Agilent At A LossBy Larry Barrett | Posted 2003-01-17 Print
Agilent blew $70 million on a software project. Was that a cause of its financial problems? Or an excuse?
Agilent At A Loss
The goal was to take the more than 2,200 internally developed and highly customized applications running on Unix and Windows NT operating systemsinherited when it was spun off from Hewlett-Packardand whittle them down to roughly 20 applications that could be transferred to Oracle's Enterprise Resource Planning (ERP) system.
Agilent's "phased approach" to this migration meant that sites in Malaysia, Singapore and the U.S. that provide silicon wafers, molding compounds, resin and other "direct" materialsas well as plants in Canada, Australia, Hong Kong, Malaysia and the U.S. that provide indirect materials such as chemicals and consumableswent live under the system in June. Deployment of the system to final manufacturing plants around the globe would be completed within 18 months.
During this switchover, Agilent says roughly 6,000 orders in the internally developed systems had to be converted to the Oracle format. Because of complications during the configuration process (which officials at the former Hewlett-Packard division refused to comment on), about one week's worth of normal production was lost. This, Agilent says, resulted in the sales and earnings shortfall for the third quarter.
"The disruptions associated with that new system have been more extensive than we expected," Barnholt said in a statement about Agilent's third-quarter earnings. "The good news is that, at this point, we believe the [planning system] implementation is stable, and we are confident we can meet anticipated customer requirements."
Enterprise software experts and Wall Street analysts expressed skepticism about both the explanation for the integration snafu as well as the material impact these problems may or may not have had on Agilent's financial performance.
"It's not just the complexity of the project," Agilent spokeswoman Karen Lewis says. "It's also the history here at Agilent and HP. Each of our business units developed its own applications over many, many years. We're talking about thousands and thousands of applications."
Industry and Wall Street analysts say the way Agilent ambushed analysts with the sales shortfall and "technology-related" explanation reminded them of similar claims made by other companies in years past.
In July 2001, Nike cited i2 Technologies' supply-chain software as the primary reason it missed analysts' estimates in the third quarter of that year. Hershey Foods claimed that complications from its implementation of SAP's enterprise software shortly before Halloween in 1999 cost the company around $150 million in sales.
"You're always skeptical about this kind of thing," says a veteran Agilent analyst at a large brokerage firm in San Francisco, who spoke on the condition of anonymity. "Every company wants to find an excuse for poor performance and the best way to do that is to find someone or something else to blame. Blaming a software installation is one of the best scapegoats because it's short-term and self-correcting. But those sales and orders that were supposedly lost during this technology change don't just disappear into the ether."
However, Agilent did manage to exceed its own sales estimates by roughly $140 million in the fourth quarter. Was this a product of improved sales conditions? Or were those "improved" sales mainly the result of orders that actually were booked in the third quarter but not closed because of the software glitch?
Gerald Fleming, who tracks Agilent for Fahnestock & Co., says he's willing to give Agilent the benefit of the doubt because he's seen and heard so many other stories of ordering and inventory mishaps that seem to always accompany large-scale software implementations. In its third quarter, printer maker Lexmark, for instance, took a $15.8 million charge for abandoning a project that involved Oracle software for tracking sales and customer accounts.
In the Agilent case, "I guess we have to take it on face [value] that this was a period of transition and a major negative that's unlikely to be repeated," Fleming says. "But I can tell you that no one expected them to lose a week's worth of sales because of this."
It's the lost production and the sales shortfall that industry analysts find most curious.
"Here's the thing I don't understand," says Gartner's Zrimsek. "Let's say Agilent experienced a disruption to its IT architecture today, maybe a terrorist incident that blew up their data center. Would that prevent them from taking orders? No, because they'd have a disaster recovery plan. And if they didn't have a disaster recovery plan, there are bigger I.T. issues at work here than trying to resolve an ERP implementation they had almost two years to prepare for."
Agilent CIO Marty Chuck declined to comment.
"Marty is the guy who would know the most about this but for now all we can say about the project is what we've said previously in public and in our releases," Agilent's Lewis says. "All I can say is, everything is running smoothly now. It was a very complicated project to take all these legacy systems that have been around for years and configure them for this new software. It's kind of like a crazy quilt."
Oracle, which served as the lead integrator for the project, is keeping largely mum, as well.
"We generally don't find it to be a good idea to comment on specific customer implementations as there's the chance that what we say won't match what they're saying," Oracle spokesman Sean Mills said in a statement to Baseline. "We really don't want to point fingers at our customers."
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