Despite COVID-19 shutdowns, re-openings, and partial re-closings in some parts of the state, Illinois manufacturers of all sizes are grappling with serious management decisions. Many halted the implementation of planned installations or upgrades to an Enterprise Resource Planning (ERP) software system or deferred part of their project when the pandemic began. Now, they are trying to decide whether to proceed or wait until their business returns to something approaching “normal” – whatever that might be once the virus recedes.

It is a huge decision with managerial, financial, operational, and employee relations implications that ripple throughout an organization.

For large manufacturers headquartered in Illinois or those that have operations in the state, re-starting or proceeding with a digital transformation in the current environment might also attract the attention of shareholders, Wall Street, business reporters, and even the SEC.

For smaller companies with sales between $50 million and $100 million, one or two factories and a warehouse, a complex supply chain, and perhaps a few hundred employees, the effect of a wrong decision might be the difference between thriving and barely surviving.

Digital Reopening Strategy

A recent report from McKinsey & Co. suggests that a corporate reopening strategy needs to include shifting IT and technology to a restart mode. Among the key reasons is that accelerating digital transformations will ensure that they reflect the needs of customers, employees, and the entire supply chain.

McKinsey writes, “The IT infrastructure must be relevant, secure and able to meet emerging (and changing) expectations … Executives will need to draw up a business-led technology road map to accelerate their digital transformation with urgency.”

This directly affects ERP software systems during and after COVID-19 and is why Illinois manufacturers should consider fast-tracking projects now.

Every technology project must reduce a company’s costs during and after COVID-19. Yet investments in the right ERP technology can contribute significantly to growth during the recession, which shows no signs of ending soon.

The key is ensuring that the project is relevant to an organization’s digital ecosystem in whatever comes during and after the pandemic.

The place for manufacturers to begin is by reviewing their existing contract or, for a new project that halted when COVID-19 hit, reviewing one still waiting to be signed.

If the ERP contract is negotiated and drafted – or redrafted – properly, and performance of the vendor and integrator is monitored closely, once the system comes online it should help enable a manufacturer to restart successfully and cost-effectively.

Regardless of its size, there are five key points a company needs to keep in mind as it considers fast-tracking at least portions of a new or upgraded ERP software system.

1 – Your business has likely changed. The “next normal” will require another major change as dramatic as the one when the lockdowns took effect. ERP users will continue to face a raft of unknowns that will not be clear for a while. The user’s operation may be functioning in one location but not in another. Supply chains will continue to be disrupted. Access to markets may be restricted.

2 – Recalibrate your ERP strategy. For most manufacturers with an ERP software system, what was a solid technology strategy in February may not be practical several months later. After the broad corporate strategy and direction is recalibrated, do the same with the ERP strategy, because it may need to be adjusted. This does not mean that an integration needs to be further delayed. Rather, it might be necessary to change the requirements that led to upgrading a legacy system or installing a new one. ERP vendors and integrators are much more likely to be willing to renegotiate the terms of a contract because they are even more vulnerable than many of their customers.

3 – Build a new integration roadmap. A major reason so many ERP integrations end up in a lengthy court battle is that the user did not start with a clear idea of the implementation process and how milestones would be measured and monitored. Not doing this has always been an expensive mistake, but in the time of COVID-19, it can lead to disaster for the company, with an impact on not just operations but also the bottom line. Whether or not you used a consultant at the beginning of the project, retaining one now is critical to an ERP project at this point.

4 – Include a change management initiative. Everyone has been affected by the pandemic, whether by wearing masks and following stay-at-home orders or because their pay was reduced and their job redefined. Just as senior management needs to work closely with IT to monitor the progress of an ERP project shifting back into high-gear, they also need to ensure HR is ready to help create a workable change management program. Many employees are still in shock from the effect of the pandemic on their daily lives. Without an effective change management program, employees are likely to revert to form quickly, blocking any significant shift in how they do their jobs.

5 – Management must control the change as they restart ERP projects. Despite the many unknowns over the several months, senior management can find ways to control effectively restarting ERP software system projects. Doing so requires understanding how the project will fit into Kimberling’s “next normal” and what the system needs to deliver now, however the business has had to change.

Restart ERP With Caution

A problem that has plagued many ERP projects is a slow decision-making process and seeing ERP as a technology solution rather than a management tool.

Right now, slow decision-making is the same as not deciding. A plan-ahead team is needed to identify and work through potential obstacles.

One way to sidestep problems is to work with counsel to renegotiate contract provisions that need reconfiguring to today’s reality. Vendors and integrators are in a vulnerable position, especially regarding specifics on deliverables. The responsibilities of the user, the vendor, and the integrators need to be very precise. Spell out what work will be subcontracted, and which party will be responsible for third-party performance.

For organizations just starting out on an ERP project, executives are contending with not just a transformation of the business, but also a type of contract they have not likely previously negotiated. Contracts for ERP software systems are nothing like the loan documents, sales agreements, leases, or employment offers that are typical of what businesses regularly review.

It is imperative to proceed with caution.

We have seen how large, sophisticated organizations with considerable resources can run into problems with their ERP projects, starting with the contracts they sign. Smaller manufacturers in Illinois need to be even more careful as they proceed with their efforts.

This article was originally published in the Fourth Quarter 2020 issue of The Illinois Manufacturer.

 

Since their inception, ERP software systems have historically been used almost entirely by large organizations: major corporations, financial institutions, federal and state government agencies, and similar behemoths with complex structures and massive operations.

Over the last few decades, ERP vendors have focused aggressively on the small to medium-sized business market. Today, a growing number of smaller businesses (stand-alone manufacturers with roughly $50-100 million in sales) have implemented ERP projects.

This shift marks a sea change in ERP users.

It also means that executives and in-house counsel are contending with not just a transformation of the business but a type of contract they’ve not had to previously negotiate. Contracts for ERP software systems are nothing like the loan documents, sales agreements, leases, or employment offers typical of what smaller businesses review regularly.

Here are six mistakes smaller businesses should avoid when venturing into an ERP software system effort:

1 – Seeing ERP as a technology tool. It isn’t. Viewed correctly, ERP is a management tool that uses technology to more efficiently run a company. Understanding this has widespread implications – from selecting a vendor and its product, to deciding which integrator to choose, and determining how the information will be used once the system goes live.

2 – Not planning for scalability. Small businesses plan their future growth. Likewise, they need to plan how their ERP software system will be scalable as the company grows. This needs to be factored into how business processes and requirements will take them into the future, rather than automating current business processes. If this is not part of the decision process, a company may find itself having to replace its entire ERP software system three to five years down the line, a major undertaking and a huge expense that can be avoided.

3 – The contract is straightforward. None of them are. An ERP contract may seem forthright, but since the vendor and integrator wrote it, it favors them. Many of the clauses need to be negotiated and rewritten, including those that spell out which side is responsible for which activity, who is authorized to approve change orders, and other provisions such as paying for software licenses (which may not be needed).

4 – The vendor and integrator does it all. They won’t, even though many of them will tell you that they will. Starting up with ERP is nothing like ordering a new machine for the factory and then paying little attention until it is delivered and installed. To avoid cost overruns and delayed timelines, senior management must stay actively involved in every aspect of the project.

5 – It will be easy. Implementations are never easy. ERP software systems are incredibly complex and integrating them with existing systems is a major undertaking – for large and small businesses alike. The challenges that plague a Fortune 100 company during an implementation might be on a smaller scale for a smaller business, but it is still highly disruptive.

6 – Forgetting about the users. All change is hard for employees. Launching ERP will change the way many workers do their jobs. People may not be ready for the discipline required by ERP systems. It becomes vital to plan for change management. Critical project activities such as training, communications, and organizational readiness are vitally important.

As many businesses reopen, projects that were on to-do lists and put on hold during the COVID-19 lockdowns are being reviewed and renewed. With extensive experience negotiating, drafting, and litigating ERP contracts, Taft’s Technology lawyers can help you identify potential problems before they arise.

Failed ERP software system implementations and integrations happen frequently and the problems are legion. However, there are ways that organizations can avoid their own failures. In a recent Taft Technology Insights post, we discussed how to avoid a failure if restarting a deferred integration during COVID-19.

We are frequently retained by companies whose projects are in such disarray that vendor or integrator relationships are beyond repair and disputes are heading to court. We spend a considerable amount of time reviewing contracts, emails, reports, and memos, and speaking with key figures as part of negotiating a settlement or preparing a court argument. Over the years, we have seen patterns emerge where the reasons behind the failure of the ERP software system could have been uncovered and corrected long before reaching the point of no return.

While not all ERP failures can be avoided, many can be salvaged if the user takes certain steps – often beginning when the project is first being considered.

Mitigating Risks of ERP Failure

Along with working with an independent, technology-agnostic consultant from the outset, a user can do several things internally to mitigate risks or salvage an implementation that is in trouble.

The Boy Scouts’ “be prepared” motto is applicable for ERP projects. The ERP contract should require weekly or monthly project status reports, and include a senior-level contact at the integrator who isn’t part of the project team to review both progress and challenges.

Beyond this, the user should consider having a “go team” on standby to swoop in at the first sign of a problem. The team would conduct an assessment to identify the likely root cause of the issue. Members of the group must be familiar with ERP and the business goal of the new installation or upgrade and might include people from the user’s IT department, plus finance and operations.

Often, the root cause of the problem can be discovered by the go team and fixed by the integrator.

If the first intervention is unsuccessful, it may be time to bring in a consultant to review the project and determine steps to right side the implementation. When an ERP project derails because the actual integration plan bore little resemblance to the project plan, it is sometimes the result of senior management’s inattention. Whatever the cause, it is critical to determine if the project can be saved. Efforts spent on righting the project will cost less and have less impact on the business than starting over with a new software product or litigating the dispute in court.

ERP Misaligned with Requirements

In preparation for filing a failed ERP implementation lawsuit, we typically conduct an extensive review of project documentation. Sometimes the project documentation does not align with the business requirements of the ERP software system. The requirements should be written into the contract and the project plan, so if a dispute arises it becomes part of the legal agreement between a user, vendor, and integrator.

When this information is missing or inadequate, it triggers a variety of issues. As one example, there are occasions when we discover that the integrator staffed a project with unqualified individuals.

Whenever we negotiate and draft a contract, we try include a provision that allows for the approval and replacement of consultants.

Not Foolproof

Obviously, there is no way to foolproof an ERP software system against failures. It is an incredibly complicated management tool tying together suppliers, factories, inventory and warehouses, invoicing and payments, and employee information. With so many moving parts that all need to work together smoothly, it is not uncommon for something to go wrong.

It is incumbent upon users to not only draft a solid contract but also to draft contingency plans that allow a successful intervention as quickly as possible when an issue arises.

Taft’s Technology lawyers have extensive experience negotiating and drafting ERP contracts with vendors and integrators, and litigating disputes when they arise. Whether you are launching a new ERP initiative, upgrading a legacy system, restarting a project delayed due to COVID-19, or resolving a dispute with a vendor or integrator, we can help.

If ERP software system integrators were as smooth at integrating new or upgraded projects as they are at selling, it is likely they would be involved in fewer court disputes with users. Often, disputes happen because senior management hands off responsibility for the effort to the integrator rather than owning it as an integral part of management’s job.

In reality, people in charge of an organization cannot delegate authority for an ERP project to either the vendor or an integrator. Interests are usually different. Ensuring this does not happen should start when the project is in its inception phase, before vendors demo the product or submit a proposal.

This carries through to the contract negotiation stage, while the software is being customized and when the integrator starts to mesh ERP with other business systems.

Avoiding Integrator’s Tricks

The development and launch of an ERP software system should be owned by the executive suite, similar to a launch of a new product line.

Deciding to proceed or restart a digital transformation – whether during or after COVID-19 – is a huge effort. Top executives – even the board, in some instances – must set the pace, tone, and boundaries of the project.

This includes riding herd on the integrator.

Indeed, a survey of ERP users done by Third Stage Consulting found that managing deficiencies with the system integrator is one of the most common problems that organizations have as they strive to make the system operational and bring it online.

During the sales cycle, integrators will assure a user they will be partners on the project. The integrator’s main job is to make the system work properly. But an undisclosed part of its job – and compensation – is to upsell additional services to the user during the project. So, it is incumbent on the user to control the integrator closely.

The starting place for controlling an integrator is to specify in the contract with Accenture, Oracle, SAP (or any other outfit) precisely what they are obligated to do. There should be a number of detailed provisions:

• Spell out who has the authority inside the user’s company to approve change orders.
• Name the third-party contractors that will be used by the integrator, and include in the contract their experience with both the ERP software system being integrated and the user’s specific type of business, and how they will be managed.
• If practical, include the names of specific people who will work on the project both at the integrator and third parties, along with how the user will be notified if there are personnel changes at any of the service providers.
• Require monthly or quarterly reports on both the progress that has been made, and exceptions to either the contractual timeline or what was stated in the integrator’s RFP response.
• Provide contact information for a designated, senior-level person at the integrator with whom the user can discuss everything from progress to resolving problems. This person should be an executive, not a project manager or account person who may be motivated to protect their position with their employer.
• Include an ”out” provision that lets you fire the integrator if they are not meeting certain, defined obligations or causing issues with the project.

If an integrator recommends buying additional software licenses, ask it to specify in writing why they are needed, how they will enhance the project, and when they will be used. Vendors and ERP software system integrators are notorious for recommending license add-ons that may not be needed for years, if at all. But they receive fees for all of that time.

Integrator’s Secret Sauce

Many integrators do not really want you to know – or understand – how they make their money. The best way to protect yourself and your organization is to be aware of how they work, and to have a tightly written contract.

While this should be a last resort, do not be afraid to fire your integrator if discussions fail to resolve a major conflict. Doing so is never easy, but it is easier than suffering a failed software implementation.

If you have questions or concerns about an integrator, or the contract it wants you to sign, feel free to call or email Taft’s Technology team. We will be pleased to share what we know and help you through the process.