In our first post of this three-part post, we looked briefly at the conclusions drawn in Panorama Consulting’s 2014 Manufacturing ERP Report, noting the reasons large companies implement new systems, how they compare to the reasons we see for our smaller (SMB) clients, and how project timeframes met their expectations and realities.
Moving forward, let’s look at project costs. While Panorama’s clients tend to implement systems in the $5 to $15 million range, if we look at “cost as percent of annual revenue” we can draw inferences for the small manufacturing firm. For instance, among “all industries” the cost as a percent of annual revenues for the typical project is around 5%, while it’s about 10% higher (about 5.5%) for manufacturers.
Panorama’s survey found that only about one-third or projects overall (in both “all industries” and specifically for “manufacturers) came in on, or under, budget. About two-thirds were over budget, often significantly so (like by more than 25% over budget). This appears to be true in spades in manufacturing where Panorama’s figures indicate that about one-third of all projects were over budget by 26% to more than 50%.
The key reason (cited by 44%): increase in scope.
We too find that invariably this is the greatest single cause of project cost overruns when compared to initial estimates. And in our many years of observations, it stands to reason for two key reasons:
- First, any firm that does not first complete a project roadmap or business process analysis is fatally doomed to an unrealistic expectation (vendors cannot quote what they do not know)…
- Second, even with a decent BPA, there are still deep levels of complexity – particularly for manufacturers – that not even an excellent BPA will necessarily uncover. These are simply the nature of implementations. But with a good BPA and a realistic factor for cost overruns, they can be greatly mitigated.
The number two reason for cost overruns: a failure to adequately staff the project. Rounding out the key budget overage reasons were “unrealistic project budgets” and “additional technology needed to be purchased to meet project goals.”
And finally, we come to Panorama’s survey results regarding Payback Periods: Fully half say they “have not yet recouped costs.” The other half saw payback in one year (12%), 2 to 4 years (31%), or 5 years or more (6%).
Why have 50% failed to earn their payback? We’ll leave you with an exact quote from their report:
“When organizations do not set a baseline to know where they are before implementation, it is impossible for them to know whether or not they received payback or positive return on investment. A business case takes into account the expected labor efficiency gains and non-labor benefits to calculate an accurate payback period.”
In our final post in this series, we’ll look at Panorama’s conclusions about the types of benefits manufacturers did receive from their ERP deployments and their levels of customization. Stay tuned for that final post…