Russ Berrie Tells Vendors: "Let's Define a Deal"By Kim S. Nash | Posted 2002-12-01 Email Print
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Things got scary for Alan Heger, VP of Information Systems at Russ Berrie & Co., when customer orders started to vanish from the company's internal records. It was June 1999 and Russ Berrie, which sells plush toys and home gifts, had spent $19.2 million over 18 months to install new enterprise resource planning (ERP) software from SAP AG.
This was the first time in its 37 years that Russ Berrie had used much packaged software at all, and its managers weren't sure whether the problems were their fault, SAP's fault or the fault of Ernst & Young, which configured and installed the applications. But any way you look at it, customer orders should not disappear, especially not during the summer and fall. That's the time of year when Hallmark Stores and 50,000 other retailers order Russ Berrie teddy bears, picture frames, country-style wooden plaques and other merchandise for the holiday shopping season.
Russ Berrie couldn't track incoming orders. Clerks and finance and administrative personnel spent hours combing databases for orders customers said they had placed. Shipments were delayed or canceled.
Heger's team removed the SAP software altogether by Christmas. Russ Berrie, based in Oakland, N.J., took a charge of $10.4 million in 1999 to end the project. The company then reverted to its old systems, homegrown applications it had built for digital equipment vax minicomputers in the 1980s. In 2000, Russ sued both SAP and Ernst & Young for fraud. The cases are still in litigation and arbitration. Neither SAP nor E&Y would comment.
Enterprise software can control nearly every aspect of how a company runs—or determine if it operates at all. Episodes of ERP gone bad aren't rare, as our report on Hershey Foods makes clear. Orders get lost, customers get mad and sales fall.
The average company buys ERP software once in a decade. Last year, Russ Berrie decided to do it a second time, fortified by learning from the failed SAP project. Here's a look inside a very private corporate process.
01.15.01 Reviving a Project. Seven Russ Berrie vice presidents and the chief operating officer meet to talk about a sensitive subject: what to do about the company's inefficient supply chain. The goal of the meeting that cold day: identify the parts of Russ that most need fixing, such as order processing, warehousing and procurement.
Yet both the chief information officer and chief financial officer positions are vacant. The group agrees to hold off on any real decisions until replacements are hired. Plus, some amount of unease with the original system lingers. No one wants to repeat the bad SAP experience.
"There was skepticism, but that's a natural reaction if you'd been through what we went through," recalls Lynn Bergin, vice president of administration. "But we also understood our legacy system was obsolete."
For example, for reasons that once made sense, when one of the company's U.S. offices wants to buy something from a business in China—where most of Russ Berrie's stuffed animals are made—purchase orders are routed first through Digital VAX minicomputers in both Hong Kong and South Korea. Elsewhere, when business users want to analyze trends or monitor sales, each report must be custom-coded to extract data from the proprietary software. "There is a great need for a new system," Bergin says.
02.01 Back-Burnered. The company hires a Chief Financial Officer, John Wille, but the search for a chief information officer continues. Other technology projects need attention, including the rollout of Lotus Notes e-mail to the seven countries where Russ operates. Staff also is diverted by a Euro conversion project to update systems to handle Europe's new standard currency.
03.01 Enter the Young and Brave. Michael Saunders, 29, joins Russ Berrie as chief information officer, his third gig as a CIO since 1998. Right away, Saunders feels the uncertainty among some business users about the technology department. If any eyebrows arch about Saunders' youth, he ignores it. He has managed technology at fitness clothier Danskin in New York, and Jenna Lane, a New York sportswear maker. Before that, he was at technology consulting firm Kurt Salmon Associates, where he worked on enterprise resource planning projects at Liz Claiborne and Guess. "I haven't been self-conscious about the age thing since my first CIO role when I was 27," he says.
04.01 Rebuilding Confidence. Saunders launches a few low-risk, high-visibility projects to renew confidence in the 30-member systems department. Videoconferencing technology is installed in the U.S. and Asia. A small-scale data warehouse of sales information is built in four months for less than $50,000. The work also helps technology staff muster belief that they can face down a new ERP project.
"What had happened in the previous implementation was that the Big 5 firm that was here made statements like, 'You will reduce SG&A expenses by 32% and cut other expenses by 3%,'" Saunders says. Such precise predictions aren't realistic, he says, and they set false expectations.
The Real Work Begins
05.01 The Real Work Begins. Russ Berrie hires Kurt Salmon Associates, the consulting company that previously employed Saunders, to help create a list of vendors to evaluate and write a request for proposal. With $294 million in sales, Russ Berrie isn't a huge company. But it acts like one. It makes 6,000 products and operates worldwide. The company needs to handle multiple foreign currencies and the regulations of many local governments.
Saunders rules out second-tier enterprise software makers, such as Lawson Software in St. Paul, Minn., or Microsoft's Great Plains division in Fargo, N.D., because their products aren't as tuned to global business as software from larger vendors. And, of course, because of Russ Berrie's previous experience, SAP is out.
The final four are Intentia International, a Swedish company with U.S. offices in Saddle Brook, N.J.; J.D. Edwards & Co., in Denver; Oracle, in Redwood Shores, Calif.; and PeopleSoft, in Pleasanton, Calif.
06.01 User Interviews Begin. In a lengthy afternoon meeting, Heger and Kurt Salmon consultants Bob Copeland and Jeremy Rubman, among others, form plans to talk with business users about what they want, and want to avoid, in a new system. They devise open-ended questions to get at problem areas, including:
- How is your work role related to other processes in the organization?
- With whom do you communicate? Why?
- What do you need approval for?
- What do you use the VAX for?
- Where do you use manual processes instead of the VAX?
- What are the frustrations with current process?
- What business event would make you change the organizational structure of your department?
The conversations last a couple of hours in each department and become the basis for the request for proposal. The no-budge technical criteria: users must be able to access the software with Web browsers; the architecture must be "thin client" (that is, not require much software to reside on the users' PCs); and the software must be installed in stages. This is a clear departure from the so-called "big bang" method used in the SAP project. The vendor also has to agree to implement the software, not pass it off to a consultant.
The interviews also spur support and involvement from a diverse set of users, which was missing in the SAP project, says Jim O'Reardon, vice president of internal audit. "Last time, users didn't see the software overhaul process until close to the end," he says.
07.01 Brass Tacks. Several of the company's highest-ranking officers, including company founder Russell Berrie himself, meet to review how to manage interactions with the four vendors. One Thursday morning, Josh Weston, a board member and chairman of the audit committee, proposes a tack that shifts the power definitively to Russ Berrie.
To say that Weston, former chief executive and chairman of Automated Data Processing, controls a room is like saying the Pacific Ocean is pretty deep. Weston, 72, states his views, states them fast and you come away thinking they aren't just opinions but really the definitive way to attack a problem. He brings a gem of an idea to Russ Berrie: Make the vendors begin contract negotiations before the technology evaluation is over.
The most common way to select a vendor is to study the technology of the competing suppliers, choose one, then negotiate a contract. But Weston suggests Russ Berrie hire technology-smart lawyers to negotiate a legal term sheet at the same time the company evaluates the four software suites. The idea is to force each vendor away from its own boilerplate contract, which favors the supplier over the buyer. Plus, Russ Berrie can maneuver the companies into similar basic contracts—creating a skeleton contract tilted to favor Russ Berrie.
Weston says a company must recognize where it's weak. "A computer company does this [kind of negotiation] a thousand times a year and Russ Berrie does this once a decade. Who knows more about structuring a favorable contract?" he says. "Whoever makes the first draft of something, even though it's not binding, shapes the discussion."
Saunders jumps on the idea. "The problem with the traditional negotiating stance is you start evaluations and users fall in love with one vendor in particular. Then you start working on the contract with that one and you don't have any leverage at that point."
Weston doesn't insist Saunders and Heger take his advice; board members who dictate demoralize line managers, he says. But they see the sense and Russ Berrie hires New York-based Shaw Pittman LLP.
08.01 Goodbye, Intentia. As demonstrations begin, Intentia is dropped. Its support for Web technology isn't deep enough for Russ Berrie.
To avoid well-oiled presentations that don't reveal enough, Heger supplies scripts to the vendors that outline which functions users and technology staff want to see, as well as practice data. He and Copeland create a scoring system. J.D. Edwards, Oracle and PeopleSoft will be rated on a scale of one to five on each of dozens of weighted features. For example, technology platform—such as which operating system the software uses or which database it requires—counts 20%. Strength of sales order processing and procurement count for more than 50%.
Each vendor comes for two to three all-day sessions, held two to three weeks apart. Business users put their work on hold or hand it off to colleagues to be able to attend. "You really had to focus," recalls administration head Bergin. "We shot out a lot of questions. Everybody left pretty exhausted."
09.01 Show Time. Software demonstrations continue; the technology is comparable in most areas. However, the styles of the vendor sales teams differ. "Oracle was very confident and aggressive in claiming very large savings in integration and implementation," Saunders recalls. "But their solution was more of a 'We can tell you how to run your business' deal." Saunders so dislikes one salesman, he has him pulled off the team. "You've got to do it. You don't want that one person to taint your objectivity," he explains.
PeopleSoft was "very willing to make concessions to guarantee our success because they're newer to this ERP marketplace," he recalls. "They were not as strong as their competitors in order processing and procurement. They knew they had ground to make up."
J.D. Edwards' technology "was solid," Saunders says. "They were more, 'We'll partner with you and let us learn together.'"
10.01 Three Comparable Bids. Shorter follow-up demos or conference calls occur for departments that requested them or for vendors wanting to try something again, to better their positions. Term sheet negotiations get serious. None of the vendors likes talking legal details before knowing whether it is the chosen one, but they do it anyway. One vendor, which Saunders won't name, initially comes in with a price that's "much, much higher" than the other two. Saunders tells the company he will drop it unless it comes down. In the end, the three vendors pitch prices within 10% to 15% of each other.
11.01 Finishing Touches—Or Just Finished. Russ Berrie's team outlines for each of the three vendors the points where they are weakest, offering a chance to change stance. Oracle is asked to provide more written guarantees of product quality, but it does not, Saunders says. "With Oracle, we had anticipated a different result than what we got. PeopleSoft was more of a friendly departure." (All of the losing bidders declined to comment.)
12.01 Decision Time. Russ Berrie chooses J.D. Edwards. The clincher is a November meeting where the lead J.D. Edwards representatives show they had been listening. "They regurgitated to us in about an hour all the concerns we had and how they would address them," Saunders says. "We said, 'This feels good.'"
Russ Berrie intends to buy several applications from J.D. Edwards' OneWorld suite, including finance, order processing, human resources, procurement and other modules. It plans to install them in five phases by June 2003, with help from the vendor and Kurt Salmon.
01.31.02 No Champagne—Just Fatigue. Eleven people—executives and lawyers from J.D. Edwards, Shaw Pittman and Russ Berrie—meet in Russ Berrie's boardroom at about noon to review the contract, end to end. As the hours wear on, five exhausted people go home. Heger stays until 7:30 p.m., then departs for his son's birthday party. At 9:00 p.m., Saunders signs the deal. He and a J.D. Edwards staffer work another 90 minutes on paperwork so the vendor can record the deal before the close of its quarter.