the real results that a company achieved via the traditional approach to ERP optimization and the results the company could have achieved via ERP transformation illustrates the latter approach’s potential benefits. The company, a major beverage firm, sought to transform its entire value chain. It had a number of related objectives specific to its ERP systems, including the consolidation of functions and the standardization of processes in its shared-services center; the harmonization of spending data and the standardization of procurement processes; and the consolidation of the company’s spare-parts management systems. The company was advised by an outside party that it needed to build a new ERP template and roll it out across all of its different companies in its various countries of operation to achieve these objectives.

    The company took the advice. A major overhaul of the company’s ERP landscape was launched in 2008. The first (modest) benefits will likely be realized in mid-2011; the final decommissioning of the company’s archive systems will not take place until after 2012. The total cost to the company is an estimated $212 million, comprising $140 million in IT costs, $65 million in business costs, and $7 million in project management costs.

    Had the company utilized the ERP transformation approach instead, we believe it could have generated significantly better results. With the same start date, the first benefits would have been realized in mid-2009 and the full set of benefits in mid-2010. The total cost of the effort would have been $142 million, a $70 million savings over the traditional approach, with the savings being driven entirely by a halving of the IT costs. And the company’s application-management team would have been able to focus completely on helping support the business and its objectives by mid-2010—a full year earlier than via the traditional approach. (See the exhibit “ERP Transformation Can Provide Significant Time-to-Benefit and Cost Advantages.”)

    exhibit
    Critical Enablers: An Understanding of the Link Between ERP and Business Value—and an Ongoing Focus on Value Generation

    The potential advantages of an ERP transformation approach are compelling. But such an approach can be difficult to execute because it calls on a number of capabilities, one of which is knowing where to concentrate efforts. A company might be able to achieve most of the hoped-for benefits of a major overhaul of its ERP landscape by simply consolidating its back-office systems. But if the company doesn’t know that, a targeted approach is pointless. Hence, the company must possess a thorough understanding of the link between its ERP and delivered business value.

    We advise using a systematic scan across the process landscape to identify the value potential of three ERP transformation levers: business process optimization (for example, process integration and standardization), organizational alignment (such as organizational realignment, delayering, or bundling into shared services), and data alignment (data cleansing or implementation of superior data standards). Successful ERP transformation also demands that the company apply a strategic lens to implementation once the project is under way—and to keep the focus not just on project management per se but on bottom-line impact. This means that critical milestones must be defined and updated. Lead indicators for value delivery must be monitored. Hurdles and gaps that threaten the realization of the initiative’s targeted value must be identified and quickly addressed. Changes to business processes and data standards must be managed in a way that allows staff, customers, and suppliers to adapt to and take full advantage of the improvements. This type of orientation will help ensure that the plan as conceived delivers its expected economic impact.



    The standard recommended approach to ERP optimization can be effective. But it is only one option and not necessarily the best in many cases. The next time your company finds itself at a threshold with regard to its ERP landscape and is told that it needs to rebuild, consider the targeted transformation approach described above. The payoff in terms of cost savings, risk mitigation, and value delivery could be significant.

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    • Senior Partner & Managing Director
    • Cologne
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