SAP Project Halted After Shareholder Pressure

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The weak economy has companies of all sizes and types moving to cut costs, and for U.S. bedding manufacturer Select Comfort, those choices have included a decision to halt all work associated with a wide-ranging SAP ERP (enterprise resource planning) project. And documents on file with a government regulator indicate that shareholder pressure may have contributed to the move.

Select Comfort, maker of the "Sleep Number" bed, will also cut 22 percent of its workforce, or about 120 jobs, and combined with other actions under consideration, the moves will save the Minneapolis, Minnesota, company about US$15 million each year, according to a statement.

A company spokeswoman declined to comment further on Wednesday.

Documents on file with the U.S. Securities & Exchange Commission show that Select Comfort planned to implement an integrated suite of SAP applications, including modules for ERP, CRM (customer relationship management), SCM (supply chain management) and many others. The company initially expected the project would be complete during the first half of its fiscal 2008.

"We believe this SAP-based IT architecture ... will provide greater flexibility and functionality for our growing and evolving business model and be less expensive to maintain over the long-term," one filing states in part.

But other SEC filings show that Select Comfort officials had for months been under pressure by a shareholder, the Clinton Group, to spike the project.

In letters to Select Comfort's board, the Clinton Group characterizes the ERP implementation as significantly over budget and behind schedule, and the company's leadership as reckless.

"We believe that spending on the SAP system installation should be deferred until an expeditious detailed review of information technology needs is undertaken and completed by an independent consultant, particularly in light of the departure of the Company's Chief Information Officer," states a letter dated March 6.

The Clinton Group also said Select Comfort spent $12 million on the implementation in 2007 and "anticipates spending another $8 million in 2008, assuming no additional costs. ... It is difficult for us to envision, given the size of the Company, that the Company could ever achieve cost savings to justify such a large expense."

"Select Comfort's plan to continue with the implementation using internal resources that have at best limited experience implementing a new enterprise software system is indicative of extremely poor judgment by management," states a letter sent by the Clinton Group in June. "Select Comfort's management has never articulated why it needs to spend tens of millions of dollars on implementing an enterprise software system, and given Select Comfort's financial performance the implementation should cease immediately."

While Select Comfort's statement did not rule out the possibility it would revive the implementation, unfinished ERP projects are "more common than you might think and more common than [they] should be," said Frank Scavo, managing partner of Strativa, an IT consulting firm in Irvine, California.

"Ceasing an implementation midstream is certainly not a pleasant decision, because assuming that at some point, this organization is going to restart the implementation, they're going to have additional costs," Scavo said.

For example, a company might have to retrain workers on processes they're already been taught, and any implementation partners being used may not be available. "But sometimes financial realities are what they are, and companies need to make a decision," he said.

Another industry observer said Wednesday that overall, the economy is undoubtedly having some chilling effect on ERP projects.

"A number of our companies are in the process of conserving cash," Forrester Research analyst Ray Wang said via e-mail Wednesday. "For some, this means the delay on implementing certain modules, reducing costs in maintenance, and also renegotiating implementation contracts."

Customers do have ways to hedge their bets during the planning stages of a project, Wang said. "If you design your contract in phases, you have the opportunity to put in clauses around phase completion and kick-off. This is more a system integrator issue than a software vendor issue.

"We typically tell customers it's best to budget for a project in good and bad times in order to achieve the best ROI," Wang added. "Delays do impact the ROI. However, when cash is king, you have to protect cash flow, and that will win out."

One thing financially strapped software customers don't tend to have is the opportunity to return the product and get their money back, according to Scavo.

"The only time I've seen that is if there's a non-performance issue or breach of contract on the part of the vendor," he said. "The customer would not be entitled to get money back just because they can't afford the system anymore."

Moreover, licensing costs don't even represent the bulk of software costs; implementation and support fees rack up a bigger percentage, Scavo noted. "There's probably more money sitting ahead of [Select Comfort] than there is behind them."

It is not SAP's place to comment on the financial well-being of a particular customer, but Select Comfort's decision appears to be an anomaly, according to SAP spokeswoman Natalie Fine.

"We fully recognize these are truly critical times for our customers ... [but] what we're seeing is this is not a trend. SAP projects are continuing to go forward," she said. "Our experience is that even in this macro environment, companies are standing firm."

Like other vendors, SAP has announced ways it is trying to help customers weather economic difficulties, such as zero-percent financing offers.

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