Without a Net

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March issue preview: In another blow for Arthur Andersen, the consultant agrees to shell out $11 million to collectibles-maker Department 56 over a failed information technology engagement. What went wrong?

Working without a Net

One crucial mistake? Department 56 had no backup plan. And while the new ERP system was being installed, Department 56 made changes to its business processes—adopting new pricing and sales commission policies, adding new products in 1999, and re-coding all inventory. Yet it only recorded these changes within the new ERP system, so there was no old system with the updated data installed to fall back on.

While the company blames Andersen for not preparing it for the worst and requiring a contingency plan, AMR's Bittner says Department 56 may have only itself to blame. "It's not Arthur that's holding a gun to their head," Bittner says. "If the project is delayed six weeks, Arthur doesn't care." Changing business processes while implementing an ERP system, he adds, is "like putting another bullet in the chamber."

When Department 56's system failed to work, the company says it suffered an almost complete breakdown of its business. The order-taking system failed to function, and continued to crash even when repaired. Orders, when taken, were often lost.

By February 1999, the warehouse system still couldn't track inventory, causing Department 56 to ship unordered merchandise, to fill and ship the same orders multiple times or to fail to ship orders completely.

Hundreds of shop owners were fuming over incorrect shipments and bills. The company's sales were hit hard by the problems, too, decreasing a huge 31% in the first quarter of 1999, when the system was turned on. But by one measure—sales growth—Department 56 has actually outperformed others in its declining industry in eight of the ensuing 11 quarters (chart, facing page). So did it ever really have a claim to have been hurt long term by the botched ERP implementation?

Its willingness to settle for such a small fraction of the original $6 billion suit may be evidence that Department 56 feels it is over the damage.

"It's not a great deal," gripes Steve Yacktman, a portfolio manager who owned more than a million shares of Department 56 stock as of September. "I think Andersen pretty much wrecked their business."

But a former lawyer for Department 56 says the company, which has also been hurt by an overall decline in the size of the collectibles market, was smart to take the money and run. "That's not bad ($11 million) when you think about the shot you take with a jury," the attorney, Sheldon Jacobs, says.

As part of the settlement, Andersen agreed to drop its non-payment suit.

Financial compensation aside, the question now is how the memory of the lawsuit—and of the fiasco that precipitated it—will shade CIO Sussman's future IT decisions.

This article was originally published on 2002-03-06
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