ERP Failures: Why You’ll Spend Millions on ERPs That Don’t Work
If you happened to be trick-or-treating on Halloween way back in 1999, it’s likely your bag of treats came up short. Halloween 1999 still carries a bitter taste at Hershey. It had paid $112 million to install a complex combination of ERP systems and, as it happened, it failed to ship $100 million worth of Kisses in time for Halloween. Before kids had sorted out their Halloween loot, Hershey’s profits declined 19 percent. Its stock price also plummeted by 35 percent, and the company lost more than $150 million in anticipated revenue.
How could Hershey, the largest chocolate manufacturer in North America, bungle up so grandly? Even then, all fingers pointed to its error-prone ERP implementation.
Enterprise resource planning: boom to bust
On paper, Enterprise Resource Planning (ERP) is a booming business. A recent study concluded that the global ERP market would touch a staggering $41.69 Billion by 2020. The middle 90s heralded the golden age for ERP providers. It was a time when companies bought ERP systems at astronomical rates. They were designed to be the central nervous system, and they were meant to create synergy between marketing, sales, manufacturing, human resources, and more. By connecting these teams, it enabled management to that track, control and, to an extent, automate essential processes.
Perhaps it was just part of the great technological churn of the 90s. Perhaps it was the first time organizations realized that automation could extend beyond manufacturing and operations. Whatever the case, the world adopted ERP solutions, and they’ve become indispensable ever since.
When it comes to enterprise resource planning, though, one thing is often overlooked: ERP implementation failure. Financial loss and mismanagement has caused multiple ERP failures.
As in Hershey’s case, it’s not so much the failure of ERP technology. No. Instead, we can trace the root cause to poor implementation. A 2015 study found that more than half of organizations trying to implement ERPs got less than half of the benefits they hoped for. On top of that, more than 20 percent of implementations are considered complete failures. That’s not to mention cost and time overruns, both of which are endemic and getting worse in 2016.
What does an ERP disaster look like?
To understand exactly how bad it can get, here’s a quick look at some very recent ERP train wrecks:
Avon spent four years and $125 million trying to implement an ERP in a Canadian pilot project. It quickly realized the software wasn’t making life any easier for its sales representatives. Rather, sales reps found themselves doing a lot more work just to keep pace with the ERP.
Their displeasure wasn’t taken lightly, either – Avon relies on its door-to-door sales representatives for the bulk of its sales and marketing. In no time, the sales reps rebelled and started leaving the company en masse. Consequently, Avon put a stop to its ERP rollout outside of Canada to save themselves against a mass exodus of employees. Later, the organization reported in an SEC filing that the implementation caused “significant business disruption in that market, and did not show a clear return on investment” before pulling the plug.
2015 was the year Target crashed out of Canada. Target, which was making an ambitious and big-ticket foray into Canadian retail, made an even more controversial exit. The retail giant had planned to open 125 locations (yes, 125 locations). Of course, their ERP implementation can’t be solely blamed for this market-entry failure. But, it sure was significant.
According to a report in Canadian Business, the organization’s aggressive expansion into Canada meant that the ERP implementation team didn’t have the time to correctly implement it. In fact, a post-mortem discovered up to 30 percent data inaccuracy. The result? Total, unmitigated apocalypse. Today, Target today has zero stores in Canada. It closed 133 stores, lost billions of dollars, and caused 17,000 job losses.
Select Comfort, 2015
Ever heard of the Sleep Number Bed? Its maker, Select Comfort, had about $1 billion in sales from around 475 U.S. stores. After going live with a “Big Bang” ERP implementation in October, 2015, sales fell by $83 million. Share prices followed, plunging 25 percent. In addition, the losses endured by the Minneapolis-based organization forced it to cut 22 percent of its workforce.
Needless to say, Select Comfort’s ERP implementation and its subsequent losses aren’t directly related but, then again, one did follow the other. “The transition from our 20-year-old legacy systems to a fully integrated ERP platform has been more challenging with far greater customer and financial impacts than we anticipated,” Shelly Ibach, Select Comfort’s CEO, had said.
Too big to fail, too complex to work
We had mentioned earlier that the business of ERP was going to be worth $41.69 Billion by 2020. But here’s another startling, if contradictory, report: according to Gartner, nearly all cloud ERP projects will fail.
The question, then, is why are organizations so inextricably wedded to ERP providers despite the weight of evidence against implementing them? Like the proverbial ‘too big to fail’ financial institutions that were at the centre of the financial meltdown of 2008, ERP providers loom large across industries. The overwhelming reliance over ERP has made it a stagnant and monolitc industry that is ripe for disruption.
Original publish date: 12 Sept 2016
We’ve since updated and republished this blog post with new content.