When oil prices were above $100 per barrel and demand was outstripping supply, the top priority for most companies was maintaining and increasing production, with cost control and “value creation” taking a secondary role.
Today, the new market reality is forcing many oil and gas companies to reassess their operating practices and increase process efficiencies.
Cost management is nothing new in the sector and many, if not all, of the key players have longer-term cost-reduction initiatives already in place that pre-date the credit crisis, striving for greater unit efficiency and a competitive cost advantage.
However, the agenda for many CEOs and CFOs is not only about reducing cost, and if a silver lining can be gleaned from the recent recession, it has been the renewed focus on “value add” to the business that will separate the winners from losers.
This is certainly true in the Enterprise Resource Planning (ERP) world, where more and more companies are challenging the value their existing ERP systems deliver.
So what of the CIOs’ agenda?
The oil and gas sector was one of the early adopters of ERP systems such as SAP and Oracle, recognising the inherent benefits of an integrated IT solution to manage end-to-end business processes.
Benefit and value realisation has become part of our day-to-day language but, until fairly recently, many companies implemented an ERP solution as part of an IT systems replacement project where they are seen as a back-office system that supports the number crunching that ultimately feeds through into the financial statements. The opportunity to enable business process transformation and add value to the business is often missed.
This is changing, and successful companies are now challenging their CIOs (chief information officers) to leverage the significant investment made in their ERP system and drive greater process efficiencies. Although additional investment may be required to make this a reality, we are seeing more and more companies revisiting the perceived benefits case of their ERP system and striving for realisable benefits of upwards of £5-10million per annum.
As Donald Rumsfeld once commented, “There are things we do not know we don’t know”, and we’ve seen this frequently with ERP implementations where the perceived benefits are often established well before the system has even been designed or implemented, and the benefits are based on the limited knowledge of what the system is capable of.
In a recent Ernst & Young study entitled “Demonstrating the value of IT projects”, only 24% of respondents admitted that their IT projects, such as ERP systems, had defined benefits that were aligned with the business objectives. The other 76% presumably did not perceive a business benefit in the multimillion-pound investment that ERPs demand.
Shareholders and boards are now demanding more and it is no longer acceptable to deliver an ERP system on time and on budget. The term “ERP optimisation” has become subconsciously embedded in organisations as CIOs, CFOs and end users are being held accountable to make the system work for them rather than just enabling a process to take place. The financial benefit from the significant investment must be realised for shareholders to justify their ongoing investment in support costs, upgrades, licence fees, and so on.
Over the past year, we’ve seen more companies rise to this challenge, and some have fared better than others in maintaining a focus on benefit realisation during project phases, but even those companies rarely keep up the focus beyond go-live. Indeed, our study found that only 16% of organisations surveyed measure project success by reviewing the benefits delivered against the original business case. Yet organisations continue to demand evidence of the value delivered.
Benefit cases and KPIs lie discarded when the project team is disbanded and the businesses don’t realise the ongoing benefits that come as the system stabilises. Rarely are the benefits cases refined post go-live and new goals established as the business evolves.
Just as the oil and gas sector was one of the first to recognise the benefits of an ERP system, it is also one of the first to start down the road to value creation in an ERP environment.
For some, this road may be relatively straightforward and involve simple tweaks such as training and educating the business to enlighten the business as to the art of the possible. For others, it may involve more wholesale change to the business processes and control structures such that they work in harmony with the ERP system rather than fighting the ERP way of operating.
Benefits realisation is just one example of how companies are driving value from their ERP investment, and as analytical procedures have advanced significantly in recent years, the old adage of ERP systems such as SAP and Oracle being described as “data rich, but knowledge poor” has also started to crumble.
Recent developments in analytics and data visualisation are phenomenal. The opportunity now exists to look into your system in real time to see how processes, controls and users are really working. Where are the blockers? Is the process as optimised as it could be? If not, how can we streamline the process and bring value back to the business?
These are the types of questions that those organisations who are looking to drive value from their ERP system are demanding answers to. The art of the possible is so vast you are only constrained by your imagination and insight.
For example, you can now look into the data running through your ERP to visualise your supply-chain functions and see the respective spend by country. By overlaying this with the transactional processing costs, which also sit on the system, you can start to understand whether your procurement strategy, as deployed in your ERP, is efficient.
What organisation would not want that transparent “single source of the truth” visually presented in a way that allows it to optimise its business and drive real stakeholder value?
In the 1990s, we saw the widespread adoption of ERP systems across organisations; the early-00s have been consumed with risk and governance introduced through the likes of Sarbanes Oxley, and as we enter the next decade, organisations should be challenging whether their ERP systems are enabling their business for success.
The successful organisations who emerge from the recession stronger and more agile in the market will be those that learn how to maximise their return on the significant ERP investment and, in the process, realise upwards of £5-10million in benefits.
So what do you need to do to successfully leverage your ERP?
Essentially, there are three components you should consider:
Do you have a holistic, yet detailed, view of the value your ERP system is delivering – for example, how is the system actually being used, who is using it and what benefit and value opportunities is it giving me?
Have you established clear goals outlining the value that you want from your ERP, and is there a framework that continually refreshes, refines and embeds this within the team and allows you to push the limit of the ERP to deliver value?
Are there examples of best practice that can be applied on a uniform basis across the organisation to maximise the return on your ERP investment?
These all sound simple, but the reality is that organisations have been struggling with this concept for years and those that can crack it will win in the market.
Kevin Duthie is a director in Ernst & Young’s advisory services team
Recommended for you
