Cubic Corporation invested in an ERP system to streamline operations and improve profitability. More than two years later software and implementation costs are over $61 million and climbing. Is this another ERP boondoggle?
Based in Southern California, Cubic Corporation is a public company that operates in the defense and transport industries. In February 2015 the CEO announced steps to streamline operations and improve profitability, which was expected to yield about $16 million annualized pre-tax savings in the financial year 2016. This would be about $160 million savings over 10 years.
The ERP project was started in late 2014 and was expected to be completed by the end of 2015. But as of mid-2017, the implementation was still going strong. Based on published financials, as of March, 2017 Cubic had spent $61 million on the project so far. With completion currently estimated to be in 2018 (assume Q2) and extrapolating implementation costs, Cubic will have spent a total of about $86 million on their new ERP software project by the time it goes live.
The same problems that caused the implementation to take much longer than planned are likely to cause business disruption when the software goes into production. Estimate the business disruption cost to be $8 million. In addition, those same problems will reduce the value returned from the new software. Estimate this hidden cost of not meeting expectations to be $4 million per year, reducing the anticipated $16 million savings to $12 million.
If a 10 year lifetime is used for this software, what return can Cubic expect from their ERP investment? The purchase was made around Q4, 2014 and assuming they go live in Q2, 2018, they will have a working life of 6.5 years x $12 million value returned per year = $78 million, less the $8 million business disruption cost incurred when going into production. Over 10 years that is a loss of $16 million instead of a savings of $160 million. In the Q2 Fiscal Year 2017 results conference call the CEO said he was expecting “significant savings and efficiency.” It will be interesting to see how our predictions turn out over the next two or so years, and if the CEO is still singing the same tune.
Why is this anticipated savings of $160 million turning into a loss of $16 million? Cubic would have done an inadequate requirements analysis, which meant that “new” requirements were discovered during implementation. Dealing with these “new” requirements takes time, which is what causes implementation schedules to slip. In an effort to reign in slipping schedules, items are left for “phase 2” and this is what causes business disruption when going live. The only winners in this affair are the software and implementation vendors.
The key to avoiding problems like this lies in the software selection process. So many companies go into these software projects intoxicated with their own abilities, only to wake up after the party with a considerable financial hangover. All too often they realize they would have been much better off never starting the project in the first place, but by then it is too late.