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Kiwibank software

At Reseller News, Rob O’Neill writes:

Kiwibank has booked a $90 million impairment in its software assets and flagged a major change in its SAP core banking roilout.

“Although the strategic review has not yet concluded, a potential change to how we build the core ‘back end’ IT system (CoreMod) to match the demands of the ‘future front end’ has prompted a re-assessment of the value of the work in progress since successfully migrating our batch payments to SAP,” the bank said today.

Source: Kiwibank books a $90 million impairment on software – Reseller News

You have to wonder why boards tolerate large-scale SAP projects when the failure rate  is so high.

I’ve been told, off-the-record, by a number of high-ranking technology executives that dumb decisions are imposed from the top down with CIOs left to carry the can and pick up the pieces.

One recurring theme is that most of the cost and time overruns are due to extensive integration and customisation.

Make that unnecessary integration and customisation.

It is as if every bank or large business has unique, arcane and esoteric processes that can only be covered by expensive and risky software rewrites.

We know that simply isn’t true.

To think there is something magic tied up in those processes is madness. And expensive.

A smarter strategy for a bank, or any large-scale enterprise, would be to purchase off-the-shelf technology and redesign internal business processes to fit the software. Packaged software usually comes with flexible enough options and settings to cope with essential exceptions.

That’s how it works for small businesses buying accounting software from firms like Xero. Speaking of Xero…

Auckland

At ZDNet Rob O’Neill says SAP is the big winner from Auckland Council’s IT spending.

He writes:

“The report reveals the so-called Auckland ”Supercity“, an amalgamation of eight former local councils into one, spent NZ$21.6 million with SAP in the nine months from 1 July 2014 through 31 March 2015”

O’Neill says the council’s SAP NewCore project aims to replace eight earlier systems with one that simplifies and standardises processes.

ERP blow-out

The cost of the project has already blown out from $71 million to $157 million.

Taken at face value, that’s a poor return on investment given the expected benefits from this spending are around $10 million a year.

Cost blow outs for big projects are not unusual. Few projects are finished on time, on budget and deliver the promised benefits.

The bigger the project, the lower the chance of hitting those targets.

ERP failure rate

The 2015 ERP Report from Panorama finds 21 percent of companies think their ERP implementation failed. More than half (52 percent) of projects fail to come in on deadline and 60 percent of customers say ERP hasn’t delivered the expected benefits.

This isn’t about SAP. It just happens to be the largest, most visible ERP vendor. And it is the one doing business with Auckland Council[1].

To be fair to SAP and other ERP vendors, these numbers are in line with other large scale software implementations. CRM systems don’t fair much better.

It also needs to be said the ERP failures and missed targets are rarely about the software.

Management failure

In almost every case the problem boils down to poor project management and badly defined, even misunderstood, business processes[2]. Muddled change management is also often behind a failed or disappointing ERP project.

All of these areas are the responsibility of the executives overseeing the project. Ownership of the project has to go right to the top.

You need exceptional management and first class leadership to get big projects humming.

None of this is comforting for Auckland ratepayers.


  1. This project has been controversial for some time. The NZ Herald rang alarm bells three years ago.  ↩
  2. An opinion piece from Don Christie at the NBR suggests battle-hardened CIOs from the previous Auckland councils were deliberately kept away from the project planning phase.  ↩

New Zealand’s bungled Novopay schools payroll contract should be a wake up call for government decision makers. Last week Steven Joyce, the minister sent in to fix the mess sacked Talent2.

As Rob O’Neill reports for ZDNet, Talent2 will pay between NZ$18 and NZ$22 million as part of a settlement.

While Novopay was disastrous and painful for teachers and their families, there wasn’t any lasting wider damage.

Enormous risk

That won’t be the case if the huge NZ$1.5 billion IRD system refresh goes wrong. Should the contractors doing the work on New Zealand’s tax system get things as badly wrong as Talent2, the nation could be in for a bumpy ride.

That might be putting things mildly. According to Wikipedia, New Zealand government spending accounts for just short of half of GDP. Take that out of circulation for long and everything could grind to a halt.

The scary part is the chances of things going badly wrong are high.

Unfavourable omens

Pickard Consulting is the lead solutions and applications architect for the Inland Revenue Department transformation project. Pickard Consulting is a SAP shop.

SAP’s main business is selling large-scale Enterprise Resource Planning or ERP software to corporations and government. ERP projects are notorious for missing deadlines and cost overruns.

Don’t take my word for it. Here’s what the State of ERP 2014 survey found:

  • between 53% and 56% of projects run over budget
  • The figure for “duration” (i.e., timeline) overruns was slightly higher and, in fact, is trending worse the past three years.
  • The number of respondents saying they get less than half the expected benefits has risen steadily each year, to the point that two-thirds of respondents in the most recent year (2013) reported receiving half or less of the expected benefit.

Fortune magazine quotes Jim Johnson of the Standish Group saying 90 percent of ERP projects are either late or over budget. He says: “Your chances of coming in on time and on budget are statistically zero

SAP has an interesting track record including being successfully sued by Waste Management for fraud after selling a US$100 million ERP system described as a complete and utter failure. 

So, on the surface, it appears government is willing to entrust the backbone of our economy to a company and industry with a track record of spectacular failure.

SAP cloudEnterprise software giant SAP reported first-quarter results that, like IBM, fell well short of market expectations. However, the company says much of the revenue shortfall is down to currency, not poor sales.

Meanwhile, it says its shift to the cloud is progressing with its software-as-a-service business growing profitably. Total revenue from cloud services is up 38 percent, although it is still relatively small only accounting for six percent of total revenue.

SAP was ahead of the enterprise computing old guard with its cloud investments. The company has tipped almost US$8 billion into buying up cloud businesses including paying more than US$4 billion for Aruba, a cloud-based business data specialist.

Nevertheless, like rivals Oracle, SAP faces challenges from cloud software companies eating into its once lucrative core business.

SAP brought its cloud services to New Zealand last year. At the time the company, which in the past has mainly sold software to huge corporations, said it is now targeted smaller businesses with its cloud services.

What do IBM, Dell, HP, Oracle and SAP have in common? All are mature technology companies – the youngest is Dell formed in 1984 – and they all bank on cloud computing getting them out of the doldrums.

There are a few things wrong with that idea.

First, it was cloud computing that got them into trouble in the first place. Hardware sales, particularly servers, fell as companies switched applications and processing to the cloud.

Cloud-hosted applications disrupt high-end software. It challenges high-margins, undermines the need for infrastructure and support that allows software giants to get away with huge costs.

Oracle, originally a software company but since buying Sun Microsystems with a large hardware business, is in a more nuanced position. It lost server sales to cloud computing while its software business is challenged by nimble, commoditised cloud-based apps. SAP faces just the app challenge.

Second, the old school companies have enjoyed relatively high margins in at least parts of their businesses. Even Dell’s commodity hardware margins were higher than the wafer-thin margins Amazon squeezes from its IaaS – infrastructure as a service – business.

Cloud needs scale

Amazon makes money because of scale. Huge scale. According to Gartner, the company has five times the IaaS capacity of the next 14 competitors added together.

The economics of scale mean each additional customer is cheaper to serve and sheer market size cuts the cost of acquiring customers.

Amazon’s scale means it sits bestride the cloud market like a colossus.

Third, Amazon has a huge first-mover advantage. That’s always a problem when any new technology comes along. It’s a bigger problem than usual with the cloud where being first means being ready to meet demand while others are still building capacity.

It means learning how to make savings – Amazon has dropped cloud prices 40-odd times in eight years of operation.  Do IBM, Oracle and SAP want to follow Amazon down that path?

Legacy

It also scores because it doesn’t have any legacy. There are no existing business or customer contracts to protect. Apart from anything else, this means Amazon is quick to innovate, there’s nothing to lose from moving fast. And that’s scary for competitors.

None of the would-be cloud giants can move without pain. In many cases, the pain involves converting high-value, high-margin products and services into commodities. There’s no path around this, but it will make it harder for them to bite the bullet.

Fourth, Cloud computing leaves little room for differentiation.  IBM, Oracle, HP and SAP all think they can add value, perhaps they can do a little around the edges, but on the whole, customers aren’t willing to pay for it when the alternatives are almost as sophisticated, but an order of magnitude cheaper.

To sum up: The big IT companies have little alternative to head to the cloud, their customers are going there with or without them.

Whether they can maintain customer relationships, add value and continue to prosper is far from given. You’d have to pick that one or more of the brands, IBM, Dell, Oracle, HP and SAP, isn’t going to make the transition.