As details regarding Knight Capital’s dramatic ERP failure continue to emerge, it becomes clear that organizations that don’t effectively handle their ERP implementations can (and often do) end up paying a price almost beyond comprehension. For those who haven’t followed the news, Knight Capital recently lost over $400 million in a matter of minutes because of a glitch in its trading software — trading software that wasn’t fully tested and properly deployed prior to production. In addition to the immediate impact of lost cash and profits, the software failure also caused the company’s stock to drop 68-percent the day following the glitch.

Although Knight Capital is a financial services firm, and thus has the ability to lose large sums of money in short periods of time, this failure does highlight and quantify some of the potential risks of ERP software initiatives for organizations in all industries. When most organizations consider the risk and cost of an ERP failure, they typically think about relatively smaller-scale risks (e.g., going over budget or not realizing business benefits) than what Knight Capital experienced. But while large companies implementing SAP, Oracle, Microsoft Dynamics or any other ERP system may not need to worry about losing $440 million in 30 seconds as a result of their ERP failures, they do need to remember that the expense of budgetary overruns and lost business benefits alone can easily carry a multi-million dollar price tag.

When you factor in other implementation risks, such as unaccounted for assets due to the inability to accurately track data, lost customer orders because of botched inventory planning, and/or revenue shortfalls due to shipping problems, the damage caused by ERP failures increases dramatically. Both Shane Company and Lumber Liquidators, two companies that quantified the impact of their failed ERP implementations, discovered that the damage caused by their failures increased exponentially once opportunity costs and negative business impacts were taken into account. In addition, Panorama’s research shows that 54-percent of organizations have some type of material operational disruption after ERP system go live, often times resulting in millions of dollars of additional costs.

So what lessons can we learn from Knight Capital’s dramatic failure and what steps can your organization take to avoid similar challenges? There are a number of guidelines we incorporate into our implementation methodologies, which all apply whether we’re implementing SAP, Oracle, Microsoft Dynamics, Epicor, Infor or any other ERP system for our clients. Here are three things to keep in mind as you prepare to mitigate the risks of your ERP implementation:

1. Fully define and document your “to-be” business processes. Organizations and their respective ERP vendors are notorious for assuming the ERP software will tell them how to run their business. As Knight Capital found, processes that aren’t well defined and fully tested can create huge operational challenges. In order to go-live without a hitch, companies need to fully define their “to-be” business processes, including process improvements, roles and responsibilities, and the test scenarios that the team will use to ensure the processes and supporting systems actually work before going live with the changes. Also keep in mind that these fully defined and documented business processes should include touch points with activities outside the system, which ERP vendors and system integrators are well-known for overlooking.

2. Fully simulate and test your business processes prior to go-live. Business processes may look good on paper, but the operational kinks can only be worked out via multiple iterations of simulations and testing. We typically help our clients conduct a minimum of three full conference room pilot cycles per functional area, and this is after all the technical and software team members have tested the software itself. These various iterations should be used to make tweaks to the business processes, ensure process and training documentations is complete and accurate, and ensure that the business processes will actually work in a real-life operational settings. And remember that just because the techies think the enterprise software is working fine doesn’t necessarily mean that the business processes work appropriately.

3. Fully leverage outside ERP and business expertise. Although the “do-it-yourself” mentality has been proven to be flawed over the years and most organizations recognize the perils of such an approach, some companies still think they can handle their own implementation because they have a strong project manager on staff or because they have a couple of employees that have been through implementations before. Best-in-class companies, however, recognize that they need outside expertise to make their implementations successful. And this expertise should encompass not just knowledge of the ERP software itself, but strong acumen in the more important critical success factors of an implementation, such as business process management, organizational change management and complex program management. As we recently told one of our aerospace and defense clients: “Just as Panorama will never know how to make aircraft parts as well as you can, your team doesn’t know how to implement ERP systems as well as we can.”

These three guidelines alone won’t mitigate the significant costs of ERP failure as experience by Knight Capital, but they will give a good start on the path toward ERP success. For more advice, check out our Lessons Learned From Best-in-Class ERP Implementations on-demand webinar and be sure to register for tomorrow’s discussion, Business Process Management: A Critical Success Factor of ERP Implementations.

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