If you're not careful, the dream of informationintegration can turn into a nightmare.

Putting the Enterprise intothe Enterprise System

by Thomas H. Davenport

ENTERPRISE SYSTEMS appear to be a dream come true. Thesecommercial software packages promise the seamless integrationof all the information flowing through a company - flnancial and

accounting information, human resource information, supply chaininformation, 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 anoff-the-shelf solution to the problem of business integration is enticing.

It comes as no surprise, then, that companies have been beating pathsto the doors of enterprise-system developers. The sales of the largest

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vendor, Germany's SAP, have soared from less than$500 million in 1992 to approximately $3.3 billionin 1997, making it the fastest-growing softwarecompany in the world. SAP's competitors, includ-ing such companies as Baan, Oracle, and People-Soft, have also seen rapid growth in demand fortheir packages. It is estimated that businessesaround the world are now spending $10 billion peryear on enterprise systems-also commonly re-ferred to as enterprise resouree planning, or ERP,systems-and that figure probably doubles whenyou add in associated consulting expenditures.While the rise of the Internet has received most ofthe media attention in recent years, the businessworld's embraee of enterprise systems may in factbe the most important development in the eorpo-rate use of information technology in the 1990s.

But are enterprise systems living up to compa-nies' expectations? The growing numher of horrorstories about failed or out-of-eontrol projectsshould certainly give managers pause. FoxMeyerDrug argues that its system helped drive it intobankruptcy. Mobil Europe spent hundreds of mil-lions of dollars on its system only to abandon itwhen its merger partner objected. Dell Computerfound that its system would not fit its new, decen-tralized management model. Applied Materialsgave up on its system when it found itself over-whelmed by the organizational changes involved.Dow Chemical spent seven years and close to halfa billion dollars implementing a mainframe-basedenterprise system; now it has decided to start overagain on a client-server version.

Some of the blame for such debacles lies with theenormous technical challenges of rolling out enter-prise systems - these systems are profoundly com-plex pieces of software, and installing them requireslarge investments of money, time, and expertise.But the technical challenges, however great, arenot the main reason enterprise systems fail. Thebiggest problems are business problems. Compa-nies fail to reconcile the technological imperativesof the enterprise system with the business needs ofthe enterprise itself.

An enterprise system, by its very nature, imposesits 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-tegration even when a certain degree of business-

Thomas H. Davenport is a professor at the Boston Uni-versity School of Management in Boston, Massachusetts.His most recent book, Working Knowledge: How Organi-zations Manage What They Know, was published inby the Harvard Business School Press.

THE SCOPE OF ANENTERPRISE SYSTEM

An enterprise system enables a company to inte-grate the data used throughout its entire organiza-tion. This list shows some of the many functionssupported by SAP's R/3 package.

FinanciáisAccounts receivable and payableAsset accountingCash management and forecastingCost-element and cost-center accountingExecutive information systemFinancial consolidationGeneral ledgerProduct-cost accountingProfitability analysisProfit-center accountingStandard and period-related costing

Human ResourcesHuman-resources time accountingPayrollPersonnel planningTravel expenses

Operations and LogisticsInventory managementMaterial requirements planningMaterials managementPlant maintenanceProduction planningProject managementPurchasingQuality managementRouting managementShippingVendor evaluation

Sales and MarketingOrder managementPricingSales managementSales planning

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unit segregation may be in its best interests. And itpusbes a company toward generic processes evenwhen customized processes may be a source of com-petitive advantage. If a company rusbes to installan enterprise system without first baving a clearunderstanding of tbe business implications, tbedream of integration can quickly turn into a night-mare. Tbe logic of tbe system may conflict witb thelogic of the business, and eitber tbe implementa-tion will fail, wasting vast sums of money and caus-ing a great deal of disruption, or tbe system willweaken important sources of competitive advan-tage, hobbling tbe company.

It is certainly true that enterprise systems can de-liver great rewards, but the risks they carry areequally great. Wben considering and implementingan enterprise system, managers need to be carefultbat their entbusiasm about tbe benefits does notblind tbem to tbe bazards.

The Allure of Enterprise SystemsIn order to understand tbe attraction of enterprisesystems, as well as their potential dangers, you firstneed to understand tbe problem they're designed tosolve: the fragmentation of information in largebusiness organizations. Every big company col-lects, generates, and stores vast quantities of data.In most companies, tbougb, the data are not kept ina single repository. Rather, tbe information isspread across dozens or even bundreds of separatecomputer systems, eacb boused in an individualfunction, business unit, region, factory, or office.Eacb of tbese so-called legacy systems may provideinvaluable support for a particular business activ-ity. But in combination, they repre-sent one of the beaviest drags on busi-ness productivity and performancenow in existence.

Maintaining many different com-puter systems leads to enormouscosts-for storing and rationalizingredundant data, for rekeying and re-formatting data from one system foruse in another, for updating and de-bugging obsolete software code, forprogramming communication links between sys-tems to automate tbe transfer of data. But even moreimportant than tbe direct costs are tbe indirectones. If a company's sales and ordering systems can-not talk witb its production-scheduling systems,tben its manufacturing productivity and customerresponsiveness suffer. If its sales and marketing sys-tems are incompatible witb its financial-reportingsystems, tben management is left to make impor-

tant decisions by instinct ratber than according toa detailed understanding of product and customerprofitability. To put it bluntly: if a company's sys-tems are fragmented, its business is fragmented.

Enter tbe enterprise system. A good ES is a tecb-notogical tour de force. At its core is a single com-prebcnsive database. Tbe database collects datafrom and feeds data into modular applications sup-porting virtually all of a company's business activi-ties-across functions, across business units, acrosstbe world. (See tbe cbart "Anatomy of an EnterpriseSystem.") Wben new information is entered in oneplace, related information is automatically updated.

Let's say, for example, tbat a Paris-based salesrepresentative for a U.S. computer manufacturerprepares a quote for a customer using an ES. Tbesalesperson enters some basic information abouttbe customer's requirements into his laptop com-puter, and tbe ES automatically produces a formalcontract, in Frencb, specifying tbe product's config-uration, price, and delivery date. When the cus-tomer accepts tbe quote, the sales rep hits a key; tbesystem, after verifying tbe customer's credit limit,records tbe order. Tbe system scbedules tbe sbip-ment; identifies tbe best routing; and tben, workingbackward from tbe delivery date, reserves tbe nec-essary materials from inventory; orders neededparts from suppliers; and scbedules assembly in tbecompany's factory in Taiwan.

Tbe sales and production forecasts are immedi-ately updated, and a material-requirements-plan-ning list and bill of materials are created. Tbe salesrep's payroll account is credited witb tbe correctcommission, in French francs, and bis travel accountis credited with tbe expense of the sales call. Tbe

The growing numberof horror stories about failed

or out-of-control projects shouldcertainly give managers pause.

actual product cost and profitability are calculated,in U.S. dollars, and tbe divisional and corporate bal-ance sbeets, tbe accounts-payable and accounts-receivable ledgers, tbe cost-center accounts, andtbe corporate casb levels are all automatically up-dated. The system performs nearly every informa-tion transaction resulting from the sale.

An ES streamlines a company's data flows andprovides management witb direct access to a wealth

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ANATOMY OF AN ENTERPRISE SYSTEM

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

CustomersSales force

and customerservice reps

Sales anddelivery

applications

Managersandstakeholders

Reportingapplications

V

VHuman

resourcemanagementapplications

Employees

Manufacturing^applications

Back-ofñceadministrators

and workersSuppliers

of real-time operating information. For many com-panies, these benefits have translated into dramaticgains in productivity and speed.

Autodesk, a leading maker of computer-aideddesign software, used to take an average of twoweeks to deliver an order to a customer. Now, hav-ing installed an ES, it ships 98% of its orders within24 hours. IBM's Storage Systems division reducedthe time required to reprice all of its products from5 days to 5 minutes, the time to ship a replacementpart from 22 days to 3 days, and the time to com-plete a credit check from 20 minutes to 3 seconds.Fujitsu Microelectronics reduced the cycle time for

filling orders from 18 days to a day and a half andcut the time required to close its financial booksfrom 8 days to 4 days.

When System and Strategy Clashclearly, enterprise systems offer the potential of bigbenefits. But the very quality of the systems thatmakes those benefits possible-their almost uni-versal applicahility-also presents a danger. Whendeveloping information systems in the past, com-panies would first decide how they wanted to dobusiness and then choose a software package that

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would support their proprietary processes. Theyoften rewrote large portions of the software codeto ensure a tight ñt. With enterprise systems, how-ever, the sequence is reversed. The husiness oftenmust he modifled to fit the system.

An enterprise system is, after all, a generic solu-tion. Its design reflects a series of assumptionsabout the way companies operate in general. Ven-dors try to structure the systems to reflect bestpractices, but it is the vendor, not the customer,that is defining what "best" means. In many cases,the system will enable a company to operate moreefficiently than it did before. In some cases, though,the system's assumptions will run counter to acompany's best interests.

Some degree of ES customization is possible. Be-cause the systems are modular, for instance, com-panies can install only those modules that are mostappropriate to their business. However, the system'scomplexity makes major modifications impracti-cable. (See the insert "Configuring an Enterprise

System.") As a result, most companies installingenterprise systems will need to adapt or even com-pletely rework their processes to fit the require-ments of the system. An executive of one companythat has adopted SAP's system sums it up by saying,"SAP isn't a software package; it's a way of doingbusiness." The question is. Is it the hest way of do-ing husiness? Do the system's technical imperativescoincide or conflict with the company's businessimperatives?

Imagine, for example, an industrial productsmanufacturer that has built its strategy around itsability to provide extraordinary customer service infilling orders for spare parts. Because it is ahle toconsistently deliver parts to customers 25% fasterthan its competitors-often by circumventing for-mal processes and systems-it has gained a largeand loyal clientele who are happy to pay a premiumprice for its products. If, after installing an ES, thecompany has to follow a more rational hut less flex-ible process for filling orders, its core source of

CONFIGURING AN ENTERPRISE SYSTEMConfiguring an enterprise system is largely a matterof making compromises, of balancing the way youwant to work with the way the system lets you work.You begin by deciding which modules to install.Then, for each module, you adjust the system usingconfiguration tables to achieve the best possible fitwith your company's processes. Let's look more closelyat these two configuration mechanisms:• Modules. Most enterprise systems are modular, en-abling a company to implement the system for somefunctions but not for others. Some modules, such asthose for finance and accounting, are adopted by al-most all companies that install an ES, whereas others,such as one for human resource management, areadopted by only some companies. Sometimes a com-pany simply doesn't need a module. A service busi-ness, for example, is unlikely to require the modulefor manufacturing. In other cases, companies choosenot to implement a module because they already havea serviceable system for that particular function orthey have a proprietary system that they believe pro-vides unique benefits. In general, the greater the num-ber of modules selected, the greater the integrationbenefits, but also the greater the costs, risks, andchanges involved.• Configuration tables. A configuration table enablesa company to tailor a particular aspect of the systemto the way it chooses to do business. An organizationcan select, for example, what kind of inventoryaccounting-FIFO or LIFO-it will employ or whether

it wants to recognize product revenue by geographicalunit, product line, or distribution channel. SAP's R/3,one of the more comprehensive and complex ES offer-ings, has more than 3,000 configuration tables. Goingthrough all of them can take a long time. Dell Com-puter, for example, spent more than a year on the task.

Although modules and configuration tables let youcustomize the system to some degree, your optionswill be limited. If you have an idiosyncratic way of do-ing business, you will likely find that it is not sup-ported by an ES. One company, for example, had longhad a practice of giving preferential treatment to itsmost important customers by occasionally shippingthem products that had already been allocated to otheraccounts. It found that its ES did not allow it the flexi-bility required to expedite orders in this way. Anothercompany had always kept track of revenues by bothproduct and geography, but its ES would allow it totrack revenue in only one way.

What happens when the options allowed by the sys-tem just aren't good enough? A company has twochoices, neither of them ideal. It can actually rewritesome of the ES's code, or it can continue to use an ex-isting system and build interfaces between it and theES. Both of these routes add time and cost to the im-plementation effort. Moreover, they can dilute theES's integration benefits. The more customized anenterprise system becomes, the less able it will be tocommunicate seamlessly with the systems of suppli-ers and customers.

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advantage may be at risk. The company may Inte-grate its data and improve its processes only to loseits service edge and, in turn, its customers.

This danger becomes all the more pressing inlight of the increasing ubiquity of enterprise sys-tems. It is now common for a single ES package tobe used by virtually every company in an industry.For example, SAP's R/3 package is being imple-mented by almost every company in the personal

A speedy implementation ofan enterprise system may be awise business move, but a rashimplementation is not.computer, semiconductor, petrochemical, and to aslightly lesser degree, consumer goods industries.[R/3 is the client-server version of SAP's software;R/2 is the mainframe version.) Such convergencearound a single software package should raise asobering question in the minds of chief executives:How similar can our information flows and ourprocesses be to those of our competitors before webegin to undermine our own sources of differentia-tion in the market?

This question will be moot if a company's com-petitive advantage derives primarily from the dis-tinctiveness of its products. Apple Computer, forexample, has many problems, but the loss of com-petitive differentiation because of its ES is not oneof them. With a strong brand and a unique operatingsystem, its computers still differ dramatically fromcompeting offerings. But Apple is an unusual case.Among most makers of personal computers, differ-entiation is based more on service and price than onproduct. For those companies, there is a very realrisk that an enterprise system could dissolve theirsources of advantage.

Compaq Computer is a good example of a com-pany that carefully thought through the strategicimplications of implementing an enterprise sys-tem. Like many personal-computer companies,Compaq had decided to shift from a build-to-stockto a build-to-order business model. Because the suc-cess of a build-to-order model hinges on the speedwith which information flows through a company,Compaq believed that a fully integrated enterprisesystem was essential. At the same time, however,Compaq saw the danger in adopting processes in-distinguishable from those of its competitors.

It realized, in particular, that in a huild-to-orderenvironment an important advantage would accrueto any company with superior capabilities for fore-casting demand and processing orders. Compaqtherefore decided to invest in writing its own pro-prietary applications to support its forecasting andorder-management processes. To ensure that thoseapplications would be compatible with its ES,Compaq wrote them in the computer language

used by its ES vendor.Compaq's course was not the obvi-

ous one. It cost the company consider-ably more to develop the proprietaryapplication modules than it wouldhave to use the modules offered by theES vendor. And using customized ap-plications meant forgoing some of theintegration heneflts of a pure enter-prise system. But Compaq saw the de-cision as a strategic necessity: it was

the only way to protect a potentially critical sourceof advantage.

For companies that compete on cost rather thanon distinctive products or superior customer ser-vice, enterprise systems raise different strategic is-sues. The huge investment required to implementan ES at large companies - typically ranging from$50 million to more than $500 million-need to beweighed carefully against the eventual savings thesystem will produce. In some cases, companiesmay ñnd that by forgoing an ES they can actuallygain a cost advantage over competitors that are em-bracing the systems. They may not have the mostelegant computer system or the most integrated in-formation flows and processes, but if customers areconcerned only with price, that may not matter.

Air Products and Chemicals, for example, sawthat many of its competitors were installing large,complex enterprise systems. After a thorough eval-uation, it decided not to follow their lead. Its man-agers reasoned that the cost of an ES might force thecompany to raise its prices, leading to lost sales insome of the commodity gas markets in which itcompetes. The company's existing systems, whilenot state-of-the-art, were adequate to meet itsneeds. And since the company had no plans to ex-change information electronically with competi-tors, it didn't worry about being the odd man out inits industry.

Of course, the long-term productivity and con-nectivity gains created by enterprise systems areoften so compelling that not adopting one is out ofthe question. In the petrochemicals industry, forexample, enterprise systems have improved theflow of information through the supply chain to

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such a degree that they have become a de facto oper-ating standard. Because participants in the industryroutinely share information electronically, itvv'ould today be hard for a company to survive in thebusiness without an ES. Still, the cost of implemen-tation should be a primary concern. It v ill often bein a company's interest to go ahead and rework itsprocesses to fit the system requirements. The alter-native-customizing the system to fit the processesor writing proprietary application modules - willsimply be too expensive to justify. As the CEO ofone large chemical firm says, "Competitive advan-tage in this industry might just come from doingthe best and cheapest job at implementing SAP."

The Impact on an OrganizationIn addition to having important strategic implica-tions, enterprise systems also have a direct, andoften paradoxical, impact on a company's organiza-tion and culture. On the one hand, by providinguniversal, real-time access to operating and finan-cial data, the systems allow companies to stream-line their management structures, creating flatter,more flexible, and more democratic organizations.On the other hand, they also involve the centraliza-tion of control over information and the standard-ization of processes, which are qualities more con-sistent with hierarchical, command-and-controlorganizations with uniform cultures. In fact, it canbe argued that the reason enterprise systems firstemerged in Europe is that European companiestend to have more rigid, centralized organizationalstructures than their U.S. counterparts.

Some executives, particularly those in fast-grow-ing high-tech companies, have used enterprise sys-tems to inject more discipline into their organiza-tions. They see the systems as a leverfor exerting more management con-trol and imposing more-uniform pro-cesses on freewheeling, highly entre- ,preneurial cultures. An executive at O W n lOiïlC O n a Ca semiconductor company, for exam- ^pie, says, "We plan to use SAP as abattering ram to make our culture lessautonomous." The manager of the ESimplementation at a computer company expressesa similar thought: "We've had a renegade culture inthe past, but our new system's going to make every-body fall into line."

But some companies have the opposite goal.They want to use their enterprise systems to breakdown hierarchical structures, freeing their peopleto he more innovative and more flexible. TakeUnion Carbide. Like most companies implement-

ing enterprise systems. Union Carbide is standard-izing its basic business transactions. Unlike manyother companies, however, the leaders of its ESproject are already thinking in depth about howthe company will be managed differently wben theproject is completed. They plan to give low-levelmanagers, workers, and even customers and suppli-ers much hroader access to operating information.Standardizing transactions will make Union Car-bide more efficient; sharing real-time informationwill make it more creative.

For a multinational corporation, enterprise sys-tems raise another important organizational ques-tion: How much uniformity should exist in the wayit does business in different regions or eountries?Some big companies have used their enterprise sys-tems to introduce more consistent operating prac-tices across their geographically dispersed units.Dow Chemical, for instance, became an early con-vert to enterprise systems because it saw them as away to cut costs by streamlining global financialand administrative processes. (A good idea in prin-ciple, although it became much more expensive toachieve than Dow had anticipated.) Some largemanufacturers have been even more ambitious,using the systems as the basis for introducing aglobal lean-production model. By imposing com-mon operating processes on all units, they are ableto achieve tight coordination throughout theirbusinesses. They can rapidly shift sourcing, manu-facturing, and distribution functions worldwide inresponse to changing patterns of supply and demand.This capability allows them to minimize excessmanufacturing capacity and reduce both compo-nent and finished-goods inventory.

Owens Corning, for example, adopted an ES to re-place 211 legacy systems. For the company to grow

An enterprise system imposes itsnpany's strategy,

culture, and organization.internationally, its chief executive, Glen Hiner, feltit was critical to coordinate order-management,financial-reporting, and supply chain processesacross the world. Having implemented the systemand established a new global-procurement organi-zation, the company is now able to enter into larger,more advantageous international contracts for sup-plies. Finished-goods inventory can be tracked daily,both in company warehouses and in the distribution

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cbannel, and spare-parts inventory bas been reducedby 50%. Tbe company expects to save $65 million bytbe end of 1998 as a result of its adoption of tbeseglobally coordinated processes.

For most companies, bowever, differences in re-gional markets remain so profound tbat strictprocess uniformity would be counterproductive. Ifcompanies in sucb circumstances don't allow tbeir

Enterprise systems can delivergreat rewards, but the risks theycarry are equally great.regional units to tailor tbeir operations to local cus-tomer requirements and regulatory strictures, tbeyrisk sacrificing key markets to more flexible com-petitors. To preserve local autonomy wbile main-taining a degree of corporate control-what migbtbe called a federalist operating model - a very differ-ent approacb to enterprise systems needs to betaken. Rather than implement a single, global ES,these companies need to roll out different versionsof tbe same system in eacb regional unit, tailored tosupport local operating practices. Tbis approacbhas been taken by a number of large companies, in-cluding Hewlett-Packard, Monsanto, and Nestlé.Tbey establisb a core of common information-financial, say-that all units share, but tbey allowotber information-on customers, say-to be col-lected, stored, and controlled locally. Tbis methodof implementation trades off some of tbe purity andsimplicity of tbe enterprise system for greater mar-ket responsiveness.

Tbe federalist model raises wbat is perhaps tbemost difficult challenge for a manager implement-ing an ES: determining what sbould be commontbrougbout the organization and what sbould beallowed to vary. Corporate and business-unit man-agers will need to sit down together-well beforesystem implementation begins-to think througheacb major type of information and eacb majorprocess in tbe company. Difficult questions needto be raised: How important is it for us to processorders in a consistent manner worldwide? Does tbeterm "customer" mean tbe same tbing in everybusiness unit? Answering sucb questions is essen-tial to making an ES successful.

Different companies will, of course, reach verydifferent decisions about the right balance betweencommonality and variability. Consider the starklydifferent approaches taken by Monsanto and

Hewlett-Packard. Monsanto's managers knew tbatdifferent operating requirements would precludetbe complete standardization of data across itsagrocbemical, biotechnology, and pbarmaceuticalsbusinesses. Nevertheless, they placed a high prior-ity on achieving tbe greatest possible degree ofcommonality. After studying tbe data require-ments of eacb business unit, Monsanto's managers

were able to standardize fully 85% oftbe data used in tbe ES. Tbe companywent from using 24 coding schemesfor suppliers to using just one, and itstandardized all data about materialsusing a new set of substance identifi-cation codes. Wbile customer and fac-tory data bave not been fully stan-dardized - differences among the units'

customers and manufacturing processes are toogreat to accommodate common data-Monsantobas achieved a remarkable degree of commonalityacross a diverse set of global businesses.

At Hewlett-Packard, a company witb a strongtradition of business-unit autonomy, managementhas not pusbed for commonality across the severallarge divisions tbat arc implementing SAP's enter-prise system. Except for a small amount of commonfinancial data necessary to roll up results for corpo-rate reporting, HP's federalist approacb gives all thepower to tbe "states" where ES decisions are con-cerned. This approacb fits the HP culture well, butit's very expensive. Eacb divisional ES bas bad to beimplemented separately, with little sbaring of re-sources. Managers estimate that well over a billiondollars will be spent across the corporation beforetbe various projects are completed.

Doing It Right at Elf AtochemConsidering an ES's far-reacbing strategic and orga-nizational implications, tbe worst tbing a companycan do is to make decisions about a system based ontecbnical criteria alone. In fact, having now studiedmore tban 50 businesses witb enterprise systems,I can say witb some confidence tbat the companiesderiving the greatest benefits from tbeir systemsare tbose tbat, from tbe start, viewed them primar-ily in strategic and organizational terms. Theystressed the enterprise, not tbe system.

Elf Atocbem Nortb America, a $2 billion regionalchemicals subsidiary of tbe French company ElfAquitaine, is a good case in point. Following a se-ries of mergers in the early 1990s, Elf Atocbemfound itself hampered by tbe fragmentation of criti-cal information systems among its 12 businessunits. Ordering systems were not integrated witb

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production systems. Sales forecasts were not tied tobudgeting systems or to performance-measure-ment systems. Each unit was tracking and report-ing its financial data independently. As a result ofthe many incompatible systems, operating datawere not flowing smoothly through the organiza-tion, and top management was not getting the in-formation it needed to make sound and timelybusiness decisions.

The company's executives saw that an enterprisesystem would be the best way to integrate the datafiows, and they decided to go with SAP's R/3 sys-tem, which was rapidly becoming the standard inthe industry. But they never labeled the ES projectas simply a technology initiative. Rather, theyviewed it as an opportunity to take a fresh look atthe company's strategy and organization.

Looking beyond the technology, the executivessaw that the real source of Elf Atochem's difficul-ties was not the fragmentation of its systems butthe fragmentation of its organization. Although the12 business units shared many of the same cus-tomers, each unit was managed autonomously.From the customer's perspective, the lack of conti-nuity among units made doing husiness witb thecompany a trial. To place a singleorder, a customer would frequentlyhave to make many different phonecalls to many different units. And topay for the order, the customer wouldhave to process a series of invoices.

Inside the company, things wereequally confused. It took four days-and seven handoffs between depart-ments-to process an order, even though only fourhours of actual work were involved. Because eachunit managed inventory and scheduled productionindependently, the company was unable to consoli-date inventory or coordinate manufacturing at thecorporate level. More than $6 million in inventorywas written off every year, and plants had to be shutdown frequently for unplanned production-linechanges. And because ordering and production sys-tems were not linked, sales representatives couldn'tpromise firm delivery dates, which translated intolost customers.

Management knew that in the petrochemicalsbusiness, where many products are commodities,the company that can offer the hest customer ser-vice often wins the order. So it structured the im-plementation of its ES in a way tbat would enableit to radically improve its service levels. Its goal wasto transform itself from an industry laggard into anindustry leader. Even though many competitorswere also adopting the R/3 package. Elf Atochem

knew that if it could achieve a tighter, smoother fitbetween its business processes and the system, itcould gain and maintain a service advantage.

The company decided to focus its efforts on fourkey processes: materials management, productionplanning, order management, and financial report-ing. These cross-unit processes were the ones mostdistorted by the fragmented organizational struc-ture. Moreover, they had the greatest impact on thecompany's ability to manage its customer relation-ships in a way that would both enhance customersatisfaction and improve corporate profitahility.Each of the processes was redesigned to take full ad-vantage of the new system's capabilities, in particu-lar its ability to simplify the flow of information.Layers of information middlemen-once necessaryfor transferring information across incompatibleunit and corporate systems-were eliminated inorder to speed the flow of work and reduce the like-lihood of errors.

To maintain its focus on the customer, the com-pany chose to install only those R/3 modules re-quired to support the four targeted processes. It didnot, for example, install the modules for human re-source management or plant maintenance. Those

Those companies that stressedthe enterprise, not the system,gained the greatest benefits.functions did not have a direct impact on cus-tomers, and the existing information systems thatsupported them were considered adequate.

Elf Atochem also made fundamental changes toits organizational structure. In the financial area,for example, all the company's accounts-receivableand credit departments were combined into a singlecorporate function. This change enahled the com-pany to consolidate all of a customer's orders into asingle account and issue a single invoice. It also al-lowed the company to monitor and manage overallcustomer profitability-something that had beenimpossible to do when orders were fragmentedacross units. In addition. Elf Atochem combined allof its units' customer-service departments into onedepartment, providing each customer with a singlepoint of contact for checking on orders and resolv-ing problems.

Perhaps most important, the system gave ElfAtochem the real-time information it needed toconnect sales and production planning-demand

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and supply-for tbe first time. As orders are enteredor changed, the system automatically updates fore-casts and factory schedules, which enables thecompany to quickly alter its production runs in re-sponse to customers needs. Only one other com-pany in the industry had this capability, whichmeant that Elf Atochem gained an important edgeover most competitors.

The company understood, however, that justhaving the data doesn't necessarily mean the data

Only a general manager isequipped to act as a mediatorbetween the imperatives ofthetechnology and ofthe business.will he used well. Computer systems alone don'tchange organizational behavior. It therefore estab-lished a new position-demand manager-to be thefocal point for the integrated sales and production-planning process. Drawing on the enterprise sys-tem, the demand manager creates the initial salesforecast, updates it with each new order, assessesplant capacity and account profitability, and devel-ops detailed production plans. The demand man-ager is able to schedule a customer's order-andpromise a delivery date-up to six weeks ahead ofproduction. Previously, production could he allo-cated to individual orders no more than a week inadvance. Now central to the company's operation,the role of demand manager could not even have ex-isted in the past because the information needed toperform it was scattered all over the company.

The way Elf Atochem is managing the imple-mentation effort also refiects the breadth of itsgoals. The project is being led by a 6o-person coreimplementation team, which reports to a memberof the company's executive committee. The teamincludes both business analysts and informationtechnologists, and is assisted by a set of so-calledsuper users, representing the business units andcorporate functions. These super users help ensurethat decisions about the system's configuration aremade with the broadest possible understanding ofthe business. They also play a crucial role in ex-plaining the new system to their respective depart-ments and training people in its use.

The team is installing the ES one business unit ata time, with each unit implementing the same sys-tem configuration and set of procedures for order

processing, supplier management, and financialreporting. The unit-by-unit process ensures thatthe effort is manageable, and it also helps the teamrefine the system and the processes as it proceeds.For example, the second unit to implement the sys-tem found that it didn't adequately support bulkshipments, which are the main way the unit gets itsproducts to customers. [The first unit uses packageshipping for all its orders.) The system was thenmodified to support bulk as well as package ship-

ping, and the new configuration be-came the new standard.

Using the large and broadly repre-sentative implementation team, to-gether with the unit-by-unit rollout.Elf Atochem has been able to staff theeffort mainly with its own people. Ithas had to engage only nine outsideconsultants to assist in the project-far fewer than is usually the case. Thereliance on internal resources not

only reduces the cost of the implementation, it alsohelps ensure that Elf Atochem's employees willunderstand how the system works after the consul-tants leave.

Elf Atochem's ES is now more than 75%complete-9 of the 12 business units are up andrunning on the new system-and the rollout isahead of schedule and under budget. Customer sat-isfaction levels have already increased, and thecompany is well on the way to its goal of confirm-ing 95% of all orders with one call, a dramatic im-provement over the previous average of five calls. Inaddition to the service enhancements, the companyis operating more efficiently. Inventory levels, re-ceivables, and labor and distribution expenditureshave all been cut, and the company expects the sys-tem will ultimately reduce annual operating eostshy tens of millions of dollars.

The Role of ManagementEvery company that installs an ES struggles withits cost and complexity. But the companies thathave the biggest problems-the kind of problemsthat can lead to an outright disaster-arc those thatinstall an ES without thinking through its full busi-ness implications.

Managers may well have good reasons to movefast. They may, for example, have struggled foryears with incompatible information systems andmay view an ES as a silver bullet. They may belooking for a quick fix to the Year 2000 problem(enterprise systems arc not infected with the much-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-mented an ES. The danger is that while an enter-prise system may help them meet their immediatechallenge, the very act of implementing it may cre-ate even larger problems. A speedy implementationof an ES may be a wise business move; a rash imple-mentation is not.

A numher of questions should be answered be-fore any decisions are made. How might an ESstrengthen our competitive advantages? Howmight it erode them? What will be the system'seffect on our organization and culture? Do we needto extend the system across all our functions, orshould we implement only certain modules?Would it be better to roll the system out globally orto restrict it to certain regional units? Are thereother alternatives for information managementthat might actually suit us better than an ES?

The experience of Elf Atoehem and other suc-cessful adopters of enterprise systems underscoresthe need for careful deliberation. It also highlightsthe importance of having top management directlyinvolved in planning and implementing an ES. Not

only is Elf Atochem's executive committee over-seeing its ES project, but its entire board reviewedand approved the plans. At Compaq, the decision togo with an ES was also made at the board level, andthe senior management team was involved withthe implementation every step of the way.

Many chief executives, however, continue toview the installation of an ES as primarily a techno-logical challenge. They push responsibility for itdown to their information technology depart-ments. Because of an ES's profound business impli-cations-and, in particular, the risk that the tech-nology itself might undermine a company'sstrategy-off-loading responsibility to technolo-gists is particularly dangerous. Only a general man-ager is equipped to act as the mediator between theimperatives of the technology and the imperativesof the business. If the development of an enterprisesystem is not carefully controlled by management,management may soon find itself under the controlof the system. ^

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

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