Changing your Business Technology?
The first question to ask is “How are the people using the business processes going to react?”
by Dave Ramsey

Over the past decade, enterprise resource planning (ERP) systems offerings from SAP, Oracle, J. D. Edwards, PeopleSoft, Baan and others have become the dominant business information systems software platform for companies and government bodies in the US and other western oriented countries. The rise of ERP systems represents a fundamental shift in the nature of business information systems and of even greater importance, in the total business process.

Compared with the MRP and other scheduling, purchasing, and customer service systems, ERP systems offer significantly increased sophistication that enables integration of software and underlying relational databases across all functional areas (accounting, human resources, operations and logistics, sales and marketing). This potentially allows the organization to have a “seamless integration” of all the information flowing through the organization. It presents “managers, who have struggled, at great expense and with great frustration, with incompatible information systems and inconsistent operating practices, the promise of an off-the-shelf solution to the problem of business integration” (Davenport 1998, p. 121).

However, as Davenport and others have noted, gaining such benefits are not without difficulties. ERP systems are complex software systems presenting major technical challenges and usually requiring large investments in time and money. More importantly, they cause the organization to have to tackle a significant management problem. To achieve the highest level of integration, ERP systems have their own internal “best practice” business processes. Thus, the organization is forced to change their culture when they the implement the software.

When the implementation takes place, the organization has to reconcile the technology of the software systems with the strategic and management needs of the organization. Unlike other systems such as MRP and MRPII, ERP systems require the organization to adapt to the software instead of adapting the software to the organization’s established processes. If the organization successfully adapts to the software, significant gains in productivity, speed of reaction, streamlined data flows and direct access to real time operating information can be achieved. If the organization cannot adapt to the demands for change then operating and management benefits become elusive. Even in the best of adaptations, the change process may become problematic and cause wasted dollars, time, and effort.

This article illustrates what happens with one such company that made the decision to adopt and implement an ERP system. While the actual activities took place several years ago, the lessons that the implementation reveals are still important for today’s business organization.

In June 2000, Nestle SA signed a much-publicized contract with SAP – and threw in an additional $80 million for consulting and maintenance – to install an ERP system for its global enterprise. The Switzerland-based consumer goods giant intends to use the SAP system to help centralize a conglomerate that owns 200 operating companies and subsidiaries in 80 countries.

Not surprisingly, a move of this magnitude sparked skepticism. Anne Alexandre, an analyst who covers Nestle for HSBC Securities in London (the company is traded only in Europe), downgraded her recommendation on Nestle stock a year after the project was announced. While she says that the ERP system will likely have long-term benefits, she is wary of what the project will do to the company along the way. “It touches the corporate culture, which is decentralized, and tries to centralize it,” she says. “That’s risky. It’s always a risk when you touch the corporate culture.”

It’s a risk that Jeri Dunn, vice president and CIO of Nestle USA, knows well. In 1997, the Glendale, CA based company embarked upon an SAP project code named BEST (business excellence through systems technology). By the time the project reaches the finish line, BEST will have gobbled up six years and more than $200 million (the same amount that the global parent intends to spend). Dunn now says she sees the light at the end of the tunnel. The last rollouts will take place in the first quarter of 2003. But the implementation has been fraught with dead ends and costly mistakes. It is a cautionary tale, full of lessons not only for its Swiss parent but also for Fortune 1000 companies intent on enterprise-wide software implementation.

The above paragraphs begin a case study on ERP implementation published in the May 2002 CIO magazine titled “Nestlé’s ERP Odyssey. The article continues “... Regardless of the project’s ROI, the lessons learned are real. The primary lesson Dunn says she has taken away from the project is this: No major software implementation is really about the software. It’s about change management. “If you weren’t concerned with how business the business ran, you could probably [install the ERP software] in 18 to 24 months,” she says. “Then you would probably be in the unemployment line in 19 to 25 months.” …

In order to understand the challenges of ERP implementation that Nestle faced, it is important to understand what ERP software is designed to do and what it really does.

What is ERP?

Enterprise planning software or ERP doesn’t live up to its name. In fact the software does very little regarding planning and the resources are only bits of information about the inputs for the organization. ERP’s true use is oriented for the entire enterprise or organization. The software attempts to integrate all departments and functions across a company onto a single computer system that can serve all those department’s particular needs.

Consider that each department usually has a separate stand-alone system custom tailored for the way that department does business. ERP attempts to combine them all together into a single, integrated software program that runs off a single database so that various departments can more easily share information and communicate with each other. More information allows better and timelier decisions and better-informed customers and employees.

There are costs for implementing the ERP solution however. Software that is capable of integrating the organization is rather costly. What often is not measured, however, are the “hidden” costs. The largest hidden cost is the challenge of motivating the staff to accept the changes caused by the change to the new ERP system. In addition to the costs associated with “change,” the following areas are most likely to be “hidden” costs that significantly affect the budget and result in cost and time overruns.

In addition to these four key areas, costs and problems associated with ERP implementation can include loss of key personnel due to recruiting from consultancies and other companies that have likewise lost their best people, delay in ROI, and lost productivity after the new system goes live due to the fact that the staff must adapt to the new software.

In the Nestle case several issues caused the difficulties in the implementation. Nestle was a collection of independently operating brands owned by the Swiss-based parent. Even though brands had been unified and reorganized into Nestle USA, the company continued to function like a holding company instead of a single entity. “I don’t think they knew how ugly it was,” says Dunn referring to the company’s condition. “We had nine different ledgers and 28 points of customer entry. We had multiple purchasing systems. We had no clue how much volume we were doing with a particular vendor because every factory set up their vendor masters and purchased their own.”

The problem with integrating the separate systems is illustrated by the fact that at the time of the decision to implement ERP, there were 29 different brands of vanilla, a key ingredient in the majority of Nestlé’s products. A team that was assessing the various systems across the company found that there were 29 different prices for vanilla – all to the same vendor who supplied the vanilla to all the divisions. It was found that there was an inability to check for uniform pricing because each division named the vanilla whatever they wanted to. In one division vanilla was ingredient 1234, in another division it was 7778.

The technical problems faced by Nestle were exacerbated by the way Nestle made the necessary implementation decisions. A team of 50 top business executives and 10 senior IT professionals made the majority of the decisions regarding implementation. The team’s goal was to create the required “best practices” that would become the common processes used by every division of Nestle USA. All the divisions and their functions – manufacturing, finance, purchasing, and sales – would have to give up their old approaches and accept the new Nestle way.

As the system came together, the roll out of the first three modules was planned. Before the modules could be rolled out however, the staff that was to use the new system rebelled. The rebellion was caused by the fact that none of the groups who were directly affected by the new processes and systems were represented on the stakeholder teams. Consequently, department heads, division heads and heads of sales were constantly surprised by something being brought to the executive steering committee that they had not been privy to. In summary, the implementation team had been naïve in not knowing how the implementation needed to be managed.

The initial rebellion continued and magnified. By the beginning of the planned implementation, the rollout had been reduced to chaos. “Not only did workers not understand how to use the system, they didn’t even understand the new processes. And the divisional executives, who were just as confused as their employees – and even angrier – didn’t go out of their way to help.” Dunn reports that her help desk calls reached 300 per day.

As a result of the mismanagement of the change, morale tumbled. No one wanted to learn the new system and turnover among the employees who forecast demand for Nestle products reached 77 percent. The planners were simply unable or unwilling to abandon their spreadsheets for the complexities of the new system. After 6 months of fighting problems, the project was halted. The company removed one of the project’s co-leaders and gave full responsibility to the other.

The ERP project at Nestle contains all the areas where organization change can go wrong. In an article titled “The Essentials of Strategic Change Management” Noel Tichy, a professor at the University of Michigan Business School, states the fact that organizations need to examine three systems within the organization before change takes place. The three systems according to Tichy are the technical, the political, and the cultural systems.

The three systems are portrayed as three interrelated strands of rope. While from a distance the three strands are not distinguishable from each other they are still there and their interactions need to be understood so that effective change can take place. Additionally, like a rope, the three strands can become unraveled. When they become unraveled, they become weakened. It is the same problem faced by the Nestle ERP project team.

In the Nestle case, the implementation team caused all three parts of the system to be disturbed and come unraveled. The technical strand by the changes in software and IT architecture; the political by not including the division heads and other key executives in the decision making regarding “best practices”; and the cultural by rolling out the implementation into the staff that had not been prepared for the magnitude of changes necessary to conform to the new system.

In the Nestle case, the group charged with the re-start eventually realized that the principles illustrated by Tichy had been overlooked by the initial implementation team. It was necessary to begin at the beginning and make the necessary changes to allow enough time and resources to make sure that they had support from the key divisional heads and all the employees knew exactly what changes were taking place, when, why, and how.

References

Booth, Peter, et al, 2000, “The impacts of Enterprise Resource Planning Systems on Accounting Practice – The Australian Experience”, Australian Accounting Review, Vol. 10 No. 3

Davenport, T. H., 1998, “Putting the enterprise into the enterprise system”, Harvard Business Review, July-August: 121-33

Koch, Christopher, 2002, “The ABC’s of ERP”, CIO Magazine, February 7, 2002

PeopleSoft, 2002, “Rapid Response Strategies for Today’s Manufacturers”, a white paper published by PeopleSoft, 2/2002

Scala Business Solutions, 2002, “Collaborative ERP – the Second-generation of Realistic E-business”, a white paper published by Scala Business Solutions N. V.

Worthen, Ben. 2002, “Nestlé’s ERP Odyssey”, CIO Magazine, May 15, 2002