The Hidden Costs of an ERP Transformation

As a leader about to undertake an ERP transformation, it is important to remember that these projects rarely go as planned. Like a house remodel, there will be hidden costs to be addressed throughout the implementation.  Whether it be that design tastes (requirements) change, the costs unexpectedly increase or an unexpected labor shortage that increases the timeline, it is important to learn from the construction industry and incorporate contingency into program budgets.  Here are a few of the common hidden costs of any ERP implementation and how to use contingency to avoid being caught unaware.

The business is constantly evolving and so are requirements, so plan accordingly

It is easy to say that most cost overruns are driven by scope creep and poor change management; however, that is typically a surface-level diagnosis of a much more fundamental issue faced by most organizations undergoing a major ERP transformation.  The core problem is that many transformations take 12 to 18 months to complete, during which time the business is constantly evolving.  The issue is not that the requirements changed, but rather that the company did not adequately plan and budget for the changes in its business.

To address this issue, look at the historical maintenance costs of legacy solutions to get a sense of the number and types of changes typically requested over a similar time period.  While not a perfect solution, this will allow the organization to estimate the expected changes and allocate contingency to the overall transformation budget.  Determining whether to utilize contingency for proposed changes throughout the project can be incorporated into the traditional program governance structure and change control processes.

 Don’t quit your day job…and don’t expect your employees to either

It is often the practice of organizations undergoing a major transformation to either a) allocate a resource part-time to the effort or b) dedicate a resource fully to the project without adequately backfilling the full-time position they traditionally occupy.  In either case, this creates conflict for the employee in question either by having them work two “part-time”, 40-hour-a-week jobs, or by creating a situation where they are concerned that their place in the organization is no longer guaranteed once the project is complete.

This could result in schedule delays and cost overruns through missed deadlines and rework as the subject matter expertise is not available when needed to complete critical tasks.  Additionally, when resources are overworked, they are more prone to mistakes, thereby increasing the risk of rework.  Managers must be realistic about the time committed to project activities and quickly move to adjust if normal business activities impede project commitments.

One way to alleviate both concerns is to budget for, and utilize, temporary resources to backfill key subject matter experts when undergoing a major transformation.  This can help remove some of the unnecessary tasks on the subject matter experts and remove the fear of being replaced as the resource is not a permanent member of the team. However, doing so requires detailed resource planning to better understand the true resource needs and the actual replacement cost.  This, plus some contingency, should be added to the overall project budget.

Everyone thinks their house is clean until they open the closet

Another way in which organizations fail to anticipate cost overruns is through a lack of focus on data cleansing until after user acceptance testing or during deployment preparation.  This lack of attention to reducing, rationalizing and preparing legacy data for conversion into the new tool can lead to errors and rework that adds time and cost to the program. Unfortunately, fixing this data requires detailed knowledge of the legacy systems, which adds to the burden on existing team members identified above.

Much of this can be avoided through preparation. First, the team can begin reviewing legacy data at the outset of the program to identify both duplicate and stale data, which should be eliminated from the conversion landscape to avoid cleansing any unnecessary data. Next, there is often data entry that needs to happen in the legacy system based on the input provided by subject matter experts. To alleviate the burden on SMEs, so they can focus on mission-critical tasks, consider budgeting for temporary help to assist in data collection and entry.  Finally, plan to execute at least two full mock cutovers prior to go-live to ensure that the sequencing of events and data cleansing is sufficient to meet go-live standards.

Like any major transformation (or remodel), there are plenty of hidden costs that can continue to drive up the budget.  Failure to adequately plan for these items through contingency, typically at least 20 to 25 percent of the overall project budget, can create uncomfortable conversations for the organization. It can also lead to the implementation of a system that meets historical business needs, while ignoring present and future needs.

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