In part 1 of our blogs series, “Changing For the Right Reasons – Part 1”, we identified the problem most businesses have when making the decision to transition to ERP and urged the need to make the “right” choice. We highlighted that our 4-step approach enables organizations to deliver all the people, process and technology components needed to achieve transformational change and the desired outcomes.
Since we have discussed “why” the need for change by the end of Step 1 in our previous blog, you should have the information you need to assess whether you have the impetus to forge ahead with the implementation of a new ERP system – or not. In order to determine the scope of “what” needs to change, organizations need to determine which business capabilities are necessary and sufficient in order to make the desired outcomes (from the previous step) viable. A good practice is to perform a simple necessity check: “in order to achieve this outcome, we MUST have which capability?” or the corollary, “if this capability is not in place, which outcome is not possible?”. The number of business capabilities should generally not exceed 6-12 per functional area (generally 50-60 companywide). This is fairly high-level assessment, but it provides a good view to the stewards of the initiative.
Assuming the case for change is a net-positive, the pursuit of the Pot of Gold and elimination of the Alligators now become the “true north” of the project. All scope elements needed to support this are desirable and those that are not supportive, should be deferred or de-scoped. During this step, many companies try to do too much. Once they’ve decided they need to change, they often assume that the best thing to do is to change as much as possible – especially since many fear that they will only have one bite at the apple, and since ERP license typically comes with a lot of functionality options included. Too often, companies make the decision to implement the many options available to them, rather than critically considering what needs to change on a systematic basis. However, more scope does not necessarily mean more benefit. Added scope in an ERP implementation almost always results in higher costs, more time, and greater risks to an organization. That’s why organizations should be selective when determining what to change. Any unnecessary variables can easily evolve into barriers that will keep an organization from achieving desired benefits. Remember: the objective isn’t to implement as much of the ERP as possible… it is to realize specific business outcomes!
Step 2: Determine what needs to change
Each capability now gets classified into the “Differentiation Risk matrix”. This matrix allows us to visualize how each capability impacts the organization along two dimensions:
- Differentiation – does an improvement in performance of this capability differentiate the organization to the extent that the market will either buy more or be prepared to pay a premium for the company’s products or services?
- Risk – does a degradation in performance of this capability expose the company to significant risk of loss?
On the Risk (vertical) axis we have Mission Critical and Enabling areas. Mission Critical represents those capabilities whose current performance is at or below the “Red Line”. These are close to the inflection point of Risk. Enabling represents those capabilities whose performance are far enough away from the red line to warrant them to be lower risk.
On the Differentiation (horizontal) axis we have Differentiating and Standard areas. Differentiating represents those capabilities whose performance is close to the green line - i.e. close to differentiating the company. Anything that’s not differentiating is by definition Standard – and whose performance is far enough from the “Green line”.
UNDERSTANDING THE DIFFERENTIATION/RISK MATRIX
On the Risk Axis, there are two classifications for capabilities: Mission Critical and Enabling. In order to understand this axis, we define the “red line”. The red line is that level of performance that if the company dips below, for a given capability, the entire company will be exposed to significant risk.
By ranking both the impact on Risk of a capability (mission critical or enabling) and the impact on differentiation (differentiating or standard), and then determining how much each capability’s performance would be improved from its current performance, companies can determine whether enabling the change is worthwhile from a cost, risk, and reward perspective. For instance, in the event that procurement is in quadrant 4, it would make more sense to implement standard model processes rather than drive innovation in that area.
Moreover, if users try to advocate for a custom solution, this objective tool allows for a mechanism for pragmatic push back.
During this step, companies should prioritize performance improvements that either move them out of the zone of risk or move them into a place where performance becomes differentiated as these shifts will lead to higher value for the organization.
Meanwhile, organizations should also reduce their attention on capabilities where improvements only move them incrementally within the zone of mediocrity.
By prioritizing capabilities for implementation, companies can better manage costs and risks associated with ERP implementation while focusing on making performance improvements that will have the biggest impact overall.
For more information on this leadership paper, click here.
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Larry Perlov
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