Harvard Business Review: Case Analysis - ERP Implementation at CISCO (699022-PDF-ENG) from Strategic Role of IT perspective

Presenting an analysis of the HBR case ERP Implementation at CISCO (699022-PDF-ENG) from Strategic Role of IT perspective. Link to the case http://hbr.org/product/cisco-systems-inc-implementing-erp/an/699022-PDF-ENG

Case Background: Reviews Cisco System's approach to implementing Oracle's Enterprise Resource Planning (ERP) software product. This case chronologically reviews the diverse, critical success factors and obstacles facing Cisco during its implementation. Cisco faced the need for information systems replacement based on its significant growth potential and its reliance on failing legacy systems. The discussion focuses on where management was particularly savvy in contrast to where it was the beneficiary of good fortune.

Introduction. 3

I.       Overview of the Business. 3

A.      Company Background. 3

B.      Market segment, Products & Channels. 3

C.      Business strategy. 4

D.      Financial Position. 4

II.      Porter’s Model of Five Competitive Forces: 5

III.         Role of IT and Strategic Grid. 6

IV.         Description and Brief Discussion of the Issue. 7

V.     ERP Implementation at Cisco. 8

A.      Strong impetus for change. 8

B.      Strong sponsorship & business involvement. 9

C.      ERP vendor selection. 9

D.      Lack of data encryption during transmission. 9

E.      Violation of PCI standards. 9

F.      Lack of regular audits. 10

G.     Lack of processing logs. 10

VI.         MOT Triangle. 10

VII.        Recommendations

Introduction

Cisco Systems Inc. is the world’s largest maker of computer networking gear. Cisco provides a broad line of products for transporting data, voice and video around the world, which transforms how people connect, communicate and collaborate. Since the networking industry is rapidly evolving, Cisco is focusing on delivering intelligent networks and technology and business architectures built on integrated products, services, and software platforms to its customers. This case analyzes the ERP rollout that took place on the brink of legacy system failures in Cisco in the years 1994-1995; the process and impact, and strategic recommendations.

       I.            Overview of the Business

A.     Company Background

CISCO was founded by two Stanford computer scientists in California in 1984 to capitalize on the expanding “internetworking” market and brought public in 1990. In 1997, Cisco featured in the list of Fortune 500 companies and ranked in the top five companies in Return on Revenues and Return on Assets[1]. In 1998, Cisco’s market capitalization passed the significant $100 billion mark. In 1999, Cisco had more than 75% internet traffic share.

B.     Market segment, Products & Channels

Cisco operates in the communications and information technology (IT) segment. At the time of the case, Routers were Cisco’s main product. Digitization had enabled the convergence of three independent proprietary networks – phone networks for voice, the local-area and wide-area networks for data, and the broadcast networks for video, in the form of the Internet. Following this trend, Cisco was accelerating to grow in the new IP-based networks market segment that did not exist earlier. Presently, Cisco designs, manufactures and sells Internet Protocol (“IP”) based networking and other products related to the communications and IT industry and provide services associated with these products and their use[2]. Cisco’s product portfolio is categorized into following categories – Switching, Routing, Service Provider Video (set-top boxes & cable modems), Collaboration (IP phones, call center & messaging products, WebEx), Security, Wireless, Data Center, Other Products (mainly Linksys home networking products) & Services (Technical Support).

C.      Business strategy

Cisco operates in both the Business-to-Business (B2B) and Business-to-Consumer (B2C) markets in the computer networking segment. In the B2C market, Cisco focuses on the “low cost” strategy selling products such as wireless routers, switches and surveillance cameras. Market, Cisco focuses on the “differentiation” strategy with innovative products and business solutions for collaboration such as Webex, Telepresence and SocialMiner. In terms of Porter’s potential business strategy types for achieving competitive advantage, Cisco lies between differentiation and low cost leadership quadrants at the bottom since it operates in a niche segment of networking. This business strategy heavily depends on research and development to ensure product's uniqueness, reliability, quality and customer satisfaction.

D.     Financial Position

Reviewing the financial statements of Cisco for the year ending January 1995, Cisco had a strong financial position with net sales of $1.9 billion and net income of $421 million[3]. Cisco was the leader in its market and had acquired four companies namely LightStream(R) Corporation, Combinet Inc., Internet Junction, Inc. and Grand Junction Networks, Inc. and further expanded its portfolio of products and services. Cisco’s net sales grew 59.2% from $1,243.0 million in 1994 to $1,978.9 million in 1995.

    II.            Porter’s Model of Five Competitive Forces:

1.      Existing Competitors

As the case mentioned, the internet and its open standards were creating a new competitive battleground for the entrenched telecommunications players such as AT&T, Verizon, British Telecom and Deutsche Telecom. Lucent Technologies was also another competitor that was transitioning towards digitization. Juniper Networks also competed with Cisco directly by providing next-generation Internet backbone routers specifically designed for service providers. There was a high rivalry among existing firms to obtain market share for different products such as routers, switches as well as network services, but neither had all the products they needed to ensure a big win. Cisco was also facing competition from over 5000 Internet Service Providers (ISPs) including UUNet, PSINet and GTE/BBN to provide fax, messaging and EDI capability at a much lesser price compared to CISCO.

2.      Threat of Substitute Products

Cisco has a brand value and it’s known for its reliable and high-quality products. Cisco’s investment in R&D provides it a competitive edge over its competitors with innovative products. Also Cisco offers a suite of networking products and services combined together that is not offered by any other single company. Customers would have to go to multiple vendors for different products, so there is a low threat of substitute products.

3.      Bargaining Power of Buyers

Since Cisco has a diverse set of products and services, large customer base and is not dependent on a single bulk buyer for its business, the bargaining power of buyers is low. As mentioned in the case, Cisco has more than 600,000 registered customers.

4.      Bargaining Power of Suppliers

Cisco does not rely on a single source of suppliers, but sources its products various contract manufacturers and only performs design, final assembly and test. Hence the bargaining power of suppliers is low.

5.      Threat of new entrants

The high growth rate of the three independent proprietary networks: phone networks for voice, local-area and wide-area networks for data and broadcast networks for video may seem to attract new entrants, however in order to successfully operate in the network industry, a company requires a huge capital investment for research and development and expert domain knowledge to design innovative networking products, or a company would need to acquire another company that is developing innovative networking products. The new entrant company would need to differentiate itself and provide complete business solutions. All these requirements serve as significant barriers to entry for new entrants. However, for big telecom companies such as AT&T and Verizon that have an established brand can easily diversify their product base through acquisitions and enter into the networking market. Hence there is a moderate threat of new entrants.  

 III.            Role of IT and Strategic Grid

IT plays an important role as an enabler of business through e-commerce, supply chain management, customer relationship management and employee self-service applications  in Cisco’s business strategy of providing innovative business solutions, achieving operational effectiveness, maintaining low cost and staying competitive. IT systems and networks enable rapid transmission of data between contract manufacturers, customers, employees, and business partners such as acquired companies. The legacy IT systems at Cisco would fall in the “Factory” quadrant of the strategic grid as it included applications that are critical to sustaining existing business for daily operations. When the legacy applications failed, Cisco was virtually shut down for two days.

Cisco’s ERP application was implemented as a turn-around system that would bring about major process and service transformations. The ERP solution would replace the legacy system with a “big-bang” instead of a phased implementation approach. At $15 million, the ERP project constituted the single largest capital project ever approved by Cisco. After the ERP implementation, Cisco was able to reorganize R&D and marketing from multiple business units to three lines of business in fewer than 60 days for a cost less than $1 million. ERP application provided significant cost reductions, flexibility and scalability through standardization. ERP project laid the foundation for incorporating the internet applications such as E-commerce, employee self-service, executive information systems and decision support systems which closed a significant cost, service and process performance gap with competitors. Since the ERP system did not have a high impact on the core operations, but had a high impact on Cisco’s core strategy, IT would be in the “Turn-around” quadrant on the Strategic Grid[4].

  IV.            Description and Brief Discussion of the Issue

Cisco’s legacy IT department was too traditional and internally oriented and being viewed as a cost center. The potential contribution of IT to business was also much smaller than it could be. The legacy systems were traditional financial, manufacturing and order-entry systems, which could not scale to support Cisco’s growth, nor were they flexible or robust enough to meet management requirements. Years of customization to the legacy system had resulted in a complex platform, that was familiar and comfortable for its users, but was out of date and in danger of imminent failure.[5] In January 2004, Cisco’s legacy environment failed. An unauthorized method for accessing core application database was used as a workaround, which malfunctioned and corrupted Cisco’s central database. As a result, the company was virtually shut down for two days. Cisco was the biggest customer of their legacy software vendor and the vendor was being bought by another company. It was unclear who was going to support the legacy systems. This created a sense of urgency to replace the legacy system. If each department at Cisco such as manufacturing, marketing and finance implemented its own software it would take longer time to do the separate projects. Hence, implementing a single integrated replacement of the legacy system such as an ERP application was crucial and time-sensitive.

     V.            ERP Implementation at Cisco

Cisco successfully implemented Oracle’s ERP application on time. The key steps in the ERP implementation process and benefits are highlighted below:

A.     Strong impetus for change

With the serious failures and limitations of the legacy system, there was a strong impetus for replacing the legacy system with the ERP product. Even though the ERP implementation would have a high cost to the company, management was able to see value in implementing the ERP product and was not looking at cost avoidance.

When I was working at Chemistdirect.co.uk the management wanted to implement an ERP package, however the high costs of the off-the-shelf ERP packages such as SAP and Oracle proved to be a major deterrent and the company decided to develop an in-house ERP package with a team of 6 .Net developers. The scope of the project grew too large and with the budget limitations, the project had to be abandoned after 6 months. It is important for the business to see strategic value in the ERP implementation and not just view it as a good-to-have feature of IT.

B.     Strong sponsorship & business involvement

As the case suggests, the ERP project had strong sponsors in Peter Solvik, CIO and Carl Redfield, SVP of manufacturing who wanted to make the ERP implementation a priority for a company instead of a second-tier effort. The sponsor’s level of commitment and support can have the greatest impact on the delivery of an ERP system[6]. Cisco’s management team also realized that the ERP implementation could not be an IT-only initiative and would require heavy involvement from the business community, and assigned critically important people from business to the ERP implementation project. CEO Morgridge made the ERP project a priority for the business and one of the company’s top seven goals for the year.

C.      ERP vendor selection

Cisco leveraged KPMG’s experience in conducting a detailed vendor package evaluation and proof of concept, and identifying the best ERP software packages to meet Cisco’s business needs. With thorough evaluation criteria defined up front, the project team was able to objectively evaluate and score five vendors of relevant application packages[7]. The choices were narrowed down to two vendors, and Oracle was selected after a three-day software demonstration. Having Oracle as the ERP vendor was a good strategic decision by Cisco as it gave Cisco a strong partner in the ERP project, since Oracle was equally motivated to make the project a success as it would be the first major implementation for the new release of the Oracle ERP product.

D.     ERP project management

Cisco’s IT team did due diligence in proposing the cost and timeline for the ERP project and took a pragmatic approach to estimating project requirements. ERP projects can quickly scale up to become overdue and over-budget if the project scope is not correctly outlined and if the requirements are not accurately defined. The decision to completely replace the legacy system instead of a phased implementation was also a good decision as it would create less confusion for the IT team for having to support the legacy system and they could focus on the ERP implementation. The fact that the ERP project was completed on time and within budget suggests that the project team did a good job of preparing initial estimates and project management was able to avoid scope creeps and keep the project on track.

E.      Internet applications and benefits

The success of the ERP implementation provided the groundwork for the next phase of Cisco IT architecture – web-enablement and incorporating internet and intranet applications. Cisco developed several intranet and internet applications such as Employee self-service, supply chain management, customer self-service, e-commerce, communication and distance learning, EIS and DSS. Through its internal applications for employees, people deployed around the world were able to interact and address business issues and customer needs. Customers were able to place orders globally through the first-of-its-kind e-commerce application which formed 92% of Cisco’s revenue base by 2001. Cisco realized productivity gains of 60% through e-commerce. Customer’s were also able to obtain online technical support through the self-service application which improved customer satisfaction. From my experience working in the e-commerce industry, being responsive to customers greatly improves customer satisfaction. It is not so much a problem with the orders or late delivery, but a lack of response that affects a returning customer.

Cisco was also able to maintain an efficient supply chain between itself and its suppliers by creating a “single enterprise” of networked applications to integrate suppliers into its production systems. Cisco automated and standardized the product test routines and deployed these at the suppliers, allowing quality issues to be detected at source. Cisco also implemented “direct fulfillment” where suppliers were directly able to ship orders to the customers, instead of shipping it to Cisco. I think it was good move by Cisco to automate and outsource the testing, however it will need to be careful that the suppliers are not able to reverse engineer the autotest routines, otherwise Cisco can face the risk of its outsourced manufacturers becoming independent retailers and competitors for Cisco.

The web-based EIS and DSS systems provided a convenient access for sales managers and executives worldwide. While working with Philips marketing team, I was part of the IT team that created a dashboard for the Philips global marketing executives, that enabled them to view the sales for any Philips product or category in any region in the world for any time period, which would help them in creating targeted marketing campaigns. In such applications, it is important to restrict access based on authority. Cisco will also need to take measures to secure the web pages and restrict access to eligible employees.

The IP based architecture also enabled Cisco to quickly and effectively integrate the acquired company through a documented and repeatable process for integration. Cisco was able to eliminate the non-standard technology within the acquired company and fully integrate it into Cisco’s infrastructure and core applications within 60 to 100 days.

  VI.            MOT Triangle

Cisco’s business strategy (mission) is to be a global, off-price value company by building their businesses gradually and providing a secure foundation and strong infrastructure[8]. In terms of information strategy, TJX had the necessary IT systems in place to enable the business through networks that enable vendor relationship management and CRM systems that helped target profitable customers. TJX also effectively implemented barcode scanners and kiosks to speed up business operations. However, its organizational strategy is not in-line with its business strategy of providing a secure foundation. There is a clear lack of ownership and authority in terms of IT network and systems security. There are no business processes defined for monitoring and regular internal audits. There are no incentives or rewards for identifying or reporting security issues internally. The company’s culture is working towards growing their business through focus on low-cost but not necessarily a secure infrastructure. Hence, the MOT triangle depicted below is uneven.

VII.            Recommendations

To align the organizational strategy with the business strategy and information strategy, the management at TJX will need to seriously focus on establishing an IT governance, risk mitigation and management strategy. The action plan for the immediate future must be to contain the security breach and implement steps to fix the vulnerabilities. First and foremost, TJX must upgrade its network security protocol to WPA at all of its store locations. TJX must also secure its physical assets to ensure that they cannot be tampered. They must be located near security cameras or store registers to ensure constant vigilance. TJX should implement firewalls to control access of kiosks to the system. TJX should look at implementing a three-tier architecture where the database layer is completely separated from the application layer to which the kiosks have access. TJX should also use a strong encryption algorithm such as MD5 (Message Digest 5) or AES (Advanced Encryption Standard) to store and transmit any information. It should also not store any customer data that is not required or against PCI standards. TJX must ensure that process and access logs are maintained at each and every system.

At an organizational level, TJX should create formal procedures for risk management and use a RACI (Responsible, Accountable, Consulted and Informed) matrix to assign key responsibilities such as network security scans and upgrades, internal PCI audits, firewall scans and ensure that these activities are carried out as planned. TJX should also look at having independent IT security audits on a quarterly basis. An effective risk management process will provide reduced cost of operations, predictability, transparency and confidence, avoidance of security breaches, and enhanced capabilities[9]. There should be training conducted throughout the organization to increase awareness about the importance of basic IT security measures such as not sharing passwords or leaving computer systems unlocked, to prevent internal security breaches. Management should promote employee rewards for exposing IT systems or network vulnerabilities. At Accenture where I worked, each project team has a “security monitor” who is in charge of reporting non-compliance to policies such as internal password exchanges or leaving work computers or laptops unlocked. TJX management must drive the organizational strategy for a secured IT framework to meet its strategic goals.

---

[1] Nolan, R. L., Porter, K., & Akers, C. (2001, March 24). Cisco Systems Architecture: ERP and Web-enabled IT. HBS Premier Case Collection, (301099), 1. Retrieved from http://hbr.org/product/cisco-systems-architecture-erp-and-web-enabled-it/an/301099-PDF-ENG

[2] Cisco Systems Inc. (2012, July 28). Cisco Systems, Inc 2012 Annual Report. Cisco Systems, Inc Annual Reports. Retrieved March 11, 2013, from http://www.cisco.com/assets/cdc_content_elements/docs/annualreports/ar2012.pdf

[3] Cisco Systems (1995, October 26). Cisco Systems - Annual Report 1995. Retrieved from http://investor.cisco.com/secfiling.cfm?filingID=950149-95-673

[4] Browne, J. (2009, January 25). Planning the Plan: McFarlan Matrix in action. Retrieved from http://www.julianbrowne.com/article/viewer/planning-the-plan

[5] Cisco IT (n.d.). Business Applications Case Study: How Cisco IT Migrated to an ERP Technical Support Module - Cisco on Cisco - Cisco Systems. Retrieved from http://www.cisco.com/web/about/ciscoitatwork/business_of_it/ERP_technical_support_web.html

[6] Guest Contributor (2006, September 19). 10 things you should know about implementing an ERP system | TechRepublic. Retrieved from http://www.techrepublic.com/article/10-things-you-should-know-about-implementing-an-erp-system/6117288

[7] Cisco IT (n.d.). Business Applications Case Study: How Cisco IT Migrated to an ERP Technical Support Module - Cisco on Cisco - Cisco Systems. Retrieved from http://www.cisco.com/web/about/ciscoitatwork/business_of_it/ERP_technical_support_web.html

[8] Our Businesses. (n.d.). Welcome to The TJX Companies, Inc. Retrieved February 2, 2013, from http://www.tjx.com/businesses.asp

[9] Building confidence in IT Programs. (2011, September). Ernst & Young - Global. Retrieved February 4, 2013, from http://www.ey.com/Publication/vwLUAssets/Building_confidence_in_IT_programmes_through_programme_risk_management/$FILE/Insights_IT_Building_confidence_in_IT_programs.pdf