You are on page 1of 12

If you're not careful, the dream of information

integration can turn into a nightmare.

Putting the Enterprise into


the Enterprise System
by Thomas H. Davenport

NTERPRISE SYSTEMS appear to be a dream come true. These

E commercial software packages promise the seamless integration


of all the information flowing through a company - flnancial and
accounting information, human resource information, supply chain
information, customer information. For managers who have struggled,
at great expense and with great frustration, with incompatible infor-
mation systems and inconsistent operating practices, the promise of an
off-the-shelf solution to the problem of business integration is enticing.
It comes as no surprise, then, that companies have been beating paths
to the doors of enterprise-system developers. The sales of the largest

ARTWORK BY CURTIS PARKER 121


ENTERPRISE SYSTEMS

vendor, Germany's SAP, have soared from less than


$500 million in 1992 to approximately $3.3 billion
in 1997, making it the fastest-growing software THE SCOPE OF AN
company in the world. SAP's competitors, includ- ENTERPRISE SYSTEM
ing such companies as Baan, Oracle, and People-
Soft, have also seen rapid growth in demand for An enterprise system enables a company to inte-
their packages. It is estimated that businesses grate the data used throughout its entire organiza-
around the world are now spending $10 hillion per tion. This list shows some of the many functions
year on enterprise systems-also commonly re- supported by SAP's R/3 package.
ferred to as enterprise resource planning, or ERP,
systems-and that figure probably doubles when
you add in associated consulting expenditures. Financials
While the rise of the Internet has received most of Accounts receivable and payable
the media attention in recent years, the business Asset accounting
world's embrace of enterprise systems may in fact Cash management and forecasting
be the most important development in the corpo- Cost-element and cost-center accounting
Executive information system
rate use of information technology in the 1990s.
Financial consolidation
But are enterprise systems living up to compa- General ledger
nies' expectations? The growing numher of horror Product-cost accounting
stories about failed or out-of-control projects Profitability analysis
should certainly give managers pause. FoxMeyer Profit-center accounting
Drug argues that its system helped drive it into Standard and period-related costing
bankruptcy. Mobil Europe spent hundreds of mil-
lions of dollars on its system only to abandon it
when its merger partner objected. Dell Computer
found that its system would not fit its new, decen- Human Resources
tralized management model. Applied Materials Human-resources time accounting
gave up on its system when it found itself over- Payroll
whelmed by the organizational changes involved. Personnel planning
Dow Chemical spent seven years and close to half Travel expenses
a billion dollars implementing a mainframe-based
enterprise system; now it has decided to start over
again on a client-server version.
Some of the blame for such debacles lies with the Operations and Logistics
enormous technical challenges of rolling out enter- Inventory management
prise systems - these systems are profoundly com- Material requirements planning
plex pieces of software, and installing them requires Materials management
large investments of money, time, and expertise. Plant maintenance
But the technical challenges, however great, are Production planning
not the main reason enterprise systems fail. The Project management
Purchasing
biggest problems are business problems. Compa-
Quality management
nies fail to reconcile the technological imperatives Routing management
of the enterprise system with the business needs of Shipping
the enterprise itself. Vendor evaluation
An enterprise system, by its very nature, imposes
its own logic on a company's strategy, organization,
and culture. (See the table "The Scope of an Enter-
prise System.") It pushes a company toward full in- Sales and Marketing
tegration even when a certain degree of business- Order management
Pricing
Thomas H. Davenport is a professor at the Boston Uni- Sales management
versity School of Management in Boston, Massachusetts. Sales planning
His most recent book, Working Knowledge: How Organi-
zations Manage What They Know, was published in
by the Harvard Business School Press.

122 HARVARD BUSINESS REVIEW July-August 1998


ENTERPRISE SYSTEMS

unit segregation may be in its best interests. And it tant decisions by instinct rather than according to
pushes a company toward generic processes even a detailed understanding of product and customer
when customized processes may be a source of com- profitahility. To put it hluntly: if a company's sys-
petitive advantage. If a company rushes to install tems are fragmented, its business is fragmented.
an enterprise system without first having a clear Enter the enterprise system. A good ES is a tech-
understanding of the business implications, the nological tour dc force. At its core is a single com-
dream of integration can quickly turn into a night- prehensive datahase. The datahase collects data
mare. The logic of the system may conflict with the from and feeds data into modular applications sup-
logic of the husiness, and either the implementa- porting virtually all of a company's business activi-
tion will fail, wasting vast sums of money and caus- ties-across functions, across business units, across
ing a great deal of disruption, or the system will the world. (See the chart "Anatomy of an Enterprise
weaken important sources of competitive advan- System.") When new information is entered in one
tage, hobbling the company. place, related information is automatically updated.
It is certainly true that enterprise systems can de- Let's say, for example, that a Paris-based sales
liver great rewards, but the risks they carry are representative for a U.S. computer manufacturer
equally great. When considering and implementing prepares a quote for a customer using an ES. The
an enterprise system, managers need to be careful salesperson enters some basic information about
that their enthusiasm about the benefits does not tbe customer's requirements into his laptop com-
blind them to the hazards. puter, and the ES automatically produces a formal
contract, in French, specifying the product's config-
uration, price, and delivery date. When the cus-
The Allure of Enterprise Systems tomer accepts the quote, the sales rep hits a key; the
In order to understand the attraction of enterprise system, after verifying the customer's credit limit,
systems, as well as their potential dangers, you first records the order. The system schedules the ship-
need to understand the problem they're designed to ment; identifies the best routing; and then, working
solve: the fragmentation of information in large backward from tbe delivery date, reserves the nec-
husiness organizations. Every big company col- essary materials from inventory; orders needed
lects, generates, and stores vast quantities of data. parts from suppliers; and schedules assembly in the
In most companies, though, the data are not kept in company's factory in Taiwan.
a single repository. Rather, the information is The sales and production forecasts arc immedi-
spread across dozens or even hundreds of separate ately updated, and a material-requirements-plan-
computer systems, each housed in an individual ning list and hill of materials are created. The sales
function, business unit, region, factory, or office. rep's payroll account is credited with the correct
Each of these so-called legacy systems may provide commission, in French francs, and his travel account
invaluable support for a particular business activ- is credited with the expense of the sales call. The
ity. But in combination, they repre-
sent one of the heaviest drags on busi-
ness productivity and performance
now in existence. The growing number
Maintaining many different com-
puter systems leads to enormous
of horror stories about failed
costs-for storing and rationalizing
redundant data, for rekeying and re-
or out-of-control projects should
formatting data from one system for
use in another, for updating and de-
certainly give managers pause.
bugging obsolete software code, for
programming communication links between sys- actual product cost and profitability are calculated,
tems to automate the transfer of data. But even more in U.S. dollars, and the divisional and corporate bal-
important than the direct costs are the indirect ance sheets, the accounts-payable and accounts-
ones. If a company's sales and ordering systems can- receivable ledgers, the cost-center accounts, and
not talk with its production-scheduling systems, the corporate cash levels are all automatically up-
then its manufacturing productivity and customer dated. The system performs nearly every informa-
responsiveness suffer. If its sales and marketing sys- tion transaction resulting from the sale.
tems are incompatible with its financial-reporting An ES streamlines a company's data flows and
systems, then management is left to make impor- provides management with direct access to a wealth

HARVARD BUSINESS REVIEW |uly-AugU8t 1998 123


ENTERPRISE SYSTEMS

ANATOMY OF AN ENTERPRISE SYSTEM


At the heart of an enterprise system is a central database that draws data
from and feeds data into a series of applications supporting diverse com-
pany functions. Using a single database dramatically streamlines the flow
of information throughout a husiness.

Managers and
stakeholders

Reporting
applications

Saiesand
delivery
applications V

Sales force Back-office


Manufacturing
Customers and customer administrators Suppliers
^applications
service reps and workers

V
Human
resource
management
applications

Employees

of real-time operating information. For many com- filling orders from 18 days to a day and a half and
panies, these benefits have translated into dramatic cut the time required to close its financial books
gains in productivity and speed. from 8 days to 4 days.
Autodesk, a leading maker of computer-aided
design software, used to take an average of two
weeks to deliver an order to a customer. Now, hav- When System and Strategy Clash
ing installed an ES, it ships 98% of its orders within clearly, enterprise systems offer the potential of hig
24 hours. IBM's Storage Systems division reduced benefits. But the very quality of the systems that
the time required to reprice all of its products from makes those benefits possible-their almost uni-
5 days to 5 minutes, the time to ship a replacement versal applicability-also presents a danger. When
part from 22 days to 3 days, and the time to com- developing information systems in the past, com-
plete a credit check from 20 minutes to 3 seconds. panies would first decide how they wanted to do
Fujitsu Microelectronics reduced the cycle time for business and then choose a software package that

124 HARVARD BUSINESS REVIEW July-August 1998


ENTERPRISE SYSTEMS

would support their proprietary processes. They System.") As a result, most companies installing
often rewrote large portions of the software code enterprise systems will need to adapt or even com-
to ensure a tight fit. With enterprise systems, how- pletely rework their processes to fit the require-
ever, the sequence is reversed. The husiness often ments of the system. An executive of one company
must be modified to fit the system. that has adopted SAP's system sums it up by saying,
An enterprise system is, after all, a generic solu- "SAP isn't a software package; it's a way of doing
tion. Its design reflects a series of assumptions husiness." The question is. Is it the hest way of do-
about the way companies operate in general. Ven- ing husiness? Do the system's technical imperatives
dors try to structure the systems to reflect best coincide or conflict with the company's business
practices, but it is the vendor, not the customer, imperatives?
that is defining what "best" means. In many cases, Imagine, for example, an industrial products
the system will enable a company to operate more manufacturer that has built its strategy around its
efficiently than it did before. In some cases, though, ability to provide extraordinary customer service in
the system's assumptions will run counter to a filling orders for spare parts. Because it is ahle to
company's best interests. consistently deliver parts to customers 25% faster
Some degree of ES customization is possible. Be- than its competitors-often by circumventing for-
cause the systems are modular, for instance, com- mal processes and systems-it has gained a large
panies can install only those modules that arc most and loyal clientele who are happy to pay a premium
appropriate to their business. However, the system's price for its products. If, after installing an ES, the
complexity makes major modifications impracti- company has to follow a more rational hut less flex-
cable. (See the insert "Configuring an Enterprise ible process for filling orders, its core source of

CONFIGURING AN ENTERPRISE SYSTEM


Configuring an enterprise system is largely a matter it wants to recognize product revenue hy geographical
of making compromises, of balancing the way you unit, product line, or distribution channel. SAP's R/3,
want to work with the way the system lets you work. one of the more comprehensive and complex ES offer-
You begin by deciding which modules to install. ings, has more than 3,000 configuration tables. Going
Then, for each module, you adjust the system using through all of them ean take a long time. Dell Com-
configuration tables to achieve the best possible fit puter, for example, spent more than a year on the task.
with your company's processes. Let's look more closely Although modules and configuration tables let you
at these two configuration mechanisms: customize the system to some degree, your options
• Modules. Most enterprise systems are modular, en- will he limited. If you have an idiosyncratic way of do-
abling a eompany to implement the system for some ing business, you will likely find that it is not sup-
functions but not for others. Some modules, such as ported by an ES. One eompany, for example, had long
those for finance and accounting, are adopted by al- had a practice of giving preferential treatment to its
most all companies that install an ES, whereas others, most important customers by occasionally shipping
such as one for human resource management, are them products that had already heen allocated to other
adopted by only some companies. Sometimes a eom- accounts. It found that its ES did not allow it the fiexi-
pany simply doesn't need a module. A service busi- bility required to expedite orders in this way. Another
ness, for example, is unlikely to require the module company had always kept track of revenues by both
for manufaeturing. In other cases, eompanies ehoose product and geography, but its ES would allow it to
not to implement a module because they already have track revenue in only one way.
a serviceable system for that particular function or What happens when the options allowed by the sys-
they have a proprietary system that they believe pro- tem just aren't good enough? A company has two
vides unique benefits. In general, the greater the num- choices, neither of them ideal. It can actually rewrite
ber of modules selected, the greater the integration some of the ES's code, or it can continue to use an ex-
benefits, hut also the greater the costs, risks, and isting system and build interfaces between it and the
changes involved. ES. Both of these routes add time and eost to the im-
• Configuration tables. A configuration tahle enables plementation effort. Moreover, they can dilute the
a company to tailor a particular aspect of the system ES's integration benefits. The more customized an
to the way it chooses to do business. An organization enterprise system becomes, the less ahle it will be to
ean select, for example, what kind of inventory communieate seamlessly with the systems of suppli-
accounting-FIFO or LIFO-it will employ or whether ers and customers.

HARVARD BUSINESS REVIEW |uly-August 1998 125


ENTERPRISE SYSTEMS

advantage may be at risk. The company may inte- It realized, in particular, that in a build-to-order
grate its data and improve its processes only to lose environment an important advantage would accrue
its service edge and, in turn, its customers. to any company with superior capabilities for fore-
This danger becomes all the more pressing in casting demand and processing orders. Compaq
light of the increasing ubiquity of enterprise sys- therefore decided to invest in writing its own pro-
tems. It is now common for a single ES package to prietary applications to support its forecasting and
be used by virtually every company in an industry. order-management processes. To ensure that those
For example, SAP's R/3 package is being imple- applications would be compatible with its ES,
mented by almost every company in the personal Compaq wrote them in the computer language
used by its ES vendor.
Compaq's course was not the obvi-
A speedy implementation of ous one. It cost the company consider-
ably more to develop the proprietary
an enterprise system may be a application modules than it would
have to use the modules offered by the
wise business move, but a rash ES vendor. And using customized ap-
plications meant forgoing some of the
implementation is not. integration benefits of a pure enter-
prise system. But Compaq saw the de-
cision as a strategic necessity: it was
computer, semiconductor, petrochemical, and to a the only way to protect a potentially critical source
slightly lesser degree, consumer goods industries. of advantage.
[R/3 is the client-server version of SAP's software; For companies that compete on cost rather than
R/2 is the mainframe version.) Such convergence on distinctive produets or superior customer ser-
around a single software package should raise a vice, enterprise systems raise different strategic is-
sobering question in the minds of chief executives: sues. The huge investment required to implement
How similar can our information flows and our an ES at large companies - typically ranging from
processes be to those of our competitors before we $50 million to more than $500 million-need to be
begin to undermine our own sources of differentia- weighed carefully against the eventual savings the
tion in the market? system will produce. In some cases, companies
This question will be moot if a company's com- may find that by forgoing an ES they can actually
petitive advantage derives primarily from the dis- gain a cost advantage over competitors that are em-
tinctiveness of its products. Apple Computer, for bracing the systems. They may not have the most
example, has many problems, but the loss of com- elegant computer system or the most integrated in-
petitive differentiation because of its ES is not one formation fiows and processes, but if customers are
of them. With a strong brand and a unique operating concerned only with price, that may not matter.
system, its computers still differ dramatically from Air Products and Chemicals, for example, saw
competing offerings. But Apple is an unusual case. that many of its competitors were installing large,
Among most makers of personal computers, differ- complex enterprise systems. After a thorough eval-
entiation is based more on service and price than on uation, it decided not to follow their lead. Its man-
product. For those companies, there is a very real agers reasoned that the cost of an ES might force the
risk that an enterprise system could dissolve tbeir company to raise its prices, leading to lost sales in
sources of advantage. some of the commodity gas markets in which it
Compaq Computer is a good example of a com- competes. The company's existing systems, while
pany that carefully thought through the strategic not state-of-the-art, were adequate to meet its
implications of implementing an enterprise sys- needs. And since the company had no plans to ex-
tem. Like many personal-computer companies, change information electronically with competi-
Compaq had decided to shift from a build-to-stock tors, it didn't worry about being the odd man out in
to a build-to-order business model. Because the suc- its industry.
cess of a build-to-order model hinges on the speed Of course, the long-term productivity and con-
with whieh information flows through a company, nectivity gains created by enterprise systems are
Compaq believed that a fully integrated enterprise often so compelling that not adopting one is out of
system was essential. At the same time, however, the question. In the petrochemicals industry, for
Compaq saw the danger in adopting processes in- example, enterprise systems have improved the
distinguishable from those of its competitors. fiow of information through the supply chain to

126 HARVARD BUSINESS REVIEW [uly-August 1998


ENTERPRISE SYSTEMS

such a degree that they have become a de facto oper- ing enterprise systems. Union Carbide is standard-
ating standard. Because participants in the industry izing its basic business transactions. Unlike many
routinely share information electronically, it other companies, however, the leaders of its ES
would today he hard for a company to survive in the project are already thinking in depth about how
business without an ES. Still, the cost of implemen- the company will he managed differently when the
tation should be a primary concern. It will often be project is completed. They plan to give low-level
in a company's interest to go ahead and rework its managers, workers, and even customers and suppli-
processes to fit the system requirements. The alter- ers much broader access to operating information.
native-customizing the system to fit the processes Standardizing transactions will make Union Car-
or writing proprietary application modules - will bide more efficient; sharing real-time information
simply be too expensive to justify. As the CEO of will make it more creative.
one large chemical firm says, "Competitive advan- For a multinational corporation, enterprise sys-
tage in this industry tnight just come from doing tems raise another important organizational ques-
the best and cheapest job at implementing SAP." tion: How much uniformity should exist in the way
it does business in different regions or eountries?
Some big companies have used their enterprise sys-
The Impact on an Organization tems to introduce more consistent operating prac-
In addition to having important strategic implica- tices across their geographically dispersed units.
tions, enterprise systems also have a direct, and Dow Chemical, for instance, became an early con-
often paradoxical, impact on a company's organiza- vert to enterprise systems because it saw them as a
tion and culture. On tbe one hand, by providing way to cut costs by streamlining global financial
universal, real-time access to operating and finan- and administrative processes. (A good idea in prin-
cial data, the systems allow companies to stream- ciple, although it became much more expensive to
line their management structures, creating flatter, achieve than Dow had anticipated.) Some large
more flexible, and more democratic organizations. manufacturers have been even more ambitious,
On the other hand, they also involve tbe centraliza- using the systems as the basis for introducing a
tion of control over information and the standard- global lean-production model. By imposing com-
ization of processes, which are qualities more con- mon operating processes on all units, they are able
sistent with hierarchical, command-and-control to achieve tight coordination throughout their
organizations with uniform cultures. In fact, it can husinesses. They can rapidly shift sourcing, manu-
be argued that the reason enterprise systems first facturing, and distribution functions worldwide in
emerged in Europe is that European companies response to changing patterns of supply and demand.
tend to have more rigid, centralized organizational This capability allows them to minimize excess
structures than their U.S. counterparts. manufacturing capacity and reduce hoth compo-
Some executives, particularly those in fast-grow- nent and finished-goods inventory.
ing high-tech companies, have used enterprise sys- Owens Corning, for example, adopted an ES to re-
tems to inject more discipline into their organiza- place 211 legacy systems. For the company to grow
tions. They see the systems as a lever
for exerting more managetnent con-
trol and imposing more-uniform pro-
cesses on freewheeling, highly entre-
An enterprise system imposes its
,
preneurial cultures. An executive at
a semiconductor company, for exam-
O W n lOiJlC O n
^
company's strategy,
pie, says, "We plan to use SAP as a
battering ram to make our culture less
culture, and organization.
autonomous." The manager of the ES
implementation at a computer company expresses internationally, its chief executive, Glen Hiner, felt
a similar thought: "We've had a renegade culture in it was critical to coordinate order-management,
the past, but our new system's going to make every- financial-reporting, and supply chain processes
body fall into line." across the world. Having implemented the system
But some companies have the opposite goal. and established a new^ global-procurement organi-
They want to use their enterprise systems to break zation, the company is now able to enter into larger,
down hierarchical structures, freeing their people more advantageous international contracts for sup-
to he more innovative and more flexihle. Take plies. Finished-goods inventory can be tracked daily,
Union Carbide. Like most companies implement- both in company warehouses and in the distribution

HARVARD BUSINESS REVIEW July-August 1998 127


ENTERPRISE SYSTEMS

channel, and spare-parts inventory has been reduced Hewlett-Packard. Monsanto's managers knew that
by 50%. The company expects to save $65 miUion by different operating requirements would preclude
the end of 1998 as a result of its adoption of these the complete standardization of data across its
globally coordinated processes. agrochemical, biotechnology, and pharmaceuticals
For most companies, however, differences in re- businesses. Nevertheless, they placed a high prior-
gional markets remain so profound that strict ity on achieving the greatest possible degree of
process uniformity would be counterproductive. If commonality. After studying the data require-
companies in such circumstances don't allow their ments of each business unit, Monsanto's managers
were able to standardize fully 85% of
the data used in the ES. The company
Enterprise systems can deliver went from using 24 coding schemes
for suppliers to using just one, and it
great rewards, but the risks they standardized all data about materials
using a new set of substance identifi-
carry are equally great. cation codes. While customer and fac-
tory data have not been fully stan-
dardized - differences among the units'
regional units to tailor their operations to local cus- customers and manufacturing processes are too
tomer requirements and regulatory strictures, they great to accommodate common data-Monsanto
risk sacrificing key markets to more flexible com- has achieved a remarkable degree of commonality
petitors. To preserve local autonomy while main- across a diverse set of global businesses.
taining a degree of corporate control-what might At Hewlett-Packard, a company with a strong
be called a federalist operating model - a very differ- tradition of business-unit autonomy, management
ent approach to enterprise systems needs to he has not pushed for commonality across the several
taken. Rather than implement a single, global ES, large divisions that are implementing SAP's enter-
these companies need to roll out different versions prise system. Except for a small amount of common
of the same system in each regional unit, tailored to financial data necessary to roll up results for corpo-
support local operating practices. Tbis approach rate reporting, HP's federalist approach gives all the
has been taken by a number of large companies, in- power to the "states" where ES decisions are con-
cluding Hewlett-Packard, Monsanto, and Nestle. cerned. This approach fits the HP culture well, but
They establish a core of common information- it's very expensive. Each divisional ES has had to be
financial, say-that all units share, but they allow implemented separately, with little sharing of re-
other information-on customers, say-to be col- sources. Managers estimate that well over a hillion
lected, stored, and controlled locally. This method dollars will be spent across the corporation before
of implementation trades off some of the purity and the various projects are completed.
simplicity of the enterprise system for greater mar-
ket responsiveness.
The federalist model raises what is perhaps the Doing It Right at Elf Atochem
most difficult challenge for a manager implement- Considering an ES's far-reaching strategic and orga-
ing an ES: determining what should be common nizational implications, the worst thing a company
throughout the organization and what should be can do is to make decisions about a system based on
allowed to vary. Corporate and business-unit man- technical criteria alone. In fact, having now studied
agers will need to sit down together-well before more than 50 businesses with enterprise systems,
system implementation begins-to think through I can say with some confidence that the companies
each major type of information and each major deriving the greatest benefits from their systems
process in the company. Difficult questions need are those that, from the start, viewed them primar-
to he raised: How important is it for us to process ily in strategic and organizational terms. They
orders in a consistent manner worldwide? Does the stressed the enterprise, not the system.
term "customer" mean the same thing in every Elf Atochem North America, a $2 billion regional
business unit? Answering such questions is essen- chemicals suhsidiary of the Erench company Elf
tial to making an ES successful. Aquitaine, is a good case in point. Following a se-
Different companies will, of course, reach very ries of mergers in the early 1990s, Elf Atochem
different decisions about the right balance between found itself hampered by the fragmentation of criti-
commonality and variability. Consider the starkly cal information systems among its r2 business
different approaches taken by Monsanto and units. Ordering systems were not integrated with

128 HARVARD BUSINESS REVIEW fuly-August 1998


ENTERPRISE SYSTEMS

production systems. Sales forecasts were not tied to knew that if it eould achieve a tighter, smoother fit
budgeting systems or to performance-measure- between its business processes and the system, it
ment systems. Eaeh unit was traeking and report- eould gain and maintain a service advantage.
ing its financial data independently. As a result of The company deeided to focus its efforts on four
the many incompatible systems, operating data key processes: materials management, produetion
were not flowing smoothly through the organiza- planning, order management, and financial report-
tion, and top management was not getting the in- ing. These cross-unit processes were the ones most
formation it needed to make sound and timely distorted by the fragmented organizational struc-
business deeisions. ture. Moreover, they had the greatest impact on the
The company's executives saw that an enterprise eompany's ability to manage its customer relation-
system would be the best way to integrate the data ships in a way that would both enhance customer
flows, and they decided to go with SAP's R/3 sys- satisfaction and improve eorporate profitability.
tem, whieh was rapidly beeoming the standard in Each of the processes was redesigned to take full ad-
the industry. But they never labeled the ES project vantage of the new system's capabilities, in particu-
as simply a technology initiative. Rather, they lar its ability to simplify the flow of information.
viewed it as an opportunity to take a fresh look at Layers of information middlemen-onee neeessary
the company's strategy and organization. for transferring information across incompatible
Looking beyond the technology, the executives unit and eorporate systems-were eliminated in
saw that the real source of Elf Atochem's difficul- order to speed the flow of work and reduce the like-
ties was not the fragmentation of its systems but lihood of errors.
the fragmentation of its organization. Although the To maintain its focus on the customer, the com-
12 business units shared many of the same cus- pany chose to install only those R/3 modules re-
tomers, each unit was managed autonomously. quired to support the four targeted processes. It did
From the customer's perspective, the lack of eonti- not, for example, install the modules for human re-
nuity among units made doing business with the souree management or plant maintenance. Those
company a trial. To place a single
order, a customer would frequently
have to make many different phone
calls to many different units. And to
Those companies that stressed
pay for the order, the customer would
have to process a series of invoiees. the enterprise, not the system,
Inside the company, things were
equally eonfused. It took four days-
gained the greatest benefits.
and seven handoffs between depart-
ments-to process an order, even though only four funetions did not have a direct impact on cus-
hours of actual work were involved. Because each tomers, and the existing information systems that
unit managed inventory and scheduled production supported them were considered adequate.
independently, the company was unable to consoli- Elf Atochem also made fundamental changes to
date inventory or coordinate manufacturing at the its organizational strueture. In the finaneial area,
corporate level. More than $6 million in inventory for example, all the company's aceounts-reeeivable
was written off every year, and plants had to be shut and credit departments were combined into a single
down frequently for unplanned production-line corporate function. This ehange enabled the com-
ehanges. And because ordering and produetion sys- pany to consolidate all of a customer's orders into a
tems were not linked, sales representatives couldn't single account and issue a single invoice. It also al-
promise firm delivery dates, which translated into lowed the company to monitor and manage overall
lost customers. eustomer profitability-something that had been
Management knew that in the petrochemicals impossible to do when orders were fragmented
business, where many products are commodities, across units. In addition. Elf Atochem combined all
the company that can offer the best customer ser- of its units' customer-service departments into one
vice often wins the order. So it struetured the im- department, providing each customer with a single
plementation of its ES in a way that would enable point of eontaet for checking on orders and resolv-
it to radically improve its service levels. Its goal was ing problems.
to transform itself from an industry laggard into an Perhaps most important, the system gave Elf
industry leader. Even though many eompetitors Atochem the real-time information it needed to
were also adopting the R/3 package. Elf Atochem connect sales and production planning-demand

HARVARD BUSINESS REVIEW July-August 1998 129


ENTERPRISE SYSTEMS

and supply-for the first time. As orders are entered processing, supplier management, and financial
or changed, the system automatically updates fore- reporting. The unit-by-unit process ensures that
casts and factory schedules, which enables the the effort is manageable, and it also helps the team
company to quickly alter its production runs in re- refine the system and the processes as it proceeds.
sponse to customers needs. Only one other com- For example, the second unit to implement the sys-
pany in the industry had this capability, v^hich tem found that it didn't adequately support bulk
meant that Elf Atochem gained an important edge shipments, which are the main way the unit gets its
over most competitors. products to customers. [The first unit uses package
The company understood, however, that just shipping for all its orders.) The system was then
having the data doesn't necessarily mean the data modified to support bulk as well as package ship-
ping, and the new configuration be-
came the new standard.
Only a general manager is Using the large and broadly repre-
sentative implementation team, to-
equipped to act as a mediator gether with the unit-hy-unit rollout.
Elf Atochem has been able to staff the
between the imperatives of the effort mainly with its own people. It
has had to engage only nine outside
technology and of the business. consultants to assist in the project-
far fewer than is usually the case. The
reliance on internal resources not
will he used well. Computer systems alone don't only reduces the cost of the implementation, it also
change organizational behavior. It therefore estab- helps ensure that Elf Atochem's employees will
lished a new position-demand manager-to he the understand how the system works after the consul-
focal point for the integrated sales and production- tants leave.
planning process. Drawing on the enterprise sys- Elf Atochem's ES is now more than 75%
tem, the demand manager creates the initial sales complete-9 of the 12 business units are up and
forecast, updates it with each new order, assesses running on the new system-and the rollout is
plant capacity and account profitability, and devel- ahead of schedule and under budget. Customer sat-
ops detailed production plans. The demand man- isfaction levels have already increased, and the
ager is able to schedule a customer's order-and company is well on the way to its goal of confirm-
promise a delivery date-up to six weeks ahead of ing 95% of all orders with one call, a dramatic im-
production. Previously, production could he allo- provement over the previous average of five calls. In
cated to individual orders no more than a week in addition to the service enhancements, the company
advance. Now central to the company's operation, is operating more efficiently. Inventory levels, re-
the role of demand manager could not even have ex- ceivables, and labor and distribution expenditures
isted in the past because the information needed to have all been cut, and the company expects the sys-
perform it was scattered all over the company. tem will ultimately reduce annual operating costs
The way Elf Atochem is managing the imple- hy tens of millions of dollars.
mentation effort also refiects the breadth of its
goals. The project is being led by a 6o-person core
implementation team, which reports to a member The Role of Management
of the company's executive committee. The team Every company that installs an ES struggles with
includes both business analysts and information its cost and complexity. But the companies that
technologists, and is assisted by a set of so-called have the biggest prohlems-the kind of problems
super users, representing the business units and that can lead to an outright disaster-are those that
corporate functions. These super users help ensure install an ES without thinking through its full busi-
that decisions about the system's configuration are ness implications.
made with the broadest possible understanding of Managers may well have good reasons to move
the business. They also play a crucial role in ex- fast. They may, for example, have struggled for
plaining the new system to their respective depart- years with incompatible information systems and
ments and training people in its use. may view an ES as a silver bullet. They may be
The team is installing the ES one business unit at looking for a quick fix to the Year 2000 problem
a time, with each unit implementing the same sys- (enterprise systems are not infected with the much-
tem configuration and set of procedures for order feared millennium bug). Or they may be trying to

130 HARVARD BUSINESS REVIEW July-August 1998


ENTERPRISE SYSTEMS

keep pace with a competitor that has already imple- only is Elf Atochem's executive committee over-
mented an ES. The danger is that while an enter- seeing its ES project, but its entire hoard reviewed
prise system may help them meet their immediate and approved the plans. At Compaq, the decision to
challenge, the very act of implementing it may cre- go with an ES was also made at the board level, and
ate even larger problems. A speedy implementation the senior management team was involved with
of an ES may be a wise business move; a rash imple- the implementation every step of the way.
mentation is not. Many chief executives, however, continue to
A numher of questions should be answered he- view the installation of an ES as primarily a techno-
fore any decisions are made. How might an ES logical challenge. They push responsibility for it
strengthen our competitive advantages? How down to their information technology depart-
might it erode them? What will be the system's ments. Because of an ES's profound business impli-
effect on our organization and culture? Do we need cations-and, in particular, the risk that the tech-
to extend the system across all our functions, or nology itself might undermine a company's
should we implement only certain modules? strategy-off-loading responsibility to technolo-
Would it be better to roll the system out globally or gists is particularly dangerous. Only a general man-
to restrict it to certain regional units? Are there ager is equipped to act as the mediator hetween the
other alternatives for information management imperatives of the technology and the imperatives
that might actually suit us hetter than an ES? of the husiness. If the development of an enterprise
The experience of Elf Atochem and other suc- system is not carefully controlled by management,
cessful adopters of enterprise systems underscores management may soon find itself under the control
the need for careful deliberation. It also highlights of the system. ^
the importance of having top management directly
involved in planning and implementing an ES. Not Reprint 98401 To order reprints, see the last page of this issue.

"It appears the Ethics Committee has gone over the edge.

HARVARD BUSINESS REVIEW luIy-August 1998 131