Kennametal, haworth, dana holding, and others: erps get a second

Please read this case and answer 4 questions at the end. Kennametal, Haworth, Dana Holding, and Others: ERPs Get a Second Lease on Life. Kennametal,…

Please read this case and answer 4 questions at the end.
Kennametal, Haworth, Dana Holding, and Others: ERPs Get a Second Lease on Life.

Kennametal, a $2 billion maker of construction tools,

has spent $10 million on ERP maintenance contracts

during the past 13 years and not once could the

company take advantage of upgrades, says CIO Steve Hanna.

The company’s implementation was too customized: The

time and effort needed to tweak and test the upgrade outweighed

any benefits, he says. But Hanna kept trying. Recently,

he priced the cost of consultants to help with an ERP

re-implementation and was shocked by estimates ranging

from $15 million up to $54 million.

The major ERP suites are “old and not as flexible as

some newer stuff, and they can’t build flexibility in,” Hanna

says. “Modifying it takes our time and money and training.”

His ears practically steam from frustration. “You tell me:

What am I missing here?”

Kennametal is like many companies when it comes to ERP.

The software is essential but, unlike when it was new, it now

offers scant opportunity for a business to set itself apart from its

competition. It certainly doesn’t help bring in new revenue, and

running it eats up an increasing share of the IT budget. Yet

longtime ERP users aren’t pitching the technology.

Companies still need it for managing supply chain, financial,

and employee data.

As Hanna and other CIOs are finding, however, behemoth

ERP systems are inflexible. Meanwhile, high-priced maintenance

plans and vendors’ slowness to support new technologies

such as mobile and cloud computing mean that, without

careful management, the ERP technology woven through

your company can become a liability.

Your ERP system probably won’t collapse if you do

nothing; it’s not like legacy mainframe applications were a
decade ago. But just as you had to adapt your approach to

managing mainframes in order to maintain their value in an

age of faster, cheaper Web-based apps, you now need to do

the same with ERP. So it’s time to rethink business processes,

drive a harder bargain on maintenance fees, and find

ways to marry ERP to emerging technologies. Achieving an

ERP system that delivers future value means managing it

differently here and now.

New ERP license revenue dropped by about 24 percent,

according to Forrester Research—one effect of the general

decline in software spending during 2009. This means vendors

are hungry for new business. They’ll offer software deals

to tempt CIOs who had put off upgrades or who want to install

completely new systems to get the latest capabilities.

Yet CIOs need to tread carefully: What used to be a

good deal may not be anymore. Steve Stanec is vice president

of information systems at Piggly Wiggly Carolina, a

privately held supermarket chain with 105 stores, most in the

southeast United States. Stanec says he and other CIOs must

depart from the traditional ERP script, where, after lengthy

negotiations, vendors hand over software and charge hefty ongoing

fees. CIOs must avoid falling into the same ERP traps

they once did, he says.

Buying and installing ERP was never a cakewalk. Today,

though, ERP is the Jack Nicholson of software: With a

hackneyed repertoire, the old and expensive dog finds it hard

to learn new tricks. It’s become a legacy technology, and CIOs

are now finding new ways to manage ERP projects and the

ongoing upkeep. Their best advice: Draw a clear project

map and modify the software only as a last resort.

Haworth, a $1.7 billion office furniture manufacturer, will

use tools from iRise to visually plan its rollouts of SAP systems

in its major offices on four continents. To get employees

accustomed to changes before rollout, the iRise tools simulate

how the finished SAP system will look. The company also

uses a sales compensation application from Vertex because

SAP doesn’t support the complicated, multitiered compensation

model Haworth uses to pay its salespeople, says CIO Ann

Harten. These choices stem from Harten’s decision to make

no custom changes to the core SAP code. The idea is to

streamline the implementation project, which started in 2006,

and to make future upgrades easier.

Modifying the core is expensive both when you do it and as

you live with it, she says. “Next time the vendor does a version

upgrade or a patch, your testing requirements are increased

several fold,” she says. “You want to avoid this at all costs.”

ERP of the future is as plain-Jane as possible, agrees

Hanna, the Kennametal CIO. The fact that it can take an

army of developers to build new features into ERP suites

slows the vendors down. But it’s also an obstacle for customers.

The 6,446 customizations—Hanna counted them—that

Kennametal made to its ERP software over the years prevented

the company from taking advantage of new technology
its vendor did build in. “We couldn’t implement one single

enhancement pack ever,” he says.

So even if Hanna could pay up to $54 million for integrators

and consultants to help Kennametal move to the latest

version of the ERP suite, he doesn’t want to. Instead, he

plans to turn Kennametal’s old ERP management strategy

on its head by putting in as vanilla a version of SAP as possible.

Hanna and CEO Carlos Cardoso are willing to change

Kennametal’s internal business processes to match the way

SAP works, Hanna says, rather than the other way around.

Kennametal will also take on the implementation itself.

Hanna hired IBM to consult about requirements definitions

and to identify business processes that must be revamped

to conform to SAP’s procedures. Meanwhile,

Kennametal staff will do the legwork. Hanna and Cardoso

have committed to the board of directors to have the job

done in eight months, he says, implementing at least 90 percent

of the SAP software unmodified. The project is so important

to Kennametal that it must succeed in order for the

company’s leaders, including Hanna and Cardoso, to achieve

their performance goals for the year. “I’m going to make it

work,” says Hanna.

Because Kennametal’s ERP system has been unable to

keep up with changing technologies, Hanna says the company

never benefitted from the millions in maintenance fees it paid

to cover upgrades. “We paid maintenance for nothing.”

Doug Tracy, CIO at Dana Holding, researched analyst

firm estimates about where maintenance money actually

goes and found that 90 percent of those fees are pure profit

for the vendor. For Tracy, there is no more time or tolerance

for vendor games.

The $8.1 billion auto parts supplier has in recent years

fought a hostile takeover attempt as well as been in, then

emerged from, Chapter 11 bankruptcy protection. Then the

auto market tanked, and Dana’s sales reflected the 30 percent

to 70 percent decline. The company had to scale back some

ERP projects, and Dana wanted its vendors to work with

them to reduce fees. Tracy declines to name Dana’s main ERP

vendor but says he wasn’t getting the deal he was looking for.
Dana’s vendor didn’t lie down. To try to persuade Tracy

that maintenance fees are valuable, the vendor analyzed

Dana’s use of its support, he says. The findings: Dana made

21,000 requests to the vendor between January and September

2009. About 98 percent of them didn’t involve human

intervention; they were automated lookups on the vendor’s

knowledge base. “We’re not getting much,” Tracy concluded.

So Tracy stopped making maintenance payments to his

main ERP vendor as of December 31, 2009. “That’s a risky

strategy, though not as risky as vendors would have you believe,”

he says. One result of the move away from provider

support is that Dana’s internal IT people have to be more

savvy about the ERP systems the company relies on—and

able to fix what may go wrong. But, he says, there have been

no technological show-stoppers in years because ERP, like

other legacy systems, is mature and reliable. Plus, there’s

plenty of ERP talent.

Eliminating maintenance saves money, because Dana is

no longer paying for a service of questionable value, and it

sets a precedent with the company’s other ERP vendors.

“You have to show value every step of the way,” Tracy tells

his suppliers. “If you try to hold us hostage, I will call what I

see as a bluff and just stop payment.”

CIOs have to take charge of what the future of ERP is

going to be. Treating ERP as legacy IT may be hard for

some who have invested so much time and energy in planning,

implementing, and tweaking these systems.

But adopting this mindset will help CIOs move ERP—

and their companies—ahead. Modifying the base applications

judiciously, if at all, will minimize expense and time

devoted to software that now provides the most basic functionality.

Everyone does accounts payable, notes Stanec at

Piggly Wiggly, so don’t waste time customizing it.

Further out, Stanec, for one, dreams of seeing ERP vendors

develop packages that help companies generate revenue.

“Then,” he says, “we’d have something interesting to

negotiate.”

Questions:
1.Why does ERP customization lead to so many headaches

when it is time to upgrade?

2.Why were the systems customized in the first place?

3.Cutting payments outright to ERP vendors may not be

possible for smaller companies without the in-house resources

that larger organizations have. Are they at the

mercy of the software providers? What other alternatives

do small companies have? Provide some recommendations.

4.Kennametal CIO complains that they “paid maintenance

for nothing.” Who do you think is responsible

for that state of affairs? Kennametal? The ERP vendor?

Both? Justify your answer.
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