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Allied Waste Industries Inc., as soon as it completes its proposed $7.3 billion acquisition of Browning-Ferris Industries Inc., plans to pull the plug on a brand-new $130 million computer system that uses the complex software known as SAP R/3.
Updated On: Jan 14, 2014

By Jeff Bailey

Allied Waste Industries Inc., as soon as it completes its proposed $7.3 billion acquisition of Browning-Ferris Industries Inc., plans to pull the plug on a brand-new $130 million computer system that uses the complex software known as SAP R/3.

The planned move, previously undisclosed, follows a similar cancellation of a major SAP R/3 installation, one that would have cost about $250 million, at Waste Management Inc.

The promised dumping of SAP software at the two biggest trash-hauling companies reflects a move by the waste industry to a more simple, decentralized management structure. It is also among the most public rebukes received by SAP SAP -0.75% AG, the German concern that makes what is widely regarded as elegant though extremely complex software that can monitor and help manage a company's every move.

Allied Waste finds SAP too expensive and too complicated to operate. "We're unplugging it," says Thomas H. VanWeelden, chairman, president and chief executive officer of the Scottsdale, Ariz., company of the system installed by Browning-Ferris, Houston. "We'll take a charge for it," Mr. VanWeelden says, adding of SAP: "They expect you to change your business to go with the way the software works."

Waste Management, also based in Houston, pulled the plug on its SAP installation when it had spent just $45 million of the estimated $250 million. Even that larger figure, however, doesn't represent the total cost of Waste Management's initial SAP ambitions. A second phase of computer revamping using SAP R/3 would have cost an additional estimated $150 million, according to Michael T. Patton, vice president of information systems at Waste Management. And Browning-Ferris was also planning a costly phase two.

"Blessedly, neither company got a chance to spend that money," Mr. Patton says. Waste Management abandoned SAP after its $19 billion merger last year with USA Waste Services Inc., in which USA Waste executives took control of the company, though the Waste Management name was retained.

'Pretty Confident'

Kevin McKay, president of SAP America, says of Allied Waste and Waste Management: "I'm pretty confident they'll be back." SAP R/3 is installed at more than 5,000 U.S. companies, he says, and about 20,000 world-wide. Mr. McKay calls cancellation "extremely rare."

SAP R/3 is so-called enterprise software that can connect and automate all the basic parts of a big company: sales, payments coming in and going out, inventory and all sorts of accounting functions.

Mr. McKay doesn't dispute that SAP R/3 customers often have to change their businesses to use the software, but he says the cost and the change is worth it because the software allow companies to operate more efficiently.

"The most important thing is executive commitment," he says. "It's not an [information technology] project -- it's a business transformation."

SAP AG received just $20 million from Waste Management and between $15 million and $20 million from Browning-Ferris for licenses to use R/3 software, Mr. McKay says. And in the phase-two installations, Mr. McKay says, SAP would have gotten a maximum of $3 million to $5 million in license fees from each company.

The remainder of the cost for the companies included consultants to implement the software, new computer hardware and "change management" consultants who help companies standardize operations and monitoring methods to adapt to R/3.

SAP did some of the consulting for Browning-Ferris, the waste company says, though it won't disclose how much. Waste Management used consultants other than SAP.

Big Corporate Staffs

Why would the trash business need such complex and costly software? Waste Management and Browning-Ferris, long the Nos. 1 and 2 in the industry, built up big corporate staffs during the 1970s and 1980s as they were acquiring hundreds of small haulers. When industry profits were hurt by a glut of dump space and other problems in the early 1990s, both companies moved toward more centralized management structures, hoping those corporate staffs could tell field managers how to operate more efficiently. But to do that, the staffs needed data from the field.

Year-2000 needs also pushed the companies to replace older computer systems, and both Waste Management and Browning-Ferris signed up for SAP R/3 in 1995. The planned installations at the waste companies would be similar in size and cost to SAP R/3 systems installed at Chevron Corp. and at Bristol-Myers Squibb BMY +0.43% Co., SAP's Mr. McKay says.

"We wanted more insight into how our processes were doing," says Stephen J. Uthoff, vice president of planning at Browning-Ferris. SAP "had something that fit us very well."

"Your processes have to change," says Mr. Uthoff, an SAP fan. "As a company that acquired so many companies, [Browning-Ferris] didn't have uniform processes. Part of our challenge was to get 500 places using standard procedures."

The early returns weren't favorable. In a May 14 filing with the Securities and Exchange Commission, Browning-Ferris says it incurred $11 million in higher costs operating with the SAP system during the six months ended March 31, "but is not yet realizing the expected benefits." The company had expected purchasing, accounting and administrative efficiencies.

For the six months ending Sept. 30, Browning-Ferris said it expected "modest benefits" from SAP. Mr. Uthoff says, "It's expensive. There is no denying that. But you have to look at this as a long-term investment. The payback is substantial."

Allied Waste and USA Waste, newer and smaller companies, were growing in recent years by acquisition and keeping their corporate staffs tiny. Their approach: let local managers run their own show and worry about their day-to-day numbers. "If corporate is worried about that as well, that's kind of redundant," says David Hunts, Allied's director of management-information systems.

Both Allied and Waste Management, after its merger with USA Waste, use less-expensive -- and, the companies cheerfully admit, less-powerful -- software.

Link to original article from Marketwatch.com


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