ERP systems are pivotal in integrating and streamlining the various functions within an organization. However, ERP implementations are notorious for going over budget, leaving many project managers and CIOs grappling with escalating costs and unforeseen expenses.
Understanding why these projects exceed financial expectations is crucial to navigating this challenging landscape. Today, we’ll explore the primary reasons why software projects go over budget and offer strategic insights on how to prevent this outcome.
8 Reasons Why Projects Go Over Budget
1. Prioritizing Technology Over People
An ERP system impacts employees, business processes, and the overall company culture.
Neglecting organizational change management and viewing it merely as end-user training can lead to employee resistance. This can delay project milestones and increase the need for additional training and management resources, ultimately leading to cost overruns.
Consider a mid-sized manufacturing firm that decides to implement a new ERP system to improve inventory management and production scheduling. The focus is heavily on the technological capabilities of the manufacturing ERP software with little attention paid to communication and training.
It’s likely that after the new system is implemented, some employees may be resistant because they are not prepared for the changes. As a result, the project may go over budget due to the additional training required and the extended timeline needed to achieve full adoption.
A Failed Payroll System Implementation
Panorama’s Expert Witness team was retained to provide a forensic analysis and written report to the court regarding the failed implementation of a major software developer’s ERP/payroll system.
2. Lack of Business Process Management
Dazzled by advanced ERP features and functionalities, companies may overlook their actual business process needs. Organizations may choose an ERP system that doesn’t meet their needs if they don’t fully understand their current and future processes. This mismatch leads to extensive and costly customizations.
Business process management involves mapping out current workflows, identifying pain points, and engaging cross-departmental stakeholders to select a system that aligns with organizational needs.
Prioritizing business needs and organizational goals can significantly reduce the necessity for expensive customizations and help keep the project within budget.
3. Unrealistic Project Expectations
Planning for a lean budget and timeline may be tempting, but without realistic expectations, software projects may be at risk of ERP failure.
Organizations should work with ERP consultants to unpack vendors’ often optimistic estimates and prepare for the actual project scope.
For example, a nonprofit organization might embark on an ERP implementation with a fixed budget and an aggressive six-month timeline. Driven by a grant requirement to quickly modernize operations, the organization underestimates the scale and complexity of the ERP implementation.Halfway through, it becomes evident that the timeline and budget are insufficient, leading to rushed deployments and significant post-go-live issues requiring additional funds to resolve.
Adequate project planning could have prepared the organization for unforeseen challenges.
4. Insufficient Executive Buy-In
ERP projects require more than just initial approval from the executive team; they need ongoing engagement and leadership.
Lack of executive buy-in often results in these initiatives being perceived merely as IT projects rather than strategic business transformations. This misalignment can diminish the project’s importance and urgency, leading to insufficient resource allocation and missed deadlines.
It is important to create an executive steering committee to help the project team stay aligned with your organization’s digital strategy. This also helps in making informed decisions about resource allocation, timeline, and budget adjustments.
For example, in a large healthcare organization, the executive team might approve the budget for a new ERP system but remains disengaged from the implementation process. The lack of ongoing executive support may lead to unclear project directives and inconsistent resource allocation.
Then, the project may stall, pushing the implementation significantly over budget.
5. Inadequate Resources
When it comes to building a project team, organizations frequently make the mistake of assigning available employees rather than those best suited for the specific challenges of ERP implementation.
Relying on external consultants without adequate industry experience can exacerbate this issue, as evidenced by the National Grid’s SAP implementation failure.
Properly vetting and selecting both internal and external project team members is crucial for avoiding delays and ensuring the project stays on budget.
6. Insufficient End-User Training
Without sufficient training, employees are likely to revert to familiar workflows, undermining the new system’s benefits.
Effective training programs should begin well before the system goes live and include multiple rounds to ensure retention and proficiency. This proactive approach facilitates smoother transitions and reduces the long-term costs associated with additional training and system modifications.
For example, a telecommunications company might implement a new ERP system to integrate its customer service and billing systems.
Assuming that a brief training session is sufficient, the company quickly moves to go-live.
However, employees struggle with the new system, leading to errors in billing and poor customer service interactions.
7. Excessive Customization
While some level of customization is often necessary to meet specific business requirements, excessive modifications can lead to significant cost overruns and project delays.
Organizations should strive to utilize as much of the ERP system’s standard functionality as possible, reserving customization for truly critical areas that offer competitive advantage or compliance.
Establishing strong project governance can help keep customization in check and ensure the project remains aligned with its original budget and goals.
8. Improper Data Migration
Data migration requires careful planning and execution. Some of the most challenging aspects of transferring data from legacy systems to a new ERP platform are data cleansing and data validation. These can significantly impact project timelines and budgets if the process isn’t started early enough in the project.
Organizations should invest in thorough planning, skilled personnel, and robust tools to manage this process effectively, ensuring data integrity and system functionality from day one.
Consider an e-commerce company transitioning to a more robust ERP system. They underestimate the complexity of data migration. So the initial data transfer is rushed and not thoroughly tested, which leads to issues with data accuracy and order processing in the new system. This eventually requires a secondary, costly effort to clean, validate, and re-migrate data, significantly impacting the project budget.
Avoid ERP Project Cost Overruns by Engaging the Experts
ERP projects are complex and multifaceted, requiring meticulous planning, adequate resourcing, and comprehensive change management. By understanding the common pitfalls that lead to budget overruns and adopting a strategic approach to project management, your organization can increase its chances of successful ERP implementation.
If your project is heading toward being over budget, contact us for a free ERP consultation today to get back on track.
