11 Steps To Conducting an Effective ERP Vendor Due Diligence

Reference checking is essential when choosing a vendor for an ERP system. With ERP systems having a greater than 85% failure rate, with the number one reason being poor initial software selection, it is vital that you get your reference checking right on your preferred application.

When choosing a software vendor, there is a high risk of wasting many millions of dollars on a poorly implemented system, and it would be a tragedy if this loss simply came down to lazy due diligence.

Reference checking is so important because the relationship with a software vendor is not a short one (at least it shouldn’t be). The analogy is like a marriage: you better get on in good times and in bad. If you have conducted your due diligence properly, you will have a good feeling about whether you can work with this company over the long term. This is why it is critical to check them out thoroughly.

Conducting due diligence doesn’t always mean you need to follow exactly what the reference sites did, but you can learn a lot from inquiring about their general process. There is a virtual gold mine of information to be gained from asking the right questions. Go into this process with the mind-set that you will learn a great deal, and this attitude has the potential to save you hundreds of thousands of dollars on your implementation.

There are 11 steps that you can take, which if handled correctly will set you up for success in this vital task of system replacement.

  1. Identify current clients of the software partner. This information can be gleaned from numerous sources. The most obvious one is your preferred vendor. Ask them for a list of clients you can talk to about their past performance. Obviously, they will give you their best clients, so it will pay to look a bit harder. Tap into the industry grapevine to get other intel on what’s happening. The opposition is all too willing to provide some bad dirt on their competitors. If you don’t know how to ask these questions or what questions to ask, engage someone who does. Independent consultants in this area will be able to provide you with an unbiased view on which vendors are strong contenders and high performers and whom to be careful of or avoid. For example, when called in to rescue a project, I couldn’t believe my ears when I heard that the only due diligence that had been conducted was the senior executive going to dinner with the CEO of the software partner. True story—you can’t make this up.
  2. Contact companies who are in the same industry. Make sure the reference sites are comparable businesses. At the very least, one should be in the same industry as you are. The rest should be in similar industries. For example, there is no sense speaking with a business that has 10 people in their sales order entry area if your business has a call centre of 300. The volumes and requirements of these two businesses are completely different.
  3. Compare the same modules. Is the scope of your project the same or similar to theirs? It’s no good reference checking a company that simply implemented three finance modules—such as accounts payable, accounts receivable and general ledger—if you are implementing those modules plus production, warehousing, procurement and some others. The effort required to be successful in these two projects would be significantly different.
  4. Look at companies of similar size. Look to see how they handled the staff commitment. For example, if you are a business that does not have the luxury of deploying a full-time project team, but the reference site does have one, then there is nothing for you to learn from how they handled their resourcing requirements. Get a site that has similar challenges when managing the project. (Please note: in my article “The 14 Deadly Sins of ERP Implementation” found at www.davidogilvie.com.au/resources, not having a full-time project team massively increases the risk of failure. Having a part-time team is not recommended).
  5. Ensure that the consultants assigned to your project actually worked on these implementations. A vendor may indicate that they were involved in an implementation, when in fact it was actually one of their consultants who did the work, and the consultant now works for an opposing company. In that case, there is no guarantee that this consultant will be available to work on your project. (Watch for the bait and switch.)
  6. Physically go and see the application in operation in those businesses. Don’t simply make a phone call and ask some questions, or you will be setting yourself up for a shallow and ineffective effort. Yes, this costs money; remember the old saying “If you think hiring a professional is expensive, try hiring an amateur.” This rule applies here. Speak to the people who are now using the application as well as those who were on the project in the past. Get an understanding directly from them about what worked well, what was a challenge and what actually failed.
  7. Have a well-structured list of questions prepared; don’t go in and simply wander around and chat. You have a serious decision to make; be professional and get prepared. Know what you want to know. And more importantly, ensure you ask about what you don’t know. That is, I always finish with the following question: “is there anything else you feel I should know that I haven’t asked about?”
  8. Find out how the vendor handles changes to the scope of a project. Some partners will set the project up on a shoestring budget to win the work, only to then issue a change request every time you or the business looks sideways. Others will work with you in the spirit of cooperation and issue a change request only for major matters. Remember, this is a long-term relationship—you need to decide if you can dance with this company for many, many years.
  9. Perform due diligence on the consultants, not just the company. A great reference from an organisation might make you feel good, but what happens if that great, successful implementation didn’t contain any of the consultants assigned to work on your project? Number eight of my 14 deadly sins of ERP implementation is ensuring that you have high-quality people working on the project. Make sure you identify and test the vendor’s consultants to ensure that the best they have are working with you.
  10. Gain an understanding from past clients of how good the vendor is at delivering within a said budget. Are their estimates of time and effort accurate, or are they consistently miles off the mark? It is imperative that you work with someone who is good at this, because my experience has been that clients are not, and they need a strong hand to guide them.
  11. Last but not least, ensure that the vendor and your business are a great cultural fit. In many ways this is actually the most important. Tremendous synergy is generated when the two cultures are in sync. For example, if your business is extremely causal, but your supporting vendor is highly structured and document driven, there is a high risk that this relationship will cause difficulties.

As you can see, there are some very important areas you need to cover to ensure you are going to be in good hands. Remember, the majority of ERP implementation projects fail to deliver what was expected, and when they go over budget, it is by more than double most of the time.

So it becomes imperative that you have a multitude of views, opinions and experiences at your disposal when the time comes to make the critical decision of who is going to support you.

It is often the case that I get called in to rescue projects, and 100% of the time, I say to myself, If only I had been here from the beginning, all of this heartache and wasted budget could have been avoided. The key here is that if you haven’t done this before, get an independent and experienced coach or advisor working on your side.

© David Ogilvie

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About David
Experienced independent business consultant with a speciality in ERP to manufacturing, warehousing and distribution businesses in Australia, New Zealand and the United States, with a turnover of $20 million+.
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