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Two Big Reasons Why ERP Implementations Have Failure Rates Higher than 50%

ERP implementation failure can be one of the costliest mistakes a company makes. According to Gartner, ERP implementations failure rates can exceed 75%. Meanwhile, global consultancy McKinsey estimates that more than 70% of all digital transformations fail. Understanding some of the reasons why ERP implementations fail before starting your project can help you mitigate risks and ensure success.

Companies have wasted millions of dollars – and years of their time – on ERP systems that just don’t work.

For example, in its $30 million lawsuit against SAP, Marin County, CA claimed that it spent $18.6 million on an ERP implementation that was supposed to simplify its HR and finance processes. Instead, the County alleged that it ended up with administrative nightmares, as it couldn’t perform basic financial functions for two years after the botched implementation. In the end, Marin County scrapped its project and the system.

The County also initiated a legal battle with Deloitte, its ERP consultant. The $3.9 million settlement that Marin County received didn’t cover the $5 million it spent on legal fees.

Generally, each party to an ERP implementation bears some measure of responsibility for the project’s outcome. However, ultimate responsibility rests with the end-customer. It spends the money and lives with the result. Meanwhile, the consultants move on to other projects and the ERP vendors sell software to other customers.

Given the high stakes, the end-customer needs to own the project. That means becoming sufficiently well-informed to make important decisions about methodologies, scope, teams, go/no-go decisions, budgets, schedules, and much more.

In this post, we dig into two of the major reasons why ERP implementation failure rates are so high and offer advice how to avoid failure.

The #1 Cause of High ERP Implementation Failure Rates: Ineffective Project Teams

From our experience with managing ERP implementations, most of these failures are due to problems with the teams – not with the ERP software. Here are the three biggest problems that we see with ERP teams:

Teams Problem #1: Core team members don’t have enough time for the project

For an ERP implementation to succeed, you must commit your top employees to the core team for the project’s duration, which can span five months to years. You should expect your core team members to spend at least 50% of their working hours on the implementation. To do this, they’ll have to offload a major portion of their day-to-day job duty tasks.

This requires planning. To begin the transformation, project management and the core team should develop a human resources capacity plan that frees-up ERP core team members. Oftentimes, the plan includes cross-training, where core team members download certain job tasks onto others. In some cases, you might even need to hire full-time, part-time or temporary workers to backfill.

The following sample shows a project organizational staffing chart that maps the core team member and their backup.

It’s vital that executives not only support these staffing moves, but also champion them. In general, you will only see business benefits from ERP if you treat it as a transformation opportunity – not a staffing hassle.

While pulling your highest performers off their day-to-day jobs can be a scary thought, you must have the confidence that business will continue as usual without them.

Teams Problem #2: The wrong people are assigned to the core team

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Many ERP projects fail to meet expectations because senior management don’t commit their best talent to the implementation.

In some cases, they assign whomever is available, instead of the best people. The predictable result is a sub-optimally designed business, because the people who reengineered the business processes didn’t have the right knowledge and skill sets.

Since integrated ERP is about cross-functional business processing, the core team need to understand their own department’s processes as well as how other departments operate. They also need to be out-of-the-box thinkers capable of defining new and better business processes.

When building teams, start by grading the skills of potential candidates. Evaluate their capabilities across multiple dimensions, including:

  • functional departmental expertise
  • cross-functional business processing knowledge
  • fundamental ERP concepts
  • basic computing skills
  • documentation skills
  • communication skills
  • adaptability to change

Once the teams are built, you need to fill their skill gaps before asking them to transform the business with ERP.

Teams Problem #3: The right people are on the team but they don’t have the right skills

Building on the previous point, another common ERP problem is that core team members oftentimes don’t have adequately developed skills.

It’s vital to develop and execute a customized ERP training plan that gives your core team the skills they need to succeed. At a minimum, your plan should include intensive customized training on fundamental ERP concepts and on the ERP software itself. The training should provide your core team members the foundation they need to reengineer your business processes. In the long-run, these are the people who will become subject matter experts that others in your organization will turn to for guidance.

As a starting point, leverage your already developed skills-gap analysis to build training plans that hone in on areas that require special attention.

Teams Problem #4: The project doesn’t have the right governance structure

To maximize your chances of implementation success (and minimize probabilities of ERP implementation failure), your project governance structure should include the following teams:

  1. A steering committee made up of senior executives who will be made responsible for a) assuring successful project completion, and b) aligning the ERP implementation to your business’ strategy and goals.
  2. A core team who will re-engineer your business processes, test the ERP system, and train end users on how to use it.
  3. Project management who keep the project on time and on budget by managing tasks, deliverables, risk, and change.

The #2 Cause of High ERP Implementation Failure Rates: Inadequate Testing

While team problems cause the majority of ERP failures, we find that inadequate testing is another major cause.

When Hershey embarked on a $112 million ERP implementation, it cut its testing phases to meet an overly aggressive deadline. When it went live, transactions reportedly didn’t flow across CRM, ERP and supply chain management systems. As a result, Hershey couldn’t process $100 million of orders during Halloween, one of its busiest seasons. Hershey’s profits dropped by 19 percent the quarter of its ERP launch, while its stock price fell by eight percent. Proper testing would likely have prevented this disaster.

Testing your ERP system requires specific strategies. Comparing results from your legacy system and new one would be ineffective. The processes and data are too different, likely making the outputs incomparable.

Instead, it’s vital to start by defining what you need to test. Make this list as comprehensive as possible. As a starting point, each department should define each and every business scenario that will be reengineered in the new system and build scripts around those.

For example, if you’re the purchasing core team member, you need to think through every business scenario in your department, such as creating a new purchase order, modifying an open purchase order, approving a purchase requisition, and adding a new vendor to your system.

Once you’ve listed your business scenarios, create “to be” process flows and step-by-step work instructions for each. The instructions should be clear, so a new employee can follow them to complete each process. Learn the six steps to business process mapping.

After you define and write instructions for your scenarios, you can methodically test them.

Our proven, three-stage testing methodology includes the following piloting phases:

  1. Conference room pilot (CRP). In this phase, you will make sure that your ERP software can handle the most common business scenarios in each department.
  2. Departmental pilot (DP). In this phase, you will retest your CRP scripts, including all updates, to ensure that they work. You’ll also test the lower-probability scenarios that you didn’t test in the CRP pilot. Finally, you’ll run stress tests to assure that the system can support your data and transaction volumes.
  3. Integrated pilot (IP). This stage is also called user acceptance testing (UAT). In this phase, all high- and low-probability scenarios are piloted in “day-in-the-life” cross-functional integrated testing. The goal is to ensure that all transactions flow properly through the ERP system (and that you don’t end up with Hershey-like outcome).

Building high-performing teams and following a rigorous testing methodology are critical to delivering a successful ERP implementation outcome. However, these aren’t the only critical success factors. Project management, change management, and planning are equally critical.

Want to avoid ERP implementation failure?

Download The CIO’s Guide to Preventing ERP Implementation Failure.

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