RESOURCE FULL
The technology has changed, but one thing about erp remains the same: technical challenges pale alongside planning and change management issues.
By Adam Lincoln

The impact of the Sars virus on the region's travel industry hasn't been the only thing keeping Francis Wai, CFO of Dragonair, awake at night lately. Sure, his airline has been forced to make drastic cuts to its flight schedules - passenger capacity was reduced by 25 per cent for the month of April, with services to some destinations suspended altogether. But on top of that, there were "court" appearances at which Wai defended his company from another threat - one with far more damaging, long-term financial consequences.

Hong Kong carrier Cathay Pacific, which is ten times the size and holds a 17.79 per cent stake in Dragonair, is muscling in on the smaller airline's patch. Last year, Cathay Pacific applied to the Air Transport Licensing Authority (ATLA) for the right to fly between Hong Kong and three Chinese destinations - Beijing, Shanghai and Xiamen - already served by Dragonair under a government policy of one-route, one airline. This policy has without doubt helped Dragonair to grow: these cities represent 80 percent of total revenue from Dragonair's China mainland network, and 50 per cent of its total revenue.

The impact of such a change - including a projected haemorrhage of 230,000 passengers - would devastate Dragonair. By Wai's calculation, a company-wide net profit of HK$541 million (US$69 million) in 2002 would turn into a loss of at least HK$606 million. Dragonair's forecast, based on a model created by independent experts, estimated a revenue loss of HK$1 billion. Counsel for Cathay Pacific disputed Dragonair's figures, with August Tang, a witness for the larger airline, comparing the contribution margin for Cathay Pacific on its Taipei route with his guess of the contribution margin for Dragonair's Shanghai route, 39.9 per cent. In short: Cathay Pacific believes Dragonair has been shielded from competition for long enough.

In response, Wai told the ATLA hearing in March: "If you look at the route performance of two routes operated by two different airlines, I think the most appropriate basis of comparison is the net profit margin, because different airlines have different organizational set-ups and different levels of outsourcing. The way that Mr Tang prepared the profit margin at contribution level for the Taipei route did not take overheads into account."

On 17 April, ATLA ruled in favour of Cathay Pacific. But at least Wai can feel he put up a fight based on accurate numbers: the company has a sound enterprise resource planning (ERP) system, from US vendor Oracle, in place. In the mid 1990s, when Cathay Pacific ditched its mainframe, Dragonair followed suit. Until that time the airline was managed by Cathay Pacific, which had purchased a controlling stake in 1990. (Dragonair continues to pay a management services fee of 2 percent of its annual profits to its former parent). But in 1996 the China National Aviation Corporation became the largest shareholder when it purchased a 35.86 per cent stake. It was, Wai recalls, the right time to rethink Dragonair's business model. "We did not really have ERP in mind when we talked change," he says. "But when we had the shareholder change, we decided we wanted to be more independent. We took a good look at the kind of company we wished to be in the future."

Evolutionary Flight Path

Soul-searching comes with the territory, as anyone who has been involved in an ERP project will attest. It's not always a happy experience. Conspiracy theorists are yet to argue a link between ERP and Sars, but in the decade since the software entered the corporate consciousness, it has been accused of many things. Budget blowouts and installations running late, labyrinthine customization needs, irate customers, disgruntled employees - indeed, just about every nightmare imaginable, including elusive ROI and more than a few tarnished careers. But if the horror stories have often been played up, it's because the promise has been so great.

Although the roots of ERP trace back to the 1960s, the term was coined in the early 1990s when MRP-II (manufacturing resources planning) software extended its traditional boundaries. Suddenly, former niche specialists like PeopleSoft (human resources) were tackling areas such as engineering, finance, and project management. Like Dragonair, many companies first turned their attention to financials, many in a bid to avoid falling prey to the millennium bug. But with Y2K relegated to history, many pronounced the death of ERP because of its focus on back-end systems at a time when outward-facing, web-based front-end applications like customer-relationship management (CRM) and supply-chain management tools were becoming trendy. A raft of "best of breed" vendors such as Siebel Systems, once specialists in fields such as call center or sales force management software, seized the limelight. Seamless visibility between business functions, and in turn "e-collaboration" with business partners, became the new Holy Grail.

And yet the big ERP vendors were up to the challenge, plugging gaps in their product suites by acquiring smaller companies or undertaking their own new development. ERP acquired a new lease on life, dubbed 'ERP II' by proponents. Back-end systems could be linked to the front end, often without significant additional programming. Such point and click configuration made it possible, for instance, for so-called operational CRM applications to be married with analytical ones. Now, software used by employees who interact with customers can feed information to colleagues who are responsible for things like market and competitor research, campaign planning, product and brand management, and sales team performance analysis. The largest ERP vendor, Germany's SAP, led the charge by coming to market with mySAP.com, a "standalone" product that meant a customer did not have to use SAP's full suite of enterprise software in order to install its CRM applications. In part this was because vendors employed so-called "open" programming platforms, but the mix-and-match approach has also been facilitated by breakthroughs in integration tools (see box).

These advances dovetailed with developments in another software segment close to any finance chief's heart: corporate performance measurement (CPM). On cue, a wave of new and improved software, from companies such as Hyperion, Comshare, Adaytum, Systems Union and SAS Institute emerged. This unified disparate financial applications into a suite of products that serve as a kind of mini-ERP for the finance team. CFOs determined to propel their professional status from "scorekeeper" to "business partner" saw a way to free their teams of data-processing duties so they could concentrate on value-adding work - beyond basic budgeting to financial reporting, information delivery, analysis, performance management and planning. The software, which encourages collaboration, can support thousands of users across many geographic locations and can even be integrated with the wider ERP system. Done right, companies are better placed than ever to monitor, report, analyze and react swiftly to conditions.

Solid Foundations

ERP is an intricate, moving target - and the options are overwhelming (see box). But through it all, some things haven't changed. "Companies need to be very focused on their objectives," says Shanghai-based Louisa Liu, an analyst with US research firm Gartner Group in Shanghai. "It can't just be because their competitors are doing it." Projects are most likely to succeed, experts say, when the technology is treated as subordinate. Building a business case, change management, and skills transfer are the real keys. As Hong Kong-based Subas Bhide, an ERP consultant with IBM, observes: "You cannot do everything for everyone. You need to prioritise. Looking at standard measures of success, you must determine what is more important. Growth over profit, for example."

Managers at Gammon Skanska, a US$1 billion-in-turnover construction company that was formed to build the runway for Hong Kong's Kai Tak airport in the 1950s, are practised at this balancing act. Although business has suffered a downturn since the Asian financial crisis of 1997, the company, jointly owned by Jardine Matheson and Sweden's Skanska, claims positive EVA figures each year of the past decade. Despite the testing economic climate, it continues to land lucrative contracts. In March, it secured a contract from DHL Aviation to build a US$100 million express cargo terminal at Hong Kong International Airport at Chek Lap Kok.

ERP software from US-based J.D. Edwards will help the company's 2000 staffers execute the project, which is due for completion by May 2004. That means Gammon Skanska will spend half the time that it took to decide on its ERP package building the terminal. "We spent two years researching our options and doing a hard dollar-business study," recalls project manager Guy Higgins. "The project was put before the board many times. Not until everybody understood what was at stake and what was involved were we given the go-ahead."

Gammon Skanska's exhaustive approach was also highly inclusive. From the outset, Higgins recognised the need to involve C-level managers - a condition of doing the project at all was that the CEO would play an active role on the ERP steering committee. The company was not merely installing a new computer system; managers were intent on changing the way the business was run. They didn't have much choice: after years of boom, Hong Kong's construction industry was hit hard by the Asian financial crisis. Developers like Gammon Skanska had to redouble their efforts to deliver on time, within budget - making the best use of raw materials and human resources, often in the face of increasing project complexity and troubled labor markets.

Previously, each department maintained its own system and server, which meant that systems could not communicate. When the time came to build a cohesive system, myriad "extra" meetings, committees, and organisation were required to plug gaps in understanding between business units. But Higgins was not perturbed. "We made a conscious decision to over-manage rather than under-manage," he recalls. An Integrated Management Services (IMS) group was set up, reporting directly to the CEO. Each step of the way, teams were required to seek confirmation from above.

At the height of the project, some 50 people worked on the implementation. "Our ERP implementation was driven by three elements," Higgins explains. "The first was to manage the project in a business-oriented way." He did not want IT people to dominate the project, although that did not mean that technology was unimportant: "The second element was working hand-in-hand with a technical project manager who had a lot of experience with ERP," he says. The third element involved the software vendor that won the contract, US-based J.D. Edwards (JDE). "They provided us with a consulting project manager who was able to help us integrate what we wanted with what their software was capable of."

Like its rivals, JDE has ploughed investment not only into broadening its functional applications, but developing industry-specific products as well. Today, 300 companies globally use the software to manage US$80 billion in building projects. It's easy to see why - the software promises to help users minimize costs with real-time forecasting; boost productivity of field labor and heavy equipment through accurate performance measurement; maximize return on heavy equipment with improved utilization and reduced maintenance costs; and cut overheads by promoting efficiencies through business integration. "The defining aspect of ERP is the integration - making sure it all works together," Higgins says. Gammon Skanska addressed this need upfront: "A change manager was appointed to guide the change from 'as is' to 'to be'," he explains. Training was performed by Gammon staffers, which gave employees a sense of continuity. "It is so much easier to learn a new system from people you know," he says.

Playing Politics

ERP veterans stress the importance of managing change, in all its manifestations. By definition, ERP projects force previously disparate parts of an organisation to work more closely together. Jobs are redefined as responsibilities which move from one section or person to another. Changes must be understood by those giving up responsibility, and those taking it on.

"Credit control policy might be moved from finance to sales, in the belief it will speed up purchases," Bhide suggests. "This might cause some to think they are doing more work for fewer benefits, or feel that their personal influence has been undermined. You have a dissatisfied user if things are not handled well." And one dissatisfied user can wreak havoc among his colleagues. If morale is low, employees will turn their backs on the new system, and revert to the incumbent one. ROI will be dealt a blow.

When Korean company ImageQuest, maker of computer monitors and LCD displays, spent US$4.2 million on an ERP installation from SAP, managers at the former Hynix subsidiary were determined to avoid a political minefield. From the start, emphasis was placed on communicating with employees.

Project leader, Lee Dong-yup, says it is the attitude of the people involved that really matters. To start with, Lee formed several teams, peopled by employees who were able to articulate the difficulties they faced in carrying out their daily work. "We recruited people who understood the detailed work processes of their own team and who had the authority to make decisions," he explains. "By recognising inefficient practices through frequent discussions, they were able to achieve a high standard of practice and it was transparent to the whole team." After the software was installed, he says,"we focused a great deal on employee education and training, so that they would understand the purpose of the new system. We felt this was a vital to our rollout."

ERP veterans say such transparency - coined "commuAnications management" by Bhide - is smart. Some companies do this by holding briefing sessions with key managers, who are then responsible for communicating the message to their teams. Others take a written approach, using in-house newsletters, perhaps sent via email or placed on intranet websites. The more people who understand the motivation and execution of a project, the less chance there is that the disgruntled can hijack an initiative by playing politics.

Indeed, failure to account for the demands of change management will result in a dangerous underestimation of a project's true cost. Bhide says it is particularly important that the HR department is brought on board early: "Say you want to transform the way the salesforce works by using the new tools. You need to think about how the new commissions and incentives work. You may need to recruit more sales people. You may be looking at cost-reduction.

If so, you need HR to handle the personnel changes," he says. Disconnects occur if the ERP team not aware of the extended consequences of radical change. For this reason, Bhide says line managers, functional managers, and representatives of key user groups should be engaged. "If you do not involve all the right people, you will have only a partially successful project," he says. If you're lucky.

Adam Lincoln, contributing editor of CFO Asia, wrote this article, based on reporting by Danyll Wills.