FOUR DISTRIBUTORS THINK ABOUT THEIR I T FUTURE
Two years ago – before working with four, large wholesale
distribution (WD) firms with differing IT stories- I could not have imagined
myself going on record today with the following advice:
If a Wholesale Distributor currently has:
1. $100MM or
more in sales;
2. A dated,
multi-patched and modified IT system; and/or, two or more systems due to
3. It has an
ambitious strategy that will involve:
pursuit of aggregate, supply-chain rebates; and/or,
offering customized, inter-company, supply-chain
cost-reduction services that will leverage the rapidly emerging “software-as-a-service”
(SaaS) trend …
THEN: those WDs should thoroughly test and compare the SAP
WD solution and its vision path to whatever other options seem appealing. I
would further recommend considering doing SAP’s “All-in-One”
implementation which means making no modifications and instead adjusting all
current internal activities to work with SAP’s solution for a big, net gain in
best-practice and integration productivity.
(“Small businesses” skim this essay and highlight all
“questions”, because IT capabilities are in the midst of a rapid state of
change, which in turn will trigger supply chain opportunities and demands for
firms of all sizes.)
REACTIVE QUESTIONS TO MY SAP-CENTRIC ADVICE?
1. Bruce, isn’t
SAP too – complex, difficult to install and expensive in every way for a
relatively simple industry like wholesale distribution – especially considering
all of the mature, totally-tricked-out and much more affordable distribution-niche,
offerings that exist?
you been a consultant to and a speaker for many of the distribution niche
software vendors over the past 27 years? Are you now discounting them? What
have you been smoking the past two years to come to this turnabout opinion?
3. How much
is SAP paying you for this infomercial?
Answers in reverse order follow.
I don’t have a deal with SAP. If they read this and have
any further interest, I’ll listen and would help if possible. I’ve never been
an IT solution expert, but rather a strategic advisor and turnaround artist who
must know a lot about IT issues. “IT solutions” are, for me, really tools and
toolkits to serve great: managers, strategy and personnel.
OVER THE PAST 2 YEARS?
I don’t proactively track what IT vendors are doing. I didn’t
notice, for example, that SAP announced a vertical software solution for the wholesale
distribution industry in October, ’04. A year later, though, ID Magazine
invited me to participate in a webinar sponsored by SAP. I did one of three, 15-minute presentations entitled “How to use IT
strategically”. My talk was independent of SAPs closing infomercial and had no
references to or endorsements for SAP’s offering. (I did thank them, though,
for indirectly paying my fee through ID Magazine.)
After the webinar, my superficial take on SAP’s wholesale
offering was that: 1) They were late to be entering the
already oversold, mature, highly-competitive, distributor market in which
traditional, niche vendors had been rapidly consolidating. And, 2) based on
stories I had heard through the late ‘90s, I suspected that SAP’s total cost of
ownership (TCO) would be way too high in comparison to the offerings of the entrenched,
The SAP webinar infomercial did, however, plant one seed
in my mind. One of their slides had two diagrams of an SAP user’s ERP system
before and after an SAP installation. The before-picture looked like a ball of
spaghetti in contrast to the simple, elegance of the SAP, after-picture. The spaghetti
(or fur-ball) metaphor reminded me of two of my on-going, WD clients that were facing
IT upgrade decisions – call them Patch, Inc. and 4ERPs.
OF ORGANIZATIONAL, IT PARALYSIS:
Patch is a 3rd generation, privately-held,
family business trying to transition to the 4th generation. They are
a regional distribution chain with sales over $300MM. They currently have a 37-year-old,
home-grown, IT system. Although the out-of-pocket cost for running this system seems
very low, the hidden opportunity costs are large and growing. The “system” has
been so patched over by a few aging, perhaps-irreplaceable programmers that
their ability to accommodate new, IT support requests is approaching zero.
4ERPs has a different form of IT paralysis. They continue
to run four internal systems that came with acquisitions. Their headquarters
legacy system is dated with insufficient capacity to consolidate all of the
systems, and the vendor for that system was bought by a consolidator that is
not currently trusted to continuously improve and support the system.
What to do? 4ERPs can continue to run their operations, but
they can not pursue a growing list of innovative opportunities that require new
levels of IT support with faster, better, central consolidation and control
capabilities. I suspect that several hundred distributors who are active
consolidators (and ERP system collectors) across 100+ different distribution
channels share some of 4ERPs frustration.
Both paralyzed companies can continue to run their
companies and fine-tune their past while they ponder their IT future. Because
of too many narrow and/or uninformed management viewpoints, we have created – at
both clients – a “question-map” by writing down an expanding and living list of
questions about their future IT needs with research-and-report-back assignments
for all. (Anyone who has energy for the topic has been included on the task
Once our collective awareness about ERP issues was
enhanced, we have all started having many more “accidental”, informational
discoveries and conversations that spark more rounds of questions for the “map”.
Because we are having more-informed, less-rushed conversations, some of the
sociological, psychological and political strife (and fog) is lessening.
PARAGONS WITH TIER ONE ERP EXPERIENCE:
Two of my accidental learning experiences in the past two
years have come from two, new, advisory clients. Both, coincidentally, have had
significant “tier one” ERP systems experience since
1998. The two, new clients, call them Howl and Beam, both had ’06 sales around $500MM
and went live on two different, “tier one” ERP solutions in ’99 to solve their
respective Y2K problems and “go to the next IT level”. Howl is an ecstatic SAP
user, while Beam is a happy, but now concerned user of a system that has been
consolidated into Oracle.
Howl started out with plans to modify a
non-wholesale-specific, SAP solution in ’98. In mid-stream they stopped modifying
out of frustration and re-installed the system without any changes and instead changed
themselves to run the software. It turned out to be a rewarding, productivity-improvement
journey with many unforeseen benefits.
Howl management readily admits that they didn’t know how
much they didn’t know about globally-gathered, best-process practices for many
different distribution environments. When Howl matched the flowcharts of their
old processes with SAPs and questioned the differences, they discovered the
collective wisdom of many of the world’s biggest and best distributors that had
already switched to SAP. These cumulative processes and practices had been built
into one coherent, integrated whole by SAPs army of business process management
(BPM) engineers: a capability that Howl would find tough to match internally.
Because Howl went with the “all-in-one” implementation,
no-mods route, they were able to quickly add every additional application
module that made sense. They currently, for example, are evaluating SAPs “horizontal
solution” for “compliance, risk and governance” (CRG).
Howl’s improvement in both productivity
metrics and earnings have climbed consistently since going live with SAP.
An outside investor was so impressed with Howl’s track record and IT capacity for
assimilating future acquisitions, they bought a big, minority piece of the company on
favorable terms to Howl in ‘06. And, in the ensuing acquisition hunt, the SAP
system has been a selling tool, because many of the acquisition candidates can
solve their own IT upgrade problems by merging with Howl and going on to it’s SAP
But, several caveats: Howl is a very well managed firm, as
is Beam. They both have:
managers and strategy. IT solutions in the narrowest sense are toolkits, which can’t
make up for poor leadership or unfocused, undifferentiated strategy.
2. Great, formal,
process management ability. This allowed Howl to cross-compare their old
systems with SAPs to understand all of the upsides and thoroughly teach the new
why’s and how’s to all employees. Without such a re-orientation and
re-education effort, many employees would not have made a sufficient
transitional effort. And, because the product is so tightly integrated with all
necessary modules, if one employee enters garbage the ripple-effect can be quickly
and extensively more harmful.
3. They have
best, retained employees. They pay more to get better people who they keep long
enough to formally educate to use the SAP system to maximum effectiveness. If
you give the biggest toolkit possible filled with the best quality tools to
unskilled craftsmen without a good direction and plan, then the results will be
Howl taught me a more comprehensive value metric than
price or TCO, let’s call it “lowest cost for total productivity gained” (CTPG). A summary
equation for this metric is: get world-class processes + educated appreciation
+ best, re-trained people + maximum number of totally integrated modules = CTPG.
VALUE CONCERNS ABOUT ORACLE.
Beam, is happy with their IT system, because: it did take
them to a next level of operational effectiveness; and, it does allow them
absorb new acquisitions easily. Their concerns (and questions) jumped, however,
when their solution provider was bought by Oracle:
Because Beam has always had great in-house
programming ability to support innovative strategy needs (including a unique
business model within a construction supply channel), they made a lot of
modifications to the original package. This has limited their options for easy
upgrades or new “horizontal” applications from Oracle, but they do like
Oracle’s tools for doing their own, on-going modifications. They are in a happy
spot, but there are two storm clouds for them on the Oracle, ERP horizon.
Beam will someday have to migrate along with 5
other historical systems that Oracle has bought in the past few years to an envisioned
platform called “Fusion”. Beam now refers to this Oracle path as “con-Fusion”,
because Oracle was initially quite intent on moving all systems to Fusion, but
then switched to supporting and upgrading all ERP platforms when they saw how
panicked their different user groups had gotten.
Beam has also noticed what an impressive number of
big domestic wholesalers have decided to go with SAP over the past few years in
addition to the 1000+, new, wholesale users SAP claims for the past two years
on a global-count basis. This raises the question about how much
industry-specific R&D Oracle will do – in comparison to SAP -- for future wholesale
needs for Beam’s particular system that may or may not be forced into Fusion. If
that day arrives, will they migrate to Fusion or switch – at what optimum point
– to SAP? Beam will continue to monitor SAP’s steadfast, wholesale-specific
improvements for its single platform and its unwavering, ERP vision of a
totally integrated system.
Beam is not too concerned about how they will take
advantage of any “software as a service” (SaaS) applications, because they are
confident that their own in-house programming will be able to blend SaaS
opportunities with their system. Longer-term they do see SAP’s Developer
Network (SDN) as being a potential plus over Oracle’s abilities to get
independent developers to work on Beam’s particular ERP platform. (Note: SAP
has shared 30,000 application program interfaces (APIs) with an exploding
number of independent software developers (over 500k in one year) with the
mission to develop new “software oriented architecture” (SOA) solutions
(“composite applications”) for SAP users. In theory, if one SAP user has a
specific need, they can work with these developers to co-create a solution and
even market it as a spin-out business to other SAP users if they desire.)
What general conclusions or questions can we draw from Zap’s
1) What are
the long-term economies of scale for an ERP consolidator? In the short run, the
consolidators promise all users that they will maintain the existing
system for X years to keep them from leaving. But, aside from trying to do some
quick cross-selling of other purchased, tack-on solutions, how can they
afford to continue to invest in developing numerous systems in parallel? Here
are three unfavorable trends: a) all ERP software is increasingly complex, so costs
to improve them are escalating; b) many of the improvements are fine-tunings of
marginal utility value; and c) there are often fewer potential customers to
sell within saturated, continuously-consolidating distribution channels. The
consolidators’ real need is to move all of the disparate platforms to one
common one as soon as possible.
2) Can the
consolidators actually create an upgrade path to a common platform for their
multiple user groups on-time and on-budget to
everyone’s satisfaction? Given how highly complex and mature ERP packages
already are, the Fusion-type vision for any consolidator is not a sure,
3) In the
meantime, what will the multiple-platform users do to keep up with the fast-moving
software trends/needs including:
universal, multi-media, connectivity for most
employees to many supply chain partners in and out of the office on a secure
software as a
Do they even have an “SOA developer network”? If
so, how big, good, and promising?
4) Will the
ERP solution provider be around 10 years from now? Beam has no concerns about
Oracle’s long-term financial survival. Oracle is public, financially
transparent, with a hugely profitable core database business. But, what
about tier two ERP consolidators being built on debt with no monster internal
cash generating core? One private-equity controlled consolidator, for
example, has gone from zero to over $2B in sales in about 4 years by doing
about 25 acquisitions across multiple verticals and countries and is currently
trying to refinance over $1.4B in senior subordinated debt. What other types of
junior liabilities do they have? How can they digest and integrate all of those
acquisitions so quickly? Because the software entrepreneurs usually sell their
companies and leave with the cash, will the new financial managers be able to maintain
and improve all platforms towards what coherent vision? How will they service
both the debt and the development costs without Oracles’s internal free, cash flow?
consolidators have fragmented, diseconomies of scale, SAP has, in contrast,
old-fashioned economies of scale. Its global, ERP market share is bigger than the
rest by far and all on one-platform. Their huge R&D budget can be averaged
out over the user base. Because they have the largest and best quality user
base, they can attract the most and best value-added, independent software
vendors to their ecosystem to work on “composite applications”.
Beam’s concerns ask this final summary
question: when evaluating ERP vendors, how should we weight the net present
value of a potential solution partner’s future, on-going: improvements,
flexibility, stability and guaranteed survivability?
The Howl case illustrated the need to move beyond “prices”
and even “TCO” for re-automating our past to “cost for productivity gained”
from all global, (distribution) best practices tightly integrated. And, the Beam
case illustrated the importance of adding in net present values for future partnership
factors. Because SAP can deliver on more factors within both evaluation
frameworks, their offering should logically be the standard by which other,
less-comprehensive solutions are measured.
When the final comparisons are made between SAP and the other
best solution candidate(s), the big question will be: how much weighting will
any given company give to the many issues touched on in this essay? Because
every firm will weight all of the issues differently, SAP is not the solution
for every firm. As I stated at the outset, the firms that should evaluate SAP
the most favorably will be:
Strategically ambitious -with both consolidation
and supply chain opportunities, and
Operationally adept at using best total IT toolkits
to achieve the most productivity gain for dollars spent.
From the stories of all four large distributors, we have
learned that figuring out what the best total, long-term value ERP solution has
gotten more difficult in these fast-consolidating and fast-changing times.
Every sized business needs to upgrade their thinking assumptions and
written-down, question maps in order to have better discussions on how to
measure the multi-faceted concept of “best total value” for their specific
context. The best IT path for each firm and its peculiar context will then
©Merrifield Consulting Group,
Inc. Article 1.18