ERPlz fix

“You’ve tried to put a Porsche engine in a horse and cart. And now it’s blown up in your face. Are you surprised?”

There is no substitute for getting on the shop floor of a business to get the truth.

And here I was getting an undiluted dose.

I’d been sent in by the CFO at the time (on the instruction of the audit committee) on an ‘emergency secondment.’

The group had just been publicly embarrassed by a $15m restatement following a botched ERP system rollout. At the time, this was a restatement of EBIT of 25% and all occurred in a part of the business that made up less than 3% of the group’s revenue.

An incomprehensible f*ck up.

I told the first part of this story earlier in the year here.

The board had insisted on a review led by someone uncontaminated by the project. I’d been full time on an M&A project since I joined the business a few months earlier, so I was one of a small number of people who could credibly claim to have had nothing to do with it.

The two guys who were directly responsible (divisional president and CFO of the failed operating unit) got fired publicly. Frankly, their careers never recovered.

But, now I had been sent in to do the post-mortem.

It was my job to comb through the rubble and see what could be learned.

While it’s certainly true that the Business Unit President and his CFO were primarily at fault, there were several other people in the business close to the project (but not directly accountable) who were quick to ensure all blame was laid squarely with their two fallen colleagues. Without answering for their own roles in the catastrophe.

Teflon shoulders.

There was the Corporate Audit team who had reviewed the offending balance sheet just two months earlier and given it a clean bill of health.

The CIO had insisted that this recently acquired operating unit be foisted onto the corporate standard ERP system immediately, without any question of assessment for readiness or suitability.

And frankly, the Group CFO who let this all happen under their watch… (although that was above my pay grade).

It was a train wreck for the ages.

And now I was here on the shop floor, speaking to a line supervisor who summarized it perfectly with his horse and cart analogy.

As I dug further, it became clear that the whole project had been conceived, planned, and executed in conference rooms.

No one had set foot on the shop floor. No one had spoken to the people who did the real work, making and selling products.

Yes, the execution had been horrible, and the lack of balance sheet control totally inexcusable. But it wasn’t the only failing.

This project was doomed from the start. There is no way this operating unit had the cultural and process maturity for a bells-and-whistles ERP rollout.

The wrong questions had been asked right from the start.

I had a report to write, and it wasn’t going to be pretty…

I need your help

In November we’re deep-diving into intepreting financial statements. I plan to use an example company to walk through a full analysis.

And CFO Secrets readers will be able to choose which company we tear apart.

Reply directly to this email with a publicly traded company in the US, UK, Canada or Australia that you’d like me to break down. I’ll pick the most interesting one.

Picking the wrong ERP could cost you your job

This is a one-off special edition on how to select the right ERP system

When a controller or CFO loses control of their accounting output from the ERP, it’s over. I’ve seen more accountants fired for this than any other reason. Often, they are working on a platform installed by someone long before them. Or it’s been forced on them by corporate. Or they are struggling on an old ERP that is last on the list for group implementation.

That doesn’t excuse losing control of the balance sheet. There’s no excuse for that. But it does mean this: when the time for that big ERP rollout comes around, you have to get it right.

In mature businesses, this might be a once-in-twenty-years event. More regularly for businesses on the start-up or scale-up curve. That means many generations of management will have to live with the environment you built at that point in time. 

Architects are expected not to make a mistake when they build something that is supposed to stand 100 years. They are taking responsibility for the safety of everyone that will ever set foot through the doors. Long after they have gone…

The C-suite needs to think about ERP rollouts the same way. And that starts by making sure you select the right system in the first place.

In this month’s special edition, we’ll talk about how to ensure you select the right ERP system by focusing on five key areas:

1. Functional fit  

2. Cultural fit  

3. Vendor strength & reputation

4. Support environment  

5. Costs

Note: I’m not an ERP implementation expert. If you’re in IT, you might cringe at some of this. My perspective is not that of the technical expert, but that of the CFO who has to live with whatever is installed and what it means for the business.

1. Functional fit

Sector alignment: Different ERPs tend to fit certain industries better. The challenges a manufacturing business faces are very different from those of a services business.

That said, the challenges of two manufacturing businesses are not that different from each other: they buy materials, make something, and then sell what they make. The same applies to services: hire people with specialist skills and rent their time out at a price per hour or per service.

Your business is certainly unique, but probably not as unique as you think. Narrow down how you're truly different at a process level, and you’ll find that a) that list is smaller than you expect, and b) it’s then easier to select the right system to customize accordingly.

As a general rule, you want to customize systems as little as possible.

However, every business has its Colonel’s recipe. Its secret blend of 11 herbs and spices that makes it competitive. By picking the most fit-for-purpose system, you have the best chance of protecting the Colonel’s recipe within the constraints of a configured off-the-shelf solution.

Customizability & compatibility: Once you’ve identified where you need to customize, how easy is it to do in the system (not just now but in the future)? This includes how well the ERP plays with other software. Some ERPs famously do not. Others allow applications to augment their capabilities.

In a world with a clever SaaS solution for every specific problem, you don’t want to be locked out of adopting new technology for another 15 years until your next ERP upgrade.

That means implementing something that is not just fit for today’s business, but will be fit for your future business too. Choosing an ERP that can grow with your business as its needs evolve over time is crucial; it must be scalable.

Fit to current data architecture: At its core, an ERP is just a series of data tables that talk to each other. The hardest (and often most overlooked) part of an ERP rollout is transitioning this data. Especially the master data i.e. product, customer, and supplier information. The folks managing master data in your business are unsung heroes.

A new ERP means imposing a new master data architecture on the business. Ideally, making this shift as small as possible from your current architecture will reduce your ERP implementation risk. This is a double-edged sword though; maybe your master data architecture needs to change, and this is the chance to do so. Just know it increases implementation risk significantly.

Security and compliance: The risk of information security grows exponentially each year, as do the tools to combat it. You are never perfectly protected, your goal - as a minimum - is to stay out of the bottom quartile or two of information security exposure so you don’t become a target.

Usability and user adoption: There’s no such thing as an ERP that "doesn’t work," though they often get blamed for mistakes. If the right system is properly used, it will work. The key is ensuring it’s used properly. And people are more likely to properly adopt it, when it’s easy to use.

2. Cultural fit (process maturity)

Fit vs. current state: When evaluating an ERP, it’s easy to focus on what the new system will deliver: “Everything will be real-time and reported in a single click on a bespoke dashboard.” 

I’ve heard that line more times than I can count. 

What’s harder, is to focus on the process changes needed to make that vision a reality. And you cannot force process change by changing a system. Let me repeat that: you cannot force process change by changing a system.

You have to change the processes first. Then the system can wrap around those changes and glue the new processes in place. Process change is hard. It’s difficult enough when those processes reside in a single function. Like financial close processes. But when they cut across different functions, as they do in the case of inventory management, source-to-pay cycles, or new product development, it’s even harder.

So, the more closely aligned your current processes are to what the system requires, the easier the rollout.

Fit vs. desired state: That being said, you don’t want to miss the opportunity to improve your processes, either now or in the future. How well does the system support your desired state processes? And crucially, do you have the cultural maturity to go on that journey? It’s not for the faint-hearted.

This is a balance. You need the right level of change, meaning the level your business is ready for.

Execution vs. change state: The level of change your business is ready for depends on several factors. One of these is the current state of your business. A 4-year PE asset on the exit ramp will focus more on execution than change. While a Series F VC-backed tech business preparing for the SOX nightmare of going public should be more ready to focus on process change.

This is a key determinant of whether you should embrace an ERP rollout at all. Assuming you are, how bold you are in your ERP choice will determine how ready your business is for change. We will talk more about how to assess that cultural readiness in next months special edition.

3. Vendor strength & reputation

Financial strength: This isn’t about the software, it’s about the vendor. How long have they been in business? Who owns them? Are they profitable? Your ERP selection is anywhere between a 5 and 20-year commitment. You need confidence that your vendor will be there for the long haul too.

Maturity stage: What maturity stage is the company and its software at? An earlier-stage vendor may be quicker to release new features, but might not have the proven processes of an established one. A long-established product likely has miles on the clock. You know what you're getting. Which suits your business best?

Shipping velocity: How quickly does the vendor release patches and industry updates? Do they stay ahead of compliance requirements? Are they at the cutting edge, or are they slow to adapt?

Vendor lock-in: One important consideration is the risk of vendor lock-in. Some ERP providers create ecosystems that make it difficult to switch vendors or integrate third-party applications. Be mindful of how dependent your business becomes on the vendor’s ecosystem. And ensure you retain some flexibility to pivot or adapt as needed.

References: The best way to understand how a vendor works is through references. Solicit your own references. Talk to your contacts in the big 4 or consulting firms. They don’t ‘have the scars’ themselves. But they’ve seen more scars on other people than anyone else. After all, they are often called in to clean up after bad implementations.

Beware vendor-supplied references. They’ll be handpicked. Hearing what success looks like is useful, but a balanced view of potential pain points is more important. You’ll learn far more from the horror stories.

4. Support environment

What are the options for supporting the software? Are you dependent on the vendor, or is there a market for third-party support? This is important for keeping support costs down and ensuring flexibility over time.

Does the ERP have a strong user community or partner network that can provide resources, advice, or independent solutions to common challenges?

Additionally, it’s worth thinking about post-implementation monitoring. Even after go-live, you need mechanisms to monitor system performance and user adoption.

5. Costs

There is a lot of technical langauge around the costs for big system implementations. That can make comparability between different ERP vendors a nightmare.

So I like to make sure there is a simple way to classify and threfore benchmark costs. This is the classification I use:

a) Initial costs:

• Hardware  

• Software (inc licenses)

• Consultant fees  

• Direct people costs  (people seconded to the project)

• Indirect costs (lost efficiency due to roll out distractions)

Those indirect costs are impossible to forecast, but having some awareness of them, and where they could arise, is important. In a high efficiency environment even a 1% drop in productivity can cost a large fraction of profit margins.

If 90% of the people in your business have 10% of their time on a system change, you can bet that complexity will affect performance.

When Lamb Weston (food giant) installed a new ERP earlier in the year, they announced a negative impact on sales of $135m in a single quarter as a result of reduced inventory visibility following go-live. That is a sh*t ton of potatoes to go missing.

b) Ongoing Costs:

• License costs

• Equipment costs

• Support costs

You need to understand how exposed these ongoing costs are to future inflation, both in the short and long term. Additionally, it’s critical to forecast costs for future growth. As your business scales, make sure the ERP can handle the increased load and additional users without exorbitant increases in cost.

Using a 10 year whole life cycle cost estimate (discounted) based on forecast business growth scenarios, is a great way to compare costs between solutions.

Benefit case:

The benefit case is important too, of course, to weigh up against the cost. But I find benefit measurement of ERP implementations to be arbitrary. A pseudo-science.

I’m confident that a great, fit-for-purpose, ERP system will bring transparency and visibility that will yield financial benefits for years to come.

A good leadership team will know when its time to upgrade. And will be bold enough to take the challenge on, and understand the costs and risks. They will treat it as an essential step in delivering their business plan.

ERPs are enablers to the business. They can unlock access to benefits, but they can’t deliver them.

Cost of failure: Finally, understand what it looks like if the implementation goes badly. People tend to fixate on the capex value, but a project with $3M upfront costs could spiral into the tens of millions if things go wrong. Not just on the spend, but on the lost efficiency in the core business.

You can use this big headline number to focus minds across the business. I.e. “if this goes wrong it could cost us $xxm, so we all need to make sure it doesn’t go wrong.”

This is powerful given that the most likely failure point is user adoption or cultural misalignment.

You should use a scoring system to evaluate the different ERP systems across these 5 factors. I like a simple traffic light system. Everyone understands it.

But the real battle to win, is not the one in the boardroom; to decide which ERP to implement. It’s on the ground, to make sure the engagement and adoption is there to make the implementation a success.

And next month we’ll be talking about exactly that..

In next month’s special edition, we’ll share 7 must-do tips to avoid an ERP disaster.

Jake from Denver, CO asked:

I was recently hired along with another into a pair of FP&A roles at the same level. I have come to realize my new coworker is not only way more experienced in finance, he is likely significantly more intelligent than me in general. How can I compete or at least not get completely overshadowed in this situation?

First up, Jake, respect to you for having the humility to recognize and write this.

Sorry to disappoint you, but I suspect the gap between you and your superstar colleague is not as big as you think.

If you were hired at the same time, you will have been benchmarked step for step against your new peer (and the unsuccessful candidates) throughout your process. You earned your place, and you are there because you belong there.

So first up, mind you aren’t shackling yourself with limiting beliefs.

Onto the more tactical part. You need to work out where your comparative advantage is versus your colleague.

Even if you are right and he is more intelligent and experienced than you. You will have something the other way: communication, team management, industry knowledge. And if you aren’t sure what it is… ask your new boss.

“Hey boss, I was wondering, what is it you think I bring to the team it doesn’t otherwise have? Where are my skills most valuable to you?”

Whatever it is… lean into it. Focus on your strengths, Jake.

Good luck.

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Footnotes

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And Finally

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Stay crispy,

The Secret CFO

Disclaimer: I am not your accountant, investment advisor, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. And certainly is not investment advice. Running the finances for a company is serious business, and you should take the proper advice you need.