More and more companies are turning to enterprise resource planning to replace obsolete processes and improve business performance. Information systems expert Jeffrey Carr offers some insights that will help you plan and implement a successful ERP solution.
Starting out as a young entrepreneur in 1975, Jeffrey Carr left his job at IBM to start his own company, Professional Computer Resources, which developed one of the first manufacturing resource planning (MRP) software packages in the 1980s. Carr eventually sold PCR to Pansophic and went on to create two more startups with venture capital funding. He then started his own consulting company in the business information arena in the mid 1990s. He’s been running the company — Ultra Corporation — for the last 15 years.
Note: This article is also available as a PDF download.
1. Jeff: So Jeffrey, for a little boomer history lesson to start us off, you were a CEO on the ground floor of the software industry in the 1970s. How did that work, pitching the idea of a tape or a floppy disc with this intangible electronic impulse on it to help people manage information on a computer? And what’s more they wouldn’t actually buy and own it; they’d pay for the rights to use a copy of it, which probably seemed suspicious, if not fraudulent. Was that a common hurdle you faced starting out in this business?
Jeffrey: Well, back in 1975, I was sitting in a lawyer’s office trying to explain this concept to him and you’re right, we were working on these licensing agreements and it was all about developing and financing a fundamentally new idea. People didn’t immediately embrace doing business this way. There was no Microsoft and no Oracle; SAP was a company out in the hinterlands of Germany somewhere, and there really were no companies that just sold software. For us the interesting thing was that we projected this new industry could be in the neighborhood of $250 million annually in North America. As of today it’s in the neighborhood of about $20 billion.
2. Jeff: Looking at the development of ERP, we think of it having its roots in MRP organizing and synchronizing a company’s manufacturing processes, which we used to call “production operations management” when I was in school. Then, eventually, the other enterprise resources were pulled in to connect the business as a whole to create ERP. Is that an accurate picture?
Jeffrey: You’re right that ERP is an extension of MRP, which is an acronym coined back in the 70s based on the writings of a guy named Ollie Wight. He said MRP was actually a logical development and not some kind of voodoo from the “International Brotherhood of Magicians,” the developers over at IBM.
Wight was the father of the MRP concept. He came out with a landmark book on business process to help manufacturers do a better job of planning their inventory in a bill of materials exploded into work orders and purchase orders. That created a whole software industry in effect, because companies like mine could develop their software to mirror the processes he was describing.
The next step was MRP II, which was a more sophisticated MRP process in the late 80s, and then we worked up to ERP — and here’s where it gets confusing. All of a sudden people started using the term ERP to describe a whole range of applications being used to manage both back-office and front-office operations in non-manufacturing businesses, like banking and insurance or services companies. Nowadays, we’ve seen the definition expanded even further to describe customers and vendors and everyone involved in moving the product through the complete supply chain. So it’s lost a lot of its specific original meaning and now it’s used to cover myriad different applications. Over the last 30 years or so, it has changed quite a lot from its original context.
3. Jeff: When people come to you with this broadened, generic interpretation of what ERP is and does, what do they expect it to do for them? Are their expectations reasonable for the most part?
Jeffrey: You have to understand that a lot of companies refer to what they have as an ERP system, and it might be something that was written in the 90s or even the 80s. So it’s often cobbled together from an acquisition of point solutions with added-on functionality and other modifications. What they’ve come to expect is much less than the capabilities that are openly available. I encourage them to focus on adopting a dynamic plan that grows with their organization and considers all the pieces. It’s more a journey of phases than just a one- or two-move project, and it may even involve multiple implementations. We want them to look for a fully integrated and non-redundant system, where they will see tangible productivity improvements and maybe even a “eureka!” every now and then. As I mentioned, clients are using “ERP” to refer to customer relationship management, product lifecycle management, supply chain management, business intelligence, and product lifecycle management. But it’s in the integration of all of those that you get to the nirvana where the ultimate productivity is.
4. Jeff: Are there specific industries where you see a greater benefit from an ERP implementation?
Jeffrey: Sure — any company that builds a product; designs, sources, builds, keeps inventory, markets, and distributes. I can’t really think of a business like that that doesn’t need ERP. For any business that has accounting, operations, and customer-facing applications, ERP has applicability across the board. What’s going to be more subjective is the depth of the solution. That’s going to be a function of what you can afford. A Dunkin’ Donuts may just need a cash register and a checkbook — is that an ERP system? Well, yes, but most companies are going to need something that’s more complex than that.
5. Jeff: With respect to the range of ERP vendors out there, you specialize in helping companies narrow the field when they make a decision. How do you classify the different types of vendors?
Jeffrey: At the highest level, there are really only two “tier one” vendors who can handle billion-dollar, multi-facility, multi-language companies. Those are Oracle and SAP. Then there are the middle-market, “tier two” vendors, suited to companies doing anything from 50 million to a billion dollars in revenue. Revenue drives users, so I don’t go at it from a number-of-users standpoint. There are about 30 to 40 vendors that address this segment, as well as Oracle and SAP. They tend to be very good at what I would call a vertical solution in automotive, or medical or aerospace — some vertical industry within manufacturing.
This is where we focus a lot of our attention, and it’s important not to underestimate the demands of this class of company. I have a client that is only a $130 million revenue customer that has all the issues of a larger, global supply-chain type of environment. A lot of the mid-market is developing the complexity that has been typical of the tier-one customers, but it lacks the same level of resources to address it.
Then, tier three covers from $10 million to $50 million, which is our company’s secondary focus area. These are typically single-site companies, and the vendors are specialized in a specific industry. Below that is a tier-four environment, under $25 or even $10 million. QuickBooks is in that arena. The vendors in this area rely on having several customers that might be converting something they bought 10 to 15 years ago. They might be looking at getting something up and running within 30 to 60 days.
6. Jeff: Are the companies you work with primarily interested in process improvements that are real but difficult to define with metrics, or are they targeting a specific financial ROI with a break-even or a schedule?
Jeffrey: That is one of the first conversations I have with any of my prospects: “What have you developed in terms of your ROI objectives?” The all-too-common response is, “The ROI is that we need to do it because the system we have is so old and so broken and hard to use that there is no need for an ROI. We just need to update the system.” Then there are companies on the other end of the spectrum that have a board of directors to answer to. They need to define the business case and make it justify the expense. For me, it’s always welcome when they are already at that point. So there is a range in terms of the sophistication, and usually the size of the company plays a big part, even within tiers two and three.
7. Jeff: Have you seen a bias in terms of a company you’re working with being favorable toward a certain technology like Oracle and then changing because of what was offered in terms of ERP vendors? And where does IBM fit into this picture?
Jeffrey: I generally find companies saying, “We’ve got Microsoft or Oracle or IBM now, but we’re open to moving toward whatever technology works best with the solution we select.” A majority of the decision-makers have that attitude, but there are some who are locked into one technology. Particularly when they are looking at replacing older software, they know it may be obsolete.
IBM isn’t really in the ERP application equation at the moment — it was years ago, but not today. But it’s the wildcard out there. If I were in charge at IBM, I would be looking at buying one of these software vendors to make this a three-company race. Could it buy SAP? I think something like that will happen within the next 24 months. And then there’s Google, which is doing a lot with office apps and development tools but it hasn’t gotten into the bigger application game yet. So it might end up being Microsoft, Oracle, IBM, and Google.
8. Jeff: What are some of the common snags a company will want to beware of in implementing an ERP solution?
Jeffrey: Shortage of executive support. The top-level executives need to realize that this is as central to their business as going live with a new plant. A new information system is right at the heart of any business and needs executive authority to get the right people assigned to it.
Another potential snag is a shortage of project-management skills. Astute project managers normally play a big role in making an implementation work. Vendors always bring in their own project managers, but the vendor never has the same vested interest you do. Their interest is in getting it up and running and getting on to the next project, and not necessarily the day-to-day problems your company is facing.
9. Jeff: So when you’re looking at the big picture, how much time is the process going to take?
Jeffrey: This going to be a journey of months and potentially years, starting with getting off the old technology and incorporating gradual improvements from there. Make the transition from the old ugly system to the new technology and don’t expect all the things in the demo on day one. For example, just get over to the new accounting system and then add CRM and your manufacturing planning system, and so on.
Manufacturing companies generally have in mind a certain amount of time to dedicate to the transition. I see companies thinking they can do it in six months when it’s going to take at least a year, so a big part of my job is setting realistic expectations in terms of time and budget. The entire management team has to be on board — the VPs of sales and marketing, engineering, operations, quality, finance — all of them have to be in synch with this thing. I don’t try to replace any of those people and be the doer, because I’m going to go away at some point and they have to have ownership. The go-to could be the CTO, or a director of engineering, or even a project manager who can grow with the business.
10. Jeff: Is there one primary factor for someone looking at an implementation — and any concluding point you would like to make?
Jeffrey: The biggest mistake executives make is saying, “I agree you guys have to go out and get a new system, so go out and test-drive a couple and pick one and then let’s go.” It’s not a shopping excursion like you’re going to Best Buy. That attitude really knocks the legs out of the idea that this should be a fundamental process improvement.
The visionary attitude says, “I need to improve business performance by improving my business processes, and I’ve got to understand my current system thoroughly at the outset. Then I need to demonstrate leadership in identifying and standardizing our best practices, as well as the ones we want to improve or even transform. Now I’m ready to build a business case. And then I’m ready to go out and look at interviewing a vendor and going through a selection process.”
So a huge piece of it is the background preparation. That is the main message I attempt to get across to hundreds of companies every month. ERP vendors are immediately aware of who has done the legwork and has an initial plan in place. Especially with the economic problems we’ve seen in the last few months, it’s all the more important to do this kind of planning.