ERP IMPLEMENTATION FAILURE AT HEWLETT PACKARD

INTRODUCTION

In August 2004, HP announced that its revenues for the third quarter ended by July 31, 2004,
from its Enterprise Servers and Storage (ESS) segment had gone down by 5% to $3.4 bn, as
compared to the same quarter the previous year. The company attributed this revenue shortfall
mainly to the problems faced in migrating to a centralized ERP system at one of its North
American divisions. The total financial impact of the failure including backlogs and lost
revenue was pegged at $160 million, more than five times the cost of implementing the ERP
project.

Industry analysts raised questions as to HP’s credibility as a consultant for SAP ERP
implementations. In the role of a consultant, HP’s primary responsibility was to prevent exactly
such execution problems on which it had faltered. Its “Adaptive Enterprise” concept focused
on the use of IT to help companies adapt to change in a quick and effective way. The failure
demonstrated the adverse financial and business impact of poor ERP implementation for an IT
company, especially if it took on the role of a consultant for implementations.

HP conducted an internal investigation to review the causes of failure of this ERP project. The
report revealed that the major problem did not relate to SAP software but to execution related
issues. It was found that the technical glitches were small but the contingency planning for the
ERP project implementation had left many issues unaddressed. HP claimed that the data
modelling between the new SAP software and the legacy system involved were of a minor
nature and it did not hold SAP responsible for the failure.

THE ERP IMPLEMENTATION

HP's products were known for excellent quality and reasonable prices. HP had a highly
decentralized organizational structure and every business unit independently designed,
marketed and manufactured its own products. In the early 1990s, as the electronics industry
started booming, the era of mass production in the industry began. In the light of this
development, HP redesigned its business strategy to venture into the high-volume low-priced
electronics market. In 1992, HP witnessed a huge increase in sales volumes of printers and
computers from resellers and direct-consumers. In the light of increasing demand for its
products, HP decided to re-organize its business processes to manage its complex
manufacturing and logistics operations efficiently. The company planned to phase out its
numerous legacy systems and replace them with SAP R/3 as the standard ERP solution
worldwide.

SAP R/3 IMPLEMENTATION

The goals set for this business process reengineering (BPR) initiative were:
 Shorter lead and delivery times.
 Cost savings.
 Establishment of a global distribution system
HP selected the SAP integrated R/3 suite of client/server applications software as it provided a
high level of functionality for global use. In 1993, HIP's BCMO unit began the project with the
implementation of several modules including Materials Management (MM), Product Planning
(PP), parts of Financial Accounting (FI) and Controlling (CO). 1 implementation of the FI and
CO modules on a global scale. Sales and Distribution module (SD) was implemented as part
of the pilot project. HP wanted to implement the R/3 software to function as a large distributed
application system covering all relevant business processes throughout the world. By
December 1998, HP had completed its major deployment and migration to SAP R/3 system.
The implementation of the SAP Sales Configuration Engine" enabled e-commerce capabilities
for selling and configuring products on HIP's direct-to-consumer e-commerce website". TIP
undertook further incremental deployments of upgraded versions of SAP R/3 as business needs
changed.

IMPLEMENTATION OF MySAP
By 2000, HP had become keen to make web-based activities more simple, direct, and effective.
At this stage, HP had over 20 SAP R/3 implementations representing FI, PP, MM, SD, CO,
Business Intelligence (BW), Advanced Planning and Optimization (APO) and Warehouse
Management (WM). These implementations were based on different versions and had multiple
SAP Graphic User Interfaces (GUI). The user base for these applications was around 10,000.
Since HP was already using SAP R/3 software, it considered SAP's Internet-enabled
technology product – MySAP as a good fit for its business. The implementation of MySAP
solution would reduce the huge costs incurred on IT support and deployment because
everything would run on a browser. It would also provide employees with a single, tightly
integrated front end to the entire SAP back end. It would eliminate the need to create custom
SAP interfaces which would not only save cost but also provide greater speed in
implementation. The solution also had the functionality to query SAP R/3 systems and would
make it easier for users to access the right information at the right time.
By early 2001, the demands placed on HP's supply chain and data workflow had increased
tremendously. Hence, HP decided to implement MySAP APO module, the central element of
MySAP Supply Chain Management (SCM). The rationale was to enable the company to
develop a single backbone to link employees, customers and partners. HP had been facing
difficulties in cases where an order was received for items from more than one product line.
The company was unable to issue one order confirmation, make one delivery note, and print
one invoice for all the items ordered. Instead, the customer received a separate order
confirmation, delivery note and invoice for each individual product line. HP wanted to ship
products faster and with greater operational efficiency. The company worked out an agreement
to allow its IT department to work with SAP on an ongoing basis to enhance and evolve
MySAP.com functionality in areas such as product life-cycle management, planning and
optimization, and business intelligence. HP aimed at achieving localization as well as globally
consistent control with sufficient planning capabilities for its supply-chain members. The main
aim was to cut costs, increase transparency, and equip HP to embrace new business models
rapidly.
The SAP APO and MySAP SCM software were first implemented in the European Imaging
and Printing division. Based in Böblingen, Germany, the division sold HP printers and printer
accessories throughout Europe. The MySAP solution aimed to provide the division with the
latest forecasting procedures and to enable integration of relevant data in a single system. The
objective was to make forecasting more accurate and specific to European requirements.
Earlier, with each system producing a different forecast, there was a little chance of tallying
the resulting decision and therefore delivery bottlenecks frequently occurred. This project took
just five months to complete and introduced new configuration and pricing capabilities. The
company achieved substantial benefits from this implementation (Refer Exhibit V for the
benefits). After the successful implementation at the European Imaging and Printing division,
HP decided to implement MySAP SCM at a number of other HP manufacturing and
distribution facilities worldwide. After its merger with Compaq Computer Corporation in May
2002, HP had started overhauling the supply chains of all its businesses in order to create five
standard supply chains, supported by standard technology platforms. The company introduced
the concept of the adaptive supply chain in which the printers could be produced by a contract
manufacturer and shipped directly to the customers. HP also implemented the MySAP Product
Life Cycle Management (PLM) module to integrate the product lines of the two merged
companies. The task was challenging as there were around 200,000 products and more than
100,000 suppliers. The objective was to have accurate and consistent life cycle data to reduce
the complex infrastructure and support costs. It helped HP to achieve operational excellence
and enabled its customers and partners do business in an easier way.
ERP MIGRATION FAILURE
In December 2003, Gilles Bouchard (Bouchard) became the CIO and Executive Vice-president
(EVP) of global operations at HP. He was made responsible for both the supply chain and ERP
software implementations. In January 2004, he held a meeting with key operational leaders of
HP to create a new organizational model. The model aimed to merge the Business and IT
groups at both regional and country level. This operation was officially completed by HP on
May 01, 2004 and had led to increased interdependencies between groups in the company. The
migration of the Industry Standard Server (ISS) division, one of the biggest divisions of HP
with $7.5 billion of annual revenues, onto ERP systems was also simultaneously completed in
May 2004. This was the 35" migration in HP and was a part of the Business Process
Architecture project at HP. Through this project, HP aimed at reducing its 35 ERP systems
implemented worldwide to four ERP code bases along with a reduction in applications from
3,500 to 1,500.
HP had adopted a business-process-based approach that combined IT with business objectives.
HP had cherished the ambition to implement a single order management system for quite some
time. The company had managed to reduce the number of different order management systems
to seven but it aimed to achieve greater efficiency and flexibility with the implementation of
SAP Fusion Order Management (FOM) Platform. Through this platform, HP was working to
unite its SAP order management systems with those from Compaq. It involved a migration
from separate HP and Compaq legacy SAP R/3 order management systems to a new, broad-
based SAP ERP system. It involved more than 70 supply chain systems and also included an
upgrade to SAP R/3 Version4.6C.
HP executives expected that the new SAP system would enable customers to receive exact
product build and delivery dates without placing multiple orders. Peter Blackmore, HP's
Executive Vice President in charge of the Customer Solutions Group" held overall
responsibility for the division. The project involved Jim Milton, Managing Director, Americas
region and Kasper Rorsted, Managing Director, Europe, Middle East and Africa (EMEA)
region. The project execution was overseen by Christina Hanger, Senior Vice President,
Americas region.
HP framed the contingency plan to include both the technical and business aspects. The
company anticipated disruption of three weeks for IT problems and catered to the business
aspect by taking over a portion of an empty factory at Omaha as a provider of buffer stock for
any customized configuration orders. 2 As soon as the project went live in June 2004, migration
problems began to surface. Around 20% of the customer orders for servers could not move
from the legacy order system to the new SAP system due to programming errors. HP fixed
these errors within a month. However, orders began to backlog and the company did not have
enough manual processes in place to be able to meet the demand. The project team had not
been able to adequately comprehend the business repercussions of the data integration"
problem.
The internal investigation team found the following causes of the ERP migration failure:
Project Team Constitution:
Difficulties in program management arose due to the high level of dependence among the
teams. There were problems of communication between the varied groups. For example,
smooth communication flow between back-end logistics group and the order-taking group at
the front end could not be maintained.
Data Integration Problems:
These problems surfaced between the legacy system and the new SAP system being
implemented, as soon as the implementation went live. Lack of effective product training and
improper product data management were identified as the major causes of these problems.
Demand Forecasting Problems:
The division could not predict the actual demand for customized server products which turned
out to be 35% higher. The division's contingency planning team had planned for a buffer
inventory of three weeks on an assumption of 50:50 ratio of sales of standardized servers and
customized servers. The additional orders could not be handled by the Omaha factory.
Poor Planning and Improper Testing:
In retrospect, company officials felt that pre-implementation preparation activities were not
planned properly. The system had been tested for standardized orders but it was not adequately
tested for customized orders because the marketing team failed to envision all the
configurations, customers could order. When the system went live, some orders passed through
the system while some were unaccounted for. The contingency plan was inadequate to handle
this situation as it was only an expanded version of an old plan which had been used for earlier
migrations and did not involve in-depth assessment of the ISS division.
Inadequate Implementation Support/Training:
The IT personnel were subjected to the new technology without having adequate time to
develop their skills for the new system. The customer service representatives were given
training two weeks in advance and they had cleared the proficiency tests. However, due to
inadequate revision they made mistakes when the implementation went live. This worsened
the order backlog situation. Later, refresher training was launched but by that time it was too
late to be beneficial as order backlogs kept increasing to unmanageable levels. In the words of
Bouchard. "We had a series of small problems, none of which individually would have been
too much to handle. But together they created the perfect storm." Analysts commented that
probably the company culture had not allowed for much active