U.S. Steel is spending hundreds of millions of dollars installing powerful software intended to help it manage its business more efficiently, a project that began in 2007 and that chairman and CEO John P. Surma says won't be completed until 2016.
While the company has disclosed the price tag on some of its plant additions -- such as the $500 million it spent for a new coke battery at its Clairton plant -- it is not disclosing much about the software costs. Wall Street analysts know few details about the massive project, even though implementing it can cost as much as building a new production line.
Enterprise resource planning, or ERP, software is a must for many companies' never-ending quest for lower costs and greater productivity. It ties together separate software programs that run purchasing, logistics, finance, human resources and other functions into a single system. The software is intended to enable companies to boost efficiency and make quicker, more informed decisions.
However, a recent survey of 172 companies found that efficiency is elusive when it comes to installing the software: 53 percent of companies exceeded their budget, 61 percent said the project took longer than expected, and 60 percent received 50 percent or less of the benefits they expected.
The survey, conducted by Panorama Consulting Solutions, reflects the challenges companies face, said Eric Kimberling, managing partner of the Denver firm.
"You're dealing with changing the entire backbone of the organization," he said. "It's like doing open heart surgery on an athlete in the middle of the game, then putting him back into the game."
Mr. Surma mentioned the ERP project at the company's April 30 shareholder meeting and during a conference call with analysts the same day. Following the shareholder meeting, Mr. Surma told reporters the project will cost "multiple hundreds of millions," but declined to give a specific cost figure.
"We don't talk about total cost of the project because we don't know where we're going to finish," he said.
Company spokeswoman Courtney Boone declined to answer additional questions, including requests for specific information about the project's cost and benefits, whether it is over or under budget, and whether it is ahead of or behind schedule. She referred to Mr. Surma's public remarks and the company's Securities and Exchange Commission filings.
Implementing the software is occurring as U.S. Steel has yet to post a profitable year since 2008, when the financial crisis battered the cyclical industry. The company lost $124 million last year.
U.S. Steel documents indicate the company first named a general manager for the software project in February 2007.
The company stated in its 2008 annual report that it had extended the schedule for installing the software, disclosing that the project would be "implemented in several phases over the next several years." Annual reports for 2011 and 2012 used similar language.
In its SEC filings, U.S. Steel provides a cumulative figure for spending on all of its large projects, such as building new coke plants at Clairton and Gary, Ind., as well as the software initiative, but does not itemize the individual project costs.
Last month, U.S. Steel disclosed that its flat-roll steel unit spent $96 million during the first quarter on the software and other projects. The steelmaker said the software will "maximize cost effectiveness, efficiency and control across our global operations."
But the company cautioned that predictions about benefits from the project "are subject to uncertainties" and that "actual results could differ materially."
Mr. Kimberling, who is not familiar with U.S. Steel's project, said a standard industry rule of thumb is that the cost of installing such software is about 5.5 percent of a company's annual sales.
Based on U.S. Steel's sales, that would put the cost at about $1 billion. Ms. Boone declined to comment on the estimate.
The software is being provided by Oracle. It will replace separate software programs used to manage operations at plants that have been part of U.S. Steel for a long time, as well as companies it acquired in the last decade, including bankrupt National Steel, Canada's Stelco, Texas-based tubular producer Lone Star Steel, and the Slovak steelmaker acquired in 2003.
Spending hundreds of millions of dollars on such software is in line with what similar companies would pay, according to Michael Krigsman, a Brookline, Mass., consultant who has studied failed ERP projects. Mr. Krigsman, who is not familiar with U.S. Steel's project, said that despite unexpected costs and delays, the software is a necessity for most companies because of the potential benefits.
"That's the reason to do it ... to make the business better," he said. "Anytime you're making changes across multiple parts of the organization, it's complicated and its difficult, no matter what you're doing."
While most companies experience problems installing the software, some have had a harder time than others.
After Montclair State University signed an ERP software license with Oracle in 2009, the New Jersey school sued the software make two years later. Oracle countersued. Both cases were dismissed in March.
Lumber Liquidators said its sales and earnings dropped when the Toano, Va., lumber retailer implemented the first phase of the software in 2010.
That November, the company estimated that a drop in productivity related to the project caused it to lose $12 million to $14 million in third quarter sales. Problems included converting orders into invoiced sales and requiring more resources to run the business.
Productivity had returned to near-normal levels by the end of the year, the company disclosed in securities filings.
Mr. Krigsman said companies tend to be overly optimistic about their ability to manage the change, including convincing employees that it will not threaten their jobs. Companies try to encourage employees to go along by saying the software requires them to use their brains more. But it can also eliminate processes.
"The natural fear is that it's going to replace my job. That's typically not the intention of upper management," said Jeffrey Carr of Ultra Consultants, a Chicago firm that advises companies on ERP projects.
"It's just a very big job when you have multiple companies, multiple plants and thousands of employees," he said. "There's lots and lots of moving pieces."mobilehome - region - businessnews - interact
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