March 31, 2010
A few days ago, I argued that a company that wants to replace its old, limping systems with a brand, spanking new Oracle or SAP application should probably wait for the next generation of apps.
The post got a lot of approving comments, which surprised me. I think there are pretty good arguments for just hauling off and buying. Consider what one of these hypothetical companies might say in defense of a decision to buy now rather than later.
1. We’ve got the money now and we should spend it.
2. The product we’ll get will be much more reliable.
3. The cost of services surrounding the product will be lower.
4. We don’t know when the new products will be out (with the possible exception of Workday 10).
5. We don’t know what will be in the new product.
Imagine what idiots we’d look like, the buyer might say, if we waited for five years for a product that was no better than what we could buy today and far more incomplete and buggy.
I see the force of this, which is why I thought it was a close call. Ultimately, I did decide it’s better to wait for markedly better products that are coming, despite the risks and delays. But I saw why people would disagree.
So are my commenters intemperate or am I dithering? One test for this is to look at the case of somebody who is not considering a replacement, but is considering a fairly big investment in the existing platform. Maybe they’re considering an upgrade, or maybe they’re considering some extension products, or maybe they want to push their existing installation out to other geographies.
This is a very realistic case. Several companies I know fairly well are considering one or more of these options. One is upgrading to Oracle 11i; another wants to upgrade to Infor LN. Still another wants to extend its QAD implementation to another geography. Still another wants to buy a CRM system from its existing vendor.
For each of these companies, the details matter a lot, but on reflection, I think the same argument applies. It will be hard to get the return on this big new investment in the old platform, because the useful life of what is to you a new product is not long enough to justify the expense.
This raises two questions. First, how does one calculate “useful life.” Most of the companies I’m thinking of believe that the useful life is defined only by how long they’re willing to use it, and for some companies, that’s pretty long. (There are, after all, big SAP clients who are still using R/2.) I think this is wrong, but I’m going to have to hold off explaining why till a later blog.
The second question is, “Assuming that the commenters and I are right, what kinds of investments should companies who have decided to wait actually make?” I have no determinate answers to this, but I think there are some guidelines.
Start with Gavin’s comment on the previous post. Gavin points out that some investments in the Oracle infrastructure and in new Fusion-based products will actually take you toward the next Oracle generation. He is quite right; Oracle designed things this way, and partly because of the problem that I’m describing, they quite deliberately created some ways of investing in products from Oracle without locking yourself into an older technology.
There are many, many caveats, of course. Among other things, if you have an Oracle system now, you might not want Oracle in the future. The three main products I mentioned in the earlier post (Workday, Business by Design, and Fusion Applications) are all highly differentiated, each with its own flaws and virtues. A rational person would do well to look at all of them before deciding to stick with the vendor they have now. (This applies to SAP customers, too.)
Even if you are bent on Oracle, you still may want to take some time thinking through your infrastructure stack before investing in pieces of it. Even the examples Gavin gives like OpenID, which are likely to be pretty good, may not be right in the long run, and if they aren’t, that will be a lot of trouble and expense gone to waste.
You should note that Gavin’s argument almost certainly will apply to SAP, as well. SAP is also workng on “hybrid” intermediate solutions, and I’ll bet you dollars to donuts that they’re trying to figure out every way they can to ease the migration to the new system by asking you to make steady, rational investments in products that extend your current capabilities.
But what about customers for whom an infrastructure or extension investment isn’t right? Here, I think there are some interesting arguments, akin to Gavin’s, for small, light cloud-based apps, point solutions designed to solve highly specific problems. I’m not just talking about a CRM app or a call-center app or a recruiting app; I’m talking about things that are very, very specific to your industry, but really powerful, things like Tradestone in the apparel industry.
Another possibility is to spend some time and effort cleaning up your existing installation. This will improve its current effectiveness, extend its useful life, and very possibly lower the cost of the new system significantly. (A lot of the cost of any implementation is cleaning up after the mess left by a system that everybody has given up on.)
There’s a very smart analyst in Europe, Helmuth Gümbel, who has spent a lot of time thinking about this problem. He has a blog, and he also has a conference, Sapience, which goes into these questions at length. If you’re thinking about extending your current ERP to other geographies, a reasonable alternative might be to find lower-cost ERP systems to serve those geographies.
The basic theme running through these latter approaches is that while you’re waiting, you can focus on saving some money and preparing your current installation, thereby making the later transition to a newer technology faster and more affordable.
March 26, 2010
Is it time to wait? If it isn’t now, then when?
Wait, that is, for the next gen of applications–Workday HR and Financials, SAP Business by Design, or Oracle Fusion Application Suite–rather than go with what’s out there now: PeopleSoft 9, Oracle EBS 11, or SAP Business Suite–all quite good products, but limited in many ways.
My gut says, “Wait.”
Of course, unless you happen to be my gastroenterologist, you shouldn’t care much about what my gut says. So here’s the reasoning behind it, which I think you can adapt to your own purposes.
PeopleSoft, EBS, and BS were all designed in the early ’90s and are now mature. (There will be no fundamental improvements made to any of them.) So they’re roughly 20 years old. Let’s assume that this takes them halfway through their useful life.
Now let’s do some algebra. Assume that the new products have a similar useful life and offer a 30% improvement in overall effectiveness.
Say the net benefit of buying a this-gen system is 1. In that case, the net benefit of a system that’s 30% better and lasts twice as long is 2.6. Now assume that the net cost of not replacing your old system -.1/yr, which makes it very, very expensive to keep your old system. Even if you have to wait four years for the next-gen system, you’re twice as well off (2.2 vs. 1) waiting. Even if the next-gen system costs significantly more than the old one (fairly likely, depending on the vendor), it’s still a big win.
If you e-mail me, I can give you a spreadsheet, and you can run the numbers yourself.
You don’t need the spreadsheet, though, to see that the argument is a function of four factors: the relative benefit of adopting next-gen apps (over the life of both apps), the cost of implementing them, the risk of implementing them, and the cost of waiting.
A friend who reviewing this argument offered the following analogy. Let’s say you live in an older house whose roof is leaking, pipes are rusty, electrical way out of date. Sure, it’s time to move. But what if there were a big tax break coming fairly soon which would allow you to buy a much better house. As long as the break was big enough, my friend says, the best bet for most people is to wait, because it’s a house, houses last a long time, and being in the better house makes a big difference for a long time.
Even if things are pretty bad in the old house, he goes on to say, your best bet is just to fix the immediate problems: repair the roof, add some new wiring, etc.
Clearly, the biggest and most important factor is how much better that house will be. For a conservative company, this may seem to be a big unknown. But really, it’s not. If you look at any of the new-gen apps, the improvements they’re offering are fairly clear. None of them are killer or transformational; they won’t let you fly when you had been walking. They’re just the sort of things that anybody would add now that they have 20 years of perspective on the old designs.
What are those things? Well, better and faster access to data, what the other pundits call “embedded analytics.” The ability to do some level of search, without having to print out reports and trek down hierarchical menus to get to a record. The ability to bring other people into a discussion of a record, by e-mailing it or asking them to approve it or whatever. All of these things can be done in the old system. But it takes longer, is often a pain in the you-know, and is often not done. Systems that will have all these things built in will be systems where each of your employees wastes somewhat less time each day wrestling with a system that was never designed to have the flexibility and accessibility that the web era has taught us to expect from any application we deal with.
None of these is earth-shattering; indeed, I usually call the next-gen apps Version 1.3 because they’re really not that big an advance over the 20-year-old ERP applications that are Version 1.0. (Is a 2.0 coming? I think so.)
But taken in aggregate, I think they’ll make a material difference in your operational efficiency. Enough of a difference to be worth waiting for.
Does this really apply to your situation? What about that risk? What are the chances that you will get the gains that would justify waiting? What about the fact that your company is ready to move now and for you, such a move comes at the right time in your career? All good questions. And in some cases, it may be right to jump. But for most people, the best thing to do is to take steps to reduce the risk and time to benefit.
January 15, 2010
SAP announced yesterday that it was creating a two-tier support system, effectively reinstating its old Standard Support offering at a slightly increased price. (The new price is 18% of net versus the old 17% of net.)
This has been hailed as a U-Turn by press and analysts, all of which proves something to me: most writers can’t do math.
SAP begins its press release as follows (emphasis mine):
In a demonstration of its commitment to customer satisfaction, SAP AG (NYSE: SAP) today announced a new, comprehensive tiered support model that is being offered to customers worldwide. This support offering includes SAP Enterprise Support services and the SAP® Standard Support option and will enable all customers to choose the option that best meets their requirements.
So let’s look at the choice that’s being offered to customers; after you look at it, you can judge how much satisfaction it’s going to generate.
The cost of Enterprise Support this year is 18.36% of a base number, a number that usually stems from (but may not be identical to) the net amount paid for the SAP licenses that are being supported. So, this year, assuming that the base for a company was $100,000, the total cost of Enterprise Support is $18,360 and the total cost of Standard Support is $18,000.
Next year, the cost of Enterprise Support goes up to 18.9%, increasing to 22% by 2016. That means that in 2011, it is $18,900, and in 2016, it is $22,000. Those of you who are writers, I apologize for all these numbers, I know they do get confusing.
Now to Standard Support. With Standard Support, the percentage is fixed. But the base is not. It is subject to cost of living increases. We don’t know what COLA (cost of living adjustment) SAP will impose. But let’s just say for the sake of argument that it is 3.00%/year. In 2011, the cost will be $18,540.00, and in 2016, it will be $21,493.00.
All this is in a spreadsheet which you are welcome to look at and play with. (In the spreadsheet, I rounded 18.36% down, so the Enterprise Support costs are slightly low.) Assuming you’re not a writer and you want to play with the numbers, here’s what you’ll see. If the COLA is 3%/year, the costs of either kind of support will be very close for a long time to come. If the COLA is 1%, Standard Support will be quite a bit cheaper. And if it is 5%, Standard Support will be quite a bit more expensive.
It’s confusing, I know, but it’s true. If the COLA is 5%, then “18%” support will cost more than “22%” support. If the COLA is 3%, then “18%” support will cost about 2% less than “22%” support. And if the COLA is 1%, then the lower tier of support will cost about 10% less than the upper tier.
So what will it be. 5%? 3%? 1%? 0%? At the press conference, SAP didn’t say. There is no commitment to impose these increases and there is no commitment not to impose them. SAP, according to Léo Apotheker, “[has] the liberty of linking Standard Support  to the cost of living index.” (Thanks Information Week.) Whatever their decision, the imposition of COLA will not be uniform. The cost of living index is the index for the country whose currency is the master currency for the contract, and the actual linkage to this actual index depends on the contract language, which varies.
So what are we to think? Whatever SAP is doing, it is not a U-Turn, and it is not a rescission of the price increase. It is offering customers a new choice, which I’ll characterize as follows:
1. Return to Standard Support and get less support than you got with Enterprise Support (though how much less is unclear) and price increases in the form of COLA (though how much increase is unclear).
2. Stay with/sign up for Enterprise Support and get more support (how much more is unclear, but I’ve been posting on this and will post more) and definite, clear price increases in the form of increases in the maintenance percentage.
It’s a choice. But is it really the sort of choice customers want?
And is offering this choice really an example of a commitment to customer satisfaction?
October 7, 2009
Has it ever occurred to you that software salespeople get a bad rap? In the popular imagination, they have blood dripping from their fangs. But in my experience, that’s not what they’re like at all. don’t. The ones I know are pretty decent folk, live in the suburbs, maybe even coach soccer. Not one of them would actually throw their mothers under a bus in order to get the deal. At least, I don’t think they would.
So what accounts for this reputation? Well, in the course of writing this series of blogs on brittle apps, I think I’ve come up with an answer of sorts.
Start with a fact that you should know, but maybe haven’t paid much attention to. Good software salespeople don’t sell software. They sell benefits. They don’t try to confuse you with features or functions or architecture; they try to make you understand what those things will do for you.
This is what they should be doing. After all, the buyers of software don’t really know about or understand what the features do, and they don’t have the patience to figure out exactly how the features produce the benefits. You’re a CEO or CFO, you want to get to the point. What is the value that these products deliver?
Software salespeople have developed this reputation, I think, because people have discovered or heard or found that the benefits aren’t available. And they think the salesperson knew this all along and, like some snake-oil salesman was promising a cure for cancer in order to wrest the last dollar out of some old lady’s handbag.
But in my experience, that’s not what’s going on at all. The salespeople actually have a fairly rational, if optimistic view of their product. They know that the products are designed to achieve certain benefits; they can see themselves how the design could work; and they probably know of customers who have achieved the benefits they should achieve. At worst, they’re like a Ferrari or a Jaguar salesman, who focuses on the riding experience and doesn’t feel it is incumbent upon him to bring up the repair records.
People like Dennis Moore would go even further in the software salesman’s defense, and perhaps they’re right. They would say that the salesperson is more like a good physical trainer, who can genuinely promise to get you in better shape if you’ll work out. If after you buy, you don’t want to put in what it takes to get the benefits, that’s your problem not theirs.
So is Dennis right (assuming he would agree with the words I’m putting in his mouth); when somebody buys software and underutilizes or puts it on the shelf, is it entirely their problem. Well, no. I think it would be if they realized how brittle these applications really are. But in my experience, they rarely do. They buy this Ferrari, go out on a Sunday afternoon, and only when they find themselves riding back next to the tow truck driver, do they find out what they’ve bought.
So whose problem is it? Well, I’ve already gone on too long. You’ll have to wait until the next post.
September 25, 2009
“Brittle” design isn’t limited to enterprise application software. You can find brittle design in cars, bridges, buildings, TVs, or even the vegetable bin. (What are those 1/2-pint boxes of $5.00 raspberries, 3/4 of which are moldy, but examples of brittle design?)
What do brittle designs have in common? The designer chose to accentuate high performance at the expense of other reasonable design parameters, like cost, reliability, usability, etc. A Ferrari goes very, very fast, and it feels good when it goes fast, and that’s a design choice. And it’s part of the design choice that the car requires a technician or two to keep it going fast for longer than an afternoon.
So why are most enterprise applications brittle? You can see this coming a mile away. It was a design choice. The enterprise applications in question were designed to be the Ferraris of their particular class of application. They were designed to do the most, have the most functionality, be the most strategic, appeal to the most advanced early adopters, be the most highly differentiated, etc.
To get Ferrari-like performance, they had to make the same design choices Ferrari did. They had to assume the application was perfectly tuned every time the key was turned, and they had to assume that the technicians were there to perform the tuning.
Enterprise applications, you see, were intended to run on the best, the highest-end machines (for their class). They were intended to be set up by experts. They were intended to be maintained by people who had the resources to do what was necessary. They were intended to satisfy the demands of good early-adopter customers who put a lot of pressure on them, with complex pricing schemes or intricate accounting, even if later on, it made setting the thing up complex, increased the chance that there were bugs, and made later upgrades expensive.
This wasn’t bad design; it was good design, especially from the marketing point of view. The applications that put the most pressure on every other design parameter got the highest ratings, attracted the earliest early adopters, recruited the most capable (and highest-cost) implementers, etc., etc. So they won in the marketplace and beat out other applications in their class that made different design choices.
I lived through this when I worked at QAD. At QAD, the founder (Pam Lopker) made different design choices. She built a simple app, one that was pretty easy to understand and pretty easy to set up and did the basics. And for about two years, shortly after I got there, she had the leading application in the marketplace. And then SAP and JDE and PeopleSoft came in and cleaned our clock with applications that promised to do more.
Now, none of the people who actually bought SAP instead of QAD back then or chose (later) to try to replace QAD with SAP did this because they really wanted high performance, per se. They wanted “value” and “flexibility” and “return on investment” and “marketable skills.” They literally didn’t realize that the value and flexibility came at a cost, that the cost was that the application was brittle and that therefore, the value or flexibility or whatever was only achievable if you did everything right.
If they had realized this, would they have made different choices?
I don’t know. I remember a company that made kilns in Pittsburgh that had been using QAD for many years. The company had been taken over by a European company that used SAP, and the CIO had been sent over from Germany to replace the QAD system with the one that was (admittedly) more powerful. He called me in (years after I had worked at QAD) to help him justify the project.
I looked at it pretty carefully, and I shook my head. Admittedly, the QAD product didn’t do what he wanted. But I didn’t like the fit with SAP. I was worried that the product designed for German kiln production just wasn’t going to work. I didn’t want to be right, and I was disappointed to find out that two years later, despite very disciplined and careful efforts, he was back in Germany and QAD was still running the company.
I’m glossing over a lot, of course. There are secondary effects. Very often, the first user of an application dominates its development, so the app will be tuned to the users strengths and weaknesses. It will turn out to be brittle for other users because they don’t have the same strengths. Stuff that was easy for the first user then turns out to be hard for others.
Two final points need to be made. First, when a brittle application works, it’s GREAT. It can make a huge difference to the user. Brian Sommer frequently points out that the first users of an application adopt it for the strategic benefit, but later users don’t. He thinks it’s because the benefit gets commoditized. But I think it’s at least partially because the first users are often the best equipped to get the strategic benefit, whereas later users are not. I think you see something of the same issue, too, in many of Vinnie Mirchandani’s comments about the value that vendors deliver (or don’t deliver).
Second, as to the cause of failure. Michael Krigsman often correctly says that projects are a three-legged stool and that the vendors are often blamed for errors that could just as easily be blamed on the customers. Dennis Moore often voices similar thoughts. With brittle systems, of course, they’re quite right; the failure point can come anywhere. But when they say this, I think they may be overlooking how much the underlying design has contributed.
It may be the technician’s fault that he dropped the beaker of nitrogycerin. But whose brilliant idea was it to move nitroglycerin around in a beaker?
September 24, 2009
In the last few posts, I’ve been talking about “brittle” applications, applications that just don’t work unless everything goes right. We all know lots of analogues for these apps in other areas: the Ferrari that coughs and chokes if it’s not tuned once a week or the souffle that falls if you just look at it funny. But it doesn’t occur to most people that many, if not most enterprise applications fall into the same category.
They don’t realize, that is, that ordinary, run of the mill, plain-vanilla enterprise apps are kind of like Ferraris: it takes a lot to get them to do what they’re supposed to do.
Here are some examples.
Consider, for instance, the homely CRM application. Many, if not most executive users go to the trouble of buying and putting one in because they want the system to give them an actionable view of the pipeline. Valuable stuff, if you can get it. When the pipeline is down, you can lay people off or try new marketing campaigns. When it’s up, you can redeploy resources.
Unfortunately, though, it takes a lot to get a CRM system to do this. If, for instance, the pipeline data is inaccurate, it won’t be actionable. Say a mere 10% of the salesforce is so good or so recalcitrant that their pipeline data just can’t be trusted. You just won’t be able to use your system for that purpose.
It’s kind of funny, really. Giving you actionable pipeline data is a huge selling point for these CRM systems. But when was the last time you personally encountered one that was 90% accurate.
Another example I ran into recently was workforce scheduling in retail. A lot of retailers buy these things. But it’s clear from looking at them that the scheduling can be very easily blown.
Finally, take the example I talked about before, MRP. When you run that calculation, you have to get all the data right, or the MRP calculation can’t help you be responsive to demand. If even 30% of the lead times are off, you won’t be able to trust much of the run. And when was the last time more than 70% of the lead times were right.
Notice that if you underutilize a brittle system, it can be somewhat serviceable. If you use the CRM system to follow the performance of the salespeople who use it and don’t try to use the totals, the inaccuracy doesn’t matter. If you just use MRP to generate purchase requisitions, the lead times don’t matter. But, as I said in the earlier post, if you do underutilize the system, the amount of the benefit available falls precipitously. And then the whole business case that justified this purchase and all this effort just crumples.
What makes me think that a lot of enterprise applications are brittle? Well, I have a lot of practical, personal experience. But setting that to one side, it’s always seemed to me that the notion of brittle application explains a lot of data that is otherwise very puzzling.
Take for instance all the stuff that Michael Krigsman tells us about project failures. He is constantly reminding us that the cause of failure is a three-legged stool, that it could be the vendor or the consultant or the company, and he is surely right. What ought to be puzzling about this, though, is why there is no redundancy, why the efforts of one group can’t be redoubled to make up for failings in another. If the apps themselves are brittle, however, it takes all three groups working at full capacity to make the project work.
Or, more generally, look at the huge number of project failures (what’s the number, 40%, are abandoned?). Given how embarrassing and awful it is to throw away the kind of money that enterprise app projects take, you’d think that most people would declare some level of victory and go home, unless the benefit they actually got was so far from what they were hoping for that the whole effort became pointless.
How can you tell whether the enterprise app you’re looking at is brittle? Well, look at the failure rate. If companies in your industry historically report a lot of trouble getting these things to work, or if the “reference” installations that you look at have a hard time explaining how they’re getting the benefits that the salesman is promising you, it’s probably a brittle app.
Two questions remain. When do you want to bite the bullet and put in a brittle app? And why would vendors create apps that are intrinsically brittle?
September 19, 2009
A software business case compares the total cost of software with the benefits to be gained from implementing the software. If the IRR of the investment is adequate, relative to the company’s policies on capital investment, and if the simple-minded powers that be have a good gut feel about the case itself, it is approved.
Clearly, a business case isn’t perfect. Implementing software is an uncertain business. The costs are complex and hard to fix precisely. Implementation projects do have a way of going over; maintenance costs can vary widely; the benefits are not necessarily always realizable.
That’s where the gut feel comes in. If an executive thinks the benefits might not be there, the implementation team might have a steeper learning curve than estimated, the user acceptance might be problematic, he or she will blow the project off, even if the IRR sounds good.
Business cases of this kind are intended to reduce the risk of a software purchase, but I think they’ve actually been responsible for a lot of failures, because they fail to characterize the risk in an appropriate way.
There’s an assumption that is built into business cases, which turns out to be wrong. The fact that this assumption is wrong means that there’s a flaw in the business case. If you ignore this flaw (which everybody does), you take on a lot of risk. A lot.
The flaw is this. Business cases assume that benefits are roughly linear. So, the assumption runs, if you do a little better than expected on the implementation and maintenance, you’ll get a little more benefit, and if you do a little worse, you’ll get a little less.
Unfortunately, that’s just not the case. Benefits from software systems aren’t linear. They are step functions. So if you do a little worse on an implementation, you won’t get somewhat less benefit; you’ll get a lot less benefit or even zero benefit.
The reason for this is that large software systems tend to be “brittle” systems. (See the recent post on “Brittle Applications.”) With brittle systems, there are a lot of prerequisites that must be met, and if you don’t meet them, the systems work very, very poorly, yielding benefit at a rate far, far below what was expected of them.
This problem is probably easier to understand if we look at how business cases work in an analogous situation. Imagine, for instance, the business case for an apartment building. The expected IRR is based on the rents available at a reasonable occupancy rate. There is, of course, uncertainty, revolving around occupancy rates, rentals, maintenance costs, quality of management, etc. But all of this uncertainty is roughly linear. If occupancy goes up, return goes up, maintenance goes up, return goes down, etc. The business case deals with those kinds of risks very effectively, by identifying them and insuring that adequate cushions are built in.
But what if there were other risks, which the business case ignored? These risks would be associated with things that were absolutely required if the building was to get any return at all. Would a traditional business case work?
Imagine, for instance, that virtually every component of the building that you were going to construct–the foundation, the wiring, the roof, the elevators, the permits, the ventilation, etc.,–was highly engineered and relatively unreliable, required highly skilled people who were not readily available to install, fit so precisely with every other part of the system that anything out of tolerance caused the component to shut down, etc., etc. The building would be a brittle system. (There are buildings like this, and they have in fact proven to be enormously challenging.)
In such a case, it is not only misguided to use a traditional business case, it is very risky. If one of these risky systems doesn’t work–if there’s no roof or no electricity or no elevator or no permit–you don’t just generate somewhat less revenue. You generate none. Cushions and gut feel and figuring that an overrun or two might happen simply lead you to a totally false sense of security. With this kind of risk, it’s entirely possible that no matter how much you spend, you won’t get any benefit.
Now, businessmen are resourceful, and it is possible to develop a business case that correctly assesses the operational risk (the risk that the whole thing won’t work AT ALL). I’ve just never seen one in enterprise applications. (Comments welcome at this point.)
The business cases and business case methodologies that I’ve seen tend to derive from the software vendors themselves or from the large consulting companies. Neither of these are going to want to bring the risk of failure to the front and center. But even those that were developed by the companies themselves (I’ve seen a couple from GE) run into a similar problem: executives don’t want to acknowledge that there might be failure, either.
But the fact that the risk makes people uncomfortable doesn’t mean that it’s a risk that should be ignored. That’s like ignoring the risk that a piton will come out when you’re mountain climbing.
Is the risk real? Next post.
August 22, 2009
I used to work at QAD, a small manufacturing software vendor. I subscribe to a QAD chat group, and occasionally people ask questions like the one in the title.
It sounds as if the person asking is peddling something–who knows–but it’s an interesting question nonetheless. What kinds of knowledge are necessary (key) for an ERP implementation? If you run a manufacturing company, is APICS (that is, supply chain) knowledge particularly important?
Certainly, QAD used to think so. When I was an employee, you got a bonus for becoming APICS certified. (APICS is the American Production and Inventory Control Society; to get certified, you had to learn how MRP worked and how inventory should be managed.) And certainly, when the product was designed, the focus was on matching supply and demand. The product was built originally for Karl Lopker’s sandal manufacturing business, and the idea was always to have simple, usable product that managed inventory well.
So you would think that the answer, at least for QAD users, is, “Of course APICS knowledge is key. Duh.” But I don’t think so.
You see, while I was at QAD and then for some years afterward, I looked at a fair number of installations. And what I saw was disheartening, at least if you believed in good supply chain practices. The systems weren’t really using good supply chain practices, at least as APICS defined them.
Let me give you an example, which APICS-trained people will understand immediately. One of the ideas of these systems is to reduce the amount of inventory you have on hand at any one time. To do this inside the system, there are two parameters that you have to set, lead time (which is the amount of time it takes for an order to be fulfilled) and safety stock (the amount you want to have on hand at all times). The longer the lead time or the higher the amount of the safety stock, the greater your inventory expense.
So what would you say if discovered that in not one or even two installations, but many, the safety stock and lead time numbers for most of the inventory were set once, en masse, and then never set again? Well, I’ll tell you what to think. These figures, which are key to making the system work, are not being used.
Now this was not just true of QAD Software; it was equally true wherever I went, no matter what software was installed.
So doesn’t this say that supply chain knowledge is key, after all? If they had supply chain knowledge, wouldn’t they have paid more attention? At first, I thought so. But then after a while, I realized that more supply chain knowledge would have made very little difference.
You see, that’s not why they were using the software. All these companies, it turns out, didn’t really care about getting supply chain stuff right. They managed the supply chain fairly sloppily–tolerated a lot of inaccuracy and suboptimal behavior–and they got along (in their minds) just fine doing that. They didn’t want to put in the kind of care and rigor that is the sine qua non for doing with these systems what they were designed to do.
What were they using the software for? Well, mostly to manage the paperwork virtually. Please don’t cringe, Pam, if you happen to be reading this. This is not a hack on you. The plain fact is that the companies needed to keep track of their commitments (orders), their inventory, and their money, and that’s what they used the system for. They needed a piece of paper that told people what inventory to move that day and where to move it to. And the system gave it to them.
To do this, though, you didn’t need much APICS knowledge or, if you didn’t believe in APICS’s recipes for inventory management, other supply chain knowledge. All you really needed was to be able to count, which most of the users could do without being APICS-certified.
So is supply chain knowledge key for an ERP implementation? Not at all. You can have perfectly happy users who have got exactly the nice simple implementation they need without much supply chain knowledge at all.
This answer, of course, raises lots of questions. What is key? Why do these companies tolerate sloppy supply chain practices? Wouldn’t they be better off if they cleaned up their act. Herewith, brief answers.
What is key? At a rudimentary level, the financials. You have to get the basics right, here, or you’ll never close your books. In a system studied recently by a grad student at Harvard Business School, 65% of the inventory records were inaccurate. Can you imagine the upset if 65% of your account balances were incorrect?
Why do they tolerate sloppy supply chain practices? I think it’s largely because more finely tuned systems are much more brittle. They take a large amount of care and feeding and their ability to take hard, rude, unexpected shocks is limited.
And wouldn’t they do much better using the systems? In many cases, no. You see, at most of the companies I’ve run into, the MRP/APICS model that QAD (and every other software vendor) provided is not actually all that accurate. To make a really significant difference, you need more sophisticated tools that are better suited to the specifics of your supply chain.
July 22, 2009
This is one of a series of posts on the high cost of buying enterprise applications and the high cost of selling the products. This high cost, I’ve been arguing, is just plain bad for both sides and almost certainly unsustainable. So the question for the analyst is, “What can be done about it?”
In the background, I’ve had a lot of discussion with industry pundits and the Twitterati: Vinnie Mirchandani, of course, and Jason Busch and @dahowlett and Brian Sommer and Dennis Moore and many others who don’t regularly comment over the airwaves. What accounts for the high cost, I’ve been asking? Two answers seem to emerge.
1. Too many cooks.
2. Too little trust.
If you’ve ever been involved in buying applications, you’ve seen the first one happen over and over again. Too many people get involved with the decision, each with their own agendas, each more or less connected to one of the contenders, and getting all these parties to agree requires too much head-banging. It’s Congress trying to pass health care, writ small, and it’s just as pathetic.
The lack of trust. Well, I get why people don’t trust, and I get why they erect structures that are supposed to control the vendor. But in my experience, it’s always been a losing game. Buyers are nowhere near as devious, oops, I mean sophisticated, as sellers–how could they be, the sellers do it for a living? So if you go into a deal, it’s natural to feel skittish, but giving in to the feeling doesn’t really protect you and does slow you down.
So what’s to be done? In the long run, you can’t do much about either problem without cooperation from the other side. If you’re going to have lots of cooks, the cost of sales for the vendor is just plain going to be astronomical, and the cost of buying will rise accordingly. If the vendor behaves in what has become the normal fashion, alas, defensive (and expensive) buying will be only too appropriate.
Granting that, you have to start somewhere, and here are some suggestions for the buyer, suggestions that should save money. All of these will really help, even though the second sounds completely ridiculous.
1. Limit the scope of what you’re buying as much as possible. Look only at what you clearly need; prefer things that you’ll use immediately; go for immediate results; and don’t buy anything else. You can always buy the rest later. (This reduces the number of cooks.)
2. Use a tape recorder and a camcorder. Keep track of what the vendor says, in full, precisely. Look the transcripts over. If you have questions or don’t understand, follow up. In the long run, it saves a lot of time. (This can help you to get more trust–kind of trust, but verify.)
3. Prototype, prototype, prototype. Get a small team to set it up and try it out, rather than assembling a large team to review demos that were set up by the vendor. If you have to pay the vendor to help you with the prototype, do it. You’ll save in the long run. (This, too, reduces the number of cooks.)
Enough from me. Suggestions from the readership are welcome.