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Kennametal, Haworth, Dana Holding, And Others: ERPs Get A Second Lease On Life.

Kennametal, Haworth, Dana Holding, And Others: ERPs Get A Second Lease On Life.

Kennametal, Haworth, Dana Holding, And Others: ERPs Get A Second Lease On Life.

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





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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