Speeding Up the Enterprise

January 29, 2013

This is the first of a series of occasional blogs whose main purpose is to make other people very rich.  I mean, heck, I’ve got enough, or at least I would have enough if my family couldn’t read the word “Sale,” in department stores.

So how can YOU get rich from my idea.  Build an app that does it.  I explain how the app works, and you go ahead and do it.

This first idea is pretty simple, but the app might be hard to build.  That’s OK.  You don’t usually get rich without talent.

The idea is to take advantage of something we’ve all observed:  that management slows projects down.  Not deliberately, mind you; usually, they want to speed things up.  But all those gates and calendars and (with top, top management) staff that surround management make it a big production just to get hold of these guys.  (And it’s usually “guys,” I’m sorry to say.)  

Now this makes no sense at all, if you think about it from the enterprise’s point of view.  A team of busy, talented people who are being productive should never, ever wait around twiddling their thumbs for weeks until it’s time for their half-hour with the boss, who will usually make a decision in a split-second.  

Bosses don’t like it either.

So what I propose is an app–or really, a series of apps, which I’ll call “unscheduling” apps.  They’re designed to short-circuit, circumvent, avoid, get rid of as much of the ceremony and delay associated with decision-making as is possible.

I believe that small, simple apps that make incremental improvements are always better, so let me  give you a few examples of what I mean, all of which are indeed very small improvements.

**  Da De-Delayer:  Your Table’s Ready, Sir.  You know the problem.  That really great executive just happens to be running late.  Everybody else’s schedule gets thrown off.  So do for busy executives what many restaurants already do for their patrons:  send them an alert when their meeting is actually about to start.  In the meantime, all those people waiting can do something productive.

**  Da Agendifier.  Make it possible for the people who are asking for the meeting to put two lines or so right in the calendar that says what question is being asked or what decision is being asked for.  This has to be readable at a glance.  As with Twitter, only giving people 140 characters makes for a needed concision.

**  Da Snooperintendent.  Back in the days when people were co-located, managers would drop in from time to time and a lot of stuff would get settled.  Nowadays, that isn’t possible.  Your manager is in Bangalore or someplace and aint’ dropping in any time soon.  So give the manager a virtual place where they can drop in and say hello and sniff around.  The group that’s working on something would keep a live description of what’s going on Now:  what people are working on, questions that are coming up, issues.  Next to each notation would be a presence indicator for each of the people involved.  The manager would be able to drop in at any time, then be able to send messages or, if they were present, videoconference the people involved. 

Da De-Synchronizer.  Meetings, which require synchronous communication, are much more expensive than a chat or e-mail exchange, which are asynchronous.  So give people who want to talk to a busy executive a choice of two schedules, the synchronous (we’ll see each other face to face, eye to eye, mano a mano) and the asynchronous (I’ll spend xx minutes reviewing this and get back to you by XX).  The executive then spends part of his (or her) time on each schedule.

I can go on and on, but there’s no need to do this, because you can see what I’m trying to do.  Whenever possible, try to give people more control over their (mutual) schedules, get right to the point, and try not to waste a lot of time when something simpler would do.

Comments welcome, of course.  And of course if there are apps that really do any of these things already, feel free to boast.

In yesterday’s post, I argued that ROI would not be an adequate measure of the benefits conferred by new-gen (or pseudo-new-gen) applications like Workday, Business By Design, or Fusion Application Suite. The previous-gen applications were all about automation. The new-gen suites confer real benefits (I think), but not necessarily benefits that fall through to the bottom line.

What benefits are they? Well, they have to do with working more effectively: making fewer errors, putting more time into work and less into busy work, making more accurate decisions, faster. Is there benefit from this kind of thing? Sure. But how do you measure it.

In the post, I suggested a hazy term, “operational effectiveness,” for the benefits one should expect. What is “operational effectiveness?” Let me admit freely that I don’t know for sure. In this post, let me propose an analogy, which should help you to understand what I’m getting at.

The analogy comes out of a historical situation that always posed a problem for ROI analysis, the transition in business from the typewriters that sat on secretary’s desks to the PC that sat on executive’s desks. This transition occurred in two different phases. First, the typewriters on the secretary’s desk were replaced with big, clunky word-processors that sat next to the desk. These word-processors automated the secretary’s document production work. Then, the secretarial position itself was eliminated, and the typing function became something that executives did themselves on that PC.

The transition to word processors could easily be justified in ROI terms. We could get more work out of the secretary or else hire fewer secretaries. Whether the justification was real is an open question. But it’s certain that that’s how people thought of it.

The next transition was much more problematic for ROI analysis. Expensive executive time was now being put into jobs that had been performed more efficiently by much cheaper labor.

At the time, people didn’t put a lot of thought into figuring out why they were funding this transition. Executives saw the PCs, knew that everyone else was using them, needed them for some functions (e-mail, spreadsheets), and just decided. “We’re doing it this way.” At least in my recollection, that’s what happened.

So were they just loony or lazy or wasting shareholder money on executive perks? I don’t think so. I think what they were plumping for was the same “operational efficiency” that I’m talking about 25 years later.

True, they spent more time typing. But they also had more control over the final product; they could change the product more easily; and they could distribute it without much overhead. And, at the same time, they were changing the form of what they were doing. They weren’t just producing typed memos; they were documents with fancy fonts and illustrations; and they were creating Power Points. True, many an executive was spending ridiculous amounts of time fiddling with type sizes so that they could get things on one page, but even acknowledging that, they thought the new way was better.

Indeed, by the time the transition was finished, justification wasn’t even a question, because the new tools changed the nature of work, and now you couldn’t get along without the tools. When executives were doing the typing, they stopped creating long reports. More and more of the time, a corporation’s decision-making was even wrapped around a full document (minutes, memos, or formal reports), it was wrapped around Power Point decks.

So by the end of the transition, ROI analysis had become entirely moot. How could you get a tangible measure of benefits when you were comparing apples and oranges?

Could we be seeing a similar transition now? It’s certainly possible. The analog to the word processors is that first generation of enterprise applications, which were funded by the automation benefits they confer and by ROI analysis. The analog to the PC is the second generation of enterprise applications.

(One caveat. As I’ve said before, I don’t think that Fusion Applications or the versions of Business by Design that I’ve seen are in fact second-generation applications. They’re more like Version 1.3. But they’re close enough to next-gen to raise the problem I’m talking about.)

If the analogy holds and if second-gen apps work as the developers hope, the benefits that businesses are going to experience will be equally hard to get your arms around, partly because the benefits are so subtle and disparate and partly because you’ll see a shift in the way work is done.

Does that mean that we won’t be able to talk about the benefits and we’ll just bull ahead with them? Well, that’s why I’m introducing the notion of operational effectiveness. It does seem to me that we can get clearer about what the benefits are.

So come on guys. Make comments. What is operational effectiveness? And how can we tell whether we are getting it?

This blog post is as more an open question than a pronouncement. So please feel free to comment on this or take the idea in a different direction.

I’ve been thinking about the next generation of Enterprise Applications, the value that they (might) bring, and about how people might justify replacing the enterprise applications they have with the new generation.

Generally speaking, you justify an investment in infrastructure using ROI. You invest this much, get this much return. For the first generation of enterprise applications (most everything designed between 1990 and 2003 or later), this made sense, because they were basically automation apps. They automated work done by people. The ROI showed up because you didn’t have to pay people to do it any more.

Now these new applications simply don’t do that, that is, they don’t automate appreciably better than the old applications do. And this means that ROI is a pretty crummy tool for evaluating whether an investment is worthwhile. Yes, there will be ROI if the enterprise application works the way it’s supposed to. But the return will be highly indirect. You won’t be able to fire people and pay for the application.

Brian Sommer has been talking about this problem for years–essentially, he points out that automating something that’s already automated doesn’t justify an investment on the same scale. But he has never really explored whether there are other forms of justification.

Nenshad argues in his book and his blog that good performance management enabled by modern tools will get you to a place you want to be, and he tells you a lot about how to do it. And while it is true that these new applications help you manage performance better and that’s one of the reasons you want them, he doesn’t offer a way of thinking about justifying the move to what he recommends. (Nenshad, if I missed this in your book, I’m sorry.)

So what does one use? Well, let me offer a concept and sketch it out in a paragraph or two, and you my small but apparently very loyal readership can then take me to task.

I’ll argue that what these new applications really do is improve “operational effectiveness.” What’s that? Well, to start out with, let’s just say that they let each employee put more effort into moving the company forward and less effort on overcoming friction, that is.

Well, that’s suitably hazy. So here are some things that you could measure that would, I think, be indicators that employee effort is more coherent and focused. You could, for instance, take a page from the black belts and measure operational errors or even just exceptions as part of operational effectiveness. Or, you could look at corporate processes that are nominally automated and see whether they are managed by exception. (Truly best, automatable practices should require almost no routine manual actions.)

People sometimes try to look at operational effectiveness by measuring what percentage of revenue is spent on things that feel like pure expense, like IT. So, a company that spends 3% of its revenues is less effective than one that spends 1% of its revenues. People also try to get at it by trying to look at which activities are “value-added” and trying to get people to do more of them. Both ideas are silly, of course, in themselves. (The 3% company may be spending on stuff that makes them effective, while the 1% isn’t.) But I think there might be indicators of operational effectiveness that are better. Wouldn’t operationally effective companies spend less time in meetings, send fewer junk e-mails, work fewer hours/employee (!), resolve more customer complaints and deflect fewer, etc., etc., etc.?

You get the idea, I think. So why is this a good measure for the new generation of applications? Because, bottom line, I think that’s what they’ll do. They’ll help organizations and people avoid wheel-spinning, error correction, and pointless processes or rules by getting to what matters, faster.

Of course, people have always accused me of being a ridiculous, blue-sky, naive optimist. But that’s how it seems to me.

What do you think?

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.

Two Cheers for Léo

November 2, 2009

The German Financial Times today took a bead on Léo Apotheker, SAP’s CEO, saying that on his watch, SAP had lost touch with its roots [verlorene Wurzeln]. No longer, as in the days of Hasso Plattner and Dietmar Hopp, is SAP customer-focused, the article says, and as a consequence, customers no longer think the software is worth the money. (The article cites the current customer unhappiness about increased maintenance prices as evidence for this.)

Helmuth Gümbel, no stranger to this blog, is cited frequently in the article; clearly, he was persuasive about the current state of affairs between SAP and its customers. Clearly, too, one disagrees with Helmuth at one’s peril.

Still, I wonder whether it’s really fair to hang all these problems on Léo. Take the infinitely hashed-over introduction and semi-withdrawal of Business By Design. Léo tends to get the blame for this because he was there on the podium claiming that SAP would get $1 billion in revenue from this product by, what is it, next year? But he had nothing to do with the original product. He was working in sales when Peter Zencke was put in charge of Project Vienna, and he was still in sales when Nimish Mehta’s team was developing T-Rex (a great product, no question), and he was still in sales when Hasso was insisting that T-Rex be incorporated into Business by Design, and so on.

Certainly, it was injudicious for him to promise that his organization could sell the heck out of a product that wasn’t ready for prime time. But why does this make him responsible for SAP’s lost roots? If anybody lost their roots, it was the development organization, which somehow or other couldn’t build the product it thought it would be able to build.

Don’t blame Léo for problems that were not of his making.

Now, I have my own issues with Léo, as my readers know. But frankly, when he came in, I think he was right about SAP. Too much time and money was being spent on stuff that wasn’t what the customer needed (or wouldn’t sell), and this had to stop. Hence the acquisition of Business Objects, the downsizing, the restructuring in the development organization. All of these things deserve at least one cheer, and I hereby give it. Hip, hip, hoorah.

Where I criticize Léo–and I’ve told him this to his face–is in his view of SAP’s role vis a vis the customer. He thinks what SAP has always thunk, that it’s up to SAP to make the best possible tools and it’s up to the customer (aided by the SI community) to figure out what to do with them. I think this view is wrong; SAP has to take more responsibility for making sure that the stuff works.

Ten years ago, when the heroes of the FT Deutschland article were fully in charge of the SAP business, I agree, SAP didn’t need to do that. SAP knew about businesses and about software, and they could figure out what they should do next without fretting about the problems customers were then having. (Believe me, there were a lot of them.) Today, though, with so much development time and development effort squandered, they can no longer believe that they can just build the right tools and count on the customers to get the benefit. Instead, they need to find out what went wrong with the tools they’ve been building and what needs to be done in the future. And the only way they can do that is to figure out EXACTLY what is preventing customers from getting the value they think they ought to get.

You can see why this problem is so important if you look at the SAP Solution Manager. This product ought to be what justifies the maintenance price increase. But as Dennis Howlett and Helmuth himself have both said, the product itself does not yet do what SAP needs it to do. If SAP really wants to justify this price increase, it needs to figure out why customers aren’t getting the value that SAP needs them to get. And they need to do it fast.

This is not easy; indeed, when I said this to Hasso late one night at an analyst party, he said, roughly, “We don’t know how to do that.” But let me just say, of all the executives I know at SAP, the one who is most likely to figure it out is Léo.

If he can figure it out, he will be able to get his customer base back again; indeed, I think they’ll be cheering, and when we’re convinced, so will I and so will Dennis and maybe even Helmuth. So, just in case this actually happens, let me give my cheer now, before it is actually deserved, as a way of saying, “I think you can do the right thing.”

Hip, hip, hoorah.

If you were one of SAP’s biggest customers and you found out that SAP was giving big discounts to another big customer, pretty much because they asked for it, what would you do?

Assuming you have at least a room-temperature IQ, that is.

Wait a minute. Let’s be democratic. If you were one of Oracle’s biggest customers and you found out that SAP was discounting maintenance for the asking, what would you do? I mean, you’re an Oracle customer, you definitely have a room temperature IQ.

Still not sure what to do? Here’s a hint. The phone number at SAP headquarters is 49/6227/7-47474. At Oracle, it’s +1.650.506.7000.

“Wait a minute, wait a minute, wait a minute,” I hear you saying. “SAP didn’t start handing out discounts, did they? They raised maintenance prices; they didn’t lower them?”

Perhaps. But let’s try to apply that IQ of yours.

As I’m sure you know, it’s been an bruited about in the media that Siemens was seriously considering the possibility of dropping its maintenance contract with SAP, starting January 1 of this year. Their plan was to have a third party provide maintenance, possibly either IBM or Rimini Street. (For a representative summary of the situation, as reported in the press, see this Market Watch report.)

So what happened? As all of you big SAP customers realize, Siemens had to make a decision September 30. Well, here’s what we know. About a week ago, SAP issued a press release, saying that Siemens had in fact re-upped its maintenance contract for three years.

Case closed, right? SAP doesn’t ordinarily announce maintenance renewals, but the underlying tone was, “Well, we’ve read the stuff in the press, too, so let’s deal with those scurrilous rumors, and issue a press release. After all, Siemens didn’t just come back. They bought more.” End of story?

Maybe. But you’ll notice that the press release doesn’t actually say anything about how much they paid for the maintenance. Indeed, there’s a funny little line about, “based on SAP’s maintenance standards for large customers,” which seems to demand some explanation.

So, let’s pursue it a little further. Is there any further information anywhere about what Siemens actually paid? About the same time as the press release, a post appeared on the Sapience blog. The post said that Siemens had been paying 30 million euros, pre-deal and was now paying 18 million euros, plus some other concessions. If you value the concessions at zero, this is a roughly 40% discount.

Sapience is written by Helmuth Gümbel, an industry analyst who has been following SAP for longer than I’ve been in the business. Helmuth is not an uninterested party here; he offers consulting on how to pay less in maintenance. But he’s also a well-respected figure, a person who doesn’t just say whatever he feels like saying, true or not.

[Full disclosure: Helmut is also a person I regard as my friend, someone whom I see socially on the rare occasions when he's in town.]

So what is one supposed to believe? On the one hand, you can say, “Why believe an isolated blogger, especially when he has an axe to grind?” Then, you assume that the press release is giving you basically the right idea about what happened. On the other hand, you can say, “Where there’s smoke, there’s fire,” and assume that Helmuth (and the Enterprise Advocates, a group that discussed the Siemens situation in its recent webcast, have to have roughly the right version of the truth.

Helmuth isn’t the only source of smoke, here. Kash Rangan, an investment analyst at Bank of America/Merrill, estimated, recently, that 20-25% of customers get discounts on their maintenance payments. (The relevant figures are reproduced in the dealarchitectt blog.

No full disclosure required here. I have only a nodding acquaintance with Kash.

Of course, all this can be pretty muddy. American accounting rules tend to make it difficult for companies to give direct discounts on maintenance; basically, if a maintenance agreement is part of the initial license contract and the stated price of maintenance isn’t supported by objective evidence, companies are supposed to recognize the license revenue ratably, not all at once. If you give discounts, then your ability to demonstrate that the stated price is supported by objective evidence, is called into question. So, contra Kash and Helmuth, you could argue that SAP can’t be giving out discounts, because it would screw up their reporting.

But of course there are ways of discounting maintenance without actually charging less than the stated price. There is, for instance, a long, long history in the software business of handing out free seats, instead of cash, when customers are unhappy. (Both Helmuth and a cynical reading of the press release suggest that something of the sort may be going on here.) If pressed, vendors have also been known to reduce the basis for the maintenance charge and also to fiddle around with start and stop dates. I’m not saying that’s going on here–I don’t know–but I’ve been told by reliable sources that it has been done, at least by some companies.

If that were the case here, then Helmuth’s way of characterizing it is really the only sensible way to figure out what’s going on. You look at your outflow before. Then you look at your outflow afterward. The difference gives you a gauge of what the discount is.

So did Siemens get a discount? The plain fact is that we don’t know for sure, even with all that IQ, and won’t know unless SAP and Siemens agree to tell us, and even then we won’t know, because the one thing we can be sure of is that SAP will present the case in a way most favorable to them.

So, if we don’t know for sure, and yet it seems possible that in fact SAP is giving discounts, what should you do? Well, I have a suggestion. It’s 49/6227/7-47474. See what they say.

But don’t hide it. Post what they say right here. If SAP really is holding the line on disounts, well and good. But if they’re giving them out, don’t you think it’s time for you to get in line?

“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?

A Flaw in Business Cases

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.

Brittle Applications

August 31, 2009

In a previous post, I said that MRP was a “brittle” application, and a commenter questioned me. What is a “brittle” application? Is this a technical term? What makes MRP brittle? All good questions.

A brittle application is one that doesn’t work at all unless a lot of disparate conditions are met. MRP, for instance, doesn’t work unless all the data is right, people know how to use the program, the demand for the products is stable, purchasing is also committed to minimizing inventory levels, etc., etc.

The notion applies to a lot of other programs besides MRP, though I’ve rarely heard the term used. But notice that it brittleness isn’t so much a feature of the program as it is the purpose to which the program is put.

Let’s take a simple example: a word processing program. For normal purposes, a word processing program in this day and age is not brittle. A rank novice can use it to type and print. But even today, if you want to use, say Microsoft Word, to put out a 16-page brochure, complete with illustrations, well, good luck, is all I can say. You try to get an illustration and have it float and change the size and put in a table, and–well, just try it, it’s a nightmare. So, to put a 16-page brochure together, Microsoft Word is brittle, but to print out a letter, it’s not.

The point about the MRP program that QAD wrote, which follows the APICS standard religiously, is that it’s brittle relative to the purposes for which it was intended. Pam and Karl and Evan (the founders of QAD) really believed that QAD’s could do supply chain management for manufacturing facilities very effectively. My point was that the program is too brittle. To get things right, you have to get all the data right and keep it right, etc., etc. And if you don’t, what you have is an overwrought and overcomplicated Kanban system, without Kanban’s virtues.

Are there other enterprise application systems that are brittle? Lots and lots of them, I think. Almost all the old, Siebel-style CRM systems were simply too brittle; they depended too much on the good-will of the salespeople, the accuracy of the sales model embedded in the system, the reliability of the sales cycle, etc., etc. You wouldn’t think that financial systems are brittle–after all, they have to work–but they often had components that were overly brittle: cash management systems, for instance, and fixed asset systems and budgeting systems.

What do most companies do when they have an overly brittle system? They use the system for lesser purposes. And they feel REALLY bad about it. So, the Microsoft Word user makes a brochure that is far less fancy, but more manageable, and the QAD MRP user uses the product for tracking inventory. And both of them keep on saying, “Well, one of these days, I’ll get around to really making this product sing.”

They shouldn’t. Brittle applications are brittle for a reason. A lot of the time, it’s because they’re really a special-purpose product, but yours is not that purpose. Some of the time, they’re brittle because they’re badly designed. Some of the time, the model they’re using (MRP is a good example) just doesn’t fit the situation you’re in. In any of the cases, the fact is that they really can sing for the right user, but that doesn’t mean it’s your fault if they don’t sing for you.

What do you do if you have a brittle app that isn’t singing? Give up on it. It won’t work for you. Get another app, one that works. Or change the process. Or just accept the fact that it will never work the way you thought it would.

In any case, good luck.

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.

Comments welcome.

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