A study of 120 North American and European industry executives shows ERP in its early stages, with many benefits not yet realized

Executive Study Assesses Current State of ERP in Paper Industry

To assess the current state of ERP within the pulp, paper, and wood products (PP&WP) industry as experienced by senior industry executives, Andersen Consulting commissioned a study that was conducted in the first quarter of 1999 by an independent research company. The study sought to understand the executives’ future expectations, requirements, and plans for ERP in their companies.

The study results contain feedback from 120 senior executives from approximately 70 companies in the PP&WP industry. Senior executives from the companies in Table 1 responded to the study. Fifty-nine percent of the respondents were senior business executives (CEO, president, divisional executive, CFO, etc.) and 41% were CIOs or equivalent.

ERP STUDY OBJECTIVES. The primary objective of the Pulp, Paper, and Wood Products (PP&WP) Industry Executive Study was to develop a shared knowledge base within the industry regarding enterprise resource planning. The main content objectives for the study were:

• Determine the current status of ERP in the PP&WP industry

• Determine the future plans for ERP in the industry

• Identify the top-level objectives that industry executives have established for ERP

• Understand the extent to which ERP has delivered against these objectives

• Identify the top-level inhibitors to successful ERP implementations

• Assess top-level technology requirements and usage patterns

• Measure the requirements and expectations of ERP service providers

• Test a turnkey application outsourcing concept tailored to the PP&WP industry

The study was implemented in both electronic and paper format. A list of key industry executives was provided by Andersen Consulting. The research company for the study, Management Insight Technologies, then requested participation by telephone, and sent the study package to approximately 150 industry executives who agreed to participate in the study—120 of which completed the survey. Advanced quantitative research methods were used to understand the relationships in the data and to develop segments (for example, to group and profile respondents with similar views on key issues).

STUDY PARTICIPANTS. The study data reflects the views of 120 senior executives from approximately 70 large and medium-sized companies in the pulp, paper, and wood products industry. The study successfully elicited responses from the most senior business and IT executives responsible for ERP investments and implementation in their companies. The high level of cooperation from these executives seems to reflect a high level of interest in ERP within the industry, and a desire to develop a common knowledge base of shared experiences with ERP in PP&WP.

The study represents the views of senior IT and business executives in North American and Scandinavian PP&WP companies. Responses came from CEOs, presidents, CFOs, executive vice presidents, division executives, directors of business processes, and, of course, CIOs. Responses came from the U.S., Sweden, Norway, Canada, and from other European countries. Approximately 60% of the study participants were corporate executives, while the remaining 40% were divisional executives.

Top-level statistics on the study participants are:

• Balanced North American and European representation

• Corporate (60%), divisional (40%), and senior staff/function (10%) viewpoints

• 59% business executives and 41% IT executives

• North American companies in the sample are more diversified than the European companies and more involved with wood products

• Seventy-nine percent of North American respondents reported at the corporate level, while 57% of European respondents reported at the divisional level

• The average company in the sample has 18 wood products mills and seven pulp and paper mills

• American PP&WP companies in the sample mostly produce for the domestic market; Canadian and Scandinavian companies mostly produce for export

• About 60% of business is make-to-order, with the remainder make-to-stock

The study asked about the technology risk propensity of PP&WP executives. Most PP&WP executives appeared conservative with respect to technology decisions. The majority of respondents will only invest in technologies that are proven in the marketplace. The data indicates that CEOs are most conservative, closely followed by CFOs. Sales and marketing executives and production executives appeared most risk-prone.

MAKING ERP DECISIONS. To assess how ERP decisions are made, respondents were asked to specify the primary decision maker in six top-level areas associated with ERP. The data reveals that CEOs make the final decision to proceed with ERP and retain ultimate responsibility for the ERP implementation (Figure 1). Beyond that, responsibility is passed to the CIO, who becomes fully responsible for the success of the actual ERP implementation. Further analysis of these data suggests that the CIO does not always get the business support deemed necessary to make ERP work effectively in their organizations, and that this issue is one of the top challenges to the success of ERP. This finding is fundamental and may explain key attitudes, problems, and opportunities associated with ERP developed later in this article.

FIGURE 1: CEO’s make the decision to proceed with ERP and retain ultimate responsibility. However, the ERP implementation itself is usually turned over to the CIO.

WHAT’S THE MOTIVE FOR ERP? One of the core study goals was to understand the industry’s motives for moving forward with ERP. PP&WP industry executives expect ERP to deliver a diverse set of benefits. According to survey responses, top-level priorities are to improve operational efficiency, to improve customer service, and to reduce business costs. Also among the top priorities are improving supply chain integration, standardization of business processes, and improving functional efficiency. It is interesting to note that reduced staff and reduced IT costs are not stated as top priorities for PP&WP ERP implementations.

IT executives share similar top-level priorities with business executives regarding ERP. However, IT executives assigned higher priority than business executives in three areas: standardization of systems, supply chain integration, and mergers and acquisitions. It also appears that IT executives end up with systems responsibility for supply chain and—both of which may involve more technical difficulty than initially anticipated.

Figure 2 illustrates some interesting differences between North American and European PP&WP companies regarding their expectations of ERP. Note that the North American companies are much more likely to value “standardization of business processes”—in fact, it is the top priority of the North American respondents to the study. In contrast, “standardization of business processes” is the eleventh priority of the European PP&WP companies. Similarly, the North American companies are more likely to value “standardization of systems.”

FIGURE 2: North American PP&WP companies are much more likely to value “standardization of business processes” and standardization of systems” than their European counterparts.

Given that there was a higher divisional representation among the European respondents, it is worth considering whether this influences the finding on standardization. It apparently does not. Fifty-six percent of North American corporate level executives value standardization of business systems, while only 39% of Europeans do. At the divisional level, 77% of North Americans value standardization of business practices, while only 14% of European executives do. It is clear that North American companies are different than European companies with respect to standardization.By not seeking it, European companies may recognize the increased complexity of standardization across diverse cultures and may be taking a more phased, piece-wise approach to achieving the ERP benefits.

FINANCIAL EXPECTATIONS. Most study respondents reported specific financial objectives for their ERP implementations. These expectations range from less than $1 million in annual savings to more than $100 million in annual savings. Most respondents expect ERP to yield between 0.2% to 0.6% of annual revenue in expense savings. Twenty percent of the respondents had higher goals, ranging from 2% to 6% of revenue in annual ERP savings.

The ratio of expected savings from ERP to company revenue is almost identical between the North American and European companies in the sample (0.682% in North America to 0.665% in Europe). Fifty-three percent of the North American respondents expect to save at least $10 million annually (they are typically reporting at the corporate level for larger companies). Only 10% of the European respondents expect to save more than $10 million annually as a result of ERP (many of the European respondents reported their data at the divisional level). From these data, it appears that PP&WP companies in North America and Europe are using similar business models to justify their ERP investments —for example, a two-thirds of one percent annual savings due to increased functional efficiency. About 20% in each geographical area specify more aggressive goals.

To assess whether the expected financial benefits of ERP have been achieved, almost 60% of the respondents indicate they will use some formal method, such as formal audit, performance management method, user survey, or customer survey. The rest of the respondents will use a subjective method. Many respondents will use more than one method to assess whether or not ERP has delivered the expected set of benefits

To realize these benefits, many PP&WP companies are investing heavily. The study showed an even distribution of ERP expenditures ranging from less than $1 million annually to $200 million in yearly ERP expenditures. The North American respondents account for almost all the expenditures above $50 million annually, with only a few European respondents reporting spending of more than $1 million annually on ERP. Again, many of the European respondents reported at the divisional level.

THE ERP PROMISE FULFILLED? At this time, the data suggests that ERP is a work in progress.Almost all of the respondents have initiated an ERP program, but only 7% report that their ERP implementation has been completed. The most frequently reported stages of ERP implementation are “rolling out” or “piloting software”. Data also indicates that North American companies are, on average, further along than their European counterparts.

Two-thirds of the respondents reported that their companies are less than halfway through their ERP implementation. Respondents from companies ranging from $500 million to $10 billion in revenue expect their ERP programs to last between two and three years. Companies with more than $10 billion in revenue expect their ERP programs to last an average of six years.

One of the more telling metrics from the study is that few of the PP&WP companies have achieved more than 30% of the expected benefits of ERP at this time. This is consistent with the finding that most of the PP&WP companies are still in the early stages of ERP implementation.From this, we can conclude that the jury is still out on ERP in the PP&WP industry, since companies are just now investing, proceeding with ERP, and experiencing some initial success. However, there remains a long and uncharted path to the full realization of the promise of ERP in PP&WP.

To gain insight into the top-level priorities of industry executives in proceeding with ERP, the respondents were asked to divide 100 points among three higher level ERP objectives, based on their importance. These objectives were as follows: delivers promised benefits, on time, and on budget. The pie chart in Figure 3 shows that PP&WP executives allocated twice as many points to “delivers promised benefits” as the other two categories. From this, it appears that PP&WP companies are more concerned with achieving the specific business objective they committed to when making their initial ERP decision than with the cost or speed of implementation. This, of course, is not to say that cost and schedule are not concerns, but that the top-level priority is meeting the business objectives specified for ERP.

FIGURE 3: It appears that PP&WP companies are most concerned with achieving the specific business objective they committed to in their initial ERP decision.

CONCERNS ABOUT ERP. The respondents stated that the top-level concerns they are experiencing are associated with ERP involve management and business resources, not the underlying ERP technology. Figure 4 shows that “managing the change process” is apparently the top-level concern regarding ERP. Next are “getting management to agree on a business model”, “securing the right business resources”, and “achieving the benefits”. Again, all of these are business concerns and not technical concerns. Interestingly, selecting the right software vendor fell towards the bottom of the list of concerns.

FIGURE 4: Respondents indicated that the top-level ERP concerns they are experiencing involve management and business resources, not the underlying ERP technology.

There was one major difference between the business executives’ and the IT executives’ responses to this question. Securing the right business resources was the top-level concern of PP&WP IT executives, but is well down the list of concerns for business executives (CEOs, CFOs, division executives, etc.)Why the difference on this issue, but nowhere else?

The pieces of the puzzle are now beginning to fall into place. We now see that business factors are the top-level inhibitors of ERP success. We know from the decision-making data that CEOs make the decision to proceed with ERP and retain ultimate responsibility. However, the ERP implementation is more or less turned over to the CIO. From Figure 4, we can assume that the CIO is starved for business resources, and that agreement on a clear business model and managing the change process to implement that model are the real issues. This assumption may go a long way to explaining why the promise of ERP remains only 30% fulfilled, on average, within the PP&WP industry.

ERP TECHNOLOGY IN PULP AND PAPER. While technology does not appear to be the gating factor regarding the success of PP&WP industry ERP installations, it is clearly a key enabler. Accordingly, the study did include some high level data on how the industry is using ERP technology, along with industry requirements and experiences with these products. However, this research is by no means a comprehensive ERP technical study.

Respondents indicated that they seek ERP software that meets their functional requirements, is low cost, and is easy to implement. These priorities are consistent with the view that it is not the software that determines the success of ERP initiatives, but the company’s business processes.Accordingly, the industry has not settled on one predominant software solution. Rather, PP&WP companies have deployed a wide range of ERP software, including the leaders (SAP, Oracle, PeopleSoft, and J.D. Edwards), but also many of the mid-tier or partial ERP solutions (Figure 5).

FIGURE 5: The PP&WP industry has not settled on one predominant ERP software solution, but has instead deployed a wide range of ERP software.

Some respondents expressed a requirement for more focus by the ERP software vendors and integrators on the specific requirements of the PP&WP industry, as illustrated by these quotes:

• “Work with the major ERP software vendors to increase the functionality they offer in their systems so that they are tailored to the needs of the forest products industry.”

• “Solve the issue of paper rolls versus SKU-based products.”

Earlier, this article showed that standardization of business processes was a top-level goal for PP&WP ERP implementations (at least in North America). The specific business processes on which the study respondents are currently targeting for standardization are:

• Warehouse management

• Transportation

• Human resources/personnel

• Finished goods management

• Payroll

The data suggest that financial functions (general ledger, receivables, cost accounting, etc.) have already been standardized. Areas such as log accounting, roll tracking, and maintenance are not high priorities for standardization at this time.

Study respondents stated that they deploy platforms primarily from three top vendors: HP, IBM and Compaq. Dell is beginning to have a presence, while Sun is a distant fifth. The respondents are deploying ERP software on UNIX systems twice as frequently as Windows NT, with HP-UX and AIX the most popular UNIX platforms in PP&WP.

ERP SERVICES REQUIREMENTS. The industry’s specific requirements for ERP services are apparently diverse and complex. The study results showed that the seven top-level requirements for ERP services were as follows: benefit from the skills, knowledge and experience of the service provider; free up resources for business change; allow more organizational focus on process and business change; free up management to focus on core business processes; save time and expense with a pre-defined ERP solution; and reduce the internal skills build-up requirement.

North Americans appear more concerned with leveraging the service suppliers’ skills, reducing skills build-up, and avoiding skills retention problems than their European counterparts. The European PP&WP companies seem more concerned with financial issues, such as capitalization, cost predictability, and deferred up-front costs.

IT executives are much more concerned with leveraging the service supplier’s skills set, reducing implementation risks, and avoiding skills retention problems. Business executives seek to free up management to run the business and to gain assistance in managing the change process.

Ultimately, the data suggests that PP&WP executives will engage ERP services suppliers when it makes business sense to do so. Since the respondents perceive that agreeing on a business model and managing the change process to achieve that model are top priorities, these would appear to be the areas in which the use of ERP service suppliers can provide the most significant business benefits.

Supplier solutions. The data suggest that most industry executives would like to leverage the expertise of the ERP service suppliers, while still maintaining control over their ERP implementations. Other popular scenarios for working with ERP service providers are to involve service suppliers in order to “jump start” ERP implementations or to outsource their ERP applications development.

While these scenarios are most popular, there is also a segment among the respondents who seek to rely more fully on the ERP service provider (this segment was revealed by a mathematical market segmentation model). This segment represents approximately 15% of industry executives, and expresses different needs than other PP&WP executives.

One area that has received recent attention is turnkey application outsourcing. The main hypothesis is that a service supplier can establish a full turnkey ERP service bureau, which would allow companies to take advantage of high-end ERP systems in a more cost-effective manner.

Andersen Consulting asked the research firm for its study to test a pulp, paper and wood products variant of turnkey application outsourcing. The concept emphasized a pre-defined turnkey ERP solution tailored to meet the specific requirements of the PP&WP industry. About half of the respondents expressed strong interest in the concept, and 15% would accept the concept almost immediately. Another 35% appeared willing to entertain serious discussion regarding the concept. Of the remaining 50%, approximately 35% responded with a lukewarm, wait-and-see “somewhat” interested attitude. The remaining 15% were not open to this concept. Interestingly, CIOs were more positive in their evaluation of the concept than business executives.

One key issue for discussion is how such a concept can be guaranteed to provide a high-quality solution that delivers on the expected benefits at an affordable cost. If so, this type of solution might go a long way towards offloading implementation risks and providing the predictability needed to realize the full potential of ERP investments.

Ken Maxwell is an associate partner out of the Portland, Ore., office of Andersen Consulting.