ERP & Total Cost of OwnershipERP & Total Cost of Ownership

Mike McIntosh, BS, MA, PMPInternational Paper

……to Infinity,

to Infinity,

and BEYOND!

and BEYOND!

How to avoid going ….

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What are our Tangents for Today?What are our Tangents for Today?• ERP & Total Cost of Ownership

– Discuss ERP implementations– Discuss Key items that affect TCO of

ERP systems.• Turn out the lights and call it a day.

Its Mick

ey

Its Mick

ey

Time!Time!

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Ground RulesGround Rules• This is an INTERACTIVE presentation.

Please feel free to Chime-In, Shout out, ask and answer questions.

• This is not rocket science, brain surgery or gamma-globulin micro-biological nanotechnology. It’s most likely things you’ve heard before.

• Rewards will be given for partcipation.

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Lets Take InventoryLets Take Inventory• How many people here are involved in a

multi-year > Financials Scope, ERP implementation?

• How many people here have just the ERP Financials and are looking to expand the scope?

• How many people here have no ERP implementation experience to date? (Auditing this class)

• How many people are here just for the raw entertainment value of this presentation? (Get a life!)

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ERP Definition ERP Definition THEORYTHEORYEnterprise Resource Planning (ERP) is a software solution that integrates

information and business processesto enable information entered once

into the system to be shared throughout an organization.

EDUCAUSE 2001 ConferenceDave Swartz, George Washington UniversityKen Orgill, West Virginia University

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ERP CharacteristicsERP Characteristics

• Integrated• Enterprise-Wide Scope• Comprehensive Organizational Approach• Newer Technologies, Modern Processes /

Supply chain efficiencies• Shared, accurate, real-time management

data• Operational Support with real-time accurate

data• Streamlined, standardized processes

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Why do we implement ERP Systems?Why do we implement ERP Systems?• Replace obsolete, homegrown, archaic

systems• Redesign of business processes

– Supply Chain Standardization & Simplification• Give Management a single-source data

view.• One Business Face to the customer• Cost Reduction associated with multiple

systems and processes.• Simplify Financial Data Collection &

Reporting at an Enterprise level

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Why do we Implement ERP?Why do we Implement ERP?• Streamline the business

– Multiple systems doing the same thing– Converge separate businesses under the

same standard process umbrella– Reduce system variability– Central data repository (financial

reporting, etc)

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What is TCO?What is TCO?

T = C = OT = (C1+C2+C3+C4+C5…CN) = O

Total Cost of Ownership/Operation (TCO) is an attempt to quantify the life-cycle financial impact of deploying information technology in an institution Gartner Group

“TCO A Critical Tool for Managing ITBill Redman, et al

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TCO DefinedTCO Defined•• Total Cost of OwnershipTotal Cost of Ownership includes all the

costs for selecting, purchasing, installing, deploying, maintaining, supporting, integrating and updating an application & its architecture environment.

• The purchase price is a small percentage of the total cost of deployment

• 50-80% of all spending on information systems is on maintenance / supportmaintenance / support.

TCO = Total Cost of OwnershipTotal Cost of Operation

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TCO In the Real WorldTCO In the Real World

• How much does a PC Cost? $1200-1400?• According to the Gartner Group, the cost of

owning a PC on a network is $11,900 per year.

• Other estimates place the TCO at about 3 to 4 times the actual purchase cost of the PC.

• The goal of TCO is to properly state the lifecycle costs of an IT investment.

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How much does a How much does a FREEFREE goldfish cost?goldfish cost?

Won 2 free goldfish at the School fair.Fair Fun Tickets 10Fishbowl 4.99Plastic Plant 1.59Gravel 1.29Fishfood 0.99Chris Roll Free Tank & Stuff 010 More Fish 1.9Filter cartridge 5.99Themometer 1.99Bubble Stone 0.996 more fish 1.14Grief / Funerals for Dead Fish HF +10

30.87TCO

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TCO Analogy TCO Analogy -- CarsCars

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Not all TCO decisions are FinancialNot all TCO decisions are Financial

Example – Building a large, single story office building. – 17 individual Heating / AC units on the roof

or 2 large HVAC units?– Cost of 17 was higher, annual maintenance

was higher.– 2 single systems were not as widely used,

limited parts channels and local trained service personnel

Chose the 17 units based on critical usage / affect of breakdown on worker productivity. Hassle Hassle factorfactor included in TCO

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Facts about ERP ImplementationsFacts about ERP ImplementationsPeerstone Research interviewed over 200 companies with big

ERP implementations and what did they discover?

•• 63%63% achieved some form of significant business benefit•• 39%39% of these achieved hard dollar ROI from ERP. (24% of (24% of

total)total)•• 38%38% did not formally evaluate the project’s ROI.• Labor is the largest cost component: 66%66% of total cost• Key business goals were non-financial in nature.

– #1 improved management vision of operations. – Lowest ranked: Headcount reduction, radical business

process change• Why do ERP projects fail to achieve their goals:

– Inadequate executive leadership (26%)(26%)– Vendor over promising (21%)(21%)– Run-away professional service costs (20%)(20%)

© Peerstone Research 2004, www.peerstone.com

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TCO Reduction Point #1TCO Reduction Point #1

© Peerstone Research 2004, www.peerstone.com

Key business goals were non-financial in nature.

We usually focus on Capital funds Request –what will the project cost?

TCO inflates because of lack of focus!

FOCUS ON TCO ReductionFOCUS ON TCO ReductionStart with the end in MindStart with the end in Mind

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A Reason for ERP implementationsA Reason for ERP implementations

• Legacy SYSTEMS ReplacementSYSTEMS Replacement– Archaic, Home-Grown Legacy Systems

Replacement – Y2K, Y3K, 14K?• Hardware obsolescence• Database migration / obsolescence• System Code (PL1, COBOL, Fortran)

• Legacy PROCESSES ReplacementPROCESSES Replacement– We’ve always done it this way– The systems are always designed to support

the processes!– Mergers & Acquisitions

Which cam

e first, th

e

Which cam

e first, th

e

Chicken Nugget or the

Chicken Nugget or the

Egg Egg McMuffin

McMuffin??

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Analogy #1: Legacy SystemAnalogy #1: Legacy System

• Custom Design, built & modified by Leroy Smooter (retired 2000)• Maintained by Darryl Smooter and his other brother … Darryl.• Parts are hard to come by – long delivery time – Custom made• Does not meet current internal or external needs • There are several of these within the Organization• Has been upgraded over the past 18 years.

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South American Business SectorSouth American Business Sector

Developed & Maintained by Diego Smooter and his other brother, …Diego.

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Why it never gets replacedWhy it never gets replaced

• Modify the system to fit the process– Bolt-on modifications– Base System Modifications– Add manual work-arounds

• People hate change so do your best to not rock the boat and keep the processes the same.

“We’ve always rode motorcycles ‘round here.”Darryl & Darryl Smooter

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Replacement Option #1Replacement Option #1

The production model replacement the Smooter Brothers came up with.

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Current Users RecommendationCurrent Users Recommendation

Production versionStandard parts and SupportUser FriendlyEasy to maintain

Excellent reliabilityGood for the long haulTemplate for future.Large User Group

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Looks Good!Looks Good!

Serial # 1. VaporCycleTomorrowTomorrow’’s Legacy?s Legacy?

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What the Consultant came up withWhat the Consultant came up with……

Think a little farther outside the box …..

Seats 3!Seats 3!

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Think Strategically!Think Strategically!

Have a vision to address the problemsproblems.

Seats 60!

Seats 60!

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TCO Reduction Point #2TCO Reduction Point #2A A DETAILEDDETAILED Visionary StrategyVisionary Strategy

• Develop a long-term, pain reducing 5-8 year strategy

• What CURRENT problems are you trying to solve?• What are you small, reasonable goals?

• Steps for your Strategy•Define the problem(s) you want to resolve•Design the processes to fix the problems •Find the system(s) to fit the process that

support your design to fix the problems you identified to resolve.

•PROTOTYPE a representative Dept (Baby steps)•Execute the plan as EXPEDITIOUSLY as possible

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No Strategy? No Strategy? What you may end up with.What you may end up with.

Numerous after thought Bolt on’s, Scope Creep, Unknowns…May actually be WORSE than the old system

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AHEIIAHEII: A HUGE ERP Implementation Issue: : A HUGE ERP Implementation Issue: SCOPE CREEPSCOPE CREEP

#1 SCOPE CREEP Statement#1 SCOPE CREEP Statement! ! “We need to leverage our ERP investment by

implementing other ERP modules.”• Maintenance / Reliability• Detailed Inventory Tracking• Shipping and Vehicle Tracking• Planning & Scheduling• Quality, Complaint Tracking• Order Entry for ALL products • Portals, Portals, Portals

Does it fit your processes?Does it fit your user base?What painful problem is it addressing?

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ERP Leverage Scope CreepERP Leverage Scope Creep

HI! I’m from the Corporate Dept. of ERP leveraging & I’m going to help

you!

Help Me!?! Five minutes ago I was

asleep on the front porch.

You think you hate us now, but just wait until we implement!

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Number 1 Reason Number 1 Reason SCOPE CREEPSCOPE CREEPNegatively affects TCONegatively affects TCO

• ERP Systems have production floor end-user issues: Casual User Syndrome– Ease of Use / Casual users– Number of transactions / screen is low– Codes, Codes, Codes– ERP is typically an office-designed system– Lack of process specific functionality: Generic

What problems are being addressed?Does it fit your user base?

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RealReal--Life ExampleLife ExampleERP Maintenance / ReliabilityERP Maintenance / Reliability

Study to address ERP Maintenance GAPS and increase usage (equipment notifications) to reduce unscheduled downtime.

• Portal Bolt-on needed so production floor personnel can enter equipment work requests.– point & click ease of use, multiple transactions on a

single screen, equipment hierarchy • Bolt-on needed for maintenance scheduling

– Functionality gap• Bolt-on needed for maint. package print

– Functionality Gap

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Costs to address Functionality GapsCosts to address Functionality Gaps• ERP Licenses Required– Upfront & Annual• Print, Portal, Scheduling Software Purchase• Print, Portal, Scheduling design, training,

implementaiton• Print, Portal, Scheduling Annual license• Upgrade and support (expertise) for 4

software packages and supporting systems (Oracle, OS, Netweaver install)

• Oracle Upgrade (Nugget or McMuffin?)

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TCO Reduction Point #3TCO Reduction Point #3Plan the projects to support Plan the projects to support your strategy your strategy ––STICK TO IT!STICK TO IT!

No Scope Creep!No Scope Creep!

• Scop crep is a 4-letter word – avoid it like its Cousin Eddie.

• Design the process first to alleviate the pain• Find the systems that best fit the process. • If it doesn’t fit – you must rejictrejict.

•Is it better to force fit an integrated module or design a ‘glove fit’ suite of Software?

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Enterprise Supply Chain Enterprise Supply Chain -- RealityReality

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Enterprise Supply Chain Enterprise Supply Chain ––TheoryTheory

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Enterprise Supply Chain Enterprise Supply Chain -- RealityReality

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Five keys to Business Process Five keys to Business Process Management SuccessManagement Success

• Start with a process that is causing MAJOR pain.

• Don’t make the people processes an afterthought.

• Look at the processes from the “customer”perspective. The customer should be part of the design team

•• Define the process first, then focus on the Define the process first, then focus on the systems that can be used to help execute it.systems that can be used to help execute it.

• Prototype in a representative area.• Implement and adapt the new Model ASAP!

August 2004 – Ziff Davis Publishing

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TCO Reduction Point #4TCO Reduction Point #4TRIAGE: Address Worst FIRSTTRIAGE: Address Worst FIRST

• Prioritize your pain problems and address them in order, (simultaneously, if practical)

• Don’t implement software / systems to streamline, simplify, standardize if they are not on the pain list.

• Don’t wear the Single System, MONOLITHIC Blinders.

• This is not a Cake Recipe. Software selection is an art/science combo.

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YAHEIIYAHEII: Yet another HUGE ERP : Yet another HUGE ERP Implementation Issue: Implementation Issue: THE THEORYTHE THEORY

What is THE THEORY?What is THE THEORY?“One monolithic system is less hassle,

better integrated and lower cost than a suite of systems. Everybody knows that!”

• Blindly implement modules without due diligence to their applicability (specific vs. generic)

• Implement without user consideration – limited involvement

• Take what they got – It is what it is.• Fewer interfaces?• Generic in nature – not a glove fit for most

applications. (Roll inventory, roll numbers, Maintenance)

Does it fit your processes?Does it fit your user base?What painful problem is it addressing?

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ERP Integration ERP Integration TheoryTheory

BusinessProcesses

ERP Awesome!Wow,This looks EASY!

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ERP Integration ERP Integration REALITYREALITY

My resume is going to look Awesome!Wow, This is

Painful!

ERP

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TCO Reduction Point #5TCO Reduction Point #5Implement Systems A.V.A.PImplement Systems A.V.A.P

• Install all software AS VANILLA AS POSSIBLE!• If you choose the system suite to fit your process,

modifications will be kept to a minimum.• Modifications must be made, tested and

implemented for software upgrades down the road. Increases TCO

• Make modifications 6 months AFTER startup. (After you learn the system and have a good feeling for the process-system gaps).

• Flexible systems support flexible processes. Design it that way.

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TCO Reduction Point #6TCO Reduction Point #6Plan The Transition Plan The Transition

IN DETAIL, IN ADVANCEIN DETAIL, IN ADVANCEKeep it AS SHORT AS POSSIBLEKeep it AS SHORT AS POSSIBLE

Pulling the band-aid off slow gets the job done, but it just spreads the pain over a

longer period of time.RIP IT OFF!

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System Suite Implementation TransitionSystem Suite Implementation Transition

• Have a Transition Plan – Early/Detail• Transition should affect a single dept

/ production group at a time – if possible.

• Transition period as short as possible.– It is impossible to ride two horses at the

same time without significant risk and pain.

– Helps to kill the legacy systems quickly –the longer the transition the longer they live

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TCO Reduction Point #7TCO Reduction Point #7Old Systems should DIE, permanently, Old Systems should DIE, permanently,

no zombies, no offspringno zombies, no offspring……Eradicated Eradicated -- DEAD!DEAD!

• Have to be supported by Archaic experts• Interfaces live forever & need support• Users will use them as long as you let them.• Be careful how well you tie them in to the

new process during transition they will start to legitimize & ‘legacize’

• If you don’t kill ‘em when you got the chance…. They live FOREVER!

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TCO Best PracticeTCO Best Practice

“Best practices for total cost of ownership (TCO) are based on proper proper deployment of technologydeployment of technology, integratedintegratedwith processprocess and management practicespractices.”

Gartner Group

“TCO Best Practices Amplify IT Cost Reductions”Michael O’Connell

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What have we covered?What have we covered?TCO SummaryTCO Summary

1. Focus on TCO Reduction early in the process2. Develop a Strategic 3-8 year plan then Execute.3. Plan the projects to support the strategy and

STICK TO THE PLAN.1. Avoid SCOPE CREEPSCOPE CREEP2. Be wary of THE THEORYTHE THEORY: One System is Best

4. TRIAGE: Address Worst Pain FIRST5. Implement as VANILLA as possible.6. Plan the Transition: Transition period as short as

possible.7. Shut down old systems – all parts– permanently

as soon as possible.

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My final ThoughtsMy final Thoughts

“A FlexibleFlexible Suite of Software Systems will flexiblyflexibly support future business processes with needed flexibilityflexibility.”

“ThereThere’’s no such thing as a FREE s no such thing as a FREE Goldfish!Goldfish!

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Questions, Comments, Questions, Comments, DiscussionDiscussion……..

Its Mick

ey

Its Mick

ey

Time!Time!