The New ERP - Part 3

Failure No. 3: Substantial -- sometimes even huge -- budget overruns
Unfortunately, the causes of the "go-live" delays typically are also the major contributors to exorbitant budget overruns, too. Executives and managers that have lost sight of specific and measurable objectives -- or they never had any such objectives in mind from the beginning -- are likely to make many foolish decisions related to customizations and modifications. Having lost focus -- or never having had any focus -- such projects will soon take on a life of their own. Managers may be incapable of bringing them back under control without the direst of actions.

Failure No. 4: Stopping or slowing production and delivery
This is clearly the worst-case scenario: the very technology investment undertaken with some vague and likely unquantified hope of delivering business advantages becomes an albatross around the neck of the whole organization. Rather than delivering a "sustainable business advantage," the new technology bogs down or stops the organization's ability to produce Throughput entirely.

Almost without exception, this dire result can be traced back to a poor understanding of the organization's real situation prior to the decision to deploy new technologies. The circumstances may be further aggravated by the fact that the organization did not obtain a valid proof-of-concept from the technology vendor before the purchasing decision was made and the Everything Replacement Project (traditional ERP) undertaken.


The Everything Replacement Project (traditional ERP) decision to buy

Since the introduction of the computer especially, executives and managers with money to spend on technologies have often carried about within themselves a peculiar mindset. That mindset tells them, "If I just had more data; if I just knew more details about my enterprise, then I could manage better. In fact, if I could know in detail everything about my enterprise, then I could manage perfectly."

Of course, traditional ERP (Everthing Replacement Project) vendors prey on this mindset. In fact, they often help instill and solidify this mindset within their prospects and clients. As a result, the decision-making process regarding whether executives and managers should buy new or more technology often follows along these lines:

There are at least two incorrect assumptions in this chain of reasoning.

The first wrong assumption is that "information" is the key to better management. Information is not the key to better management. Knowledge is the key to better management and information is not knowledge.

Data gathered and presented by technology is a representation of what your organization has experienced. That experience (history) may include what you sold, some cost data, some profit data, data about your expenses, and so forth. However, as W. Edwards Deming put it so plainly, "Experience teaches you nothing without theory." He also said, "Knowledge comes from theory."

[To be continued]

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The New ERP - Part 2

So, what's wrong with traditional approaches to ERP? Why do so many ERP implementations lead to disappointing results? Why do so many companies spend so much money on new technologies and then end up reaping so little return on their investment?

Failure No. 1: Not achieving the planned return on investment (ROI)
It remains today a regrettable fact that many small to mid-sized companies considering new technologies have only the vaguest of notions about the ROI that their new investment should deliver. This is not to say that executives and managers haven't thought out ROI, or even that they may not have already "pinned a number" on the ROI that they'd like to see from the expenditure of their time, energy and money.

What they do not know -- far too frequently -- is precisely how the new technology will deliver results. They have not tied the expected results to specific improvements in Throughput, specific reductions in Investment, or specific savings in Operating Expenses. Rather, there appears to be a general consensus among executives and managers -- despite considerable evidence to the contrary -- that investments in information technologies (IT) sort of auto-magically deliver a return on investment (ROI). That, somehow, IT and automation investments bear an inherent capacity to make the company better and more profitable.

Over the more than 25 years that I have been working with IT from both sides of the desk -- as an executive and as a consultant -- there have been fewer than a handful of companies with which I have worked that actually calculated an ROI for their investment in technology. Fewer still had any measurable objectives for specific IT investments beyond some number clearly picked from the air like "increase revenues by 5%" or "cut manufacturing costs by 7%." Almost none of these firms could tie specific technology functional deployments to the expected ROI.

Given these facts, it is no wonder that traditional ERP (Everything Replacement Project) fails to deliver ROI. The executives and managers deploying the new ERP have not based their ROI expectations on much more than "gut feelings" and some vague sense that having more data will make them better managers.

Failure No. 2: "Go-live" delayed inordinately
Substantial delays to "go-live" in Everything Replacement Projects (traditional ERP) are generally attributable to one or more of the following factors:

• Poor decisions related to customizations or modifications -- when they are selected; how the program code is designed, developed and managed; and the methods chosen for testing and deployment
  
  
• Executive management's improper view of the goals and objectives of a valid ERP project -- thus leading to out-of-control scope creep, usually with absolutely no correlation to project ROI
  
  
• The organization being overwhelmed by an Everything Replacement Project -- rather than being focused on leveraging specific technologies for the benefit of the "system" (i.e., the organization) as a whole

[To be continued]

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The New ERP - Part 1

Unfortunately, the trade press has been rife with horror stories describing ERP (enterprise resource planning) projects that have gone off-track or failed entirely. The stories have gone on for well more than a decade and, although the number seems to be decreasing, in part that decrease is due to the smaller number of companies actually making their first leap in ERP solutions.

In a KPMG Canada survey from 1997, more than 61% of the respondents deemed their ERP implementation as less than a success. Four years later (2001), a Robbins-Gioia survey found that 51% reported their ERP implementations were not successful. And, Bob Lewis, writing in InfoWorld has suggested that only about 30% of ERP implementations are actually considered "successful" by some measures.

It appears that traditional approaches to ERP software selection, planning and deployment have, by almost any measure, proven to be capable of delivering any sustainable business advantage in fewer than half the reported cases.

In the following series of posts I will begin introducing what I believe to be a radical new approach to ERP, an approach I call Extended Readiness for Profit -- The New ERP. The results of this approach on the working relationship between business (financial) goals, measurable business objectives, and new technologies include:

1. A holistic view of the enterprise that encompasses its people, its processes, its products and services, its trading partners, and its technologies
   
   
2. Clarity and focus on finding and making the changes in the organization and supplying technologies when and where they will deliver a sustainable business advantage
   
   
3. Concepts that help executives and management in the organization establish sound budgets for each key component of any technology initiative based on calculated and measurable benefits expected to flow from the implementation
   
   
4. Sound techniques that will help executives and managers unlock the enterprise's "tribal knowledge" in order to leverage what the organization already knows in a process of ongoing improvement (POOGI)
   
   

SOME DEFINITIONS

• Revenues (R) - We will employ the standard accounting definition of revenues or sales where this term is employed.
  
  
• Truly Variable Costs (TVC) - Here we include only the costs involved in producing a unit of Revenue that truly variable with the unit of Revenue. Typically, TVCs include direct materials, subcontract or piece-rate labor, commissions, royalties, other outside services, and so forth. However, since normal employee labor is not directly variable with a unit of production, production labor is not included in TVC calculations.
  
  
• Throughput (T) - Throughput is equal to Revenues less Truly Variable Costs, as in the formula: T = R - TVC.
  
  
• Inventory or Investment (I) - In most inventory-based enterprises, the most volatile form of investment is inventory. However, since a key component in the calculation of ROI (Return on Investment) is the value invested, we will not limit discussions of "I" to only inventory.
  
  
• Operating Expenses (OE) - Operating Expenses is all the money the organization pays out day-after-day, month-after-month to support the production of Revenues. Since most employees -- even so-called "direct labor" employees -- are paid on this basis (i.e., they are not sent home early if work is slow; they are seldom laid off; they get paid the same whether their work unit produced 100 widgets or 1,000 widgets in a given period of time). If Revenues are down in a given month, for example, chances are the payroll amount was the same (within a few percentage points, anyway).
  
  
• Return On Investment (ROI) - As with Revenue, the traditional calculation method may be used. However, for clarity and for improved accountability, we will link specific initiatives to specific measurable results. Therefore, when considering any specific POOGI initiative, we calculate ROI for that initiative using the following formula:
  
  If no change in Investment (I) is required, then a simpler formula may be applied:
  
• Net Profit Before Taxes (NPBT) - Our definition will be equivalent to the general accounting definition, but calculated using the following formula:
  
  NPBT = R - TVC - OE
  
  Or, since T = R - TVC, we may substitute and shorten the formula to read:
  
  NPBT = T - OE

[Next time: What's wrong with traditional ERP approaches?]

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The danger of "We know!" - Part 3

In this portion of our series, we're going to talk about how to put a "framework" or "theory" around what you already know about your business enterprise. This is not an exercise in "business theory." This is a real and practical approach to gaining effective control of your enterprise after (perhaps) years of "muddling through" with more or less mediocre results.

One of the reasons executives and managers are not able to really "understand" what they "know" about their own organizations is that, since they are unaware of a "tool set" to aid them, they never actually put what management "knows" (we call it "tribal knowledge") about how their organization works -- or doesn't work -- on paper. Therefore, in the absence of such a written document, the managers themselves cannot read and re-read their own logic about cause-and-effect relationships that flow throughout their enterprise.

Our mind makes thousands of assumptions about what we think we know. Our mind processes these assumptions and incoming information so rapidly, we are unable to filter out our incorrect thinking or invalid assumptions adequately. Putting our thoughts down on paper helps us step through the logic that is leading us to certain conclusions.

Equally important, however, is that fact that, if we never get our reasoning down on paper, it is nearly impossible for us to invite others to truly analyze our logic -- to critically review our logic -- in an effort to help us bring about lasting improvement. As a result, not only do we not realize that we have flaws in our thinking about what's happening in our organization, others who might bring beneficial insights to our aid cannot do so because they, too, cannot help us find the flaws in our rationale. This inevitably leads to the fact that these undiscovered flaws in our thinking about how our organization really works -- or does not work -- remain embedded in our decision-making processes.

The good news is that there is an outstanding set of tools that are readily accessible, easily understood, and relatively simple to apply that will help executives and managers lay hold of "tribal knowledge" and reduce it to an understandable framework (or "theory") about how their organizations function in a real and practical way. Others that have applied that tool set have said things like:

• "I have never seen my business so clearly before."
  
  
• "We truly understand our business for the first time."
  
  
• "This process has helped us regain a sense of control over our enterprise."
  
  
• "For the first time in a long time, we are empowered to move proactively toward real, lasting improvement."
  
  
• "We now have a consistent framework for diagnosing problems and planning for improvement."
  

What is this simple, yet amazing, tool set for executives and managers?

It is simply the TOC (Theory of Constraints) Thinking Processes as developed by Eliyahu Goldratt, a suite of logic trees that provide a simple, yet effective, road map for diagnosis and change.

So, continue to say, "We know!" and miss out on the opportunity for real, practical and sustainable improvements to your enterprise, or discover a whole new, easy-to-use and effective tool set for starting down the road to ongoing improvement.

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The danger of "We know!" - Part 2

In Part 1 of this series, I discussed how many executives and managers fail to reap benefits from new methods and ideas -- especially if these new methods and ideas arrive in the form of a "consultant" -- simply because these executives and managers believe that the already know what can be known about their organizations and their industries. This prevents many organizations from growing to their full potential.

W. Edwards Deming put it bluntly: "Information is not knowledge. Knowledge comes from theory."

Unfortunately, what far to many executives and managers have is a lot of information about their businesses and their industries. What they desperately lack is "theory" by which to interpret and understand the information at their disposal.

G. K. Chesterton put it this way in Tremendous Trifles (Beaconsfield, Britain: Darwen Finlayson, 1968): "One of the four or five paradoxes which should be taught to every infant prattling on his mother's knee is the following: that the more a man looks at a thing the less he can see it, and the more a man learns a thing the less he knows it. The Fabian argument of the expert, that the man who is trained should be the man who is trusted would be absolutely unanswerable if it were really true that the man who studied a thing and practised it every day went on seeing more and more of its significance. But he does not. He goes on seeing less and less of its significance."

Think of Sir Isaac Newton and the story of his having begun his development of the theory of gravity because he had seen an apple falling from a tree. Surely there had been tens of thousands of individuals that had witnessed objects falling to the ground under the influence of gravity for several millennia prior to Sir Newton's experience. Yet, no one understood "gravity."

It has only been since Isaac Newton put a "theory" around gravity that men could take what they had experienced with gravity and put it into a framework -- a theoretical context -- that made the experience understandable to them. Furthermore, the framework (the "theory") gave men the opportunity to predict outcomes of certain actions relative to the gravitational affects. This meant that men could plan and execute with some real certainty as to the results they would obtain under "gravity."

Precisely the same is true of business.

Executives and managers have all manner of data in their hands relative to the performance of their enterprises. What they lack is a "theory" by which that data may be abstracted and understood for the purposes of effective management. A framework that will help them bring simplicity out of the complexity before them.

In all too many cases, the missing "data" for beginning the process of ongoing improvement is to be found within the organization at all. The missing component for executives and managers is quite often this simple point: there is a simple method available to help organizational leadership logically analyze what they already know internally.

In the absence of a "tool set" that helps management bring forth "knowledge" from their "information," executives and managers tend to continue "tinkering" with their businesses. They make changes here or there to see if the change helps.

Sometimes such change seems to help, other times the change actually makes things go worse than before. Still other times, the change is made and their is no perceptible affect on the organization at all.

This is no way to run a business -- or any other kind of organization!

Executives and managers are yearning -- sometimes without even recognizing what is lacking -- for a simple, effective tool to help them gain control of their enterprises once again.

[Next time: Gaining Control]

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The danger of "We know!" - Part 1

As a consultant, I meet folks in business very frequently that are pretty much convinced along one or more of the following lines:

1. "We already know about our business." By this owners and managers mean to express the sense that they already understand how their business works and what it will take to make the business better.
   
   
2. "There might be some room for improvement, but the returns on any improvement we could make would be so small, it's not worth the effort." This statement or mind-set by owners and managers is a restatement of the so-called "law of diminishing returns."
   
   
3. "Our business (or industry) is unique, so we have to work this way." This is an argument suggesting that a consultant, being an outsider to the business or the industry, can't possibly bring any valuable insight. Furthermore, even if he or she does, we probably couldn't make the recommended changes anyway.

On far too many occasions, when I meet such owners and managers, I am simultaneously witnessing an organization that started off great, grew rapidly, and still has the entrepreneurs that started the firm in the driver's seat. They are also, quite often, over-the-hill.

I'm not talking about the owners or managers being over 40 (or over 50) years of age. I'm talking about the fact that their once booming organization is now in a state of coasting on its earlier success or even in the early stages of decline. Sometimes management hasn't even recognized that fact yet. They may be thinking that they are just in a temporary slump, that things will inevitably pick up again, and their firm will regain its earlier vigor.

Sadly, the chances of such a revitalization are usually slim.

While it is unequivocally true that a consultant can never learn everything about an enterprise that the owners and management know from all their years in their industry and in their own business, it is equally true that there are more things that are similar about human organizations than there are things that are different between human organizations.

Among the key things that are TRUE about all human organizations is that they all rely upon the same three scarce resources:

1. Time
2. Energy
3. Money

Furthermore, contrary to popular opinion, managing the first two -- time and energy -- is more important than managing the third (money). This is true simply because if you had unlimited time and unlimited energy, you could have all the money you wanted or needed.

For this simple reason, focus is everything. As organizations grow and expand, the entrepreneurs who manage them start to lose focus, and they do not have within their knowledge or skills a set of tools to help them focus again on those few simple things that will revitalize their over-the-hill firms.

Having gained, perhaps, many years of experience in their industry and with their own firm, they frequently find that their experience really does not contribute that much toward discovering effective responses to the new challenges their firm now faces. What is missing is a method for discovering a new theory or framework that clarifies how their grown and expanded organization now works -- or doesn't work -- at making more money.

[Next time: Why is it so difficult for owners, executives and managers to discover how to effectively change their companies for ongoing, vital growth?]

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Getting more of what you want - Part 7

So, let's suppose that you've decided that applying the TOC Thinking Processes might really help your organization bridge the chasm -- successfully make the leap from entrepreneurial to enterprise. What kind of results might your firm expect from a sound and diligent application of TOC-based continuous improvement?

Here's a summary from an independent study as the results were published in a white paper available from AGI - Goldratt Institute:

• Mean reduction in lead times = 70%
• Mean improvement in on-time deliveries = 44%
• Mean reduction in cycle times = 65%
• Mean increase in combined financial variables performance = 63%
• Mean reduction in inventory levels = 49%
• Mean increase in revenue/throughput = 73%

If you'd like to get started on a path to improvements like these, contact me today at rcushing(at)ceoexpress(dot)com.

Thank you.

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