Why ERP Systems Fail or Succeed: Causes and Case Studies

Introduction to ERP Systems

In order to increase productivity and compete effectively, any company must implement a well-designed Enterprise Resource Planning (ERP) system. Failure to do so leaves a company weakened and unlikely to attain its stipulated short-term and long-term goals. By definition, an ERP system helps consolidate enterprise information and control all business processes within an organization. Successfully implementing an ERP is not simple — its success or failure depends on a variety of factors, and starting the process without an elaborate plan leaves a company vulnerable to a great number of pitfalls along the way (Vinatoru & Calota, 2014).

Since an ERP focuses on integration and management, a company stands a better chance of making resource usage and distribution more efficient and timely. This, in turn, increases the company's reputation and competitive edge in the market. Despite this compelling reason to adopt an ERP solution, most companies that use such systems made the move for a variety of additional reasons, including:

Business needs — such as cutting down on inventory costs, improving order management, and establishing a transparent pricing policy for clients and employees.

Technical issues — such as the need for one unified system to handle all business processes and replace multiple systems that have proven ineffective.

A combination of both — factors whose combined effect constrains the company's profit margins.

With an ERP, a company can store information and automate all its functional domains. However, this does not mean that all ERP implementations are successful.

Causes of ERP Failure

According to statistics, more than half of all launched ERP projects fail — a concerning rate of approximately 60% across all tested implementations. The fact that "failure" is a relative term can make things appear more nuanced. A number of criteria can define failure, each with distinct causes.

This occurs when the client does not find the functionalities needed in the system. It can lead to re-engineering or a complete change of the system, resulting in increased costs, reduced quality, and longer delivery times. To avoid this, developers should investigate all requirements adequately before implementing a solution. Using prototyping tools such as use cases and Joint Application Development (JAD) would reduce errors (Ghosh, 2012).

Even though management typically initiates the ERP project, a lack of sustained dedication often leads to failure. In many cases, managers are unaware of the project's full scope and do not appreciate what they are committing to. Without sufficient commitment, the ERP is bound to fail. Top-level managers frequently delegate responsibilities to lower-level managers — a reasonable management strategy, but one that more often than not slows the implementation process. Sustained success is most likely when a top-level manager committed to the project's outcome leads it (Ghosh, 2012).

Every ERP user must be adequately trained before the system is rolled out. Users need to understand its capabilities and how to leverage them to make their work easier. This ensures that each employee understands his or her responsibilities and can deliver results in a timely manner, since an ERP's overall efficiency depends on the success of each individual user (Ghosh, 2012).

In today's market, finding an ERP package is not difficult. A company may purchase a complete off-the-shelf system or assemble packages to build a custom solution. While the latter can be less expensive, it carries the risk of choosing a package that does not fully meet the company's needs — a risk that stems from a lack of technical information or a misunderstanding of requirements (Ghosh, 2012).

This applies to the time and effort required to bring the project to completion. If the estimated completion date is missed, the business may incur additional costs or lose productivity and customer trust. It is always better to overestimate than to underestimate (Ghosh, 2012).

An ERP that does not fit a company's existing business processes is essentially worthless. It will either force the company to change its way of operating or create gaps that lead to poor synchronization of tasks and workflows. This typically results from assumptions and a poor understanding of the business's core operations (Ghosh, 2012).

Companies That Succeeded in Implementing ERP

Alcoa is an aluminum company founded in the 1880s. It is currently the world's largest producer of electrolytic aluminum, aluminum oxide, and related products, and is an active participant in aluminum recycling and reuse. Its products — including aluminum wheels, body sheets, and household membranes — are used in aerospace, packaging, building, and commercial transport (Profile, 2011).

The company began its first ERP implementation efforts in 2001. It now runs several successful modules, most notably in its financial, Order to Cash (OTC), Requisition to Pay (RTP), and human resource management departments. Because it is a global company, implementation required considerable time and effort. The first 50 European branches reported increases in efficiency and productivity once the system was properly introduced and in use (Profile, 2011). The company has since rolled out the ERP across North America, Australia, Asia, and South America.

Lesson Learned: Correct ERP implementation is crucial for business success. The OTC system at Alcoa has been highly successful because ERP management was made a priority. Without it, the company could not have achieved success across all the regions in which it operates.

How to do it better: Despite its notable success, Alcoa should have accelerated its implementation process to minimize the time needed before realizing returns on investment.

Warning Signs: Alcoa's correct use of ERP has allowed it to manage its platforms effectively, such that potential failure indicators have been proactively addressed.

Capital One Financial Corp. is the first financial company on this list. Its technology adoption began in 1995 when it entered the credit card business, requiring a fundamentally different management system to support its Information-Based Strategy philosophy. By 2004, Capital One had become one of America's top ten credit card companies, with over 15,000 employees and a turnover of $1.5 billion.

Its ERP implementation took a new direction in 2000 when it began deploying the PeopleSoft ERP, using modules for financial management, human resources, supply chain, and asset management (Profile, 2011). Implementation was carried out in phases; the first phase only stabilized after the second phase had begun. The overarching goal was to create a solution that would streamline operations and handle the client base more effectively, thereby increasing customer satisfaction.

Lesson Learned: ERP execution through financial strategies and the PeopleSoft ERP led to positive growth at Capital One Financial Corp. Such strategies are essential for sustained business growth.

How to do it better: It took a long time to implement PeopleSoft ERP, and the transition between phases was delayed. These delays could have been avoided with proper planning and focus.

Warning Signs: Despite the company's ultimate success, delays during implementation signaled that structured ERP management is essential to keeping projects on track.

Colgate-Palmolive is an international consumer goods company headquartered in New York, USA, that reaches over 200 countries with a workforce of approximately 40,000 employees. The company focuses on oral care, household care, and personal care products, with well-known brands such as Colgate, Ajax, and Protex.

Colgate uses a SAP ERP system with special attention paid to modules that strengthen its existing business plan — including a supply chain module to manage its vast distribution network, a human resource module for its large employee base, and a financial management module. A notable addition is a self-service module, which demonstrates how thoughtful ERP design can boost efficiency without increasing the number of in-house employees (Profile, 2011).

ERP implementation efforts date to 1996, and the company has completed two major upgrades since then, with the current system running on the SAP R/3 series. The company also plans a mySAP senior upgrade and an expansion of its SAP portal. Its SAP Business Warehouse holds over 6 TB of data and currently handles more than 15,000 instances of ERP use (Profile, 2011).

Lesson Learned: The establishment of a supply chain module using ERP has played a crucial role in Colgate's competitive success. The ERP plan functions as a key enabler of the company's market position.

How to do it better: Colgate should have mobilized more resources within the distribution chain to ensure maximum utilization of the implemented ERP strategies, which could have delivered even greater benefits.

Warning Signs: The self-service module served as a positive indicator that the company could achieve better returns without proportionally expanding its in-house workforce — a signal pointing toward further ERP optimization.

Conclusion and Best Practices

To implement a successful ERP, a company must first assess its needs and ensure they align with what it handles in its everyday business. Matching each implementation with the underlying business plan will ensure that the company gets the most out of its investment.

This means that each company must define its expectations in a realistic and measurable manner. This process involves identifying the problems the ERP must solve, determining what its current technology can support, and deciding how many upgrades it is prepared to undertake. Equally important is an honest assessment of employees' ability and willingness to learn new systems.

Many off-the-shelf ERP systems already offer a great deal of the features a company would need in a bespoke solution. When selecting a package, companies should carefully weigh their preferences, user knowledge, technology platforms, and budget (Vinatoru & Calota, 2014).

Every company must understand the importance of establishing a structured change management process when deploying a new system. This includes training employees on how to use the new ERP. Training can be delivered to the entire staff or focused on key leaders who will then support the rest of the organization as the system rolls out (IBM, 2008). Either way, the company should ensure that all staff members understand the new system and are aware of its rollout date.

Identifying potential implementation risks is not sufficient on its own. Organizations must also understand how those risks correlate with one another and what their combined impact could be. This enables the development of a comprehensive roadmap that uses minimal resources to address problems effectively. A post-implementation review should also be conducted to identify and resolve any errors before they affect customers (Stanciu & Tinca, 2013).

Studying previous ERP projects — both successes and failures — helps practitioners avoid repeating the same mistakes and provides insight into how to maximize implementation outcomes. Careful planning and an understanding of potential pitfalls will improve the odds of success, though no plan is guaranteed. There are always unpredictable variables in any market environment. This is precisely why having a contingency plan is just as important as the implementation plan itself.

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Stanciu, V., & Tinca, A. (2013). ERP solutions between success and failure. Accounting and Management Information Systems, 12(4), 626–649.

Vinatoru, S., & Calota, G. (2014). Challenges involved in implementing ERP and auditing. Internal Auditing & Risk Management, 4(36), 103–115.