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The First Challenge: Choosing A New Partner
Editor's Note: Selecting an enterprise resource planning (ERP) system is one of the most challenging projects a CIO ever performs. Les Johnson, CIO at a western wholesale electrical distributor, is going through that process. In this and the coming months, Les will chronicle his journey as he evaluates providers, visits users and installs the new system.
Last August our ERP provider of 20 years ceased to exist. So did a four-year-old project that would have brought our business system into the 21st century. So did our relationships with former product managers, support staff and executives. A new company with new faces took over, promising things would be like before, only better. Most importantly, it promised to support our current software, a vintage COBOL/C-ISAM program from the 1970s.
That support was a relief, but it wasn't a long-term strategy. It was time to shop around.
We had considered a move once before. Two years earlier, the owner of my company, a midsized wholesale electrical distributor, popped into my office. He smiled as he asked, "So Les, what do you think of SAP?" We had already discussed dumping our existing ERP provider to get new features and functionality. But we hadn't gone ahead because of the training and implementation costs.
After an awkward silence, I leaned forward and said, "If we went with SAP, it would cost us at least $6 million and take at least three years to implement. At the end of the project, you'd be unhappy and would fire me." I paused for a moment and then said, "Why don't you pay me $2 million dollars now and save yourself some money?" He laughed. I'm still waiting for the money.
Horror stories of failed Fortune 500 ERP projects costing companies in excess of $150 million swirl like urban myths. Giants like Gore-Tex, Weyerhaeuser and Whirlpool have swallowed budget-crippling expenditures after aborting their ERP projects.
But like a scream from the bottom of a pool, midsized ERP project failures go unnoticed by the financial media, even though they're no less frequent. Three of the top 100 companies in our industry have terminated projects after spending 2% or more of their gross revenue -- in an industry that averages less than 5% after-tax net income. Lawyers are smiling everywhere. Consultants aren't.
Thus, a lot was riding on my decision. My company, a midsized wholesale distributor operating between Fairbanks, Alaska, and Phoenix, is considered progressive in an industry that spends less than 1% of annual revenue on IT. We're budgeting 2% of our revenue just for this project. Except for real estate and acquisitions, this will be the largest decision my company has ever made.
Because we are, like many midsized enterprises, family-owned, we can make big decisions quickly. In a meeting not long ago, I presented a one-page summary of our options, including estimated costs. After two minutes of sticker-shock silence, we discussed the options. Then we decided to go ahead.
Choosing Prospects
Midsized companies are often referred to as the growth engines of American business. The large ERP providers seem to agree and see this market as untapped, but only vertical solution providers have shown they have the domain knowledge -- and prices -- necessary for niche vertical market segments like mine.
Electrical distribution is a small community and a great source of information. Thus, to build my first list of ERP candidates, our search team -- which included the vice president of operations and functional area specialists for sales, purchasing and operations -- talked with contacts at industry associations, other distributors and our largest vendors. We found a guide listing the 22 largest providers of enterprise software for distribution companies.
In the end, I sent simple requests for information to all of those 22 providers, and 18 responded. We pared the list down to three by asking two questions:
- Does the company do business with distributors we know?
- Does the company have a history of working with our associations and vendors? Customers, vendors and processes unique to our industry impose requirements that most ERP companies don't understand.
Then the real work began.
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