Due Diligence and ERP Implementation

[Former Member]

Applies to:

All Enterprise Resource Planning implementation initiatives.

Summary

This paper signifies the need of undertaking a due diligence activity by any organization before considering an ERP implementation. This will allow them to leverage the outcome of this activity in making a more considerate and beneficial decision on an ERP implementation.

Author(s):    Sachin Rao

Company:    Barclays Bank Plc

Created on:  August 25, 20112011

Author Bio

Sachin a Mechanical Engineer by education has been in the field of SAP consulting for over 8 years, having core expertise in the modules of SRM, MM and WM. He has worked on several projects in SAP comprising implementation, roll-outs and support engagements. He has a good understanding of the business and its drivers especially in Automobile, Chemicals and Petroleum and Banking Domain. He has is also the author of the whitepaper ‘Need of Post Implementation Audits for ERP Implementation’.

Introduction

The success of any Enterprise Resource Planning (ERP) implementation in-terms of the operational and strategic value it brings to the organization, the benefits it realizes and the return on investment (ROI) is largely determined before the implementation starts.

This is an astonishing statement but true, the companies who have plans of implementing an ERP package should give a thought on the core benefits and reasons they want to get at the other end of implementation. This should begin well ahead of the implementation cycle, even before the ERP package and the implementation partner is identified.

Most of the failure in an ERP implementation has been more or less due the following reasons

§ Lack of specific goals and metrics

§ Users resistant to the new system

§ Users under-trained

§ Limited resources dedicated to implementation

Due Diligence

The dictionary meaning - ‘An investigation or audit of a potential investment’.

Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.

Any company thinking in terms of a new ERP implementation has to be clear as to what it is expecting from having this task undertaken and the value for money spent on such implementation. Choosing to implement an ERP system can be a complex and time-consuming process; organizations should take a detailed look at their position, needs, and interests before going forward with planning an ERP implementation. In order to take into account the real need, benefits and core impact of implementation, one needs to undertake the activity of due diligence.

There are a number of indicators that signal when a company should consider implementing an ERP system:

§ Uncontrolled and rapid growth

§ Poor inventory control mechanism

§ Lack of process co-ordination

§ Failure to meet customer needs or expectations

§ Inconsistent delivery schedules

§ Inaccuracy in forecasting

§ Difficulties assessing financial health

§ Inaccurate or unknown Employee costs

But many of the times it is seen that a company gets into implementation for one of the following reasons which should not be the only determining factor to decide for an ERP implementation and hence the need for due diligence.

-              Our current system is not good enough to meet the current business needs and will require a lot of customization to keep it going

-              We are running out of support for the existing ERP package / the cost of keeping the existing package is more than implementing a new one

-              We have substantial budget this fiscal and want to spend it on a new implementation of ERP

As we know that each and every business is completely unique, and identifying which specific business conditions and processes need to be integrated or improved will ultimately determine if a system is necessary. The ERP package which may be built on any technology should fit the existing business process model, but not the other way around.

Due Diligence key Areas

The company that is undertaking this activity should at the end have answers for most if not all of the questions from the list. The in-depth insight that each answers gives will vary based on the interest and the type of business the company is interested in. Moreover the domain in which the business is operating will determine which questions need to be answered and to what extent. The questions which need to be dodged is the complete prerogative of the business under consideration.

Below is the list of probable questions which will have to be answered by any company to  get a clearer understanding on the real need, benefits and core impact of an ERP  implementation.

o    Why do we need this implementation?

This may seem to be an open ended question, forcing the company to think in various directions, which is a good start. This will give them an opportunity to list out all the points they would want to bring to the table and justify the need of going for the implementation.  A clear understanding on the priority of the points listed and which they wish to accomplish can be listed. This will give clarity on the factors that can be accomplished with the implementation. Some of the probing questions which can be listed are as below,

·        Enhance productivity, flexibility and customer responsiveness

·        Enable new business and growth strategies

·        Eliminate costs and inefficiencies

·        Extend business using the Internet

o    Which are the pain points that will be addressed with the implementation?

During the listing and prioritizing the factors which are compelling and directing for taking up the new initiative of implementation there will be some of the points which will qualify to be in the list by the virtue of being a pain point. These pain points need to be seen in the light of any business impact it makes or reduces the efficiency of a business process which can be eliminated or more efficiently managed with the development of a new process or deploying an ERP package.

o    What benefits / returns are expected from and after this implementation?

·        Improve alignment of Corporate strategies and business operations

·        Improve overall productivity

·        Reduce costs through increased flexibility

·        Improve financial management and corporate governance

·        Reduce risk across business

·        Gain higher ROI faster

·        Bring transparency in the business process

·        Support dynamically changing industry requirements

o    Who are the stake holders who will be affected from this change?

An organization which intends to implement ERP will need to identify and understand the stakeholders involved and how they contribute to the success or failure of the project. Broadly, the stakeholders can be categorized as below. The need to assign ownership with clear roles and responsibilities for each is a must

·        Executives and upper management

·        Departmental personnel such as middle management, procurement, and sales team

·        The IT department

·        Any other functions in the organization who are affected by the process changes

Due Diligence Activity Deliverables

Once the key areas are taken into account and all the outstanding questions and clarifications arecomplete, then all the activities carried out have to be consolidated as an approach document. Some of the points that needs to be highlighted are as below

·        Business Overview

·        Pain Areas

·        Business Process Improvements

·        Measurable Specifics of improvement

·        Cost Benefits

·        Long term benefits to the organization.

·        Road Map to accommodate future growth

·        Prerequisites for ERP package implementation

o    Process to identify the ERP package

o    Evaluation process for selection of Implementation Partner

Conclusion

The Due Diligence activities should be conducted by a service provider who should be a purely consulting firm and who should preferably not have any presence in the ERP implementation services. The only justification for this statement is that it may lead to a biased approach which will defeat the basic purpose of Due Diligence as one needs to have an open view during and at the end of this activity.

It would be better to seek the expertise of an independent consultant in the Supply Chain Management [SCM] area or a service provider having rich consulting experience pool. Consultants with specialized certifications in Supply Chain or with minimum of 10 years of experience in SCM would be best fit for conducting such due diligence. They will not only have a sound knowledge in the area but call also suggest core changes / inputs to the business process which will augment the overall efficiency and effectiveness of the business through ERP implementations.

Key feature of any ERP implementations

After the due diligence activity if the outcome justifies for going ahead with the ERP implementation the following should to be kept in mind

• ERP initiatives are always very challenging and demanding
• Business process re-engineering should happen before, not after, you implement your ERP software
• ERP is about your business, not only technology
• Selecting the right software is the first step in a successful ERP implementation
• SaaS (Software as a Service) ERP won’t eliminate all of your risks, either
• Your project will fail without adequate organizational change management
• Executive buy-in and support is critical to ERP success
• There is no “one size fits all” ERP strategy
• If your operations and ERP system are misaligned, it’s probably not the software’s fault
• Expectations are high, but most ERP implementations may not always properly define the “finish line.”
• Most organizations strive for “no customization,” initially,  but fail to do so eventually
• You don’t have to implement ERP all at once
• If you don’t measure it, you won’t achieve it

* The contents of this paper are my personal views and opinions, gained in the course of my experience.