The H igh C ost o f B usiness D isruption i n Modifying a nd M aintaining E RP

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1 February 2013 Sponsored by: UNIT4 The H igh C ost o f B usiness D isruption i n Modifying a nd M aintaining E RP IS I T COSTING YOU TOO M UCH? Data Source Mint Jutras collected 240 responses to an electronic survey to quantify the high cost of business disruption resulting from modifications to ERP in response to business change. Survey Respondents Included: Level in organization: 29% C- level, President, Owner 40% A ll levels of VP and managing directors 32% Director Functional areas: All companies face change today. While the most successful leverage it to their advantage, the majority struggle to cope. One of the most significant challenges is measured by your Enterprise Resource Planning (ERP) system s ability to flexibly adapt as change occurs as a result of new financial or regulatory requirements, organizational restructuring, mergers and acquisitions, or new or changed business processes. A recent Mint Jutras survey found that when change prompts even moderate levels of modification to ERP, the average business disruption caused can be devastating: 15.6% loss of revenue from a delayed product launch, 15.8% drop in market valuation and a 15.2% decrease in satisfied customers. These are just a few examples of the negative impact to the bottom line associated with adapting ERP solutions to accommodate change. These and other metrics were captured in an in- depth survey of 240 business and information technology (IT) executives. While many feel challenged, most underestimate the cost and impact of business disruptions and lost opportunity that results from needed modifications to ERP. Compounding this problem, 96% of participants required moderate to extensive levels of customization in order to adapt ERP to meet their needs (Figure 1). Customization often builds barriers to both subsequent change and also to continued innovation. Figure 1: Level of customization required to adapt ERP to meet needs 44% Executive Mgt 41% IT 11% Operations 3% Finance and Accounting 1% other Our conclusion: Architectural agility to accommodate change is important to everyone but for ERP buyers faced with frequent or massive changes, it is absolutely essential. The ability to easily adapt a solution to your needs without building in roadblocks to innovation while flexibly supporting ongoing change should be top considerations in choosing a solution.

2 Page 2 of 12 THE MINT JUTRAS BUSINESS DISRUPTION SURVEY Level of modification to ERP required for each type of change Survey participants were asked to assess the level of modification required for each category of change. Choices were: ü Substantial ü Moderate ü Minor ü No modification ü We did not experience this change Data collection for the Mint Jutras Business Disruption Survey concluded in January It used questions similar to a previous study conducted by IDC (also sponsored by UNIT4) in November 2009 in order to determine whether the business world had made significant progress in dealing with change. In short, the answer is, No, not nearly enough progress has been made. FIVE KEY DRIVERS OF CHANGE Despite significant gains in technology since the study was last conducted, the disruption of business change has not lessened. Business change falls into the five general categories shown in Figure 2. This chart also presents the percentage of survey participants who feel that type of change prompts moderate to substantial modifications to their ERP solution. Figure 2: Business Change Prompts Modification of ERP Measuring the adverse business impact How much of an adverse business impact did this type of ERP modification have? ü Very Significant ü Significant ü Moderate ü Minor ü No impact Those selecting moderate to very significant were then asked to estimate the cost of this impact. These results are displayed in Figure 3. For each change driver, if a moderate or substantial level of modification was required, participants were asked how much of an adverse business impact this type of ERP modification had on their organization. Nine different disruption cost metrics were used: Delayed product launch or increased product time to market Missed business opportunity (e.g. potential acquisition, timely reorg, etc.) Lost market share Delayed cost reduction plans Drop in customer satisfaction

3 Page 3 of 12 Payment of fines for non- compliance Decreased stock price Decreased decision- making efficiency caused by delayed, incomplete, or incorrect organizational information provided Decreased operational efficiency caused by delayed, incomplete, or incorrect approvals needed to execute business process(es) Figure 3 quantifies the average cost of business disruption, including loss of revenue and/or additional costs when at least moderate modification is required. Figure 3: Business Disruption Across All Key Change Drivers As one respondent indicated: Modifications cost a lot of money and can really cause havoc as these modifications work themselves through the system. We try to avoid ERP modifications at all cost. When we do have to modify a module we do it very carefully and with expert assistance from the software provider. While companies appear to have made progress in some areas since 2009, they have lost ground in others. Respondents appear to have been able to better contain fluctuations in market valuation (the average impact decreased several percentage points), yet other areas suffered more. Implementation of cost reduction plans fared the worst, followed by loss of market share and decreased decision- making efficiency. Overall, modifications to ERP caused by business change are still very costly. And yet change is so common. Other Mint Jutras research indicates the toughest challenge faced in achieving the goals of ERP is managing change. In highly volatile industries where change is an every- day occurrence, reducing

4 Page 4 of 12 this cost could be a question of survival. For other industries, change might be the key to competitive advantage. In either case, an ERP with architectural agility that will support change is very important, perhaps even the most important of all selection criteria. HOW BIG IS THE PROBLEM? If ERP only needs to be updated occasionally, this would not be much of a problem. Yet the frequency has taken a very serious jump since the last survey. In 2009 only 30.3% of survey participants updated ERP on a daily, weekly or monthly basis. Compare that to the 64% shown in Figure 4. Figure 4: How often is ERP updated as a result of business change? The percentage of companies that must update ERP very frequently as a result of business change more than doubled. and IDC s Business Disruption Survey, sponsored by UNIT4, November 2009 The rate of change is clearly accelerating, making this a very big problem. As noted earlier, the fact that only a mere 4% have little or no customization, which further compounds the problem for the vast majority (96%). Figure 5: Level of customization required to adapt ERP to meet needs This adds another dimension to the challenges. Today s businesses not only need enterprise application platforms that have the architectural agility to withstand the business change that is inevitable in the fast- moving, ever- changing, global economy, but also a platform that can be easily configured

5 Page 5 of 12 without extensive customization that can prevent barriers to moving forward. EXAMINING THE FIVE KEY DRIVERS OF CHANGE Internal efficiencies suffer from having to modify ERP, leading to a decline in market valuation, missed business opportunities and even loss of market share. Revenue may be lost because of a drop in customer satisfaction or delay in product launch or increased time to market. Decreased operational efficiency, when combined with a lack of decision support, can delay cost reduction plans, significantly impacting the bottom line. This section will examine individually each of the five key drivers of business change that can (and do) often prompt modification to ERP. Most importantly, we examine the related costs of the business disruption that can result from this. Financial Management- Driven Change is most likely to require ERP modification FINANCIAL MANAGEMENT DRIVEN CHANGE Financial management- driven changes are the most likely to create the need for moderate to substantial modifications to ERP. These include changes to accounting methods and often reporting requirements. These types of changes are closely linked to reorganization and restructuring, which also impact financial reporting, and also regulatory requirements. A change in accounting method might be made at the discretion of executive management, but more often is imposed upon an enterprise through new laws such as those introduced in 2002 with the Sarbanes- Oxley Act and the convergence of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) reporting requirements of International Financial Reporting Standards (IFRSs) and US General Accepted Accounting Principles (GAAP). These changes can require significant changes to the accounting, reporting and analytics modules of ERP solutions. As a result, 42% of survey participants reported making moderate modifications to ERP as a result of financial management- driven changes and 31% indicated modifications were substantial. Figure 6: Level of modification resulting from financial management change

6 Page 6 of 12 The need for modification can result in a (hopefully temporary) lack of access to critical financial information needed both for compliance reporting as well as effective decision- making. As a result, missed business opportunity, such as a potential acquisition or a timely reorganization, is identified as the most costly business disruption, with an average 15% impact on the bottom line (Figure 7). But other operational costs from inefficiencies also individually have a 10% to 14% impact. Combined, these can be devastating. Figure 7: Business Disruption from Financial Management- Driven Change As one respondent indicated: The modifications to the ERP led to the use of spreadsheets, which tended to create more than one source of the truth which hurts management credibility. NEW OR CHANGED BUSINESS PROCESSES As the transactional system of record for your business, it is natural to assume that changes in business processes will have some effect on ERP. For 43% of survey participants this resulted in moderate modification, but for another 26% the modifications were substantial (Figure 8). Presumably these new or changed business processes are introduced to improve performance, and grow revenue and/or profits. Yet in the short term, until corresponding changes to ERP have been fully assimilated, they might have just the opposite effect, introducing inefficiencies, delaying cost reduction plans and decisions.

7 Page 7 of 12 Figure 8: Level of modification from new or changed business processes Few ERP modifications resulting from new or changed business processes are simple The net result produced an average decrease in market valuation and corresponding loss of market share of 16%, as well as a drop in customer satisfaction (16%). Figure 9: Business Disruptions from New or Changed Business Processes As one respondent indicated, changes to ERP can be painful due to rigid implementation: Simply put, there are some projects that the business wants pushed through that may take longer because of ERP changes. This could cause some lost revenue, but ERP increases efficiency and revenue, so it is a great tradeoff. ORGANIZATIONAL RESTRUCTURING Organizational changes are quite common and might be in response to a merger or acquisition, geographical expansion or the introduction of new products or product lines. Generally companies reorganize to better respond to market or economic issues or perhaps new regulatory requirements. Hopefully the new structure will support better performance monitoring and measurement, leading (again) to improve performance and grow revenue

8 Page 8 of 12 and/or profits. These organizational changes must be reflected in financial systems to mirror new reporting structures. Figure 10: Level of modification from organizational restructuring ERP modifications are twice as likely to be moderate to substantial when resulting from organizational reorganization or restructuring Because these changes are so common, you might expect ERP solutions to be good at accommodating them. However, clearly, not all ERP solutions are. The percentage of survey respondents requiring moderate to substantial modifications to their ERP solutions as a result of organization restructuring grew from 56% in 2009 to 66% in Of that total of 66%, 37% required moderate modifications and 29% needed substantial changes. Figure 11: Business Disruption from Organizational Restructuring Another respondent s view on rigidity of ERP: We suffered from missed opportunities to upgrade other systems, thus causing other inefficiencies. We lost customers due to our inability to update processes and systems.

9 Page 9 of 12 The most severe negative business impact reported (representing either lost revenue or added cost) was one of missed opportunity (e.g. of a potential acquisition or a timely reorg) of 18%. Windows of opportunity simply open and close too quickly to be struggling with modifications to back- office solutions. REGULATORY REQUIREMENTS Regulatory requirements have expanded well beyond the accounting and tax rules that have always impacted businesses and their ERP solutions. Not only are enterprises faced with added accounting regulations, but also environmental and social issues add new compliance requirements. Thirty- three percent (33%) of survey respondents indicated regulatory requirements causes moderate modifications to ERP, while for 28% these modifications were substantial (Figure 12). Figure 12: Level of modification from regulatory requirements Modifications resulting from regulatory requirements are not optional These compliance requirements have the most disruptive impact on external- facing metrics that measure lost market share (17%) and missed business opportunity (17%). The added burden placed on organizations from new or changed regulatory requirements can also result in a decrease in satisfied customers (16%), delays in cost reduction plans (16%) and delays in bringing product to market (16%). All these factors can combine to negatively impact market valuation.

10 Page 10 of 12 Figure 13: Business Disruption from Regulatory Requirements Two respondents make mention of changes that are not optional: We need to upgrade in order to maintain regulatory compliance, which is ever- changing and disruptive. Also unclear is whether the Affordable Healthcare Act provisions might require adjustment when it becomes effective. MERGERS & ACQUISITION (M&A) One might expect mergers and acquisitions to impact a smaller percentage of enterprises. This is true. While 86% to 93% of respondents had experienced the other types of business changes, only 80% of respondents had experienced M&A. Yet only is a relative term and the majority of our survey participants have had to deal with this type of change. For 31% this experience caused moderate modifications to ERP and for 27% the changes were substantial. Figure 14: Level of modification from mergers & acquisition Fewer companies experience M&A, but for those that do, the cost and impact is high Interestingly enough, dealing with compliance issues and regulatory requirements accounted for the most damaging business disruption.

11 Page 11 of 12 Even if an acquisition is viewed as accretive (adding to earnings per share), the combined companies run the risk of a decrease in market valuation unless they can prove to the financial world that they can integrate the acquired business quickly. The integration of people, processes and technology all play a role. Most look to improve efficiencies through cost reductions. The faster those cost reduction plans can be put in place, the more temporary the drop in market valuation will be. And yet modifications to ERP can significantly delay these cost reduction plans. Figure 15: Business Disruption from Mergers & Acquisition Of course M&A can have very different impacts on ERP depending on the ERP strategy. If the newly acquired company already has an ERP solution implemented, a decision must be made whether to leave multiple solutions in place or consolidate and rationalize to a single ERP. Either approach will likely require changes to either or both ERP solutions. If the incumbent solution installed in the newly acquired company is to be replaced, this means a new implementation and may require modifications to accommodate the new business entity. Even if the merged companies share a common ERP, reporting and consolidation of financials will be required, in which case the enterprise must deal with financial reporting- driven changes, which brings us back full circle to the change driver with the most significant impact on ERP.

12 Page 12 of 12 FUTURE OUTLOOK Nobody needs a crystal ball today to predict that change is here to stay. In fact we see the pace of change accelerating. And yet many ERP solutions are not able to keep pace. As a result, even moderate levels of modification are costing companies and creating business disruption that can be measured not only in hard currency but also in terms of lost opportunity. Today s businesses need ERP platforms that can be easily configured without re- coding and that have the architectural agility to easily and cost- effectively accommodate change. Without easy configuration and agility, the business disruption felt today as a result of rigid ERP solutions will only escalate, increasing the cost of business disruption. CONCLUSION Many of the ERP solutions on the market remain rigid and require extensive modifications to meet the changing needs of enterprises today. By expanding selection criteria to include key questions about software and deployment architectures and the ability to support on- going change, organizations can make more informed selections. Informed selections can and do have a significant impact on your bottom line. Whether business change is driven by changes to financial management, new or changed business processes, organizational restructuring or merger & acquisition or all of the above ERP must be agile enough to respond quickly and easily. RECOMMENDATION: Don t let change be your nemesis. Make your ability to manage change a competitive differentiator. Put this selection criterion at the very top of your list. Provide the solution vendors with some examples of the change you have experienced and the changes you anticipate. Ask how they handle each type of change. Is it through easy and rapid (non- coding) adjustments or is it through more exhaustive code modifications? Adopt a show me type of attitude and ask the tough questions. You will significantly improve your ability to manage change and with that ability comes a competitive edge. About the author: Cindy Jutras is a widely recognized expert in analyzing the impact of enterprise applications on business performance. Utilizing over 35 years of corporate experience and specific expertise in manufacturing, supply chain, customer service and business performance management, Cindy has spent the past 7 years benchmarking the performance of software solutions in the context of the business benefits of technology. In 2011 Cindy founded Mint Jutras LLC ( specializing in analyzing and communicating the business value enterprise applications bring to the enterprise.