The Hidden Pitfalls of ERP Implementations: A Case Study of Metcash's $300 Million Struggle

What happens when an organization spends two years longer and $200 million more than expected on their ERP implementation? As part of the Third Stage Consulting Group team, an independent consulting firm specializing in digital transformations, our team and I have seen firsthand the challenges and complexities that accompany these large-scale projects.

Today, I want to delve into the case of Metcash, an Australian-based retailer dealing in liquor, groceries, and home improvement goods. Metcash embarked on a Microsoft Dynamics 365 (D365) implementation, aiming for completion by 2023, yet by that year, they had only managed to implement a third-party subset of their entire ERP plan.

Let’s explore why this project did not succeed and what lessons can be learned. You can also watch my YouTube video with my analysis below:

Understanding the Complexity

One of the first challenges Metcash faced was underestimating the complexity of moving to a standardized operating model. Metcash is a diversified retailer with three distinct business units, each operating differently and using different systems. The goal was to transition to a single platform, a common aim for many organizations seeking efficiency and cohesion. However, this transition proved far more difficult than anticipated.

Transitioning to a standardized operating model involves not only technological changes but also significant adjustments in business processes, employee roles, and organizational culture. Each business unit at Metcash had its own way of operating, which meant that aligning these processes required extensive coordination and change management efforts. The resistance to change from employees accustomed to their existing systems added another layer of complexity.

The key takeaway here is the importance of defining standard business processes early in the project. For diversified conglomerates or any business with multiple operations, failing to agree on standard processes before implementing technology can lead to significant problems. In Metcash’s case, it seems they did not take the time upfront to establish these processes.

Moreover, there is a question of whether a common business process operating model was the right choice. With three distinctly different businesses, moving everyone onto a single platform may not have been realistic. Some degree of flexibility or decentralization might have been more appropriate, allowing each business unit to operate independently while still integrating certain core functions. For instance, while financial reporting and inventory management could be standardized, customer-facing processes might need to remain tailored to the specific needs of each business unit.

Unrealistic Expectations and Overselling

Another major challenge was that the Metcash project team felt they were sold an unrealistic vision of what D365 could achieve. Microsoft presented D365 as a plug-and-play, highly integrated solution that would seamlessly fit into Metcash’s diverse operations. This idealized vision led to unrealistic expectations within Metcash, a common root cause of project failures.

The allure of a plug-and-play solution is strong, especially for organizations looking to simplify their IT landscapes. However, ERP implementations are rarely straightforward. They involve significant customization to fit the unique needs of the organization, extensive data migration, and rigorous testing to ensure that all business processes function correctly in the new system.

Unrealistic expectations often lead to two significant issues. First, projects take longer and cost more than planned. The initial budget and timeline set by Metcash were based on an overly optimistic view of how quickly and easily D365 could be implemented. When the reality of the implementation's complexity became apparent, costs ballooned, and the timeline slipped.

Second, organizations with unrealistic expectations make poor decisions later, trying to force the project into an unachievable plan and budget. This often results in cutting corners, such as inadequate testing or insufficient training for end-users, which can lead to significant issues post-implementation. Metcash’s experience underscores the importance of setting realistic expectations from the outset.

Vendor Bias and Governance Issues

From the start, Metcash was committed to using Microsoft tools for every aspect of their business, regardless of fit. This bias stemmed from a previous D365 implementation at a small part of their company, which was perceived as successful. However, deploying D365 across an entire diversified business is vastly different from implementing it in a single location. This overreliance on one vendor can be detrimental, as it may not address all business needs effectively.

Vendor bias can lead to a lack of critical evaluation of whether the chosen solution truly meets the organization’s needs. In Metcash’s case, the success of D365 in a smaller context was not a guarantee that it would scale effectively across their diverse operations. This is a common pitfall where organizations assume that success in one area will translate universally, ignoring the unique challenges of different business units.

Project governance also played a role in Metcash’s struggles. Initially, the project team did not report to the CEO but to a leader within one of the business units. This structure was problematic for a project intended to transform the entire organization. Effective governance requires visibility and accountability at the highest levels of the organization. The lack of direct oversight from the CEO and the executive team meant that the project lacked the strategic alignment and support needed to address the challenges that arose.

Furthermore, the project ran parallel to business operations rather than integrating them, leading to insufficient business involvement and oversight. Successful ERP implementations require active participation from business users to ensure that the system meets their needs and integrates seamlessly with existing processes. Metcash’s approach of treating the ERP project as an IT initiative rather than a business transformation effort contributed to its struggles.

The Role of Consulting Firms

At the peak of the project, Metcash had over 200 consultants from KPMG and additional support from PricewaterhouseCoopers (PWC). Despite this, the project still failed. This highlights a crucial point: having a large number of consultants does not guarantee success. The effectiveness of these consultants and the overall project strategy are what truly matter.

When a new CEO took over, he paused the project to reassess and reduce the run rate. He also shifted the reporting structure so the project team reported directly to him, enhancing accountability and control. Additionally, he brought many competencies in-house, reducing reliance on external consultants and building internal capabilities for long-term sustainability.

Bringing competencies in-house is a strategic move that more organizations should consider. It ensures that knowledge and expertise remain within the company, allowing for better continuity and adaptability post-implementation. Relying heavily on external consultants can lead to a dependency that undermines the organization’s ability to manage and optimize the system independently.

Insights from Early Conversations Prior to the Implementation

Interestingly, I had the opportunity to interview some Metcash team members several years ago, before the project encountered major issues. They expressed concerns about being "sold a dream," a sentiment echoed in the postmortem reports. This indicates that the seeds of failure were planted early, with the team aware of potential pitfalls but proceeding nonetheless.

During our conversations, Metcash employees also mentioned they had standardized their business processes before starting the implementation. However, post-failure reports suggest otherwise, indicating a disconnect between perception and reality. This discrepancy points to the importance of thorough and accurate process standardization and understanding.

Standardizing business processes is not just about defining them on paper; it involves ensuring that all stakeholders understand and agree on these processes and that they are thoroughly tested in practice. The gap between Metcash’s perception of having standardized processes and the reality suggests that they might have overlooked critical details or failed to achieve consensus among all business units.

Conclusion: Key Lessons Learned

Metcash’s ERP implementation provides several valuable lessons:

1. Define Standard Processes Early: For diversified organizations, establishing and agreeing on standard business processes before technology implementation is crucial.
2. Set Realistic Expectations: Avoid being swayed by overly optimistic vendor promises. Realistic expectations are essential for project success.
3. Avoid Vendor Bias: Don’t rely solely on one vendor for all needs. Evaluate and choose solutions that best fit each aspect of the business.
4. Ensure Proper Governance: The project should report to top executives to ensure visibility, accountability, and alignment with organizational goals.
5. Build Internal Competencies: Relying too heavily on external consultants can be risky. Building in-house capabilities ensures long-term sustainability.

For more insights and best practices on ERP implementations, I encourage you to read my ebook, "Lessons from 1,000 ERP Implementations," available for free on our website. I hope Metcash’s experience serves as a guide to help you navigate your digital transformation journey successfully.