Please read this case and answer 4 questions at the end.
Kennametal, Haworth, Dana Holding, and Others: ERPs Get a Second Lease on Life.
Kennametal, a $2 billion maker of construction tools,
has spent $10 million on ERP maintenance contracts
during the past 13 years and not once could the
company take advantage of upgrades, says CIO Steve Hanna.
The company’s implementation was too customized: The
time and effort needed to tweak and test the upgrade outweighed
any benefits, he says. But Hanna kept trying. Recently,
he priced the cost of consultants to help with an ERP
re-implementation and was shocked by estimates ranging
from $15 million up to $54 million.
The major ERP suites are “old and not as flexible as
some newer stuff, and they can’t build flexibility in,” Hanna
says. “Modifying it takes our time and money and training.”
His ears practically steam from frustration. “You tell me:
What am I missing here?”
Kennametal is like many companies when it comes to ERP.
The software is essential but, unlike when it was new, it now
offers scant opportunity for a business to set itself apart from its
competition. It certainly doesn’t help bring in new revenue, and
running it eats up an increasing share of the IT budget. Yet
longtime ERP users aren’t pitching the technology.
Companies still need it for managing supply chain, financial,
and employee data.
As Hanna and other CIOs are finding, however, behemoth
ERP systems are inflexible. Meanwhile, high-priced maintenance
plans and vendors’ slowness to support new technologies
such as mobile and cloud computing mean that, without
careful management, the ERP technology woven through
your company can become a liability.
Your ERP system probably won’t collapse if you do
nothing; it’s not like legacy mainframe applications were a
decade ago. But just as you had to adapt your approach to
managing mainframes in order to maintain their value in an
age of faster, cheaper Web-based apps, you now need to do
the same with ERP. So it’s time to rethink business processes,
drive a harder bargain on maintenance fees, and find
ways to marry ERP to emerging technologies. Achieving an
ERP system that delivers future value means managing it
differently here and now.
New ERP license revenue dropped by about 24 percent,
according to Forrester Research—one effect of the general
decline in software spending during 2009. This means vendors
are hungry for new business. They’ll offer software deals
to tempt CIOs who had put off upgrades or who want to install
completely new systems to get the latest capabilities.
Yet CIOs need to tread carefully: What used to be a
good deal may not be anymore. Steve Stanec is vice president
of information systems at Piggly Wiggly Carolina, a
privately held supermarket chain with 105 stores, most in the
southeast United States. Stanec says he and other CIOs must
depart from the traditional ERP script, where, after lengthy
negotiations, vendors hand over software and charge hefty ongoing
fees. CIOs must avoid falling into the same ERP traps
they once did, he says.
Buying and installing ERP was never a cakewalk. Today,
though, ERP is the Jack Nicholson of software: With a
hackneyed repertoire, the old and expensive dog finds it hard
to learn new tricks. It’s become a legacy technology, and CIOs
are now finding new ways to manage ERP projects and the
ongoing upkeep. Their best advice: Draw a clear project
map and modify the software only as a last resort.
Haworth, a $1.7 billion office furniture manufacturer, will
use tools from iRise to visually plan its rollouts of SAP systems
in its major offices on four continents. To get employees
accustomed to changes before rollout, the iRise tools simulate
how the finished SAP system will look. The company also
uses a sales compensation application from Vertex because
SAP doesn’t support the complicated, multitiered compensation
model Haworth uses to pay its salespeople, says CIO Ann
Harten. These choices stem from Harten’s decision to make
no custom changes to the core SAP code. The idea is to
streamline the implementation project, which started in 2006,
and to make future upgrades easier.
Modifying the core is expensive both when you do it and as
you live with it, she says. “Next time the vendor does a version
upgrade or a patch, your testing requirements are increased
several fold,” she says. “You want to avoid this at all costs.”
ERP of the future is as plain-Jane as possible, agrees
Hanna, the Kennametal CIO. The fact that it can take an
army of developers to build new features into ERP suites
slows the vendors down. But it’s also an obstacle for customers.
The 6,446 customizations—Hanna counted them—that
Kennametal made to its ERP software over the years prevented
the company from taking advantage of new technology
its vendor did build in. “We couldn’t implement one single
enhancement pack ever,” he says.
So even if Hanna could pay up to $54 million for integrators
and consultants to help Kennametal move to the latest
version of the ERP suite, he doesn’t want to. Instead, he
plans to turn Kennametal’s old ERP management strategy
on its head by putting in as vanilla a version of SAP as possible.
Hanna and CEO Carlos Cardoso are willing to change
Kennametal’s internal business processes to match the way
SAP works, Hanna says, rather than the other way around.
Kennametal will also take on the implementation itself.
Hanna hired IBM to consult about requirements definitions
and to identify business processes that must be revamped
to conform to SAP’s procedures. Meanwhile,
Kennametal staff will do the legwork. Hanna and Cardoso
have committed to the board of directors to have the job
done in eight months, he says, implementing at least 90 percent
of the SAP software unmodified. The project is so important
to Kennametal that it must succeed in order for the
company’s leaders, including Hanna and Cardoso, to achieve
their performance goals for the year. “I’m going to make it
work,” says Hanna.
Because Kennametal’s ERP system has been unable to
keep up with changing technologies, Hanna says the company
never benefitted from the millions in maintenance fees it paid
to cover upgrades. “We paid maintenance for nothing.”
Doug Tracy, CIO at Dana Holding, researched analyst
firm estimates about where maintenance money actually
goes and found that 90 percent of those fees are pure profit
for the vendor. For Tracy, there is no more time or tolerance
for vendor games.
The $8.1 billion auto parts supplier has in recent years
fought a hostile takeover attempt as well as been in, then
emerged from, Chapter 11 bankruptcy protection. Then the
auto market tanked, and Dana’s sales reflected the 30 percent
to 70 percent decline. The company had to scale back some
ERP projects, and Dana wanted its vendors to work with
them to reduce fees. Tracy declines to name Dana’s main ERP
vendor but says he wasn’t getting the deal he was looking for.
Dana’s vendor didn’t lie down. To try to persuade Tracy
that maintenance fees are valuable, the vendor analyzed
Dana’s use of its support, he says. The findings: Dana made
21,000 requests to the vendor between January and September
2009. About 98 percent of them didn’t involve human
intervention; they were automated lookups on the vendor’s
knowledge base. “We’re not getting much,” Tracy concluded.
So Tracy stopped making maintenance payments to his
main ERP vendor as of December 31, 2009. “That’s a risky
strategy, though not as risky as vendors would have you believe,”
he says. One result of the move away from provider
support is that Dana’s internal IT people have to be more
savvy about the ERP systems the company relies on—and
able to fix what may go wrong. But, he says, there have been
no technological show-stoppers in years because ERP, like
other legacy systems, is mature and reliable. Plus, there’s
plenty of ERP talent.
Eliminating maintenance saves money, because Dana is
no longer paying for a service of questionable value, and it
sets a precedent with the company’s other ERP vendors.
“You have to show value every step of the way,” Tracy tells
his suppliers. “If you try to hold us hostage, I will call what I
see as a bluff and just stop payment.”
CIOs have to take charge of what the future of ERP is
going to be. Treating ERP as legacy IT may be hard for
some who have invested so much time and energy in planning,
implementing, and tweaking these systems.
But adopting this mindset will help CIOs move ERP—
and their companies—ahead. Modifying the base applications
judiciously, if at all, will minimize expense and time
devoted to software that now provides the most basic functionality.
Everyone does accounts payable, notes Stanec at
Piggly Wiggly, so don’t waste time customizing it.
Further out, Stanec, for one, dreams of seeing ERP vendors
develop packages that help companies generate revenue.
“Then,” he says, “we’d have something interesting to
1.Why does ERP customization lead to so many headaches
when it is time to upgrade?
2.Why were the systems customized in the first place?
3.Cutting payments outright to ERP vendors may not be
possible for smaller companies without the in-house resources
that larger organizations have. Are they at the
mercy of the software providers? What other alternatives
do small companies have? Provide some recommendations.
4.Kennametal CIO complains that they “paid maintenance
for nothing.” Who do you think is responsible
for that state of affairs? Kennametal? The ERP vendor?
Both? Justify your answer.