Wed, Apr 8, 2009 14:09 EDT

Why CFOs and CEOs Hate IT: ERP

Topic: Applications

Current Rating: Comments: 21

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

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All Comments Comments

Thu, Apr 9, 2009 12:32 EDT

Alternatives

Posted by: Gman
Rating:

What are some good and realistic alternatives that CEOs and CFOs should consider? These execs usually like to take action if something is not good for their business. They need something to mangage loads of data, transactions, business processes, divisions, products, locations, people, customers, vendors, etc.... Custom build? Point solutions? What does the future hold?

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Fri, Apr 10, 2009 14:50 EDT

The CEOs and CFOs SHOULD hate IT

Posted by: benb
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CEO and CFO should hate IT, ERP, ITIL, COBIT, and all the other solutions offered by vendors, peers, shareholders, and boards-of-directors to “make more money” or “make the business more efficient”. These are reasons CEOs and CFOs love outsourcing. We pay one “known” price for all that “stuff” and fire one group if it fails. Until those of us in the technology world understand that it is not about the vehicle but about transportation, the hate will continue. When one decides to go on a trip, there are many options (personal car, bus, train, plane, combination) depending on the time, money, and chosen destination. We who deliver IT solutions must start to deliver solutions in a similar manner.

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Fri, Apr 10, 2009 17:13 EDT

The customer is always right

Posted by: Anonymous
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I think there is a lot of truth in your comment, but I have never had an enterprise customer that didn't initially want the car, bus, train, plane and maybe a spaceship all at once regardless of cost, schedule, resources and goals and objectives.

Outsourcing sets limits that are not acknowledged when in-house staff are doing the implementation. In addition, it removes the up close and personal task of having to discipline known staff for poor performance. Although I disagree with the act, these are often underlying reasons for outsourcing.

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Fri, Apr 10, 2009 16:59 EDT

I don't think it's "Hate"

Posted by: OldCIO
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Having headed up 5 successful ERP initiatives (Under budget and Schedule), I don't think CFO's really hate IT. I think somewhere around the third or fourth project meeting they start to realize that they are completely helpless without IT which triggers a fear response which results in something less than loving behavior. I don't know of one company with revenues over $5M that could survive more than a very brief period if their IT systems (ERP especially) were shut down. It's kind of like if your mother-in-law controlled the electricity for your home (scary, isn't it?) Over-priced vendors, products and external labor do not help. Compliance requirements are an additional headache. The main thing is to explain the out year costs up front, make the functional side (CFO included) responsible and accountable for defining and validating the requirements. Make it do what they need in a friendly fashion, and deliver on time. They will still be afraid, but maybe the "hate" part will not be so evident...until the next enterprise implementation.

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Sun, Apr 12, 2009 19:46 EDT

Well this is a little different

Posted by: Mick Andrus
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I've been implementing ERP systems since the late 80s (since before it was called ERP) and this is the first time I have seen someone recommend changing the system to fit the business. The ERP text book has always been change the business to fit the system. The skill is in guiding the complex, team-heavy process of finding the best fitting system out of the box.

There is a wealth of evidence showing that heavy changes of ERP systems greatly increase the implementation and on-going costs.

Yes, ERP is expensive and it is even more costly if heavily customized. I have always guided the business by using this guiding statement: Modifications are allowed by a) only for strategically critical functions and b) only when approved by an executive steering committee.

Many times, project teams have insisted on system modifications but then back-off the position when confronting the CFO and CEO with the demand. Amazingly, the business can almost always adapt their processes to the system with no lost productivity and the CFO and CEO know that.

Now, as another commenter said, executives don't hate IT and ERP but they do often resent IT and ERP. Quite often I resent my cable television company or my phone company. When I feel helpless in a relationship then this feeling breeds resentment.

As adult IT managers we have to recognize this and manage our way through it. That's all ... and it's what we get paid to do.

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