ERP Utilization Series: Business Value Realization

Implementing a Cloud ERP solution does not guarantee business value, regardless of the Cloud ERP provider (vendor).  There are countless examples of customers that have not experienced the expected business value articulated in the sales cycle.  Why is this? 

  1. Cloud ERP software could not deliver on the business benefits promised.
  2. Customers could not adapt to the delivered public Cloud ERP delivery model.
  3. System Implementation (SI) partner could not implement Cloud ERP correctly or SI partner could not enable the customer to support their Cloud ERP solution.

Naturally, when things go wrong every stakeholder will point the finger at each other.  As each stakeholder has a share in the success of a Cloud ERP implementation, so is there a share of responsibility in the failure of realizing business value from a Cloud ERP implementation. 

A common theme I’ve observed in my ERP implementation experience is the lack of defining business value goals to be managed during the ERP implementation cycle.  The majority of time, business value goals are assumed as a “natural” result from the project.  Many consider business value an area that is managed after the initial implementation.  The inherent flaw in this approach is that the cost to manage business value is greater when the Cloud ERP solution is live.  This statement is a corollary to the rule that fixing bugs in design is 15x less than the cost of fixing bugs in production.

For example, let’s say you want to consolidate individual functions into a shared service model to leverage economies of scale and promote greater process efficiency (business value). However, this transition is not easy given that the implemented enterprise configuration only considered a “point-in-time” structure. Addressing the functional configuration limitation in production requires greater effort/discipline in a public Cloud ERP model versus an on-premise model (no more direct SQL updates in a public Cloud production environment).

I recommend that business value is front and center throughout the implementation and that business value is the ultimate indicator of Cloud ERP implementation success.  Unfortunately, the majority of Cloud ERP implementation methodologies are based on “traditional” approaches of on-time, on-budget and in-scope. 

What is Business Value Realization?

Do you know how many definitions there are for business value realization?  The number is far more than I can count!  I pride myself at being a pragmatist versus a theorist.  Therefore, the definition must support a repeatable and realistic process given the reality of resource constraints.  I am not arrogant enough to say that I have it all figured out, but the following is my working theory as I interact with ERP customers:

Business value realization is the observed evidence that the customer experiences either as a positive or a negative impact on business process execution.  Consider the following points:

  • Business value is in the eye of the customer.  I humbly believe that the vendor and the SI Partner are responsible in assisting the customer to see the business value created. Simple cost reduction does not equate to business value. 
  • From the customer perspective, business value unnoticed is business value unrealized.   Education is a key requirement in business value realization.
  • Without a baseline, how can one quantify the business value realized? As the Cloud ERP market continues to become more competitive, realized business value will become a competitive differentiation for Cloud ERP vendors. 

Now that we have defined the problem, let’s spend some time discussing how to best address business value realization during the implementation.

Business Value Realization Framework during the ERP Implementation

I have done an exhausted search of business value realization frameworks.  The majority of the frameworks do not address the implementation phase of an ERP solution.  I contend that these approaches should be updated given the apparent level of dependencies that business process execution has with technology today’s environment.  I’ve only found one framework that addressed business value realization during the implementation.

This is a great framework from an IT perspective from the academic world.  I would recommend the above framework to any IT leader looking to create more of an advisory service versus being a traditional service provider (IT should move up the value chain).   In general, I agree with the Lean Six Sigma approach to focus first on process efficiency then process effectiveness for most revenue-supporting and compliance processes.   However, for revenue generating processes, it may be best to focus on process effectiveness first to create market share/disruptance before focusing on process efficiency.

Now, allow me to provide a more detailed framework for business value realization during an ERP implementation.

Performance metrics including KPIs are the definitive “evidence” that the ERP implementation added business value.  Therefore, it is very important that you take a baseline or “snapshot” of your business KPIs before and after the ERP implementation to measure the business value.   My recommendation is to capture the baseline business KPIs during the sales cycle.  Hint: Leverage the ERP vendor to assist you in defining the specific business value you will experience with the purchase of their ERP software.

As you progress thru the Cloud ERP implementation, broad vision and objective(s) becomes specific siloed tasks.   It is important that you reassess your project progress to the agreed upon vision and objective(s).  An iterative approach is best to ensure that you have to opportunity to perform course corrections during the implementations versus more costly corrections after the implementation.

Capturing the post KPIs should be done after stabilization.  The duration of the stabilization phase depends on several factors that I addressed in a previous blog.  Once you have captured the performance metrics and KPIs, you should be able to provide an accurate picture of success and improvement gaps. 

Summary

Going live is only the beginning to business value realization.  Second, traditional ERP implementation project metrics (On-time, In-Scope, and On-budget) only have an indirect relationship on business value.  Generating business value is the primary objective of an ERP implementation, not just moving to the cloud or replacing an outdated system.  Business value must be an iterative and recurring theme in your Cloud ERP implementation approach.

Business value must be a continuous focus for all key stakeholders.  Failure to do so will result in a longer period to business value realization.

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Disrupting the ERP Cloud market with Business Value Realization

“In a survey of 1,322 global organizations who had implemented ERP in the previous three years, only 21% of respondents said that they had realized 50% or more of the expected benefits.” (Source: Lumenia). 

Total Cost of Ownership (TCO) and Return On Investment (ROI) are the outdated, traditional indicators of ERP success.   These metrics have been turned on their heads with the new Cloud ERP subscription based model.  Even with cost reduction, the subscription model does not solve the issue of unrealized business value.

It begs the question when will Vendors and the System Implementation (SI) Partners provide a more equitable risk/reward agreement via a business value based pricing model?  In the current Vendor-SI-Customer model, the customer assumes the majority of the business risk(s) & cost(s).    Given that the Cloud ERP market is still open for domination, customers should consider a business value based agreement where all parties share in the rewards and risks associated with a transition to an ERP cloud subscription service.

Paradigm Shift from Vendor SLA Compliance to Business Value Realization

The traditional “On-Time, On-Budget” KPIs have no direct impact on Business Value Realization (BVR).  The KPIs are more of a Vendor-Service Provider metric to demonstrate that the Vendor-SI Partner completed the delivery of services.  This approach assumes that the Vendor-SI Partner knows “exactly” what the customer needs for BVR.  Also consider that the “On-Time, On-Budget” metrics is more aligned with a commodity-based service.  As a customer, do you want a commodity-based implementation approach or a custom customer-based approach for your Cloud ERP transition?

With current subscription and professional services contracts, there are no financial incentives to ensure all stakeholders focus on the true objective of value realization. 

Building a Business Value Based Agreement

The first and most important step in aligning partner(s) focus on BVR is developing a Statement Of Work (SOW), Service Delivery Agreement (SDA) that focuses on attaining business value.  Consider the following example:

Business Value Realization (BVR) is a mutual responsibility between the Customer, the Vendor, and the SI Partner.  This agreement does not infer that the Customer will get the cheapest price for an ERP transition to the Cloud.  In fact, this agreement will cost the Customer more than a “commodity-approach” ERP transition to the Cloud.  “You get what you pay for.”   Contrary to marketing hype, there is nothing inherently “intuitive” about the Cloud model.  The implementation effort is the same to the SI Partner. 

Smart Transition to a Business Value Realization Agreement Model

Every ERP Cloud Vendor and SI Partner will say that their #1 priority is your company’s business success.  Yet, this is not always true “in the heat of the battle”.  Customers also need to step up their investment and capacity for change with this agreement approach. 

I cannot count the number of times where customers did not know what they purchased or they did not purchase every individual product to support their business process(es).   Keep the focus on business results, not product(s) and feature(s). Second, ERP service training must be available and easily accessible across multiple delivery platforms.  Vendors should also make formal training as cheap as possible.  Consider the following quote:

“Untrained (or under trained) users may end up needing three to six times as much support as end-users who have been trained.” ERP: Tools, Techniques, and Applications, Carol Ptak, Eli Schragenheim.

ERP Vendors, it is as simple as this.  Either you take a smaller profit hit now by providing free formal training or you will pay in buckets of operational support costs down the road.  In the next illustration, we will discuss key responsibilities and maturity activities for SI Partners.

 

In my humble opinion, SI Partners have two key responsibilities for competent delivery of ERP implementation services: (a) maximize the value of the Cloud ERP service purchased and (b) complete knowledge transfer for Customer enablement.  It is also important that the Customer defines an accurate KPI baseline on existing business activities in order to compare against business results experienced in new Cloud ERP service.  SI Partners should be able to assist and guide Customers in this exercise.

Now, let’s have a practical discussion regarding the customer’s responsibilities:

Customers have to align their expectations to their executive’s decision to move to an ERP Public Cloud service.  There are non-competitive business activities and reporting that should be eliminated.  ERP software changes will accelerate by a factor of 5 in an ERP Public Cloud delivery model.  Either you can make an investment in Organizational Change Management (I recommend Prosci  (ADKAR) or your company can expect to maintain/grow their IT budgets given all the ERP extensions they have to test and maintain with every service update.   

Money Talks – Consider Retentions to Promote Shared Success

The traditional approach of using go-live as the key event for ERP service delivery is not an effective indicator for business value realization.  Is the event a prerequisite? – Absolutely!  In a previous post I discussed how true business value realization is not possible until you are past the stabilization phase.   I would recommend that you create retention of 25% for both professional services fees and vendor subscriptions to promote focus and delivery from every provider until business value is realized. 

Summary

Gartner estimates that companies are achieving only 43% of their technology investments’ full potential value. 

In my humble opinion, an overriding driver for this gap is the traditional approaches Vendors, SI Partners, and Customers are clinging to in driving business value from technology.  ROIs and TCOs are extremely high level estimates based on a huge number of assumptions and constraints that are not fully defined in the sales cycle.  ERP Cloud vendors and SI Partners are more concerned with transaction efficiency and commodity repetitiveness versus unique customer business success.    A Business Value Realization agreement is not easier, or cheaper and will require a greater investment from all three players.    

Don’t expect any ERP Cloud Vendors or SI Partners adopt this approach any time soon given where we are at in the Cloud ERP market cycle:

As the market reaches its apex and competition continues to grow, disruptive agreements based on BVR will become a strategic competitive advantage.  Customer will make a decision on whether they want a Vendor or a Partner.  ERP Cloud Vendors are transactional and replaceable.  ERP Cloud Partners are long-term relationships critical to your success.

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