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

 

negotiate.”

 

Questions:

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.