Category: Accounting Failures

Note to self: do ERP vendors benefit from the sunk cost fallacy and asset specificity?

I’ve never really been very interested in ERPs – so I likely don’t know what I’m talking about…

But over the years there have been many times I’ve heard organisations saying they need to “leverage their investment” in their ERP.  This is usually after they have spent far too much money implementing it in the first place so whenever I hear that phrase I can’t help but hear “we don’t have the expected benefits from this yet so we should invest more in it because we’ve already invested too much not to get any benefits from it”.  This is clearly the sunk cost fallacy at work.

There has been talk of the end of ERPs for some time, and there are certainly many web-based alternatives, much-hyped redesigns, as well as web based versions of classic ERPs.  But at the same time ERPs aren’t going away.  Certainly the companies themselves are far too clever to not evolve.

But I’m more interested in why the benefits aren’t realised.  Because from an enterprise architecture perspective there are certain elements of the ERP value proposition that make perfect sense.  If you think of enterprise architecture as primarily being about finding the capabilities, services, and processes that you want to further integrate or standardise across your organisation (and I haven’t found a better definition) then taking disparate payroll, HR, procurement (etc, etc) processes and standardising them should delivery value.

I’m going to make a leap here and say that ERPs actually do deliver value.  In fact, any critic that suggests otherwise probably has a skewed view of why we use information technology in our organisations in general.  The problem with ERPs isn’t that they don’t deliver value – it’s that they are incredibly overpriced.

Given that organisations pay that price I have to wonder how ERP vendors are able to extract value from organisations so successfully.  Going back to my limited experience with ERP implementations I see three ways ERP vendors extract value from organisations:

1) ERP people are over specialised.  While development and support for software packages from mid-sized vendors, or custom software development can be implemented with a variety of method, tools, and resources, a SAP implementation for example must be staffed with ‘SAP people’.  There are no business analysts, developers, or project managers.  There are instead SAP Project Managers, SAP Developments, SAP Business Analysts.  This of course creates a scarcity of quality resources and the subsequent high price of those resources.

2) ERP vendors force their customers to follow an Ideal Realised Strategy which says your implementation will be simple if you don’t customise your implementation.  However, by virtue of the fact the everybody customises their implementation this doesn’t seem like a feasible strategy in practice.

3) ERP implementation partners take control of both IT change and business change.  However, rather than take the approach that business change is about delivering benefits and increased productivity they appear to take the approach that ‘business change’ is all about making sweeping changes to work practices rather than making small changes to the product.  i.e. by owning business change they are using it to the vendor’s advantage not the client’s advantage.

Long-overdue rant complete.

Agile Manager on the risk of a Lean IT Financial Crisis


“Accounting rules dictate that inception has to be funded out of SG&A. What this means is that before we can spend out of a capital budget, we must spend some SG&A money first. It’s also important to bear in mind that the same is true at the other end of the delivery cycle: last mile tasks such as data migration can’t be capitalized; they also must be funded out of SG&A.

In effect, our SG&A budget (also known as operating expense, or OpEx) is leveraged with capital expense (CapEx). A contraction of OpEx proportionally reduces the CapEx accessible to us.”

And then the likelihood and mitigation:

“This “perfect storm” is more common than you might think. Mitigating exposure is done through a variety of different mechanisms.

One is to hedge the project portfolio by bringing several investments into the early stages of delivery and then putting them into operational suspense. This creates a deliberate OpEx expenditure at the beginning of a fiscal cycle (before risks of OpEx impairment are realized over the course of a year) to multiple project inceptions, and then rendering some of those investments dormant. This diversifies the IT project portfolio, allowing IT capability to shift among different projects should one or more of those projects be cancelled.”

Project Managers Should Not Fear the Baseline | CIO – Blogs and Discussion

There is some wisdom in Jim Vaughan’s article and the related comments:

The poor performance of the project usually has less to do with the project manager or the project team and more to do with the systemic failures of the organizational culture to provide the proper tools and governance to allow the projects to succeed. These systemic issues really become the moose on the table that no one wants to talk about. As a result the PM and/or the project team are blamed for the failure.

via Project Managers Should Not Fear the Baseline | CIO – Blogs and Discussion.

The Professional Mess

There is a very interesting interview with Dr. Thomas Dorman on the Lew Rockwell podcast entitled ‘The Medical Mess’.

Dr. Dorman talks about how placing an intermediary between a professional (the doctor in this case) and their customer (patient in this case) destroys the relationship between the doctor and the patient.

I think anybody, not just Doctors, who considers themselves a professional will recognise the sentiments Dr. Dorman highlights as common to the experience of being over-managed and under-lead in many a large organisation.

In summary:

  • The intermediary breaks the clear ‘point of transaction’ at which point the consumer owns the service provided – creating arguments and errors which then require regulations
  • Regulations require the professional to ‘code’ medical conditions and categorise medical conditions based on the codes specified by the intermediary
  • Because payments are made based on these ‘codes’ it forces the professional to spend considerable intellectual effort on the management of codes – at the expense of spending intellectual effort on the service
  • Also, ‘if there isn’t a code for something there isn’t a service’. So ‘codes’ must be manipulated to order to produce ‘a fair outcome’. This creates mistrust amongst all parties.
  • Professionals then spend time ‘documenting things to the satisfaction of the inspectors’ rather than working on services. This amounts to ‘costs escalating exponentially’
  • This intermediation process is ‘known not to work’ in that it doesn’t create a more effective services. So ‘there must be an agenda’
  • This agenda is ‘control, rather than providing quality services’

Sadly, Dr. Dorman passed away earlier this year before I even listened to this podcast.  The ideas, as always, live on.

Confessions of an aeroholic

“Airlines are notoriously cyclical because revenue is very sensitive to changes in demand. Profits are greatest when strong demand results in full planes (‘‘load’’) and high prices (‘‘yield’’), but they can disappear quickly when demand falls because costs are relatively fixed and flights can’t easily be cancelled.”

via Confessions of an aeroholic.

I’m currently working on the very edges of the airline industry (via IT outsourcing).  I can relate to the ‘aeroholic’ tag.  It’s a very compelling industry and while I don’t invest money in it I certainly invest time in it.

So, somebody important let me under his umbrella this morning.  I spoke briefly to him and it got me thinking about Boston Consulting Group (from where he had worked as an adviser to Qantas for 10 years).

I think the airline industry’s highs and lows have been managed through sophisticated financial devices (fuel hedging, for example, or deferred losses).  This is by necessity, but I think this process might have had it’s own unintended consequences.

I’m currently focusing on what those unintended consequences might have been… because that is where I will be able to have the greatest impact.  There are some non-optimal behaviors and outcomes I have noticed.  I think if I understand them in terms of the necessities above things will make sense …

“We glorified finance, we privileged finance, we even subsidised finance”

ABC radio’s PM programme has a good little interview with Jim Standford regarding how people incorrectly think of economics as part of the finance industry rather than the finance industry being just a part of the economy:

JIM STANFORD: … I mean the financial sector is a part of the economy but it’s not the most important part of the economy. In fact in many ways it has very little to do with what the true economy is about, which is about average people getting up, going to work, producing something useful, a good or a service that has inherent value, and then how we pay people for it and how they buy stuff.

JIM STANFORD: I think that this meltdown in some ways is the culmination of say three decades or so of a trend where we glorified finance, we privileged finance, we even subsidised finance through a tax system that favours paper investments over real production. And we came to equate the ups and downs of the markets with what the real economy was all about and that was wrong.

The financial sector doesn’t produce anything of real value in and of itself. It is supposed to facilitate investment and growth in the real economy but it ended up serving its own purposes. It became the tail that wagged the dog and as a result of 30 years of over-financialisation we had this inevitable breakdown and now we’re all paying the price.

Bad maths, accounting, and risk management

A brief, but interesting introductory article on the types of accounting rules that are legal but which promote bad investment in the long term appears here (pdf).   The summary, in the form of a joke, follows:


 Three accountants interview for a job.  When asked to evaluate 2 plus 2, the first responds “four,” and the second, thinking it’s a trick question, says “five.” But the third, whom they hire on the spot, says: “what do you want it to be?” I wasn’t laughing, however, when I learned that the behavior of candidate three lies within generally accepted accounting practice.


The article provides an example of the “trouble [that] can arise when single numbers are substituted for distributions.”  But I think there is likely to be a more general explaination of the problem.  Also, as the article sights there is the general problem of: 


  …But when they need to estimate the NPV of a project for an accountant, they will inevitably be asked for a number.


I can’t help but think this is an example of the ‘bad math’ that Chris Macrae keeps mentioning in his more lucid moments (1, 2, 3) when he say, for example here:

about 10 year ago … in big management consultancies through the 90s I was appalled at a maths error that was systematically devaluing trust, rewarding those who imaged over reality including conflict-makers and short-term speculators -the so called Unseen Wealth Intangibles crisis as it was then called, the Inconvenient Truth crisis as some sustainability mapmakers now call it. (typos corrected from the original quote)

Somewhere in all of this there is a lesson to be learnt from economics and the need to look beyond the short-term to the long-term impacts of the rules within systems.

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