How to Avoid Cost Overruns on your ERP Project!
“But you told me that putting in the new ERP would cost $900K!” exclaimed George, the CEO. He was known for his generosity to the staff while being careful with cost controls for the company. FLAG was one of the finest manufacturers of flags and banners with sales over $100M and growing each year. "And now this ERP project is already at $1.4 million - I can't believe it!"
George gazed at Martha, the CFO, with incredulity. He knew she was super smart and careful. That's why he'd relied upon her over the past ten years. But she had been dropping stitches on this project. It had been more than a year since the project kick-off date and they were now two months past the Go-Live date.
“Well, you see…” Martha drew out the sentence, knowing that she would have to have a grand reason since she had been the one to advocate for the new system. In fact, she'd taken charge of the entire ERP initiative. Martha had presented the project as mission-critical, an upgrade that was necessary, and would not be costly.
“I know that the original budget was much lower," Martha admitted, "but we didn’t expect all the additional customizations and other modules that the software folks are now telling us we need. It is beyond our control.” Martha felt that the atmosphere in the room was getting tense.
“What?” George tried to move the focus. “We don’t want customizations. That was the problem last time, and we paid heavily for it. Our top competition is using a cloud system and no customizations. My dear buddy over there showed me a cool looking dashboard that he references daily. I want that. I thought we were headed that way!”
Martha looked up at the ceiling. She had been the one to insist they didn't need to look at other ERP systems beyond the one she'd chosen at a meeting early on in the process. Martha had really liked the software company’s salespeople. They had promised that their new version would have all the features the company could possibly need – they'd been friendly and reassuring.
Yet after the project launched, each project meeting brought another surprise. At the most recent project meeting, the Warehouse team asked about the integration and upgrades. The software folks pointed out that this had not been included in the original budget, but they would gladly add it in for another $250K to cover the software and hardware upgrades. And a month ago, the Sales Department had voiced their expectation that there would be a Demand Planning module. For that, the software folks had quietly submitted a change order for another $150K.
Martha knew this was a growing list of ups and extras, and her good favor with George was wearing thin.
WHAT could Martha do to remedy the situation before the budget grew from the original $900K to twice that?
There is always a solution!
To find a solution, Martha first looked back on how she'd landed in this predicament. To start the ERP project, Martha had assembled an internal Project Team. Thomas, the Operations Manager, had been assigned the task of collecting the show-stopper features. Martha thought that Thomas would do a nice job. Thomas didn’t have to bother asking all the departments about their wish lists because he already knew what they needed.
Martha wanted to move the project quickly, so she'd decided to shortcut a lengthy evaluation process by meeting with only two software companies – the one they were already working with and a close competitor she had read about.
The internal Project Team contained all the necessary people – each had been with the company over 10 years and were comfortable with and knowledgeable about the current processes. They didn’t rock the boat. Martha felt that the newer staff, always full of complaints, simply didn’t get it.
When the pricing for the new ERP system came in, the current software folks matched the pricing of the competition. Martha was pleased, thinking that she'd gotten a great bargain. Discounts always made George happy.
But now that the project was underway, the implementation team from the software company had assigned their internal manager and a couple of system integration analysts who were driving Martha’s people crazy with questions and recommendations for more customizations. It seemed like every meeting ended with a change order.
Now that Martha was under pressure to right the boat, she remembered a presentation about selecting new financial systems at one of the monthly CFO Association meetings. The presenter had talked on and on about how they’d searched for a Project Management firm. Martha had thought the guy was crazy and had wasted time. Why spend the money?
But now she realized that she was the one who had started the project in a crazy way. There was no real plan or controls in place. The project was becoming her monster. She needed to rein it in before it continued to spiral.
Martha called the presenter and spent an hour listening to his recommendations. He said that this was not his first rodeo. When he had first tried a large project without an external advocate to guide the process, he had also found himself in uncontrollable-cost-land.
He recommended that she stop the project and start looking for an external Project Management firm. A strong overall Project Manager who would guide the entire initiative would keep the project moving forward and keep the budget in-line with expectations.
Martha leaned back in her chair and chuckled out loud. The irony: the extra money might result in spending less money. Cost containment was the immediate need. Time to start taking the right steps now.
The remedy? Bring in a Project Manager.
Martha interviewed three Project Management firms. This time she would not be swayed by super-friendliness; rather, she would understand their process. She’d select the most independent, process-driven, solution-oriented firm. She was looking for a firm that would look out for her project’s best interests and thus her company’s best interests.