In recent years, CEOs and CFOs are being held to greater account for the financial, operating, and brand damage that is being delivered by poorly executed digital transformation and ERP replacement initiatives. Last week brought multiple class-action shareholder lawsuits against no less than 7 past CEOs and CFOs of Revlon due to the material accounting practice weaknesses identified as a result of their recent SAP implementation.
Previously, we have seen the CEO of Israel Chemical Limited (ICL) resign in part due to the cost overruns associated with their SAP deployment. In other cases, the CEOs at Sleep Number and Hertz have had to personally step in to address flawed ERP and digital transformation initiatives. The market is ruthless when these projects fail, and CEOs are neglecting to protect shareholders from the risks that are clearly present.
Why is This Happening?
As cost pressures increase and rapid time to deployment is required to meet competitive pressures, companies are skipping or failing to identify steps in their implementation process, steps that have been around for ages. These gaps are likely the results of:
- The adoption of agile which tends to be more focused on the delivery of code vs. the delivery of change
- An increasing trend of system integrators to conveniently leave out steps as a means to lower costs or reduce vendor side risks
- A generational change we are seeing in client-side leadership where executives with situational awareness associated with these types of programs are replaced by new up-and-comers yet to experience the shake-to-the-shutters rigor and complexity management that is necessary to successfully complete these programs.
By our reviews of RFP responses to large transformational programs and the in-depth analysis of these project failures, here is a list of the most common gaps we see in program plans:
- Planning for the adoption and validation of internal audit controls. Almost every RFP response we have seen frequently fails to incorporate project processes or time allocation to account for internal audit review and sign-off on controls.
- Identification and implementation of business process performance metrics. Without the availability of these performance metrics, organizations often fail to realize that the business is not operating at the levels anticipated, causing backups and business process failures due to unanticipated workload.
- Solution integrity validation checks. Every proposal typically includes the development of business process tests and the implementation of data quality load checks, but many fail to account for the holistic integrity validation tests. These tests confirm that the solution as a whole is producing the anticipated results. Tests similar to parallel payroll, inventory costing comparisons, and promise data correlation are deemed too difficult, time consuming or costly to incorporate.
- Process and business management training. Training gets focused on the use of transactions and confirmation that users understand the how to use. What is often missing, however, is training on when to use new capabilities, and more importantly, how to react to problems that require management intervention.
- Failure to adjust internal business incentives to align with new ways of operating the business. Management rewards that are focused on minimizing inventory and manufacturing costs may be in direct opposition to process changes that are designed to significantly reduce time to market or delivery lead times.
Four Questions to Ask
In coaching our client’s CEOs and CFOs as they move through the procurement process of selecting a systems integrator (SI) to assist them in their transformational journeys, we advise the following three questions be put to each SI:
- Please describe the portions of your methodology that will be implemented that will ensure and confirm the operational integrity of the organization (take orders, ship product, pay bills, receive payment, and report accurately).
- How will the program engage the general management of the organization to efficiently manage the business to both capture the anticipated benefits and address any process performance failings?
- If the implementation involves multiple deployments, what steps will the team take to design, implement, test and control any interim state processes?
- If an independent 3rd party were to review the plan and approach proposed, what gaps might they find, and why?
It is highly probable that SIs faced with these questions will need to revise their proposals to address the specific risks that have been called out. These revisions will likely result in proposed cost increases. However, I think every CEO and CFO would agree, they would much rather pay the cost of problem prevention rather than suffer the potential catastrophic consequences of problem realization.
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