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May 24, 1999

Making ERP Add Up

Companies that implemented enterprise resource planning systems with little regard to the return on investment are starting to look for quantifiable benefits

By Tom Stein

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s companies of all sizes collectively poured billions of dollars into enterprise resource planning systems over the past several years, the promise of automating and integrating business processes and gaining operational efficiencies was often little more than that--a promise. Rarely did anyone do a strict return-on-investment analysis.

"We didn't calculate a hard ROI," says Steve Hansen, VP of corporate information services at Toro Co., of his company's implementation of SAP's human resources, manufacturing, financial, and customer-service applications four years ago. "But we had a bunch of good business reasons for doing it."

Surprisingly, given the level of investment and time needed to implement ERP systems, many companies forged ahead without making ROI calculations. Like Toro, most companies had good reasons for doing so: Some wanted to integrate disparate business units, others wanted to consolidate redundant proprietary systems, and many used ERP systems to help solve their year 2000 problems. Toro, a $1.1 billion maker of lawn mowers and snow throwers in Minneapolis, says its SAP implementation eliminated about 70 homegrown systems that would have required $12 million to $15 million in Y2K remediation work.

Increasingly, companies are looking to generate hard numbers on their ERP investments. Some are putting in place strict metrics to evaluate their ERP implementations and tracking those measurements over time. Others are calculating return based on improved customer service, sales productivity, and inventory control. Still others are beginning to see that ERP may provide its greatest ROI potential as a platform for the next generation of E-commerce and E-business applications.

Analysts say the scrutiny is long overdue. "Now that the Y2K crisis has been dealt with, many companies are wondering if they're any better off," says Jim Holincheck, an analyst with the Giga Information Group. "They spent all this time and money [on ERP], and put themselves through major changes, but what could they have done to make themselves more competitive?"

Barry Wilderman, an analyst with the Meta Group, says it's not unusual for ERP investments to result in a negative ROI over a five-year period. Meta Group recently surveyed 63 companies to determine what kind of payback--if any--they were getting from their ERP investments. It found that, over a five- to six-year period, the average company incurred a negative ROI of $1.5 million. Also on average, it took a company 23 months to get an ERP system up and running, at a cost of $10.6 million for the implementation and another $2.1 million for maintenance over a two-year period.

Benefits At A Price
So why deploy ERP at all? Analysts say a successful ERP project can cut the fat out of operating costs, generate more-accurate demand forecasts, speed production cycles, and greatly enhance customer service--all of which can save a company millions of dollarsover the long run.

But the benefits often come at a high price. Not only do ERP systems take a lot of time and money to implement, they can disrupt a company's culture, create excessive training requirements, and even lead to productivity dips and mishandled customer orders that, at least in the short term, can damage the bottom line.

Some companies find this out the hard way. About four years ago, Owens Corning began ripping out its old, stove-pipe business systems and replacing them with integrated, state-of-the-art applications from SAP. By implementing SAP's manufacturing, financial, and distribution applications across the board, Owens Corning for the first time in its history was attempting to consolidate its disparate business units and provide a single, coherent point of contact for the customer.

David Johns

The Toledo, Ohio, company had previously been divided along product lines--fiberglass insulation, roofing materials, exterior siding, and so on--with each unit using its own information systems and essentially operating as a distinct entity. Owens Corning wanted to let its sales and customer-service representatives access a single system and determine product availability across the company.

"When we first went live with SAP, it was a tough time," admits David Johns, director of global development. He says the company's overall productivity and customer service took a nosedive in the first six months after implementation. "When you put in something like SAP, it's not a mere systems change," he says. "You're changing the way people have done their jobs for the past 20 years."

The Owens Corning employees were overwhelmed and ill-prepared for the process changes wrought by SAP, such as new ways of entering orders. As a result, customers were adversely affected: They often didn't receive the products they'd ordered and experienced frequent delays. "We underestimated the impact that swapping out all our old systems would have on our people," Johns says.