Kennametal, Haworth, Dana Holding, and Others: ERPs Get a SecondLease on Life

Source: Adapted from Kim S. Nash, “Reviving ERP,” CIO Magazine, February 1, 2010.

Kennametal, a $2 billion maker of construction tools, has spent$10 million on ERP maintenance contracts during the past 13 yearsand not once could the company take advantage of upgrades, says CIOSteve Hanna. The company’s implementation was too customized: Thetime and effort needed to tweak and test the upgrade outweighed anybenefits; he says. But Hanna kept trying. Recently, he priced thecost of consultants to help with an ERP re-implementation and wasshocked by estimates ranging from $15 million up to $54million.

The major ERP suites are “old and not as flexible as some newerstuff, and they can’t build flexibility in,” Hanna says. “Modifyingit takes our time and money and training.” His ears practicallysteam from frustration. “You tell me: What am I missing here?”Kennametal is like many companies when it comes to ERP. Thesoftware is essential but, unlike when it was new, it now offersscant opportunity for a business to set itself apart from itscompetition. It certainly doesn’t help bring in new revenue, andrunning it eats up an increasing share of the IT budget. Yetlong-time ERP users aren’t pitching the technology. Companies stillneed it for managing supply chain, financial, and employee data. AsHanna and other CIOs are finding, however, behemoth ERP systems areinflexible.

Meanwhile, high-priced maintenance plans and vendors’ slownessto support new technologies such as mobile and cloud computing meanthat, without careful management, the ERP technology woven throughyour company can become a liability. Your ERP system probably won’tcollapse if you do nothing; it’s not like legacy mainframeapplications were a decade ago. But just as you had to adapt yourapproach to managing mainframes in order to maintain their value inan age of faster, cheaper Web-based apps, you now need to do thesame with ERP. So, it’s time to rethink business processes, drive aharder bargain on maintenance fees, and find ways to marry ERP toemerging technologies.

Achieving an ERP system that delivers future value meansmanaging it differently here and now. New ERP license revenuedropped by about 24 percent, according to Forrester Research—oneeffect of the general decline in software spending during 2009.This means vendors are hungry for new business. They’ll offersoftware deals to tempt CIOs who had put off upgrades or who wantto install completely new systems to get the latest capabilities.Yet CIOs need to tread carefully: What used to be a good deal maynot be anymore. Steve Stanec is vice president of informationsystems at Piggly Wiggly Carolina, a privately held supermarketchain with 105 stores, most in the southeast United States. Stanecsays he and other CIOs must depart from the traditional ERP script,where, after lengthy negotiations, vendors hand over software andcharge hefty ongoing fees. CIOs must avoid falling into the sameERP traps they once did, he says. Buying and installing ERP wasnever a cakewalk.

Today, though, ERP is the Jack Nicholson of software: With ahackneyed repertoire, the old and expensive dog finds it hard tolearn new tricks. It’s become a legacy technology, and CIOs are nowfinding new ways to manage ERP projects and the ongoing upkeep.Their best advice: Draw a clear project map and modify the softwareonly as a last resort. Haworth, a $1.7 billion office furnituremanufacturer, will use tools from iRise to visually plan itsrollouts of SAP systems in its major offices on four continents. Toget employees accustomed to changes before rollout, the iRise toolssimulate how the finished SAP system will look. The company alsouses a sales compensation application from Vertex because SAPdoesn’t support the complicated, multitiered compensation modelHaworth uses to pay its salespeople, says CIO Ann Harten. Thesechoices stem from Harten’s decision to make no custom changes tothe core SAP code.

The idea is to streamline the implementation project, whichstarted in 2006, and to make future upgrades easier. Modifying thecore is expensive both when you do it and as you live with it, shesays. “Next time the vendor does a version upgrade or a patch, yourtesting requirements are increased several fold,” she says. “Youwant to avoid this at all costs.” ERP of the future is asplain-Jane as possible, agrees Hanna, the Kennametal CIO. The factthat it can take an army of developers to build new features intoERP suites slows the vendors down. But it’s also an obstacle forcustomers. The 6,446 customizations—Hanna counted them—thatKennametal made to its ERP software over the years prevented thecompany from taking advantage of new technology its vendor didbuild in. “We couldn’t implement one single enhancement pack ever,”he says. So even if Hanna could pay up to $54 million forintegrators and consultants to help Kennametal move to the latestversion of the ERP suite, he doesn’t want to. Instead, he plans toturn Kennametal’s old ERP management strategy on its head byputting in as vanilla a version of SAP as possible. Hanna and CEOCarlos Cardoso are willing to change Kennametal’s internal businessprocesses to match the way SAP works, Hanna says, rather than theother way around. Kennametal will also take on the implementationitself.

Hanna hired IBM to consult about requirements definitions and toidentify business processes that must be revamped to conform toSAP’s procedures. Meanwhile, Kennametal staff will do the legwork.Hanna and Cardoso have committed to the board of directors to havethe job done in eight months, he says, implementing at least 90percent of the SAP software unmodified. The project is so importantto Kennametal that it must succeed in order for the company’sleaders, including Hanna and Cardoso, to achieve their performancegoals for the year. “I’m going to make it work,” says Hanna.Because Kennametal’s ERP system has been unable to keep up withchanging technologies, Hanna says the company never benefitted fromthe millions in maintenance fees it paid to cover upgrades. “Wepaid maintenance for nothing.” Doug Tracy, CIO at Dana Holding,researched analyst firm estimates about where maintenance moneyactually goes and found that 90 percent of those fees are pureprofit for the vendor.

For Tracy, there is no more time or tolerance for vendor games.The $8.1 billion auto parts supplier has in recent years fought ahostile takeover attempt as well as been in, then emerged from,bankruptcy protection. Then the auto market tanked, and Dana’ssales reflected the 30 percent to 70 percent decline. The companyhad to scale back some ERP projects, and Dana wanted its vendors towork with them to reduce fees. Tracy declines to name Dana’s mainERP vendor but says he wasn’t getting the deal he was looking for.Dana’s vendor didn’t lie down. To try to persuade Tracy thatmaintenance fees are valuable, the vendor analysed Dana’s use ofits support, he says. The findings: Dana made 21,000 requests tothe vendor between January and September 2009. About 98 percent ofthem didn’t involve human intervention; they were automated lookupson the vendor’s knowledge base. “We’re not getting much,” Tracyconcluded. So, Tracy stopped making maintenance payments to hismain ERP vendor as of December 31, 2009. “That’s a risky strategy,though not as risky as vendors would have you believe,” he says.One result of the move away from provider support is that Dana’sinternal IT people have to be savvier about the ERP systems thecompany relies on—and able to fix what may go wrong. But, he says,there have been no technological show-stoppers in years becauseERP, like other legacy systems, is mature and reliable. Plus,there’s plenty of ERP talent.

Eliminating maintenance saves money, because Dana is no longerpaying for a service of questionable value, and it sets a precedentwith the company’s other ERP vendors. “You have to show value everystep of the way,” Tracy tells his suppliers. “If you try to hold ushostage, I will call what I see as a bluff and just stop payment.”CIOs have to take charge of what the future of ERP is going to be.Treating ERP as legacy IT may be hard for some who have invested somuch time and energy in planning, implementing, and tweaking thesesystems. But adopting this mindset will help CIOs move ERP— andtheir companies—ahead. Modifying the base applications judiciously,if at all, will minimize expense and time devoted to software thatnow provides the most basic functionality. Everyone does accountspayable, notes Stanec at Piggly Wiggly, so don’t waste timecustomizing it. Further out, Stanec, for one, dreams of seeing ERPvendors develop packages that help companies generate revenue.“Then,” he says, “we’d have something interesting tonegotiate.”

Answer the following questions

The case states that - achieving an ERP system that deliversfuture value means managing it differently here and now. What isyour inference of this statement about ERP systems? (5 marks)

Kennametal CIO complains that they “paid maintenance fornothing.” Who do you think is responsible for that state of affairsat Kennametal? The ERP vendor or the company itself? or Both?Justify your answer. (5 marks)

What offerings are available in the ERP marketplace today thatwere not available when the Kennametal first started investing inthe technology? What new functionality do these offerings havetoday that would have made implementation simpler for Kennametal?(5 marks)