ERP Software: Its Effect on Performance and Productivity, Part 2
August 21, 2006 Jerome Peloquin
This is the second of three-part article series on the use of technology to improve and enhance human performance in the workplace. These articles specifically address computer software as typified by the large scale ERP applications of the last thirty years, and chronicles the development of technology in support of performance and productivity. This installment covers first generation of ERP systems and their underlying technologies.
I recommend reading the first article in the series, of course. Although helpful, reading it is not absolutely necessary to understand this article.
A Tiny Review–The Beginning
The functional purpose of technology in the workplace is to improve the ability of individuals and organizations to accomplish meaningful work. Whether through the use of a simple lever to move a physical object or the use of a software algorithm to search a database, technology is meant to extend human capabilities. Although the means to search lists of items has changed dramatically from the days of the ancient scribes, the fundamental objectives and problems remain.
This underscores the point that although technology has changed, the goals of improved performance and productivity have not. Even though modern technology can leverage the performance of a single individual a thousand times or more, e.g., in searching lists of information, the issues of what information to find, how to organized it, visualize it, and, of course, how to apply it to improve performance and productivity are key variables in the performance/profit equation.
The first article in this ERP series discussed the leveraging of human performance through productivity enhancing software, as embodied in the first generation ERP systems, and their historic impact upon organizational productivity. I also reviewed the genesis of integrated software in business management solutions, including early programs such as the original IBM MAPICS and COPICS packages, and briefly discussed how in the early days of IT, most software was developed by internal “Data Processing” departments. This article carries the process forward, providing more detail, including a review of the first generation of modern, productivity enhancing ERP software, and providing a rational for its imminent obsolescence.
The Role of Information in the Decision Making Process
The term “IT” consists of two elements, the words “Information” and “Technology.” Much has been said about the technology component, even though information is what IT is all about. Technology is the enabler, but information is the point of the spear.
Information defines the workplace. Information informs knowledge–the true coin of human capital. So, before I dive back into the comfortable world of technology, let us consider the world of information. Let us explore the information dynamic, for without a thorough understanding of how information effects human performance, our technology could well be misapplied.
The term information has special meaning in performance management, since information is the key component in decision making. Information informs the entire workplace. Information is the very foundation of business itself. Human performance technology tells us that information, or the lack thereof, is the single greatest cause of poor performance in the workplace.
Here is the main issue you have to consider when you think about ERP systems: Data versus Information.
There is a significant difference between data and information. Data only becomes information when it is placed in context. An SKU (a “stock keeping unit” in inventory management), for example, is meaningless unless one recognizes the item it represents; out of context, the SKU is an alpha/numeric sequence. Essentially, we need to be able to understand the contextual relevance of data before it can be applied. A good, business-related definition of information is, therefore, usable or actionable (in current business-government speak), it is data in context.
The IT function at your company has a major role in the gathering and provisioning of information in the workplace, although in many companies the IT function may have no control over the selection, manipulation, or disposition of this information. IT is the repository of almost all financial and operations information. The IT function and, specifically, the chief information officer have the mandate to provide the tools to leverage significant improvement in both individual and organizational performance. A comprehensive understanding of the role of information would seem a pre-requisite for achieving that goal.
Information: A Behavioral Overview
A behavioral view of information in the workplace reveals three basic domains in which information drives human performance. These domains are: objective, process, and incentive. In the behavioral engineering model, the use and application of information can be described as follows:
Let’s go through these in a little more detail.
Objective information is the measurable performance standard. Performance in the workplace is defined as the effective execution of specific tasks required to achieve organizational productivity and/or profit objectives. This requires that clear, timely, and accurate communication of practical and achievable objectives to those who need to accomplish them.
Process information is the timely and accurate presentation of clear, understandable information necessary to accomplish the objectives of the job. It is an essential information task often overlooked by the IT function. Yet, without available process and procedure guides, people must either guess or rely upon flawed memory to recall forgotten training.
Incentive information is the timely and accurate feedback on operations that can motivate individuals and organizations to improve their performance. This information incentive then improves operating performance. IT can leverage the company’s information assets, allowing the company to increase workforce motivation and performance.
The following example illustrates this point. One day, Andrew Carnegie, after observing a particularly productive day in his steel mill, had workers paint a large “6” (for the six tons of steel produced by the second shift in his mill) on the company parking lot. The next day, after seeing the “6,” the third shift (not wanting to be out performed by the second shift) had crossed out the six and painted a “7” for seven tons of steel, whereupon the first shift, not to be outdone by the other two had crossed out the seven and produced “8” tons of steel. That was a 25 percent increase in production, without any additional spending for salaries or overtime, purely from the incentive in the feedback provided by management and the natural competition between shifts.
The data stored in the ERP system provides the direct means to leverage technology and thereby to measurably improve human performance.
Performance Information Cycle Time (PICT)
The relevance of information in the form of feedback and its potential to leverage performance improvement is directly effected by the timeliness and relevance of the information. The cycle time referred to here is not machine cycle time, but the time it takes an element of information to reach the person who needs it to perform. Thus, it is called Performance Information Cycle Time, or PICT.
There is a direct link between an event, the PICT, and improvements in performance and productivity. Finding out, for example, that a flawed customer service procedure results in a 30 percent increase in customer complaints is surely important. If, however, customer care does not know about it until the next quarterly report, much of the damage will have already, and possibly irretrievably, been done. Also, finding out that a specific production line is experiencing 14 percent more defects than acceptable should not happen at the end of the shift. You can’t wait for that type of feedback, either.
Another example of the consequences of slow or delayed feedback was the FAA report that a certain airline was carrying dangerous cargo in the crew compartment against regulations. The report was written fifteen days before a plane from that company crashed into the Everglades in Florida. The cause of the crash was a fire caused by the leakage of chemicals from the illegal cargo–in this case, oxygen tanks–being carried in the crew cabin. The report, written in Dallas two weeks before the accident, was sitting in a supervisor’s in-basket in Chicago when the catastrophe occurred. The FAA grounded the airline a week after the accident.
PICT is a critical component of an agile organization, one that can respond quickly to changes in the business ecology, shifts in markets, and unexpected perturbations in the workforce. It is a tool almost completely under the control of IT. Accelerated PICT is one of the major advantages of an integrated software system like an ERP system. The faster one can respond, the better the outcome or result. Fast, accurate PICT enables better decisions, improved performance, increased productivity, and greater profits. As you can see, it can also save lives.
First Generation ERP Systems
Provision of an integrated, single-entry, organization-wide software solution in the form of an ERP system, as we have seen, can optimize the use of key information so necessary to the decision process. The advent of first generation ERP applications was a key to the productivity surge that drove American industry to the 21st century. The computer and the ERP systems that ran on them enabled the factorial jump in productivity required by today’s global markets. SAP was the first ERP systems vendor to introduce a multi-relational database into its ERP system, which was the final piece of the puzzle. The relational database enabled sophisticated reporting and complex data management historically unavailable in flat file systems. Advances in computer software, like ERP systems, permitted access to buried information resources. These breakthroughs fueled both performance and corporate profits.
Although the first generation of ERP systems enabled the great productivity jumps of the late-20th century, business practices of the new millennia will require a new set of functionality. Recent developments in miniaturization (nanotechnology), combined with wireless and other related developments, demand more of these aging systems than they were designed to deliver. The time has come to move on to a new generation of Web-based, object-driven, architecture-derived tools (as an example, IBM’s Blox technology for DB2) that have the flexibility and functionality needed to carry business to the next level. The ultimate goal is total, real-time availability of information, so that the organization can meet the ever increasing demands of the customer for value and service.
Major drawbacks of Existing ERP systems
Aging software: It is also very important to note that most of the current crop of first generation ERP systems are between 20 and 25 years old. This means that most of these complex programs are written in a procedural language with voluminous lines of legacy code requiring extensive maintenance. This burden is one reason for the high cost of acquisition, as I discussed in the first article. These costs can easily exceed a quarter of a million dollars for a midrange shop, and the software has the equally burdensome costs of vendor maintenance. Fortune 500 corporations can spend between $50 million and $100 million dollars or more annually on their ERP suites.
Total Cost of Ownership (TCO): Acquisition cost is only one line-item in a long list of direct and indirect costs associated with today’s ERP systems. There is the cost of installation, or, if you have an existing system, conversion. Numbers ranging from $10 million to $50 million dollars have been discussed, but not in public.
Like corporate aircraft, no company wants to publish the real cost of acquisition and/or ownership. Maintenance, for example, typically averages 15 percent to 20 percent of initial licensing fees on an annually basis, and on top of this you have to add the cost of internal infrastructure (i.e., human resources and training). These costs, over a three-year period, will easily exceed the initial cost of acquisition for an ERP system, and the customer keeps on paying these costs year after year. Then, there is the cost of the database manager and associated administration and programming staff. Throw in equipment maintenance, too. Also, If your ERP system has a per-seat end user cost on top of the server license, that adds to the burden. These are “fine print” items, often minimized by both the vendor and/or the customer during the acquisition process.
The installation of ERP systems often requires that the host company completely change its way of doing business. It requires running parallel software for months to assure a successful transfer of data, often for a multi-year period.
For example, installation of a complete SAP ERP suite is typically sold as requiring 3 to 5 years of time. I am familiar with several ERP system implementations, including SAP and PeopleSoft, in automotive-related companies that have averaged 10 to 15 years for implementation, even though these systems were sold as only requiring three years for the complete installation of the systems and conversion of legacy data. Only organizations with enormous resources can afford the extreme costs of time and consultants required. These are the unfortunate, “real world” economics of first-generation systems.
Client/Server Model: There are other problems as well. There is the client/server model employed by many of today’s low-end ERP users. The maintenance of server farms is extremely expensive in itself. There is the constant maintenance of hardware and software. The annual fee associated with a client is between $500 and $800 per year, per desktop. This includes: new software, maintenance, virus protection, new hardware, etc. If your ERP system runs on a client/server system, this will only add to the TCO. In an 800 person company, with 600 workstations (a conservative 75 percent) at a projected annual support cost of between $600 and $800 (assuming standard back office workload only), the ongoing user support could cost as much as $480,000, exclusive of individual applications support.
The generally accepted ratio for applications help desk personnel is 1:25, that is, one help desk person for every 25 users. My example 800 person company would require an additional 24 help desk staff, along with overhead and other associated costs. The gravity of these costs required to support legacy ERP applications makes them vulnerable on several levels. Business will need to closely examine the costs of maintaining these systems in light of new and less burdensome technology.
A thin client strategy employing a single central box, such as the System i5, could eliminate most of these expenses.
Then, of course, there are the problems of scaling or growing the company. In a client/server model, bandwidth, processor power, and complexity make growing the organization a serious IT infrastructure issue. The lack of scalability inherent in the growing complexity of a client/server model requires a complete re-conceptualization and re-engineering of the operating topology of the organization. New employees require new servers. The client/server model also brings out issues of desktop control. Which computer has which version of the software? Are they compatible?
All of these problems cost money to address, and require more staff.
Proliferation of Consultants: Speaking of staff, many ERP customers have incurred a second work force, whose exorbitant fees they pay for as part of the conversion process. This temporary workforce is often still there years after the sale, and the fees go on and on.
Maintenance: The legacy code that runs at the core of these programs requires almost constant attention and support to maintain a minimum functionality. The ERP customer pays for this complex infrastructure that is a constant burden.
As change is a constant in business, every manager knows that the maintaining a competitive edge requires day-to-day attention to changes in the business ecology. For example, innovations in order entry system at a Fortune 500 consumer products company have resulted in moving the order entry point from an order entry department to the customer’s own site. Tens of thousands of dollars in savings were realized. This is in addition to reduced invoicing time and better cash management. How many of today’s ERP systems can take input from a PDA?
Here’s the big lie. Get ready. Virtually all of the top ERP systems, including JD Edwards, Lawson, SAP, and others, were created 20 years ago or more. This means that they were written in a procedural programming language. This fact alone dramatically limits their usefulness in the new, agile business environment of the 21st century, fueled by wireless and other mobile technologies. Many existing programs of this genre call themselves Web-enabled. This means they provide the illusion of full Internet functionality when, in fact, the displays are mostly “output only,” essentially “screen scrapers” with functionality only a “few inches” deep. “Our ERP won’t be truly Web-based for at least four more years. . . ” This partial quote has been uttered by various spokesmen representing almost every major ERP vendor in the market today.
A fully functional system, capable of providing both input and output, remote wireless accessibility on PDAs and cell phones, along with a host of new technology, needs to be Web-based and not merely Web-enabled. The Big Lie is embedded in the term “Internet-enabled.” An unsuspecting customer might be led to think that this means the system is available over the Internet, that it will run within a browser, that it will be available anywhere a user may need to access it from, be that from a desktop, laptop, palmtop, or cell phone. This is simply not the case.
The Real Truth
SAP is not. J. D. Edwards is not. Lawson is not. Not one of these first generation ERP systems is really Web-based. In fact, the most aggressive estimates made by their own marketing departments place achievement of a full Web-based product around the 2009 or 2010 timeframe–three to four years from now. Can your company afford to wait that long to take advantage of the new functionality available today? And, can you afford to let the next four years of technology go past you?
The issue is this: is the software Internet-enabled or Internet-based? At this point, it should be apparent to even the casual reader that the term “Web-enabled” is an attempt to take a liability and present it as an asset. Since these first generation ERP systems were not designed using object-based architecture, a requirement for any program to provide a robust, fully functional Web-based delivery capability, Lawson, J.D. Edwards and the others cannot be Web-based. In other words, the term Web-enabled really means limited Web functionality.
Time to Retire . . .
In his recent book, The Singularity is Near,” Ray Kurzweil notes that “. . . not only is change increasing logarithmically, the rate of change is also increasing.” The first generation of ERP systems that ran on the System/36, System/38, and the reborn AS400, the recast iSeries, and now the i5 are often obsolete in relation to today’s Web-based business models. Their time has past. Your present ERP system may now be an anchor holding your company back from implementing, or benefiting from, the latest technology.
Like the old 1960s musical group, Mitch Ryder and the Detroit Wheels, once sang, “. . . it’s time to retire!” Our companies need to be positioned for change. This is the posture of the Agile Corporation: Adapt, Migrate, or Perish. Our final article in the series will address the “next generation” of ERP systems. Is your company ready for tomorrow?
Oh, yes. . . what’s in your computer?
Jerome Peloquin is the owner of Performance Paradigm, and a whole lot more. We welcome him to the ranks of IT Jungle’s expert commentators. Peloquin is a former U.S. Marine and was a member of the President’s U.S. Marine Band in Washington, D.C., and upon discharge, joined the U.S. Capitol Police. After that, he moved to San Francisco where he helped found one of the most popular bands of the day, Jefferson Airplane. For a time, he had a career as a professional musician, playing with such talent as Nina Simone, Jose Feliciano, Paul Winter, and Chad Mitchel. In the mid-1970s, Peloquin left the music business and went back to school to get a master’s degree in Instructional Systems Design. He studied with the eminent behavioral psychologist, the late Thomas Gilbert, a colleague of B.F. Skinner, the former being the father of the Human Performance Engineering branch of behavioral management, the latter being the most famous behavioral psychologist in the world. Peloquin subsequently founded and managed his own electronic publishing and consulting company, and after 10 years, he sold the business to Sylvan Learning Systems in 1996, and took a position as the director of consulting services at the company. In that capacity, he consulted with numerous Fortune 500 companies, including Ford, Frito-Lay, Gillette, Merck & Co., and Honda America Manufacturing. Peloquin left Sylvan in 1999 when the consulting division was sold, and formed his own practice.