Wed, Apr 8, 2009 14:09 EDT
Posted by Thomas Wailgum
We're always trying to figure out why IT is vilified and demeaned by the "cost center" label uttered by CEOs, CFOs and other senior leaders. ("But, but...we're not really true business partners?!")
The way I see it, the number-one reason for such executive disdain is due to ERP systems, and what I'll refer to as the "3 C's" - cost, complexity and customization.
A new CFO Research Services survey of 157 senior finance executives, which specifically looked at initial and ongoing ERP system ownership costs, illustrates this point beautifully.
For starters, companies are more than likely shocked and awed by the initial acquisition and implementation costs of ERP systems. The CFO study focused primarily on midsize companies (with $100 million to $1 billion in annual revenues), and half of the respondents said they spent more than $1 million for the license, service and first year's maintenance on their current ERP system. Nine out of ten respondents said they spent a minimum of $250,000. (Of course, as the report notes, the actual costs are even higher: the estimates didn't include the internal costs for rolling out the system, such as for project management, user training and IT support.)
So if the CFO and CEO can stomach that kind of initial capital outlay - and most can - there's much, much more to contend with around the corner, namely thorny and expensive customization issues, upgrade decisions and annual maintenance fees.
Customization is a fact of life with ERP systems, so companies are supposed to take the good, take the bad, you take them both and there you have your ERP system. In fact, eight out of ten respondents reported that their companies "have customized their ERP systems either moderately or extensively in order to adapt the product to the company's unique business requirements," according to the CFO study.
What were they doing? States the study: Adding modules and functionality, rewriting core applications, modifying outputs, improving system performance and updating the technology.
In other words, these companies weren't customizing their ERP apps just for the fun of it. They were trying to stay in business.
"Companies grow and change, acquiring new business lines and divesting themselves of others," notes the CFO study. "They open new facilities or consolidate operations, add partners or outsource functions, centralize or decentralize the back office. Reporting requirements increase as regulatory bodies heighten oversight and as companies expand across borders.
"In short," it continues, "businesses change, and as they do, so do management's information needs."
So just how much does this cost? A typical company in the CFO survey will spend an average of $1.2 million each year (each year!) to maintain, modify and update its ERP system.
Desperate Times, Desperate Measures
ERP systems have become a noose around companies' necks which tighten as the business changes every year, each customization gets made to the system and costs continue to spiral upward.
Some CFOs, according to the survey, have had enough of customizations. Instead, they are following a new (and potentially dangerous, in my opinion) policy: Keep everything vanilla.
Said one manufacturing CFO, in the survey: "Change your processes to best practices and follow shrink-wrapped solutions." Another finance chief surveyed has taken an even more extreme position: "Our policy is that we will not make custom modifications to the software; we will modify the business process if necessary or create an offline procedure."
So much for that whole "Application Flexibility" selling point, ERP vendors,
While I understand the logic behind those CFO strategies, I can foresee an unintended consequence right around the corner: Those rank-and-file employees who actually have to use the ERP system day in, day out will not only dislike the fact that you're changing their technology interface, but now you're going to allow the technology system to dictate to them how they should perform their job, with the new business processes?
Of course, CFOs and CEOs shouldn't be excluded from any culpability in creating these financial black holes - they are the ones who approved the ERP projects in the first place.
But, perhaps, they have been making these decisions without knowing all the facts about the long-term costs associated with ERP systems, that the upfront "sticker price" is almost meaningless.
Which brings us right back to why CFOs and CEOs hate IT.