Enterprise Resource Planning: It's In the Morphing

Enterprise Resource Planning: It's In the Morphing<@VM>New META Study<@VM>Eye-Opening Data<@VM>The Role of Standards<@VM>ERP Outlook<@VM>Glossary of Terms

By John Makulowich

For enterprise resource planning, or ERP, the operative verb is morph, as in transform.

Today it applies not only to the various systems and their modules, but also to its application in different sectors, both private and public, manufacturing and service. ERP morphing extends from the serious effort by one IT research firm to redefine its scope, all the way to a multiyear investigation by a federal agency to review the need for standards.

How important is all this activity? Suffice to say, it is attracting the attention of most of the major players, from IBM Corp., Armonk, N.Y., up and down the ERP food chain. In fact, Big Blue, now seeking the throne of e-business, considers ERP worldwide one of its five major priorities.

In the IT research arena, the META Group Inc., Stamford, Conn., is morphing the ERP envelope with its notion of enterprise resource management, or ERM, in a newly released, comprehensive, multiclient study, "ERM Solutions and Their Value."

And the National Institute of Standards and Technology in Gaithersburg, Md., the standards arm of the Commerce Department, is hard at work trying to define a role for itself in ERP interface standards, specifically for manufacturing.

For Bob Carlson, IBM director of solution sales in the public sector, ERP is one of the firm's top five global strategic initiatives. The company prides itself on having participated in what is now known as ERP almost since the founding of the field in the 1950s. In fact, one of the leading and largest ERP firms, SAP AG (Systems, Applications and Products in Data Processing; Waldorf, Germany), was founded in 1972 by five German ex-IBM executives.

The depth of IBM corporate commitment to ERP is clear from the number of competency or best practice centers it has established for the major vendors, as well as the size of its professional support teams. For example, 1,000 SAP-qualified engineers populate the IBM competency centers in the United States and spend their waking hours implementing the SAP ERP packages with clients.

The company also has invested heavily in industry-specific support, as well as created dedicated teams to service the federal government and public sector.

With the increasing penetration by the Internet, intranets and extranets into business-to-business and business-to-consumer transactions, ERP is likely to morph further from tools like outsourcing and increasingly interactive World Wide Web browsers that allow more e-business and e-commerce opportunities.

Among the trends IBM hopes to exploit are the accelerated effort by both vendors and systems integrators to reduce the time to market for ERP solutions and increased investment by vendors in specific sectors, such as federal, state and local government.

IBM is pushing its own value-added wrinkle by selling a set of templates it built that allows firms to configure the different ERP modules to meet the specific needs of their own enterprise, rather than fit their operations into the mold created by ERP vendors.

It serves to show that however far ERP has come over the last few years, the issues identified by Thomas Davenport in his seminal Harvard Business Review article, "Putting the Enterprise into the Enterprise System," (July-August 1998) are still critical, yet often overlooked.

As Davenport said: "Enterprise systems [i.e., ERP] appear to be a dream come true. These commercial software packages promise the seamless integration of all the information flowing through a company ? financial and accounting information, human resource information, supply chain information, customer information."But, he noted, "An enterprise system imposes its own logic on a company's strategy, culture and organization." And it demands answers to a number of key questions, such as: What will be the effect on our organization and culture? Are there other alternatives for information management that might actually suit us better than an enterprise system?

Those questions serve as cautious reminders when reviewing the conclusions of the META Group in its newly published, 172-page study, "ERM Solutions and Their Value."

The company surveyed more than 60 organizations that put in place ERP/ERM systems, then compared seven leading vendors (Baan Company N.V., J.D. Edwards & Co., Lawson Software, Oracle Corp., PeopleSoft Inc., SAP AG and System Software Associates) in areas such as cost to implement, total cost of ownership and time to benefit, and finally quantified the benefits and net present value of ERP/ERM systems.

According to the study, the time to implement ERM applications from specific vendors ranged from 18 months to 26 months, with an average time to implement of 23 months. The total cost of ownership for the implementation and the following two years ranged from 0.4 percent of the user company's revenue to 1.1 percent.

META Group also reported it takes two and one-half years from project initiation to achieve a quantifiable return on investment for an ERM system. Ninety percent of these benefits are associated with cost reduction.

The average net present value of all the companies studied was -$1.5 million. Further, the average time to implement was 23 months, with an average of eight months to achieve benefits. Therefore, average time to benefit was 31 months.

According to Barry Wilderman, META Group vice president of application delivery strategies service, the most stunning result was the negative net present value.

"But we urge the user of our survey to look much more deeply at both quantified and intangible benefits," he said.

The result serves to highlight, as the study notes, that "ERM solution decisions must be motivated as much (or more) by the attainment of indirect benefits as by return from quantifiable benefits sufficient to offset costs over time."

The survey stressed that ERM should be measured with four key metrics. The first is total cost of ownership, which includes hardware, software, professional services and internal staff costs.

The survey noted that total cost of ownership as a standalone metric had limited value. That said, the average total cost of ownership for an ERM account was $15 million.

The second metric is time to implement, which is the duration to implement the solution and the time until tangible benefits were achieved.

The full time span is referred to by the survey as time to benefit.

The third metric is quantified benefits, including cost containment and revenue attainment as well as qualitative or intangible benefits.

The last metric is net present value and includes hardware costs, software costs, professional service fees, internal staff costs, post-implementation costs and quantified benefits.

Enterprises must evaluate the broader impact of ERM on supply chain economies, customer loyalty, application interoperability and faster business cycles "because traditional measurement methods centered around cost reduction are not effective in measuring the true value of ERM solutions," Wilderman said.

He observed that while the study did not differentiate specifically between manufacturing and service ERM, a whole new set of drivers on the service side are emerging in areas such as work force effectiveness and knowledge management.

In the same vein, he divided service companies into those that are project oriented and those that are administrative. Consulting firms were grouped into the former category, and federal agencies, for the most part, in the latter group.

Lastly, he noted the division of the enterprise into ERM, supply chain (for business-to-business dealings) and customer relationship management, which covers sales, service and marketing.

Of particular interest to systems integrators serving the federal government market is one eye-opening set of data, the distribution of the implementation cost. Averaging $10.6 million per ERM site, the four categories of implementation cost accounted for these percentages:

* software, 17.5 percent;

* hardware, 13.8 percent;

* professional services, 45.5 percent;

* internal staff, 23.2 percent.

As the study noted, purchased professional services account for most of cost of implementation. When combined with internal staff, this labor component counted for 69 percent of the ERM implementation cost.

According to Wilderman, ERM's key in the federal sector is the overall management framework.

"With scope creep and drift constant issues, the requirements definition is crucial," said Wilderman. "Projects tend to take on a life of their own. It is important to put together a world-class team to manage these projects, including business line experts and people from systems integration."

While the META Group study indicates it is possible to achieve savings by reducing IT costs by consolidating disparate systems in a single ERM solution, the greatest rewards are connected with fundamental business transformation.

To be successful, noted the report, ERM must be part of a comprehensive business plan or driven by a strategic issue such, as year 2000 compliance, and must prompt integration and change, echoing points made or alluded to by Davenport in his article.

According to the META Group, the impact of intangible benefits, such as improved information access, enhanced customer satisfaction and reduced financial closing time, is difficult to isolate and quantify. But they must be taken into account to accurately justify the time and expense requirements of ERM.

Overall, the study found, ERM applications remain a suitable choice for enterprises that must integrate key operational functions. However, the META Group recommends considering and measuring a broader range of criteria than traditionally used when evaluating ERM solutions.

Barry Wilderman

On another plane, the work of researchers at the National Institute of Standards and Technology is focused completely on ERP for manufacturing firms.

The Manufacturing Systems Integration Division is working on a project whose objective is to determine what interfaces to ERP systems are most appropriate for early standardization and to define an appropriate role for NIST in the development of those interface standards.

In the group pursuing this project, now just completing its first year, are NIST researchers Edward Barkmeyer, Mary Beth Algeo, Neil Christopher and Shaw Feng.

As the group noted in its project description, ERP systems form the information and transaction backbone of modern manufacturing enterprises, helping feed the order fulfillment process. Not only do such systems capture specifications for materials, resources and procedures used in making any given product, they also capture and track orders, shipments and inventories as well as acquisition, use and cost of all resources.

However, these modern systems are very large software complexes and very expensive to buy, install and maintain. Moreover, they are difficult to integrate with other decision support systems, according to the NIST researchers.

Most importantly, key functions, such as optimizing materials flow, demand communication between the ERP systems of the producers and the consumers.

This is where the need enters to modularize ERP system services in order to reach what NIST refers to as the small-to-medium enterprise market. And it is here that the role of standards enters the picture.

"There is also a need to provide means for interworking with decision support systems that were not developed by or in partnership with ERP systems vendors," the NIST researchers noted.

Finally, there is a need to provide for interworking the enterprise resource planning systems of suppliers and customers, they said. "All of these needs can be met or significantly ameliorated by providing standard interfaces to ERP information and services," they said.

While this need is recognized widely by users and vendors of enterprise resource planning systems, the researchers said the only existing standard interface work has been directed "toward the interfaces between the ERP systems and the business systems for procurement, accounting and labor management."

In the manufacturing software arena, government support has been for 20 years "a sine qua non for the development of technical interface standards."

Thus, there is a need for NIST to lead in defining a standards road map in the enterprise resource planning area, the researchers concluded.

Elizabeth Malis

Q&A with Elizabeth Malis, research director for Benchmarking Partners Inc., Chicago

WT: In what ways is enterprise resource planning in the federal space different from the non-federal space?

MALIS: ERP for the public sector has emerged as a key initiative for the leading players like Oracle Corp., PeopleSoft and SAP. These organizations changed their marketing, pricing and products to be successful in the public sector.

The leading vendors have all worked for approval on agency buying lists, restructuring their pricing and learning the subcontracting network. Product initiatives also have moved forward as cross-industry applications were extended to support public sector requirements.

The cross-industry model for ERP includes financials, human resources, manufacturing and distribution, with a design orientation towards organizations that maintain inventory for manufacturing and distribution. But public sector organizations rarely use the manufacturing and distribution components. Early ERP adopters implemented the financial and human resource modules designed for cross-industry use, though these systems had to be highly modified.

The application software vendors are targeting three public sector subindustries: federal, state and local/municipal. Federal agencies tend to be among the most complex in budgeting and allocation processes. General ledger coding structures tend to be complicated and transaction volumes rival those found in Fortune 500 private organizations.

State agencies also have aggressive financial requirements, some related to reporting back to federal agencies or monitoring grants to local authorities. At this level, extensive use of project accounting is used to track grants and other entitlements to ensure compliance with the granting authority.

WT: What are some of the differences between enterprise resource planning for manufacturing firms vs. service firms?

MALIS: Some of the issues for manufacturing vs. service are similar for public vs. private sector. Service sector firms do not need inventory management and manufacturing process software, but they do create a product in the service they deliver. Service organizations will not have some of the complex public sector financial requirements, but they have strategic assets vital to the delivery of their service, that is, the people they have on staff.

This creates the critical need to look at the employee and skill information maintained in human resource modules. But frequently human resource modules do not have the ability to manage the staffing and skills development and planning activities that service organizations require. This function has been supported in spreadsheets and custom development extending human resource capabilities.

Additionally, there are new organizations creating software specifically for the services sector, particularly in temporary staffing and professional services environments.

WT: What are challenges that a chief information officer in the federal government is likely to face in trying to initiate an enterprise resource planning solution?

MALIS: The chief information officer is facing a number of challenges. Many of these agencies traditionally have developed their own custom solutions; the CIO may deal with resistance from the IT organization accustomed to the custom environment.

However, creative CIOs are using packaged implementations as a motivator for programmers to update their skills and learn some of the popular ERP packages. This is not without its risks. The ERP skills marketplace is very competitive and CIOs are having to restructure their IT pay scales to increase scarce skill retention. Some are even finding that they are unable to match market salaries and are having a difficult time retaining experienced professionals.

WT: Would the META Group's use of the term ERM for enterprise resource management qualify as a developing trend in enterprise resource planning?

MALIS: ERM is part of a larger trend where organizations are driving to derive greater value from their core ERP transaction processing systems. Our research has shown that many ERP implementations do not provide the business value that many organizations committed to when they requested their budgets.

In response to these underperforming systems, vendors are developing new solutions to leverage the value in the transaction databases. Customer relationship management systems focus on extending the "customer" components of the ERP system.

Performance management systems overlay the financial systems and provide a cross-process technique to develop business performance scorecards and assess the detailed transaction data with a layer of analysis to facilitate decision making. Supply chain management systems provide a decision support layer over manufacturing and distribution capabilities to optimize the planning decisions the operations organizations make within the enterprise.

Other trends include the greater availability of outsourcing options. This will provide the public sector the opportunity to outsource the management of these complex systems. Expanding outsourcing initiatives will allow the public sector CIO to have a third party deal with ongoing implementation issues, such as applying annual updates to these integrated systems and maintaining a qualified staff.

WT: For systems integrators, what are some of the key value-adds they could contribute in implementing ERP vendor solutions? For example, how might an integrator add value for a federal customer to the SAP ERP package or specific modules?

MALIS: The integrator can provide vital assistance in major change management initiatives. For customer development shops, an integrator can assist in redefining the organization to better support a packaged implementation, offer transition strategies to move custom system professionals to a packaged environment, provide organizational design support and deal with the inevitable resistance issues that can introduce substantial risk into these project environments.

The integrator also can offer access to experienced business analysts for specialized configuration support which blends both industry requirements and product skills. Often vendors cannot provide the business process skills and focus on product configuration, not necessarily maximizing the capabilities of the product to support the business.

The integrator can also provide project risk mitigation through experienced consultants and proven methodologies. Many of these integrators have created specific releases of their methodologies to address the complexities of industry specific implementations that can help ensure the success of these projects. Enterprise Resource Management (ERM):
META Group's preferred term for this application solution. The IT research group believes ERP understates the operational content (for example, financials, order management) of the enterprise-focused applications that track, report and predict the resource needs of the enterprise. Thus, ERM equals enterprise resource operations plus enterprise resource planning (ERP).

Enterprise Resource Planning or Enterprise Systems:
Commercial software packages that promise the seamless integration of the information flowing through a company.

Environmental Cost of Ownership:
In the overall set of implementation costs are a core set of costs that involve bridging or integrating the legacy environment with the ERM environment. These costs concern business process re-engineering, data migration and interoperability between legacy "keeper" applications and the ERM environment.

ERM Functional Complexity:
ERM functions are clustered into five groups: finance, manufacturing, logistics, sales and human resources and payroll.

ERM implementations:
Series of complex activities, including procurement of approval for the initiative, requirements definition, business process redesign, ERM vendor and systems integration vendor selection, infrastructure implementation, data conversion-migration, interface development, systems integration, software customization, help desk design and end-user training.

Implementation Cost of Ownership (ICO):
Costs include hardware, software, professional services and internal staff costs.

Net Present Value (NPV):
The calculation includes hardware costs, software costs, professional service fees, internal staff costs, post-implementation costs and quantified benefits.

Post-Implementation Costs:
The costs of maintaining systems for the first year after implementation.

Quantifiable Benefits:
Increased revenue and reduced costs.

Time to Benefit (TTB):
Total elapsed time to achievable benefits.

Total Cost of Ownership (TCO):
ICO plus two years of post-implementation costs.

Source: "ERM Solutions and Their Value,"
a report by the META Group

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