Getting Value From Enterprise Initiatives: A Survey of ... · companies as FoxMeyer and Hershey Foods have raised questions about the value of these applications. Yet the market for

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BCG R E P O R T

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Getting Value from Enterprise Initiatives: A Survey of Executives

The Boston Consulting Group (BCG) is a general management consulting

firm that is a global leader in business strategy. BCG has helped companies

in every major industry and market to achieve a competitive advantage by

developing and implementing unique strategies. Founded in 1963, the firm

now operates 47 offices in 32 countries.

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Getting Value from EnterpriseInitiatives: A Survey of Executives

BCG R E P O R T

March 2000

Copyright © 2000 by The Boston Consulting Group, Inc.

All rights reserved. Published March 2000.

Cover illustration © Dave Cutler 2000 c/o theispot™

For information or permission to reprint, please contact BCG.

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This report and other BCG publications may be found on our Web site: www.bcg.com.

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Learning from Experience: Profile of Interviewees . . . . . . . . . . . . . . . . . . . . . . 5

What Companies Learned from Their Enterprise Initiatives . . . . . . . . . . . . . . . 7

Positive Outcomes Were in the Minority . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Few Companies Met Their Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Many Companies Could Have Achieved Similar Value for Less Money . . . 8

Good Execution Did Not Ensure Business Value . . . . . . . . . . . . . . . . . . . . 8

What Companies Can Do to Improve Their Chances of Success . . . . . . . . . . . 9

Begin with a Strategic Vision and Clear Business Objectives . . . . . . . . . . . 9

Analyze the Business Capabilities Required to Attain the Vision. . . . . . . . 11

Do Enough Up-Front Work to Determine the Best Options . . . . . . . . . . . 12

Make Sure Decisions Are Driven by Business Requirements . . . . . . . . . . . 15

Divide the Initiative into Focused Modules with Quick Payback . . . . . . . . 17

Choose Vendors Carefully and Manage Them Vigorously. . . . . . . . . . . . . 20

Understand the Risks and Manage Them . . . . . . . . . . . . . . . . . . . . . . . . . 21

Use Strong Leadership to Limit the Scope . . . . . . . . . . . . . . . . . . . . . . . . 22

Know When to Stop and Reevaluate Enterprise Initiatives . . . . . . . . . . . . 22

A Predictive Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

The Challenge of Enterprise Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

For Further Contact

To discuss the issues in this report with The Boston Consulting Group, please contact

the BCG representative in your region or local office.

Hal SirkinSenior Vice PresidentThe Boston Consulting Group, Inc.200 South Wacker Drive, 27th FloorChicago, Illinois 60606 Telephone 312-993-3300Facsimile [email protected]

Karl DickelSenior Vice PresidentThe Boston Consulting Group GmbH & PartnerChilehaus AFischertwiete 2D-20095 HamburgGERMANY Telephone 49 40 30 99 60Facsimile 49 40 33 79 [email protected]

Kathleen ConlonVice PresidentThe Boston Consulting Group Pty. Ltd.Governor Phillip Tower, Level 611 Farrer PlaceSydney NSW 2000AUSTRALIATelephone 61 2 9323 5600Facsimile 61 2 9323 [email protected]

Acknowledgments

The authors of this report were Nick Archibald, Barry Saeed, Karl Dickel, Hal Sirkin,

and Mike Petkewich. The authors would like to acknowledge the substantial

contributions made by the BCG team. Bob Wolf, Jean-Marc Bellaiche, Sarah Cranston,

Romi Mahajan, Haley Mitchell, Marcus Mullarkey, Nate Redmond, and Jeff Wong

made significant contributions to the supporting analysis and research. Bruce Posner,

Elyse Friedman, Janet Emmons, and Kim Friedman moved the project from

manuscript through editing and production. Research Pros Incorporated of Chicago,

Illinois, assisted with data collection.

Note

Information about companies identified by name is either publicly available or being

used with the companies’ permission.

Barry SaeedManagerThe Boston Consulting Group, Inc.Two Embarcadero Center, Suite 2800San Francisco, California 94111Telephone 415-732-8000Facsimile [email protected]

Christophe DuthoitVice PresidentThe Boston Consulting Group & Cie4 rue d’Aguesseau75008 Paris FRANCETelephone 33 1 40 17 10 10Facsimile 33 1 40 17 10 [email protected]

Danny DaleVice PresidentThe Boston Consulting Group Pty. Ltd.101 Collins Street, Level 52Melbourne VIC 3000AUSTRALIATelephone 61 3 9656 2100Facsimile 61 3 9656 [email protected]

Getting Value from Enterprise Initiatives B C G R e p o r t 1

Introduction

Despite their rapid proliferation, packaged enterprise applications have been

the subject of notorious calamity stories over the last few years. High-profile

debacles of enterprise resource planning (ERP) implementations at such

companies as FoxMeyer and Hershey Foods have raised questions about the

value of these applications. Yet the market for ERP continues to grow, and

annual growth rates of 40 to 50 percent are expected for newer applications

like supply chain management (SCM) and customer relationship management

(CRM). At the same time, e-commerce is creating even more demand for these

packages. Packaged applications are becoming must-haves, and business

leaders are asking, What should we be doing, how do we avoid disasters, and

how do we make sure our company gets a healthy return from these

investments?

The Boston Consulting Group set out to answer those questions by interview-

ing more than 100 executives across North America who had taken responsi-

bility for enterprise initiatives between 1996 and 1999. Most of the executives

either had primary responsibility for the decision to implement or had been

closely involved in making the decision. We have combined the results of our

interviews, BCG’s extensive experience with such initiatives, and publicly

available information. Our study focuses on the value derived from the

initiatives and on the practices that distinguished successful efforts.

This study differs from other studies in that it focuses on far more than exe-

cution. It examines the complete enterprise initiative, from strategic assess-

ment through option evaluation and process, organization, and system re-

design. Our study finds that effective execution, while important, does not by

itself guarantee that business value will be created. This report outlines the

critical lessons of enterprise initiative implementation and provides recom-

mendations to ensure that investments in enterprise initiatives will translate

into value for businesses. That, after all, is the purpose of enterprise initiatives.

2 Getting Value from Enterprise Initiatives B C G R e p o r t

Executive Summary

What Companies Learned from Their Enterprise Initiatives

Relatively few companies reported that their initiatives had achieved signif-

icant value:

• Only 33 percent of outcomes were viewed as positive, based on respon-

dents’ judgments of value creation, cost-effectiveness, tangible financial

impact, and attainment of goals.

Many companies claimed success, but few met their objectives or realized

significant financial impact:

• Despite their significant investments, only 60 percent of respondents said

their initiatives had delivered sufficient value to justify the effort.

• Only 52 percent said they had achieved their business objectives.

• And only 37 percent could point to tangible financial impact.

A significant segment of the companies could have achieved similar value for

less money:

• Most respondents believed they could have saved at least 5 to 10 percent

of their costs.

• Twenty percent of all ERP and SCM respondents said they could have

achieved the same value for less than half the cost.

Good execution did not guarantee improved business value:

• Only 58 percent of all positive outcomes were finished both on time and

within budget.

• Of the cases with negative outcomes, 33 percent finished on time and

within budget.


What Companies Can Do to Improve Their Chances of Success

Begin with a strategic vision and clear business objectives:

• A strategic vision derives from a thorough up-front assessment of company

needs and an analysis of evolving market conditions, competitive position-

ing, and customer needs.

Analyze the business capabilities required to attain the vision:

• A complete review of business capabilities must analyze existing processes

and consider competitor and best-practice benchmarks.

Do enough up-front work to determine the best options:

• Simple software modifications, process redesign, and interim solutions are

often overlooked as alternatives to large-scale systems investments.

Make decisions on the basis of business requirements, not the capabilities of

software packages:

• Software packages provide specific solutions to a specific set of problems.

Software should not be used to justify radical change or as a general cata-

lyst for improving processes.

Divide the initiative into focused, manageable modules with quick payback:

• Large projects become unmanageable. It is important to understand how

to divide large-scale initiatives into small, manageable pieces.

• The greatest value is often driven by a small portion of the investment.

Choose vendors carefully and manage them vigorously:

• Realize that vendors will balance your best interests against the value of

their billings.

• Remember that you understand your business and its needs better than

your vendors do.


Understand the risks and manage them:

• FoxMeyer filed for bankruptcy, alleging that its new ERP system could not

handle its transaction volume.

• Hershey Foods estimated that it lost $150 million to $200 million in sales

owing in part to a new order-taking and distribution system.

Install strong, unbiased leadership to ensure that the scope of the initiative

does not become too big:

• Secure the support of key executives.

• Grant the leadership team authority to filter recommendations from busi-

ness users and IT implementers.

Know when to stop and reevaluate the initiative:

• Figure out whether the next phase will add sufficient value.

• Establish metrics to track progress toward your objectives.


Learning from Experience: Profile of Interviewees

The executives interviewed for this survey had been involved with enterprise

initiatives that were implemented between 1996 and 1999. Executives indicated

which of four types of initiatives their companies had undertaken: ERP, SCM,

CRM, or e-commerce (see Exhibit 1).1 Our study examined packaged appli-

cations and proprietary, in-house solutions that offered similar functionality.

Even though some of the initiatives were still under way, they had reached a

stage where executives could make reasonable assessments of their outcomes.

The Boston Consulting Group targeted executives who had played significant

roles in the implementation of an initiative and who were sufficiently knowl-

edgeable to assess its outcome. Nearly half of the executives interviewed had

been the major players in their companies’ decisions to launch initiatives, and

most of the others had been closely involved in the decision (see Exhibit 2).

1. In general, ERP included appli-cations from such companies asBaan, J.D. Edwards, Oracle,PeopleSoft, and SAP. SCM in-cluded applications from suchcompanies as i2, Manugistics, andNumetrix. CRM included applica-tions from such companies asClarify, Epiphany, Pivotal, Rubic,Seibel, and Vantive. E-commerceincluded applications from suchcompanies as Ariba, BroadVision,Commerce One, and IBM.

Exhibit 1

Executives Were Involved in Four Types of Initiatives

ERP38%

SCM22%

CRM13%

E-commerce27%

Mainly implemen-tational role14%

Closeparticipation indecision-making40%

Key decision-making role46%

Most Executives Were CloselyInvolved in the Decision

SOURCE: BCG survey.

Exhibit 2


Two-thirds of the executives were at companies with more than 5,000 employ-

ees (see Exhibit 3). The executives were drawn from a wide range of industries,

including manufacturing and processing, energy and utilities, financial serv-

ices, high technology and telecommunications, and food products (see

Exhibit 4).

Most Companies Had More than5,000 Employees

Manufacturing/processing33%

10,000–20,00017%

5,000–9,99919%

Financialservices11%

>20,00032%

<5007%500–999

6%

1,000–4,99919%

Other4% Transportation

5%Media/entertainment5%

Wholesale/retail5%

Health care/pharmaceuticals6%

Food products8%

High tech/telecom11%

Energy/utilities12%

Companies Were Drawn from a Wide Range of Industries

SOURCE: BCG survey.

Exhibit 3 Exhibit 4


What Companies Learned from TheirEnterprise Initiatives

Our interviews led to insights about the enterprise initiative process. In a large

number of companies, the results did not meet executives’ expectations.

Positive outcomes were in the minority.

Only 33 percent of interviewees judged their initiatives as “positive” or “strong

positive” (see Exhibit 5). These interviewees affirmed that their initiatives had

created sufficient value to justify the effort; had met business objectives, sched-

ules, and budgets; and had achieved tangible financial impact. Many of the ini-

tiatives that earned neutral or negative assessments were problematic. Some

had been canceled after wasting substantial investments, others failed to de-

liver required functionality, and some required replacement of a vendor.

Few companies met their objectives.

For all the effort companies put into these initiatives, only a narrow majority of

Exhibit 5

Positive Outcomes Were in the Minority

Negative12%

Neutral55%

Positive24%

Strong positive9%

SOURCE: BCG survey.


the initiatives met their business objectives and delivered sufficient value to

justify the effort. Executives could point to tangible financial impact in less

than 40 percent of the initiatives (see Exhibit 6).

Many companies could have achieved similar value for less money.

In addition to those companies that failed to meet business objectives or

achieve tangible financial impact, more than half of the companies incurred

significant unnecessary costs. Of that group, some 20 percent of the organi-

zations implementing either ERP or SCM reported that they could have

achieved similar business value for 50 to 60 percent less. Many of their expen-

ditures had gone toward false starts, nonessential features, and overreliance on

expensive external consultants.

Good execution did not ensure business value.

Initiatives that were completed on time and within budget garnered more posi-

tive outcomes than initiatives that were not. Nevertheless, our findings show

that good execution did not guarantee value creation. In fact, 33 percent of

the initiatives with negative outcomes had been well executed.

Exhibit 6

Few Companies Met Their Objectives

100

80

60

40

20

0

% of initiatives

Yielded sufficientvalue to justifyeffort

Met businessobjectives

Had tangiblefinancial impact

SOURCE: BCG survey.


What Companies Can Do to Improve TheirChances of Success

While many executives reported disappointing results, our interviews identified

a set of practices that promoted positive outcomes. Most companies that

followed such practices had better results than those that did not.

Begin with a strategic vision and clear business objectives.

Some companies selected an enterprise application before they had developed

a strategy, but that approach proved detrimental. Companies that started with a

strategic vision and a thorough strategic assessment of their business needs had

positive outcomes 53 percent of the time, in contrast to a success rate of 22 per-

cent for those that had no strategic vision and had not conducted a thorough

strategic assessment (see Exhibit 7).

A thorough strategic assessment performs three important functions. First, it

helps executives understand the full scope of the enterprise initiative. This un-

Exhibit 7

Strategic Analysis Improved Success Rates

100

80

60

40

20

0

% of initiativeswith positiveoutcomes

No strategicvision and weakstrategicassessment

Strategicvision

Thoroughstrategicassessment

Strategic visionand thoroughstrategicassessment

SOURCE: BCG survey.


derstanding helps them determine whether the company needs to undertake a

large-scale, multiyear investment program or a targeted initiative. It also pushes

executives to make explicit tradeoffs and establish clear priorities. Second, the

strategic assessment helps generate the executive commitment necessary for an

initiative to achieve success. And third, it provides a road map for reaching

business objectives.

Two problems common among companies with disappointing implementa-

tions were a lack of commitment from key executives and an absence of strong

leadership for the initiative. The following comments were typical. One utility

executive said, “Senior managers did not understand why they were supporting

the implementation, so every time there was a problem, their commitment

dwindled.” And an executive at another utility company observed, “We let

some senior managers disagree on the importance of SAP. This was a mistake

as it had cascading effects.”

Companies undertaking enterprise initiatives must have strong leadership that

is prepared to make tough decisions with regard to scope and direction, and to

communicate the project’s objectives with authority throughout the organiza-

tion. Only companies with well-defined strategic imperatives can determine

which business capabilities are worth developing. With so much at stake, com-

panies simply cannot afford to plow ahead with only the hope that everything

will be fine after the implementation. An executive at a $2 billion industrial-

process company deeply regretted his company’s lack of strategic assessment:

“We didn’t so much have a strategic plan as a feeling of frustration that our

systems didn’t work. We just wanted to do something to fix our problems. After

spending $20 million, we gave up.”

While strategy is important for all types of initiatives, companies moving into

uncertain or unfamiliar terrain were particularly emphatic about up-front stra-

tegic thinking. Companies involved in new e-commerce initiatives are prime

examples. The CIO of a major industrial-goods manufacturer in the midst of

creating an e-commerce solution said:

You must understand market segmentation and true customer value. You

must think out of the box in terms of current business practices and envi-

sion an entirely new way of doing business. If you don’t, you’re just put-

Getting Value from Enterprise Initiatives B C G R e p o r t 1 1

ting lipstick on a pig, dragging all of your old practices onto the Web. E-

business involves completely reconstructing your business and redesigning

your processes with that in mind.

Analyze the business capabilities required to attain the vision.

Once companies have defined their strategic objectives, they need to identify

the specific capabilities that will promote value creation. Using such tools as

customer interviews, benchmarking, and process analysis, companies can de-

fine their capability requirements. Companies that conducted thorough eval-

uations at this stage saw positive outcomes of 56 percent—significantly higher

than companies that did minimal analysis (see Exhibit 8).

Answering such questions as What are our opportunities to cross-sell to our

customers? and How high do our inventory turns need to be? enable a com-

pany to make investment decisions that create value. The understanding

gained from such inquiries will help guard against excessive spending encour-

aged by vendors and internal business users. Later in the process, this knowl-

edge will help management distinguish true value-added features from bells

Exhibit 8

An Analysis of Capabilities Improved Outcomes

100

80

60

40

20

0


Minimal analysisof capabilities

Processanalysis

Processanalysis andbenchmarking

Process analysis,benchmarking, andcustomer interviews

SOURCE: BCG survey.


and whistles. A common concern is that because many executives do not have

the background or training to make such distinctions, they are obliged to rely

on parties who have vested interests. A marketing executive who implemented

a CRM system at a major financial services company commented, “Sometimes I

have the feeling that the IT guys within my company try to enjoy themselves by

overcomplicating some useless feature of the software.”

In addition to preventing unnecessary spending, executives can use this period

to make sure the initiative is on the right path and has the right goals. A major

manufacturing-and-process company that was installing an SCM system di-

rected a team of 50 managers to spend more than six months thoroughly ana-

lyzing their processes and benchmarking them internally and against compet-

itors’ processes. Only when this phase was complete did the company engage

a software vendor in the execution of the system. The initiative, completed

within budget and ahead of schedule, had a strong positive outcome: The

objectives were achieved, costs were reduced, and payback was expected within

two to three years.

In the absence of well-defined capability objectives, initiatives may be judged

on their execution instead of on their ability to create value. A senior finance

executive at a large energy-and-utilities company explained, “Before the imple-

mentation, we had only very general objectives. The primary driver on the proj-

ect was to get something implemented on time and on budget, so people could

chalk up a success story.”

Capability analysis also helps companies see problems before they reach a

point where the only option is to invest in expensive IT and applications fixes.

Sometimes the first step toward fixing a problem is to identify and quantify it.

A high tech company had serious order-to-delivery problems that were damag-

ing its market position. Management decided to start tracking order-to-delivery

times, with a view to analyzing the problem and possibly installing corrective

systems. However, the act of measurement itself set in motion a dynamic of

improvement that made an expensive systemwide solution unnecessary (see

Exhibit 9).

Do enough up-front work to determine the best options.

When managers understand their capability requirements, they can assess the


range of options. Forty-three percent of the initiatives in which managers per-

formed a thorough option analysis had positive outcomes, in contrast to a 9

percent success rate for initiatives in which managers performed a minimal

analysis (see Exhibit 10).

The list of options can be long, so it’s important to determine which solutions

to consider. The CIO of a major energy company starts by examining a wide

assortment of solutions, some of which may not require IT: “First I ask if the

problem even requires any IT support or if it can be solved with a different

process or business model. Then I ask if that IT needs to be packaged software

or not.”

A BCG client in the pulp-and-paper industry found that approach valuable.

Management felt strong financial pressure to increase inventory turns and the

necessity to implement a packaged SCM solution. However, after analyzing the

company’s internal processes and inventory drivers, the managers found that

they could maximize turns by reducing the total number of SKUs and adopting

new rules for scheduling and planning. That approach saved both time and

Exhibit 9

Simply Measuring the Problem Led to Stunning Results

Order todelivery (days)

January February March April May June

Decision to measurecycle-time performance

Orders with systemic problems

4

3

2

1

0

SOURCE: BCG casework.


money, and the solution imposed less operational risk than a systems imple-

mentation would have incurred.

But the process of evaluation does not end with a decision to choose or reject a

packaged solution. If the decision is made to use a packaged solution, the or-

ganization faces additional questions: How much of the application should be

custom made rather than standard? Which vendors are right for the task?

Where will best-of-breed solutions be better than integrated solutions? Should

the initiative be implemented all at once, in a big bang, or would a phased

implementation be better?

Given the importance of starting on the right track, selecting the best vendor is

a critical decision. It is surprising that many companies limit their assessment

of vendors to only three or four suppliers. While that may seem practical in

light of management time constraints, it may mean overlooking some of the

best vendors for specific tasks. The executive committee of a multinational

telecommunications company, for example, had thought that all ERP systems

were pretty much the same. One executive at the company explained, “Because

Exhibit 10

An Analysis of Options Improved Success Rates

100

80

60

40

20

0


Minimalanalysis

Thoroughanalysis

SOURCE: BCG survey.


we didn’t have a clear understanding of our requirements, we didn’t really

know how to choose our ERP vendor. We just went with the least expensive. We

got it wrong, and now we are locked into an expensive cycle of customization.”

The experience of another BCG client exemplifies the importance of option

evaluation. The client, a large industrial-goods company, had decided to imple-

ment an ERP solution but wished to improve on its preliminary plan. The pre-

liminary plan would have had a payback period of more than five years. How-

ever, analysis revealed opportunities to achieve rapid improvements during the

first two years with only a few elements of the ERP initiative. This would allow

the company to phase in its ERP implementation more gradually. In addition,

the company identified SCM and CRM implementations that would add to the

cost but would more than double the benefits. The result would be greater

benefits with dramatically faster payback and less risk (see Exhibit 11).

Make sure decisions are driven by business requirements.

Enterprise initiatives should provide specific solutions to specific problems.

When they do not, new problems develop. A CIO who had experienced several

Exhibit 11

An Analysis of Options Led to Rapid Improvements

Cumulative($millions)

Cumulative($millions)

280

240

200

160

120

80

40

0Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

280

240

200

160

120

80

40

0

cost

benefit

Preliminary plan had long paybackRevised plan had greaterbenefits and shorter payback

cost

benefit



Exhibit 12

Apple and a PC Competitor Had Different Results from the Same Software

Inventoryturnsper year

Apple PC CompetitorInventoryturnsper year

100

80

60

40

20

0

100

80

60

40

20

01992 1993 1994 1995 1996 1997 1998 1999 1992 1993 1994 1995 1996 1997 1998 1999

ERP implementations remarked, “Very often these large application initiatives

are responses to a feeling that something needs to be done. They don’t neces-

sarily address the right capabilities; they are a sledgehammer to crack a nut.”

Organizations have introduced big application initiatives as a way to stimulate

radical change. Radical change may well be required, but it should be the re-

sult of careful analysis aimed at positioning the company to exploit its compet-

itive advantage. A logistics executive at a large manufacturing company admit-

ted, “We made the mistake of viewing software solutions as catalysts for im-

provement and change. If only we had started out improving our business

processes, we would have saved a lot of money.”

It is important to realize that software packages alone do not lead to opera-

tional effectiveness. The personal computer industry provides a case in point.

Since the mid-1990s, both Apple and one of its competitors have implemented

ERP and SCM packages from i2, Manugistics, and SAP. Apple’s inventory turns

increased from fewer than 10 times per year to about 90, whereas the com-

petitor’s inventory turns hovered at around 10 until last year. The company

SOURCES: Literature reviews; vendor interviews; company press statements.NOTE: At Apple, Manugistics installation began in 1994; i2 began in 1998; SAP began in 1999. At the competitor, i2 installation began in 1995;SAP began in 1997; Manugistics began in 1998.


announced that inventories turned 30 times in 1999 (see Exhibit 12). Clearly

there were other factors that influenced operational effectiveness. In partic-

ular, Apple pushed a leaner, more innovative product line during this period,

was faster to adopt a build-to-order production model, and worked aggressively

to outsource noncore assembly operations.

Divide the initiative into focused modules with quick payback.

Dividing the initiative into focused, manageable modules can be a significant

success factor. There are various ways to do this, including phasing by business

unit, location, or application functionality. To reduce overall cost and the risk

that subsequent integration could become more difficult, some pieces could be

tightly integrated as core systems. However, our data show that smaller initia-

tives are far more likely to be successful (see Exhibit 13). One reason for their

success is that it is easier for managers to focus on the value added when they

are not dealing with multiple issues simultaneously. Their size alone makes

large projects complex and challenging. As one systems executive at a global

business-services company put it, “Divide and conquer. Do it piecemeal, or

none of it will be done right.”

Exhibit 13

Smaller Initiatives Had Higher Success Rates

% ofinitiativesby outcome

Less than$3 million

$3 million to$29.9 million

$30 millionor more

Original budgeted cost

100

0

1510

35

40

10

25

55

10

10

70

20

Strong positive

Positive

Neutral

Negative

SOURCE: BCG survey.


Large projects can be unwieldy. A particularly stark example of this involved a

large retailer that had given up on a $100 million packaged ERP initiative, be-

lieving it to have been a huge waste. One company executive explained, “In

hindsight, the extent of the necessary changes was far too complicated. It all

proved too costly. We ended up scrapping our ERP solution in favor of focused

systems that do specific tasks well.”

Large initiatives can swamp an organization’s staffing resources, forcing them

to depend on integrators whose incentives may not be aligned with those of the

client. (And the integrators may have staffing problems of their own.) An exec-

utive at an energy company that was forced to hire several integrators made

this point: “We were not able to find one consulting company to staff a suffi-

cient number of experts, so no one felt responsible for the implementation.”

Another reason for the higher success rates of smaller initiatives is that they are

more likely to undergo strong analysis (see Exhibit 14). Thorough up-front

analysis becomes less manageable as the scope expands. In fact, some smaller

initiatives begin as large initiatives, which, as the result of up-front analysis, are

then redefined and narrowed. For example, an analysis of one company’s pro-

Exhibit 14

Many Larger Initiatives Were Undertaken Without Thorough Analysis

% of initiativeswith thoroughanalysis ofcapabilities

100

80

60

40

20

0

% of initiativeswith thoroughanalysis ofoptions

100

80

60

40

20

0

Original budgeted cost Original budgeted cost

Less than$3 million


$30 millionor more

Less than$3 million


$30 millionor more

SOURCE: BCG survey.


posed ERP implementation revealed that 80 percent of the benefits could be

achieved with only 33 percent of the investment. Were the company to fund

the initiative at the 100 percent level of more than $70 million, it would see

only a marginal increase in benefits (see Exhibit 15). Managers must conduct a

thorough analysis to determine how to modularize their initiatives and when to

stop investing.

The experience of a BCG client, an industrial goods conglomerate, exemplifies

the value of breaking initiatives into small modules with rapid payback. Com-

pany executives thought they needed to implement an ERP solution as a foun-

dation to subsequent SCM and CRM solutions. To test their hypothesis, the

company broke the ERP, SCM, and CRM initiatives into small modules and

assessed each to determine which ones would provide the greatest benefit.

This analysis led to three insights. First, some modules would not be needed;

the main benefits could be achieved with simple modifications to existing

systems, processes, and organizations. Second, most of the value would come

from a few of the SCM and CRM modules, so they were the ones that needed

the highest priority for implementation. And third, it would be easier than the

Exhibit 15

Dividing an Initiative into Modules Indicated When to Stop Investing

Cumulativeannual netbenefits($millions)

Cumulative investment($millions)

80% ofbenefits

70

60

50

40

30

0

20

10

0 10 20 30 40 50 60 70 80

33% ofinvestment

57% ofinvestment

100% of benefits



executives had thought to implement the linkages between the high-priority

SCM and CRM modules and existing systems. As a result, the company decided

to pursue simple modifications to the existing system first; specific, high-

priority SCM and CRM modules second; and the remaining modules according

to their priority. This approach, the company projected, would more than

double the company’s benefits, increasing its return from 20 percent to 70

percent and halving the payback period.

Choose vendors carefully and manage them vigorously.

We have already noted the importance of choosing vendors that are appropri-

ate for a company’s overall requirements. It is also important to hire vendors

that will focus on creating business value and working effectively with your

organization. Because vendors balance your issues with theirs, they require

vigorous hands-on management. Some 15 percent of our survey respondents

felt that their vendors had not been focused on business value, and 33 percent

believed that their vendors had encouraged excessive spending. In 12 percent

of the initiatives we studied, companies found it necessary to fire their primary

vendors (see Exhibit 16).

Exhibit 16

Many Companies Were Dissatisfied with Their Vendors

100

80

60

40

20

0

% of initiatives

Vendors encouragedunnecessaryspending

Vendors were notfocused onbusiness value

Primary vendorwas fired

SOURCE: BCG survey.


One of the companies that expressed dissatisfaction with their vendors had

hired a systems integration firm to implement ERP. The firm specified 200

processes that involved heavy customization and would generate substantial

fees for itself. Eventually the company, with some assistance, determined that

170 of the targeted improvements were unnecessary, and they were discarded.

Executives from a global business-services outsourcing company told us that its

systems integrators had absurdly oversold management on an ERP implemen-

tation. The systems integrators delivered only 25 percent of the promised capa-

bilities before the project was scrapped, at a cost of $10 million—double the

original budget. It is worth noting that the fees of systems integrators typically

account for more than half the cost of an enterprise initiative. And if we take

into account the hardware and packaged software that integrators frequently

recommend, it is clear that they drive a much higher portion of the total costs.

Software vendors earned criticism as well: FoxMeyer’s bankruptcy trustee is

suing SAP for $500 million, alleging that SAP failed to deliver the promised

functionality and that that failure contributed to FoxMeyer’s bankruptcy.

Understand the risks and manage them.

One executive told us that his company had not bothered to estimate its initia-

tive’s risk of failure because “the CEO would not allow the possibility of failure

to be considered.” Unfortunately for the company’s shareholders, the initiative

did fail, and the company lost tens of millions of dollars. An understanding of

the risks should play an important role in the decision to go ahead as well as

the determination of how to manage the implementation.

The list of potential risks is long. For example, FoxMeyer may have under-

estimated the possibility that its vendors could not deliver the scalability it re-

quired. Other companies have underestimated the risks associated with inex-

perienced systems integrators, staff attrition, unforeseen customization re-

quirements, and disruptive process changes. McKesson is one company that

learned from early mistakes not to underestimate the risks of a large initiative.

After its initial effort failed to reengineer business processes in line with SAP’s

software processes, management decided to change its fundamental approach.

It replaced the original systems integrators and brought in a firm that could

provide personnel whose experience met specific criteria. Management also


restructured the project management team in order to increase responsiveness

and responsibility. It reduced membership on the steering committee from 40

to 4 and strengthened the weekly process review. In addition, McKesson nar-

rowed the scope of the project and adopted a more phased, modular ap-

proach. Subsequent to those moves, the company successfully implemented

three core SAP modules.

Use strong leadership to limit the scope.

Experience shows that strong, unbiased leadership is crucial. Leadership

should play a decisive role in controlling the scope of the initiative. Vendors

may encourage additional spending out of self-interest. Within client com-

panies, competing parties advocating for their full set of needs may lack a big-

picture understanding of what constitutes a good investment.

The design process can lead to value destruction if it relies too heavily on un-

filtered user recommendations. As a marketing executive at a multinational

manufacturing company noted, “Our design phase consisted of passing around

the wish list to make everyone happy. Even after trying to trim down, probably

25 percent of our expenditure was on bells and whistles.”

Not only does expanding scope lead to the introduction of features that lack

value, it can also contribute to schedule delays. A high tech company’s pro-

gram manager said, “SAP covers a lot of functions. It took more than a year to

find agreement on common lists of requirements.”

Even worse, when managers are unable to reach decisions, the solution design-

ers can become disillusioned, leading them to dismiss potentially important

input from the end users. One company’s IT manager said, “Don’t let the

business users have oversight over the implementation; it just opens up a whole

can of worms.”

Successful initiatives have clear leadership structures and the support of top

executives. The leaders have the authority to filter recommendations from

business users and IT implementers, and to keep the initiative focused on value

creation.

Know when to stop and reevaluate enterprise initiatives.

In order to divide an initiative into pieces and phase in implementation, you


need to know at what points to stop and evaluate future efforts. To do this, it is

helpful to establish metrics that define endpoints. Without endpoints it is easy

to overspend and pursue low-value initiatives.

Some 23 percent of the interviewed executives identified the lack of a well-

defined endpoint as a factor that contributed to overspending. A member of

an IT steering committee at a large multidivisional energy company com-

mented, “You need a guide or a metric to tell you when to stop. Otherwise you

are always dissatisfied.”

There is strong evidence that metrics provide guidelines for determining when

to stop. Initiatives that lacked metrics were more likely to incur unnecessary

costs and finish over budget (see Exhibit 17).

An executive who had been responsible for a highly successful business-to-

consumer e-commerce initiative commented, “We had a well-gated process to

decide what to do and how far to go. We had evaluation points where we would

consider next steps in view of our evolving understanding of our needs. It gave

us a sense of confidence that things we were doing were appropriate.”

Exhibit 17

Metrics Increased Cost-Effectiveness

% ofinitiativescompletedwith fewunnecessarycosts

100

80

60

40

20

0

100

80

60

40

20

0

% ofinitiativescompletedwithinbudget

Lackedmetrics

Hadmetrics

Lackedmetrics

Hadmetrics

SOURCE: BCG survey.


A Predictive Model

On the basis of statistical discriminant analysis, BCG has built a model to pre-

dict initiative outcomes. To demonstrate the importance of analytical inputs to

the success of any enterprise initiative, we modeled two scenarios. One sce-

nario looked at small, low-risk initiatives. The other looked at large, high-risk

initiatives. The outcomes differed only in the thoroughness of each company’s

analysis and the size and risk levels of its initiative.

Our model demonstrates the importance of thorough analysis of strategy, capa-

bilities, and options. A thorough analysis of strategy is not sufficient by itself,

but when followed by a thorough analysis of capabilities and options, there are

dramatic effects on the probability of positive outcomes. If any of these compo-

nents is left out, the initiative incurs extra risk. The added risk is especially

apparent in large, high-risk initiatives. However, the model demonstrates that

large, high-risk initiatives have a higher likelihood of success if all three ana-

lytic components are performed very thoroughly (see Exhibit 18).

Exhibit 18

A Thorough Analysis Is the Key to Success

Probability ofpositiveoutcome (%)

100

80

60

40

20

0Inadequateanalysis

Analysis ofstrategy

Analysis ofcapabilities

Analysis ofstrategy andcapabilities

Analysis ofstrategy,capabilities,and options

Large, high-risk initiative

Small, low-risk initiative

SOURCE: BCG survey.NOTE: A small initiative was defined as $3 million; a large initiative was defined as $20 million.


The Challenge of Enterprise Initiatives

BCG’s survey results can be best summarized by juxtaposing two approaches.

Companies with less successful enterprise initiatives demonstrated similar

behaviors. They responded to the hype before they considered their strategies

and business capabilities. They were drawn to big-bang ERP projects that

promised to reengineer the business or to force change. They allowed vendors

and integrators to make decisions that served more to increase the vendors’

and integrators’ fees than to create true business capabilities and value for

themselves. In addition to their failure to achieve desired business results, they

risked incurring huge cost and time overruns.

Companies with successful initiatives followed a different approach. They em-

phasized business value and focused on strategy and capabilities, not hype. In-

stead of starting big-bang projects, they carefully assessed capabilities, explored

multiple options, and prioritized and phased their initiatives to make sure they

were investing wisely. They were able to get extensive business value with less

risk of cost and time overruns.

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Getting Value from Enterprise Initiatives: A Survey of Executives

Getting Value From Enterprise Initiatives: A Survey of ... · companies as FoxMeyer and Hershey Foods have raised questions about the value of these applications. Yet the market for

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