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8/31/2010
09:28 PM
Bob Evans
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Global CIO: SAP Stunner: ERP Deal Boosts Customer Profit $100M Per Year

Airgas says its extensive SAP project will raise annual operating profits by at least $75 million and possibly more than $125 million. Here's how.

In a strikingly detailed and rare peek inside a huge ERP deal, Airgas Inc. has disclosed that its highly customized enterprisewide SAP implementation carrying a price tag of about $85 million should begin generating significantly more than that investment in annual incremental operating profit by 2013.

Begun about 2-1/2 years ago, early and mid-stage phases of the project have proven to be so successful for the distributor of industrial, medical, and specialty gases that it recently committed to an accelerated schedule with SAP that calls for completion by the end of 2012.

While the project will have a positive impact on operating income before 2013, Airgas said, the company expects that in that first full year after completion, SAP's impact in just three specific operational areas—sales growth, price management, and administrative and operating efficiencies—should "yield an aggregate of $75 to $125 million in incremental operating income on an annual run-rate basis."

My mother always told me—and still tells me, God bless her—that the world is full of surprises. So just as we had all been led to believe that big ERP deals are a relics of the past, that they'll never happen again, that they don't work, and that they inevitably blow up in the faces of the customer, the software vendor, and the integrator, here we have one of life's surprises: a big, multi-year, many-moving-parts ERP implementation that by all accounts is succeeding beyond everyone's wildest expectations.

Let's take a look at how this all came about:

1) The Cost. In April 2008, the Airgas board of directors approved the SAP project. In June of 2010, by which time Airgas had "invested" about 70% of its total SAP project budget of $85 million, the company decided to accelerate the final phases of the implementation "based on the early success of system conversions and the substantial benefits to be realized," the company said in its press release detailing the adventure.

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"Airgas expects the additional implementation costs of the accelerated schedule to be approximately $20 million, which will be more than offset by the economic benefits that will begin to accrue during the conversion process," the statement continues. "These additional costs do not impact any previously issued earnings guidance given by the Company. Specifically, the additional SAP implementation costs incurred during calendar 2012 will be more than offset by SAP benefits, and the Company reiterates its CY2012 EPS goal of $4.20+ per share."

2) The Impact. The Airgas document says that while it is possible that additional benefits will be generated by the overall project, it is basing its projected annual increases in operating income on the three areas mentioned above: sales growth, price management, and administrative and operating efficiencies. Here's a look at each:

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