ASSIGNMENT: ERP

IMPLEMENTATION AT
CISCO
GROUP 12
PRIYANKA GUPTA(M20202HRM043)
PULKIT CHANDRA(M2020HRM044)
TABLE OF CONTENTS

INTRODUCTION TO ERP AND CISCO .............................................................................. 2-4

IMPLEMENTATION OF ERP AT CISCO ........................................................................... 5-8

ANNUAL REPORT AND BALANCE SHEET ANALYSIS……………………………....9-11

FINAL ANALYSIS…………………………………………………………………………12-19

REFERENCES………………………………………………………………………………….20

1
ENTERPRISE RESOURCE PLANNING (ERP)

“An enterprise process is a companywide process that cuts across functional areas, business
units, geographic regions, product lines, suppliers, and customers.”

ERP is a comprehensive database that is a collection of data from different business units and
functions, collated into a single central unit. By providing access to an entire organization’s
information through a common platform, ERP systems make managing production across
locations, global and local, easier with real-time analysis.

Figure 1 ERP System Structure (Source: Davenport, T.H. Harvard Business Review, 1998)

ERP systems provide a central platform for the various functions within a firm. As can be seen
in the diagram above1, a typical sales demand from a customer based in a hypothetical location A
can be managed by the Operations team at the factory located in hypothetical location X. Even
the forecasts for demands from location A can be updated on the ERP system, which can be
further fulfilled by either location X or location Y based on the cost- or time-efficiency. Even the
targets of the Sales representative can be managed through the ERP system and the

1
Davenport, T.H., 1998. Putting the enterprise into the enterprise system. Harvard business review, 76(4).
2
consecutive incentives and commissions paid out to him by the Human Resources team be
managed through the ERP system.

ERP systems are also known to streamline the firm’s data flows and help management
mitigate operational losses by offering real-time supervision of resources and inventories.
The example2 of Amazon.com can be cited. Their adoption of an ERP system into the supply
chain application has allowed them to streamline customer orders through to the warehouse
shipments and other supplier order related demands.

The main reason enterprise systems fail is the organizational(business) changes involved. The
organization often needs to modify to fit the system. Organizations neglect to accommodate the
technological goals of the Enterprise Resource Planning systems (ERP) with the business needs.
There are enormous technical challenges of implementing ERP as these are complex modules of
software and installing the enterprise systems requires large investments of time, money, and
expertise.

Another problem posed by enterprise systems is that by its very nature it imposes its own logic
on a company’s strategy, organization, and culture. It pushes a company towards full integration
as an enterprise system is, after all, a generic solution, even when a certain extent of business-
unit segregation or customized processes (which can be the source of its competitive advantage)
may be best suited to it. So, it is imperative for a company to have a clear understanding of the
business implications for the successful integration of ERP. Vendors try and structure the
enterprise systems to reflect best practices, but it is their definition of what “best” means. Some
degree of ERP customization is possible as the systems are modular which allows the companies
to install only those modules that are most beneficial for their company. But the system’s
complexity makes any major modification unfeasible and thus as a result, most companies will
need to adapt or even rework their processes to implement the enterprise system.

A recent study showed that organizations receive the maximum benefits when they work with a
few software vendors, use standardized systems as opposed to modifying them widely, and keep

2
Krajewski, L.J., Ritzman, L.P. and Malhotra, M.K., 2010. Operations management: Processes and supply chains.
Upper Saddle River, New Jersey: Pearson.
3
their ERP implementations simplistic. If these factors are not taken into consideration, it may
lead to firms spending exorbitant amounts of money on implementation of ERP systems that
would be complex to use and costly to manage.

CISCO

Cisco Systems, Inc.

Founded 1984

Founders Sandy Lerner and Leonard Bosack

Current CEO Chuck Robbins

Public Listing NASDAQ, 1990

Industry Networking Hardware & Software

Headquarters San Jose, California, United States of

America

Total Revenue (2020) $12.15 billion

Cisco was started by Sandy Lerner and Leonard Bosack, fellow scientists at Stanford, as a
technological solution to problems in sending emails across different domains on the campus. In
1984, Cisco started as a company based on building the multi-protocol router.

By 1988, Cisco had grown and they hired John Morgridge as the company CEO and soon, in 1990,
Cisco went public. By 1990, Lerner had been fired and Bosack left soon afterwards, giving the
opportunity to Morgridge to centralize the core management functions.
Peter Solick, the Chief Information Officer (CIO) arrived in 1993 and soon realised that the UNIX
based software package was not enough to support CEO Morgridge’s plan of growing to a $5
billion-plus company. There was an initial reluctance on the part of Pete Solvik to avoid breaking
away from the legacy system to shift to an ERP solution based on operational and budgetary
constraints. The new system could cost considerable money and come with operational difficulties
during the implementation phase, and as such this supposedly “mega-project” was rejected.

4
However, a malfunction in Cisco’s legacy system shutdown operations for 2 days, which fortified
Solvik’s decision to invest in an ERP system. Through consultation with KPMG, Cisco ended
up selecting Oracle as their ERP system provider. Finally, after the bureaucratic hurdles and the
operational challenges the Oracle as the provider of the ERP system was approved on June 2, 1994.

Randy Pond, who later became a co-leader on the ERP project, said that the most compelling factor
in the Board accepting the ERP solution was due to a legacy system failure on the day of the
meeting. To quote him, “The day of the meeting, [the legacy system] went down. We were able to
walk into the board meeting and say ‘It’s down again.’ It was really a compelling story.”3

Implementation of ERP
Holland and Light (1999)4 mention three major strategies5 for implementing ERP solutions in
any organization:
(1)” the skeleton approach”, a few functionalities with the basics of the ERP is implemented
initially and the customizations are rolled out in later versions
(2) “the single module approach”, the ERP system is divided into multiple modules which are
then implemented chronologically and
(3) “the big bang approach”, where the entire ERP system is implemented in one go across the
organization.

The consultation with KPMG led Cisco to adapt “the big bang approach”. Cisco used a
development technique known as “rapid iterative prototyping”, using which they broke down
the implementation into phases referred to as “Conference Room Pilots (CRP)”. The purpose of
the ERP was to navigate through each phase of the implementation process with a certain level of
technical knowledge and mitigate the issues simultaneously for each phase.

CRP0

3
Austin, R.D., Nolan, R.L. and Cotteleer, M.J., 2002. Cisco Systems, Inc: implementing ERP. Boston: Harvard
Business School
4
Holland, C.R. and Light, B., 1999. A critical success factors model for ERP implementation. IEEE software, 16(3),
pp.30-36.
5
Doom, C., Milis, K., Poelmans, S. and Bloemen, E., 2010. Critical success factors for ERP implementations in
Belgian SMEs. Journal of Enterprise Information Management.
5
This step involved the training of the implementation team and a “tiger team” which was
involved with setting up of all applications. Though Cisco had been trying to avoid modifications
to the ERP system, they realized during the CRP0 phase that they would require significant
changes to suit the business requirement of Cisco.

CRP1
Following the CRP0 step, the implementation team grouped to document the various procedures
and steps, in a detailed script, to implement the system within their specific areas. This step also
involved comprehensive documentation of all issues tracked during the process, which was later
addressed in the weekly Project Management meeting.

CRP2 and CRP3

As CRP1 turned into CRP2, project scope had expanded and numerous changes had to take place
like a new after-sales support package, a new approach wherein all data communication would
take place via a “data warehouse”. The team at Cisco worked with Oracle consultants to identify
and make simple technical changes but avoided changing the core code.
The final goal of CRP2 was to test how well both hardware and software would stand up to
the processing load and transaction volumes requirement to run Cisco’s growing business.
on testing the full system and assessing CISCO's preparedness to “go live.”

6
Figure 2 Timeline of Implementation (Source: Cisco ERP Steering Committee Report, October 20, 1994)

7
Figure 3 Cisco ERP implementation Team Structure (Source: Cisco ERP Steering Committee Report, October 20, 1994)

8
ANNUAL REPORT AND BALANCE SHEET ANALYSIS
Pete Solick had realized in his first year as the CIO, that the previous UNIX-based legacy system
needed to be replaced. However, he was worried about multiple constraints, budgetary constraints
being one of the priorities. With CEO John Morgridge looking at a strategy based on making Cisco
a $5 billion organization, they needed to revamp their internal system to match the output strategy
and streamline their various functions into one ERP system.

1991-1993

Figure 4 Statement of Operations (Source: CISCO Annual Report 1991)

(all figures in thousands)

From the table, it can be seen that from 1988, when Vice Chairman Don Valentine hired John
Morgbridge as the CEO, Cisco was on a growth route. The revenue for the year 1991 stood at
$183.18 million, with a colossal growth figure of about 3000% between 1988 and 1991.

9
Figure 5 Financial Data (Source: Cisco Annual Report 1995)

1994-1997
Net sales grew from $649.0 million in 1993 to $1,243.0 million in 1994. The 91.5% increase in
net sales during the year was primarily a result of increasing unit sales of new Cisco products. The
ERP implementation project kicked off in Q2 of 1994.

The revenue figure for 1995 was $1,978.91 million6, reporting a growth percentage of around 60%.
This is a significant drop in the growth rate as compared to the previous year, which we assume is
due to the operational changes and difficulties attributed to the implementation of ERP system.
“General and administrative expenses rose $29 million from 1994 to 1995… The increase in these
expenses reflects increased persovet costs, application of the Company's new information system,
and the amortization of goodwill since the date of the acquisition of the assets and assumption of
the liabilities of Light Stream"7

6
According to the annual report for the year 1995, the reported Net Sales was reported as $1,978 million but in other
comparison to the revenue $2,232.65 million reported as comparison figures in annual reports for the years 1996 and
1997.
7
Annual Report 1995
10
Figure 6 Statement of Operations (Source:1998 Annual Report and 1998 10-K Form)

For the year 1996, the revenue was reported at $4,096 million, citing a growth of 83.5% from
1995. The annual report attributes this to new mergers and increased sales.
And for the year 1997 the revenue of $6,440 million. This resulted in a 57.2% growth from the
year 1996.

11
FINAL ANALYSIS

NET REVENUE/SALES

Year Net Revenue (SALES) (in $ thousands)

1991 1,83,184
1992 3,39,623
1993 6,49,035
1994 12,42,975
1995 22,32,652
1996 40,96,007
1997 64,40,171
Table 1 Net Sales (Revenue) by Years

NET REVENUE (SALES)

6,440,171

4,096,007

2,232,652

1,242,975
649,035
183,184 339,623
YEAR

Figure 7 Graph: Sales by Year

We computed the net revenue figures for all the years starting from 1991 to 1997 and tabulated
them (as shown in table 1). On plotting the figures on a line graph, there were no discernible
factors that stood out:
1. The revenue is consistent with no sudden or unexpected change reported in any year. The
graph represents an upward parabola, consistent with increasing revenue of a relatively
stable and growing organization.

12
 2. For the year 1995 (when the ERP system went ‘live’) and afterwards, there are no standout
factors that can be attributed to the ERP implementation

GROWTH RATE

YEAR GROWTH RATE

1993 91.1%

1994 91.5%

1995 79.6%

1996 83.5%

1997 57.2%
Table 2 Growth Rate of Revenue

GROWTH RATE (Comparison of Net Sales CY to PY)

100.0%
90.0%
80.0%
91.1% 91.5%
70.0% 79.6% 83.5%
60.0%
50.0%
57.2%
40.0%
30.0%
20.0%
10.0%
0.0%
1993 1994 1995 1996 1997

Figure 8 Growth Rate Line plot

13
The growth rate percentage is calculated by comparing the revenues for each year with the
previous year. The data reviewed from the Annual reports points out that the general trend in the
growth rate depicts a decreasing figure (Figure 8). There is, however, an anomaly in the trend
for the year 1996, right after the implementation of the ERP system.
1. The jump in growth rate for the year 1996 is attributed to the increase in sales of the
new product launched earlier that year and the foray into international markets.
2. A major chunk of their drop in sales had been due to the old items becoming obsolete.
Looking the other way round and considering the growth rate for the year 1997 an anomaly,
the reasons are due to increased sales of low-cost products in comparison to the high-
cost products attributed to market demand and the international economic slowdown.

Years Ended July 25, 1998 July 26, 1997 July 28, 1996

Net sales $8,458,777,000 $6,440,171,000 $4,096,007,000

Income before provisions for $2,302,466,000 $1,888,872,000 $1,464,825,000
income taxes
Net income $1,350,072,000 $1,048,679,000 $913,324,000
Net income per common share $0.84 $0.68 $0.61
(diluted)
Shares used in per-share 1,608,173,000 1,551,039,000 1,490,078,000
calculation (diluted)
Total assets $8,916,705,000 $5,451,984,000 $3,630,232,000
Number of employees 15,000 11,000 8,782
Net sales per employee $563,918 $585,470 $466,409
Net income per employee $90,005 $95,334 $103,999
Table 3 Financial Analysis for Year 1998 (Source: CISCO Annual Report 1998)

14
EXPENSE COMPARISON TO TOTAL REVENUE

R&D
Expense Sales Expense Sales R&D
Year % Expense% % Expenses Net sales Expense Expenses

1993 26.95% 16.90% 13.67% 1,74,936 6,49,035 1,09,717 88,753

1994 30.87% 16.56% 13.26% 3,83,675 12,42,975 2,05,797 1,64,819

1995 35.47% 15.89% 9.44% 7,91,829 22,32,652 3,54,722 2,10,815

1996 31.38% 17.73% 9.75% 12,85,339 40,96,007 7,26,278 3,99,291

1997 39.93% 18.02% 10.84% 25,71,499 64,40,171 11,60,269 6,98,172

Table 4 Expense Comparison Total and Detailed Segmentation (All amounts in $ thousands)

Expense Distribution Relative to Total Sales

45.00%

40.00%

35.00%

30.00%

25.00%

20.00% 16.90% 17.73% 18.02%

16.56% 15.89%
15.00%

10.00% 13.26%
13.67%
5.00% 9.44% 9.75% 10.84%

0.00%
1993 1994 1995 1996 1997

Expense % Sales Expense% R&D Expense %

Figure 9 Plot of Total, Sales and R&D Expenses

15
 Computer Equipment
Total Expense Computer and Related Software Net sales
Year % Expense% Total Expenses Expenses

6,49,035
1993 26.95% 5.96% 1,74,936 38,667
12,42,975
1994 30.87% 5.78% 3,83,675 71,821
22,32,652
1995 35.47% 5.66% 7,91,829 1,26,331
40,96,007
1996 31.38% 6.85% 12,85,339 2,80,777
64,40,171
1997 39.93% 6.13% 25,71,499 3,94,735
Table 5 Computer Expense Distribution relative to Total Sales

Computer Expense relative to Total Sales

45.00%

40.00%

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
1993 1994 1995 1996 1997
Total Expense % Computer Expense%

Figure 10 Plot of Total Expense and Computer Expense

The idea behind considering this factor was that as an independent entity expenses would always
increase in absolute value due to the operational cost of increased revenues. However, expense as
a percentage of net sales gives a comparative idea of how much an organization has to spend
to earn that profit, which gives an analysis of their financial health. Fig. 9. shows that the graph
tends towards a positive rise with the expense per cent for the year 1997 showing an oddity in
the trend.
Expenses, however, include not only the impairment losses remnant of the legacy system but
also include Research and Development (R&D), Sales and Marketing (Sales), Computer
Equipment & Related Software Expenses (Computer) and Manpower Cost.

16
 1. The fiscal years from 1995 to 1997 report a general increase in Total Expenses which is
relevant to the expenses accrued due to the growth strategy of Cisco. Being the industry
leaders, Cisco is expanding into international markets and new products. As such, there is
a considerable increase in expense from 1996 to 1997. “The increase in these expenses
resulted from an increase in the size of the Company's direct sales force and related
commissions, additional marketing programs to support the launch of new products,
the entry into new markets, and expanding distribution channels.”8
2. From the analysis, it can be seen that Research and Development expense to the Total
Sales has decreased. While Cisco has seen an increase in absolute R&D expenses, over the
years 1995-1997, in terms of hiring new personnel and investing in technologies to roll out
newer and broader products in a timelier fashion, these expenses relative to the total Sales
show a smaller figure. The improvement of 3.61% could be attributed to better utilization
of R&D expenses because of the ERP implementation. However, this could not be
validated from the Annual Reports or any news articles from that period.

The dynamic industry CISCO operates in naturally means that their products become obsolete
comparatively quicker, and thus also increases their expenditure on R&D. As is evident from
the analysis, Cisco’s R&D Expenditure has gone up but relative to the total Revenue increase
across the years, they managed to maintain a comparative advantage.

As a growth-strategy, CISCO had been growing substantially during the years 1993-1997. They
forayed into new products and international markets while keeping updated with the tech
advancements. From our observations, we can conclude that Cisco Systems were not that
affected, financially, by the implementation of the ERP system. There is clear evidence of
their streamlined R&D operations. However, any effect particular to the ERP solution on their
financials is not specified.

Also, to be noted is that, by 1997, its first year on the Fortune 500, Cisco ranked among the top
five companies in return on revenues, a feat which only Intel and Microsoft had earlier been able
to achieve. By July of 1998 Cisco’s market capitalization passed the $100 billion mark (Table 3).

17
 1993 1994 1995 1996 1997

Value (in $ Percentage Value (in $ Percentage Value (in $ Percentage Value (in $ Percentage Value (in $ Percentag
thousand) of Sales thousands) of Sales thousands) of Sales thousands) of Sales thousands) e of Sales

Sales 6,49,035 - 12,42,975 - 22,32,652 - 40,96,007 - 64,40,171 -

Material 2,10,528 32.44% 4,12,814 33.21% 6,44,152 28.85% 14,09,862 34.42% 22,41,378 34.80%

Raw Material & Components

9,191 1.42% 13,724 1.10% 33,555 1.50% 1,34,531 3.28% 89,226 1.39%
Consumed

Total Expenses 1,74,936 26.95% 3,83,675 30.87% 7,91,829 35.47% 12,85,339 31.38% 25,71,499 39.93%

Research & Development (R&D) 88,753 13.67% 1,64,819 13.26% 2,10,815 9.44% 3,99,291 9.75% 6,98,172 10.84%

Figure 11 Analysis of Expenses with respect to Revenue for 1993-1997

Sales and Administration Expenses 1,09,717 16.90% 2,05,797 16.56% 3,54,722 15.89% 7,26,278 17.73% 11,60,269 18.02%

Computer Equipment and Related

38,667 5.96% 71,821 5.78% 1,26,331 5.66% 2,80,777 6.85% 3,94,735 6.13%
Software Expenses

Manpower Cost 26,456 4.08% 46,334 3.73% 84,695 3.79% 1,95,197 4.77% 2,63,269 4.09%

18
 Sum of 2 Years (1993-1994) Sum of 3 years (1995, 1996, 1997)
Improvement 3 Year Benefit Yearly Benefit
Value (in $ Percentage Value (in $ Percentage of
Average Average
thousands) of Sales thousands) Sales

Sales 18,92,010 9,46,005 - 1,27,68,830 42,56,277 - - - -

Material 6,23,342 3,11,671 32.95% 42,95,392 14,31,797 33.64% -0.69% - -

Raw Material & Components

22,915 11,458 1.21% 2,57,312 85,771 2.02% -0.80% - -
Consumed

Total Expenses 5,58,611 2,79,306 29.52% 46,48,667 15,49,556 36.41% -6.88% - -

Research & Development (R&D) 2,53,572 1,26,786 13.40% 13,08,278 4,36,093 10.25% 3.16% 3,09,307 1,03,102

Figure 12 Analysis and Comparison Before and After ERP Implementationi

Sales and Administration Expenses 3,15,514 1,57,757 16.68% 22,41,269 7,47,090 17.55% -0.88% - -

Computer Equipment and Related

1,10,488 55,244 5.84% 8,01,843 2,67,281 6.28% -0.44% - -
Software Expenses

Manpower Cost 72,790 36,395 3.85% 72,790 5,43,161 12.76% -8.91% - -

19
REFERENCES:

1. Austin, R.D., Nolan, R.L. and Cotteleer, M.J., 2002. Cisco Systems, Inc: implementing
ERP. Boston: Harvard Business School.
2. Krajewski, L.J., Ritzman, L.P. and Malhotra, M.K., 2010. Operations management:
Processes and supply chains. Upper Saddle River, New Jersey: Pearson.
3. Davenport, T.H., 1998. Putting the enterprise into the enterprise system. Harvard business
review, 76(4).
4. Austin, R.D., Nolan, R.L. and Cotteleer, M.J., 2002. Cisco Systems, Inc: implementing
ERP. Boston: Harvard Business School
5. Holland, C.R. and Light, B., 1999. A critical success factors model for ERP
implementation. IEEE software, 16(3), pp.30-36.
6. Doom, C., Milis, K., Poelmans, S. and Bloemen, E., 2010. Critical success factors for ERP
implementations in Belgian SMEs. Journal of Enterprise Information Management.
7. Annual Report 1991, 1993, 1994, 1995, 1996, 1997, 1998.

20