Selecting a new
management information system
Graduate Thesis Summer 2005 A.R. Muhring University of Groningen
Faculty of Management and Organization
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Fedics ltd.
University of Groningen,
Faculty Management and Organization
Selecting a new management information system
A. R. Muhring
University: University of Groningen
Faculty of Management and Organization
Landleven 5
9700 AV Groningen The Netherlands
University supervisors: Dr. B.J.W. Pennink
Dr. W. Westerman
Company: Fedics ltd.
7 Arnold rd
2132 Rosebank Johannesburg
South Africa
Company supervisors: E. Bauser
T. Walters
© Fedics Ltd. May 2005, A.R. Muhring
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system of any nature, or transmitted in any form or by any means, electronic, mechanical, now known or hereafter invented, including photocopying or recording, without prior written permission of the publisher.
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Table of Contents
Table of Contents ... 3
Management Summary ... 5
1 Preface... 6
1.1 My personal experiences... 8
1.2 Content of this Thesis ... 13
2 Scope of research... 14
2.1 Assignment ... 14
2.2 Problem definition ... 15
2.3 Research objective ... 15
2.4 Main research Question ... 16
2.5 Sub questions ... 16
3 General setting ... 21
3.1 General Information on Tsebo. ... 21
3.2 General Information on Fedics ... 24
3.3 The history of Fedics. ... 25
3.4 Company structure ... 28
3.5 Fedics mission... 31
3.6 Statistical Information on Fedics ... 32
3.7 Other companies within Tsebo ... 33
3.8 Summarized ... 34
4 Fedics business process and information systems ... 35
4.1 Fedics current Information Systems. ... 36
4.2 Deficiencies deriving from the old systems... 40
4.3 Reflection on deficiencies... 43
4.4 Summerized. ... 45
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5 Feasibility Study ... 46
5.1 Benefits Quantification Methodology... 46
5.2 The Five steps ... 50
5.3 Reflection on the decision... 54
5.4 Summarized ... 55
6 Selection Method ... 56
6.1 The Start of selecting ... 56
6.2 Fedics approach. ... 60
6.3 Selecting... 60
6.4 Four Phases ... 61
6.5 Summarized ... 69
Chapter 7 The fit... 70
7.1 Strategy ... 72
7.2 Requirements ... 73
7.3 Axapta ... 75
7.4 Alignment ... 76
7.5 Summerized ... 78
8 Conclusion ... 79
8.1 Financial Analysis... 79
8.2 Selection methodology... 80
8.3 Fit ... 80
8.4 Overall conclusion ... 80
8.5 Other recommendations ... 81 Appendix 1: Nomen Clature ...Error! Bookmark not defined.
Appendix 2: List of Abbreviations ...Error! Bookmark not defined.
Appendix 3: Figures...Error! Bookmark not defined.
Appendix 4: Services by Drake & Scull ...Error! Bookmark not defined.
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Management Summary
Fedics, a South African catering company, is replacing its management accounting system.
The new system, Axapta, is selected. Fedics wants to know whether Exordia and its system (Axapta) are the right partners. To answer this I looked at three items that played a key role in the selection process.
First a feasibility study was conducted where Fedics emphasized on an NPV analysis, which is based on partly invalid information. In this thesis another NPV analysis, based on assumptions, is done. The problem of assumptions is that it causes uncertainty which leads to a questionable analysis. The fact that Fedics needed this system in order to guarantee continuity is another reason why one can place question marks at a financial analysis.
Secondly the Selection Method, Fedics used, is studied. Fedics first identified its requirements twice in order to be absolutely sure each requirement contributed to the company. These requirements were then ranked from most to less important. This list of requirements is included in the request for proposal, which is issued to several vendors.
The replies of these vendors were carefully studied and after four phases of selection Fedics found its partner.
Thirdly the Fit between the requirements, offered solution by the partner and the strategy of Fedics are discussed in terms of alignment. Here the conclusion was that these three matters are in alignment but that a careful re-evaluation of the strategy would not harm Fedics, as this new system has its effect on the strategy.
It is discussable whether a feasibility study was necessary to conduct as it did have minor
influence on the selection process. It can also be questioned if this procurement of a new
system is an investment in efficiency, or if it is just an act of survival. The selection
methodology was conducted fairly and in a very professional way. The fact that Axapta is
the proper software package for Fedics is proven by the fit that exists between Axapta and
Fedics.
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1 Preface
In August 2004 I had to make an important choice. It was a choice between two internships. One was in The Netherlands with a clear objective and the other was in South Africa with a rather mysterious objective. Factors such as the adventure of working in an overseas corporate world, made me eventually choose South Africa.
The company where I did my internship is active in the South African catering industry and is called Fedics. My start at Fedics was far from a dream start. My personal experiences, frustrations, and learning points from interacting with a South African organization are described in the next section and might be interesting to read before reading the rest of the thesis.
The story that follows is about the difficulties that are important to manage when choosing a new management accounting system. Fedics is a company that is in the stage of implementing a new system. The choice of which system will be used is therefore already made.
In the end I think it was a good decision to come to South Africa. I learned a lot about the way of doing business in a non-European company. Although most of the people I worked with were rather Anglo-Saxon minded, some aspects of business culture might be slightly different. Most important would probably be that business life in South Africa is not quite used to interns.
To make important decisions such as where to do my internship and what to write about are sometimes difficult. Certain persons played key roles in helping me with those decisions.
Therefore I would like to thank three persons. First I thank my mentor Dr. Bart Jan Pennink for his advice and patience. Second, Mr. Westerman for giving me the confidence and courage that I needed for the choice whether I should go to South Africa or stay in The Netherlands. When I lost focus in the process of writing about the selection process, Dr.
Pavel Jinek helped me to sharpen my thoughts.
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Within Fedics, Sheila Redelinghuys, Tim Walters and Craig Penfold opened my eyes and
were willing to help me. Further more I would like to thank the Exordia team for giving me
their opinion on the whole matter.
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1.1 My personal experiences
It was the 4
thof September when I arrived in South Africa. After a telephone conversation with Cheryl Sheraton the HR manager of the Randburg office, I was told that I had to start on Monday the 13
thof September. After dealing with some personal business like car, phone and housing I started on that Monday of September at Fedics. There, Willie van Jaarsveld received me very kindly. The first week I spent in his office, not knowing what to do or where to start. My constituent, Eric Bauser, was very busy in Durban (Kwa Zulu Natal) working on the Integrated Business System (IBS)
1.
I knew that my research was going to be about this IBS so I tried to gather information on the subject and the organization before Eric Bauser would be back. During this period, I also spent a lot of time arranging a desk, a computer, internet on that computer, and a phone and tried to make myself useful for Fedics, which was not easy. Before I was completely ready to start three weeks had past and very little about the IBS was known by me.
In a telephone conversation, Eric Bauser appointed Margaret Campbell to me as my coach.
She showed me around the company, arranged meetings at several units and tried to explain what the IBS is all about. What I needed to do, to research, to find out and to write a thesis about, was unknown by her. Although I remember her as one of the warmest and nicest persons within the workforce of Fedics she could not really help me out. For me it was essential to talk to Eric in order to find out what Fedics was expecting of me, but communication was rather difficult.
Margaret Campbell is concerned with the enterprise portal, which is an important item of the IBS, but also very specific and detailed. She and the other direct Fedics employees with who I stood in contact could not tell me a lot about the overall picture. I focused my attention on the Exordia (PWC) consultants that were working on the implementation.
1
This is the ERP based system that is called Axapta and is Implemented by Exordia a 100% price waterhouse
coopers it consultancy firm.
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What they told me would shape my picture about Fedics and the implementation process until I met Sheila Redelinghuys somewhere in December.
I thought, based on all the arguments I heard from the consultants, that Fedics must be a rather strange company. I now know that partly because of my one sided information source my thoughts of Fedics were not very good at that point in time.
Most of the time at this stage I was sitting behind my desk at the creditors department.
Overlooking the old system, I was thinking of what to do, while listening to three phones ring all the time, several phone calls, two radio stations and a massive and very noisy printer at the same time. On the side I had plenty to do, because I had to come up with new codes for every Unit/sub-unit and for new Item numbers for the products Fedics makes/
buys. This was a time consuming but quite a boring job for which one needed full concentration.
I got first frustrated and two weeks later very impatient. It occurred to me that in South Africa certain things would take longer and it would require more patience to write a thesis.
But all the people I had to deal with seemed to be rather European and not really different from Dutch business people. It frustrated me that they let a student come down from The Netherlands without giving him proper instructions for over a month.
Then one morning I demanded to see my boss. I got a little angry and suddenly there was a ticket for me to fly to Durban the next Tuesday. When I had to pick up my ticket on Monday, Eric Bauser stood in front of me. Finally he was there, he was a very nice man and gave me a map with information, concerning the IBS, the seize of a 16
thcentury bible.
The two weeks thereafter I was studying this map with very dry information technology terms, understanding only very little.
A week later Eric and I met again, this time he told me significantly more about the IBS
and slowly I started to understand more of it. I had an idea now of how my thesis should
look like.
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In the month of November I concentrated all my efforts on making a solid research proposal. I mailed back and forth with my supervisor Dr. Pennink and came to the following two main questions:
“What were the causes of the mindset change that occurred during the process?”, the other:
“At Fedics the Axapta system is an on basic business principles based system, at Fedics it underwent major changes to fit the way of doing business. Would it not have been better to fit the way of doing business to the system?”
The first question is interesting to know for Fedics, but very hard to find out, because everybody has a different opinion, and there is hardly any documentation. The second question is very specific, in the sense that knowledge of systems is required. I do not have that kind of knowledge, besides I cannot make sound conclusions on results from research of facts that did not happen. It would then be a highly hypothetical research. I came to the conclusion that this research proposal was far from being perfect.
Then somewhere in December I tried to get an appointment with the project manager, Sheila Redelinghuys. This was a true quest, since she had a very full agenda, besides this there is a problem with confidentiality, at least that is what I sensed. I kept on trying to sign a confidentiality contract and a week later I could sign the contract and on the same time I had an appointment with Sheila Redelinghuys.
Now she was allowed to tell me everything and that was what she did. The image I had
about Fedics was completely crumbled under the new information I received. In an hours
time I started to realize that my research proposal was not getting me anywhere, that Fedics
was not a crazy company and that I should focus my entire research on other things. She
provided me with a document called the business case which explains very clearly what the
problem was with the old system and what to implement in order to resolve this. This
document is the key to the whole IBS and I was somewhat disappointed that it was only
now, just before Christmas, that I could see this.
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I deleted almost everything I made so far, it was useless and mainly based on documentation that was to abstract anyway. By now it was almost Christmas, most employees went on holiday. I also went on holiday with my family that was visiting me.
After Christmas, I moved from my old office and got an office at the head office. This was truly a revelation. I had a quiet office with a huge whiteboard all for myself, but had to start from scratch. I did study the “16
thcentury bible”
2, Eric Bauser gave me, again and a lot of things made, since I did have the knowledge of the Business Case, sense now.
I started all over again, was moved from office space a couple of times within head-office, but most of the time I had a chair, desk, pc and a quit environment. Sheila was gone, she immigrated to New Zealand, but her previous secretary was still helping for what she can. I started to write the basics that I needed anyway, and from time to time I needed information on certain subjects. Although I had signed my confidentiality contract, employees were still very careful to provide me with information. This sometimes caused difficulties and delays, but made me creative on the other hand.
On the 7
thof February I asked to see the annual report, because I wanted to know how big the project was compared to the turnover and other figures of the company. The person that, I thought, could have provided me with the information never gave it to me. Being a student in finance, I was rather frustrated that this basic information, an annual report, was not to be seen for me. Later I understood that Fedics did not make any annual reports, I was looking for something that did not exist in the form I wanted to have it. So I tried other ways and in the end I got what I needed.
It took longer than I expected to find my ways around Fedics and to find the correct methods to gather information in the company. When I had an appointment with Tim Walters CEO of Invalu, an important man for Fedics, the IBS, and especially to me. I
2
a massive document containing the Request for proposal, project definition document, Exordia’s proposal,
and a whole bunch of other documents, graphs, specs etcetera. For information on what was in these
documents council the nomenclature.
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explained him what I was supposed to do here at Fedics. I sensed that he felt he could use someone like me to find out numerous things that were bothering him. Together we looked at my research so far and decided to adjust it slightly. He provided me straight away with the information I had been searching for so long. After this discussion we agreed on the fact that I should write my thesis on the selection procedure Fedics had been through concerning the IBS. He wanted me to find out whether Fedics selected the right partner and if the selection techniques were the right ones. I also should emphasize on the importance of a quantified feasibility study for the situation where Fedics founds itself in.
One of Mr. Walters’s co-workers, Craig Penfold, was appointed to assist me, where necessary, with answers to further questions. Craig was somebody who was interested in what I did and his help was very much appreciated by me. From this moment on, I found collecting my data less difficult. What I heard in interviews with both Tim and Craig was still very confusing sometimes, in terms of contradictions with other people’s opinions.
Sometimes I almost thought that I was interviewing people that all worked for different companies.
Finally I had a clue what to do and where to start, I felt more useful to Fedics. I became enthusiastic again, and tried to make up the time I lost in the past and found myself working more and more over-hours the more I grew in my research. I got to know the team that is concerned with implementing the IBS more and more. By now it was a custom that on Friday afternoons suddenly directors and other important Fedics employees would storm into my office room and summon me to come over to the company bar to join them for a couple of beers.
The last 6 weeks of my internship I was really trying to finish the thesis as far as I could,
Tim Walters gave me permission to enter the office on Saturday’s and Sunday’s. In the
end, I really liked the company. I got to know the way around Fedics very well, but it was a
long way to get there. The last day I worked at Arnold Road 7 in Rosebank I was relieved
but also a little sad.
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1.2 Content of this Thesis
This thesis started with my personal experiences. The reason why I started with this text is that I think that people who read my thesis will understand it better if they know what the situation, in which I wrote this thesis, was about. I will continue to describe Fedics as a company. Now subjects as history, general information, structure and certain statistics are discussed. In chapter 4 the current systems are discussed and also what the problems with their current systems are.
Chapter 5, 6 and 7 are more the core of the thesis. In chapter 5 the feasibility study, that Fedics conducted, as well as the general importance and possibilities of studies like these are discussed. In chapter 6 the selection method is discussed and chapter 7 is on the fit between requirements, strategy and the new system that are the main characters. In chapter 8, I will consolidate a conclusion based on the previous three chapters in alignment with the content of the assignment.
Introduction 3&4
Feasibility study
5
Selection Method
6
Fit Axapta, Strategy &
Requirements 7
Conclusion 8
Figure 1
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2 Scope of research
In this chapter an explanation on what this thesis is about is given. The assignment, a joint creation of Fedics, my university and myself is described. This thesis could serve multiple purposes such as backing up the management decision for implementation if the conclusion would be positive, as well as explaining the difficulties that are concerned with calculating the benefits of a not yet implemented MIS. The problem definition should explain why this thesis is of benefit for Fedics. The research objective is to highlight what exactly belongs to the scope of this research. This objective evolves in a main research question and several sub questions.
2.1 Assignment
Project Selection is an important activity in many disciplines such as R&D, capital budgeting and information systems. Recently, with increased organizational pressure to cut costs, MIS managers have started to take cognizance of shared costs and benefits among projects so as to develop more projects with the same level of resources and obtain greater level of benefits.
3Before a selection procedure starts there is already a wish to change or obtain something. In many cases this is started with looking at the benefits that this change or purchase will bring a company. In some cases it is easy to conduct, for instance, an NPV Analysis, in other cases it is almost impossible.
After a company decides to choose a way to change or to purchase a new asset, it is important that there is a fit with that new Item, the strategy and needs of the organization.
This thesis will concentrate on the MIS selection procedure Fedics has been through.
3
Santhanam and Kyparisis, A multiple criteria decision Model for Information system selection, 1995,
Computers & Operations Research, Volume 22, Issue 8.
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The thesis should provide Fedics with an Audit of the selection process that took place.
It should provide an insight on why, based on this particular case study, certain things are not considered higher priority key issues then others. The importance of an investment analysis, a selection methodology and a fit between an information system, strategy and needs of an organization are discussed.
2.2 Problem definition
Fedics is in the middle of implementing a new information system. This is a necessary matter and the job needs to be finished as soon as possible. Although the general opinion is that the new system will be better than the old, not everybody is sure whether the new system is going to be as good as Fedics thought it would be.
The selection process, choosing a partner for implementing a new information system is a very important part of the whole process of changing systems. In order to find out if something went wrong, Fedics wants to know if her selection method and feasibility study were conducted in the best way and whether this leads her to a perfect fit with the just purchased system.
2.3 Research objective
Fedics asked me to give an audit on the selection process. This means that I shall explain what the effects of the selection process are on the whole project. I will test if the requirements identified by Fedics were in alignment with the strategy, whether the deficiencies are correctly translated to requirements and if the chosen system answers to all these requirements. I shall also discuss what Fedics could have done better in selecting a new partner and whether the feasibility study was done correctly.
Fedics asked me to write in my final conclusion matters that I have noticed during my
research that could be of any value to Fedics. Any recommendations as an outsider on the
whole process would be welcome. I translated this into the following.
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2.4 Main research Question
Is Exordia with its system Axapta the right partner for Fedics?
Axapta is the new information system; an information system could be defined as
1. Means an interconnected set of information resources under the same direct management control that shares common functionality. A system normally includes hardware, software, information, data, applications, communications, and people.
42.
The organized collection, processing, transmission, and dissemination of information in accordance with defined procedures, whether automated or manual.
Information systems include non-financial, financial, and mixed systems.
5In this thesis I interchangeably use Information System (IS) Management Information System (MIS) Accounting System (AS) Management Accounting System (MAS) Enterprise resource planning system (ERP system) Integrated Business System (IBS) and sometimes just system. All these names are applicable on the Axapta software that will be installed. In some articles scientist prefer to refer to MIS or MAS while in others it might be IS or AS and Fedics likes to say IBS but sometimes refers to it as (ERP-based) system or simply Axapta. In this case and thesis these names can all be intermingled they all refer to Axapta.
2.5 Sub questions
In order to create an audit on the selection process Fedics undertook and to answer the main research question the following sub questions have to be answered.
1. What were the deficiencies that derived from the old management information system?
2. What were the requirements that derived from the deficiencies of the old management information system and were these requirements correct?
3. What is the importance of a feasibility study in this case?
4. Has the selection methodology Fedics applied been the right one?
4
Source: University of Stanford
5
Source: Government Accountability Office (www.gao.goc) & wikipedia, the free encyclopedia
(www.wikipedia.org)
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5. Looking at the selected partner, are all the requirements covered and is there an organizational fit?
6. If there are still gaps, could these have been solved if the requirement definition
process or the selection process would have been different?
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2.6 Research model
Problems
Requirements to solve problems
Is the
fulfillment of the
requirements the solution?
NO
Redefine Problems and requirements
YES Is a change in MIS necessary?
NO Fulfill
requirements in other way.
Other than MIS change
YES Can we change the current system
NO
Select new MIS
Yes
Change it, but if it is too expensive, go back
Selection process, making a choice
• Financial story
• Selection methodology
• Fit
Partner is selected,
Implementation process starts New MIS
Are all problems solved?
YES
Perfect NO: What could we have done
differently in the selection process that
would have made a change
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In the model on the previous page, the process that enacts a company to choose a new system, as well as the effects that this decision process has on the company are shown.
Some words are highlighted. These highlighted parts correspond directly with the model, this is done in order to make the model easier to understand.
Fedics had Problems with the old legacy system. Certain Requirements to solve the problems derived from these problems. When the question, “is the fulfillment of the requirements the solution?”, could be answered with no, the problem and the requirements should be redefined. Redefined, because of the fact that fulfillment of these requirements does not solve the defined problems. If the question could be answered with yes, there is another question that immediately derives from the previous one. This question is, “Is a change in IS necessary?” in order to fulfill the requirements. If the answer is no, then the requirements must be fulfilled in another way, other than IS change; the model is left now since this is not important for the current research.
If the answer is yes, another question comes up; ”Can we change the current system?”.
If that is a possibility, it needs to be investigated, the organization might find that it is possible but to expensive, or not efficient and strategy-focused enough. In this case, or if it is not possible to change the current system, it must be concluded that a new system is needed. At select a new IS, this is where we enter the core of this thesis. The selection process, making a choice is very important for the eventual implementation and use of the new system.
Different scientists underline this: even in the extreme case of an organization with resources capable of developing every proposed system, the selection process would still be necessary to ensure congruency of the project portfolio with the corporate mission.
6If there is one area where good preparation is essential, than it is with selecting a new financial
6
McKeen and Guimaraes, Selecting MIS projects by Steering Committee, 1985.
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system. Essentially when ERP is involved, the essence of a well-considered selection process cannot be enough emphasized.
7Current practices in the software industry give an increasing importance to software procurement. A significant instance of software procurement relevance growth is the clear trend in both private and public companies with regard to their current options for software-based management information systems: the fast and wide proliferation of large packaged ready-made ERP systems, surely among the most extreme examples of current customizable Off-The-Shelf (COTS) software packages.
8When the selection process is completed a partner is selected and the implementation process starts. When the new IS becomes reality there is another question to be asked.
“Are all problems solved?” A yes on this question would be the most desirable one of all, in fact it would be perfect because the selection and implementation went all well. (If not, the mistakes made in these phases contributed to the overall success)
If the organization is not convinced and thus the answer is no, the last question that will be handled in this thesis could be posed; “What could we have done otherwise in the selection process that would have made a change?” Some scientists claim that composing the key issues (requirements) are the most important step. Studies of key issues in IS management have gained increased importance for practicing IS managers to identify gaps and priorities compared with other IS managers in the same country and around the world.
9Since the new system is not operational yet, the last question can only be partly answered.
This will be done based on what the system description is. I will look here at the “off the shelf” form of Axapta with adjustment possibilities.
7
Baerends, Pakketselectie nog belangrijker bij de keuze voor een ERP, 2001.
8
Illa, Franch, Pastor, Formalizing ERP Selection Criteria, 2000.
9
Gottschalk, Studies of key issues in IS management around the world, 2000.
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3 General setting
In this chapter an introduction is given on the Tsebo holding, the different companies within this corporation and specifically Fedics. Fedics forms the environment in which this research is conducted. This chapter furthermore describes the History, mission and vision of the organization.
3.1 General Information on Tsebo
10.
Tsebo is a holding company that is founded in its current structure in 2001, to give a new image to the already existing company Fedics. Tsebo is South Africa’s leading hospitality services and facilities management company.
The Tsebo group has previously been enlisted at the Johannesburg Stock Exchange (JSE).
After a two year period no benefit of being listed was realized. Besides this there was hardly any trade in the Tsebo stock and thus the company was de-listed again. Before the shareholders structure and the other companies that are part of Tsebo holding are discussed, one must know about black empowerment.
After the Apartheid fell in South Africa it was stated that the black population and other racial groups in South Africa all have equal rights. This is also being reflected on jobs and capital. Dividing the wealth of South Africa is very much stimulated. The main example is the enforcement of the Black Economic Empowerment Act in 1994 (BEE)
11. As most South African companies try to change according to this vision, Tsebo can be seen as an example. From the earliest times since it was possible to change towards equal rights for everybody, Fedics was one of the most fanatic and successful practioneers of this ideal.
Empowerment is a trend influenced by law and state, next to that it is also influenced by
10
Sources: www.Fedics.co.za, Fedics Intra net, Internal Documents Tsebo.
11
Source: Governmental document: South Africa’s economic transformation; a strategy for broad based black
economic empowerment www.dti.gov.za/bee/complete.pdf.
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the market. In order to do business in South Africa and to maintain a good position in the market, companies try to be well empowered.
12Of the nearly 8000 employees the Tsebo group has, 90% are black and of management positions nearly 35%.
13The impact of this policy could imply that certain employees have jobs without having the proper education/ degrees to do it. The big problem is that there are not enough capable black people yet for such positions. The ones that are capable are offered very high salaries and are bought away by the highest bidder. The result is that only the rich companies can act according the rules, when it concerns high management levels.
Window dressing is used more frequently, especially since in the summer of 2005 a new governmental audit on this matter will take place.
The shareholding structure of Tsebo group can be seen in the figure below. Here it is also visible that Tsebo is proud to be owned for the majority by black investors.
12
Deducted from an interview with; Philip Welchman, marketing director Tsebo.
Figure 2
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The reason that black people are promoted to participate in the equity of the corporate world might be clear, but the effects are somewhat underestimated. The most normal construction for black people to get hold on equity is to buy shares with the help of banks.
These banks lend money to consortiums of black people. In order to buy these shares, an estimation is given by the bank on how many years company profit should be paid out to the bank in order to pay back the loan that was issued in order to buy the shares. In the time that this was fashionable to do, the people were more optimistic than was righteous. The consequence was that in some cases the interest on the loan was not even being paid off by the lenders because the profit of the company was not high enough. In this case the loan is merely growing. A solution is to sell parts of the company. With money generated by this action, the bank is partly paid of. The problem is that these companies had to sell sometimes very healthy and prosperous business parts. The parts that were left over still had to be prosperous enough in order to pay back the remains of the bank loan.
1413
Fedics site www.fedics.co.za information and internal documents.
14
Deducted from an interview with; Philip Welchman, marketing director Tsebo.
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3.2 General Information on Fedics
15Fedics is the food services division of the Tsebo Outsourcement Group, and the domain of this research. Fedics is widely recognized as being the pioneer and leader in the outsourced catering market. Since its inception in 1971, Fedics has grown from a modest contract catering business into a leading, multi-dimensional hospitality services company, employing approximately 7000 employees and serving in excess of one million meals and snacks everyday.
Fedics provides a range of multi-services that complement its core business of outsourced catering. Clients range from corporations to educational and healthcare institutions, industrial, construction, mining and remote sites. Because of the diversity in all these industries Fedics is segmented into eleven segments that are individually branded with their own Identity as can be seen in the figure below.
Fedics slogan, provides an idea of her attitude; “To deliver service excellence”.
15
Sources: www.fedics.co.za, Internal documents Fedics, random information giving by employees of Fedics.
Figure 3
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3.3 The history of Fedics.
16Founded as Fedics in 1971, the company started in the form of a joint shareholding between Federale Volksbeleggins, Imperial Cold Storage and Gardener Merchant. In this era there was no such thing as an outsourcer for food. Because the political regime and the business were related, the company did not fear any competition. Fedics owned the market for what it was. After eight years, Gardener Merchant (trust house, a British company) sold its share to the others, because of political reasons. Federale Volksbeleggins and Iperial Cold Storage were left, hence its name Fed-ICS.
Fedics grew and in 1976 the company had about 160 contracts. In 1977 John Taylorson was appointed and the head office moved from Cape Town to Johannesburg. The turnover increased from R 13 million to R 65 Million. The growth pace was high and there were little impediments. Contracts were awarded to Fedics more and more and in 1978 Fedics had a staff of 4000 people. Next to making food, cleaning becomes also part of the business. Because of the growth and size, the company was structured geographically and according to the nature of the different services they sold.
Fedics became larger when it started to do business in the flight catering industry. Air-chefs was founded and Air Caterers was acquired in the year 1986. A couple of months later Fedics got awarded with a five-year contract with South African Airlines. Within years, Fedics catered for all the big airports and airlines in South Africa.
In 1986 an attempt was done to stick to the core business and the cleaning division was sold. Growth went on and the financial year in 1987 was closed by Fedics with a turnover of 171 Million Rand. The first IT system becomes a fact when Menutec is up and running.
This system was now in use at 40 units, mastering the administration of invoices and control of cost.
16
Deducted from an interview with; Paul Welchman, Marketing Director Tsebo.
26
By the time it was 1989, Fedics had 750 contracts. Air chefs was merging with Swiss Air in-flight operations to form an international catering conglomerate. Air Caterers was put into a joint venture with Gate Gourmet, another big player in the aircraft catering business, to become more efficient, create synergy and cut costs.
During the beginning of the nineties, Fedics increased its market share in the hospital food industry so dramatically that they gave it an own division called healthwise. Fedics became 40% owner of the Protea Hotel group. Menutec was updated and the use of it increased.
Fedics started a hospitality school for its own and others personnel, it also opened a range of shops, including non-food shops at the Johannesburg international airport. Fedics bought a stake in Reef food services and starts to specialize in the Mining catering segment.
In 1994, the Apartheid falls and South Africa becomes liberated. Black empowerment starts right away. Black managers are appointed throughout the organization and in 1995 Fedics receives the black management forum’s “Most progressive company of the year”
award.
Fedics starts a joint venture with the British company Drake & Scull, a big outsourcer, but buys out the British part soon after. In a meanwhile black investors are buying the Fedics stocks from Federale volksbeleggins, now named Servgro.
In this period Fedics was for a very short time listed on the JSE. In 1999 a leverage buy out took place which was the consequence of the JSE listing adventure and other financial matters. Although the company does not change at this moment, it does have influences later in time.
The position of Fedics gets stronger and the company starts to market its own brands,
which seems to be very successful. In October 2001, Fedics changes its name to Tsebo
Outsourcing Group to reflect its empowerment heritage and its core business focus. The
word ‘Tsebo’ is Sotho for knowledge, know-how or skills. Its food services division retains
27
the Fedics brand name. This year Fedics is rewarded again for its empowerment by being finalist at the Most Progressive Company of the year award.
The twenty-first century is started when Fedics needs to gain control and increase efficiency, so a new information system, My market, is introduced. This is a centrally managed procurement system, which combines the force of all the different units.
Partnerships are started with various suppliers and Fedics is becoming a real player on the food market with a lot of power.
In 2002 the whole air catering division of Fedics is sold. The reason for this is to focus more on the core business. Another reason is that Tsebo needs to pay off debts caused by the LBO. From now on it also means that Fedics is permanently for sale.
17This will have its effects on the investment policy of the firm.
Tsebo offers to run company canteens better and more cheaply than companies could themselves. Clients signed on, sometimes (not often) subsidizing staff meals. Tsebo brings in its catering skills and economies of scale and is able to tailor her service too company budgets.
Now at this stage, Fedics can be considered from the outside as an adult firm. From the inside, some things are unchanged for a long time. For example the company is grown out of it is financial and administrative system. In 2003 this is being recognized and in 2004 implementation of a new system starts. The company hopes to finish the project in 2005.
17
Deducted from an interview with; Sheila Redelinghuys, IBS project manager.
28
3.4 Company structure
Fedics has its head office in Johannesburg; furthermore it has three main regional offices that are located in 3 geographical suitable locations, Inland-Johannesburg, Durban and Kaapstad. These site offices are called companies. Leisure is (L) considered to be a different company, just as Institute for Hospitality Studies (IHS) and Site Services (SS).
This is because the nature of the business in which these segments are active is so different from the other segments (OS), that these require a certain specialty and knowledge.
18Fedics structure is a unique one. Units (canteens) are a joint creation of Fedics and the concerned client. This causes a wide variety between units. In fact these units are all adapted to the client’s wishes and the unit manager’s kind of style.
18
Deducted from an interview with; Isabelita Muller, Customer Relations Manager.
L IHS OS
SS
Fedics Head office
Company 2 Kwa-Zulu Natal
Company 1 Inland
Company 3 Cape
L OS L OS
Figuur 4
29
The top management at head office makes the strategy and coordinates the Regional offices. These regional offices control their district managers; here the structure seemes to end. This is because every unit has its own optimal way of working. Some units need to count stock everyday, whereas others need to make 500 different individual meals everyday; the diversity is thus very big. Standardization off all units is impossible, since the clients wishes are so diverse. Fedics instead groups similar units into segments.
Figure 5
Figure 6
30
But even in the segments, there is no real homogeneity. Fedics is thus absolutely not a franchise-like corporation.
19The relevance of this remark is to illustrate that the Units are not homogeneous. In franchise environments the units are more homogeneous than in this case. It is easier to develop a IS or accounting system if all the units are similar, but this is not the case.
On unit levels is decided what recipes are used, what amount to cook, and what to do with leftovers. The units also have the power to create their own recipes, while average meal prices are set on a higher level in the business hierarchy. This could lead to behaviour of chefs that are cooking more expensive than they should, which has an enormous influence on the profitability of a unit and in the end the whole of the company.
The department sales of the regional offices is concerned with the negotiation process with a possible new client. The client can choose from a variety of services Fedics offers. The contract will be tailor made for the client’s wishes, but there are two options that refer to risks and payments.
20¾ Management Fee Contract
The Management Fee enables Fedics to cover the overhead costs. The client has almost complete control of selling price, and profits are for the client. The client has greater control of day-to-day operation.
¾ Full Risk
Fedics has all risk and all profits of that certain unit, sets the prices and makes the standards for quality.
Nowadays we can state that there is a trend visible. The contract majority changes from management fee to risk contracts. More clients want to have their catering completely outsourced and want no responsibility or financial strings. There are some companies that used to subsidize the food for their clients, this is not the standard anymore.
19
Deducted from an interview with; Sheila Redelinghuys, IBS Project manager.
20
Catering company profile sales proposal document
31
3.5 Fedics mission
21The overall goal for an organization, also known as the organization’s reason for existence, is called the mission
22. Fedics Mission is.
“To achieve a sustainable compound growth of 22% annually, through expanding and exploiting the outsourced services market.”
The following vision is outlined.
“To be the first choice, world-class, outsourced services supplier and employer in Africa”
These statements are accompanied by the following Core Values.
¾ To elevate integrity above everything
¾ To promote the spirit of Ubuntu
23- respect and consideration for others
¾ To harness and nurture the potential of all our people
¾ To foster innovation
¾ To continuously recognise excellence
21
Deducted from an interview with; Cathy Bishop, communication & Training manager.
22
Daft, Organization theory and design, 2001.
23
Ubuntu: a pervasive spirit of caring and community, harmony and hospitality, respect and responsiveness,
that individuals and groups display for one another. Manufacturing Management concepts. Source: The
Ubuntu Case.
32
3.6 Statistical Information on Fedics
Together with Kagiso Khulani Supervision Food Services (KKS) Fedics is Market leader in the catering branch. There is plenty opportunity for growth since 48% of the market is still not issued.
Froden 6%
Servco 2%
Royal Sodexho 3%
6% Fedics
29%
KKS 29%
Independent 25%
Figure 7
Turnover figures Fedics over the last four Years
24Year Rand
2001 1.231.307.000 2002 860.163.000 2003 923.255.000 2004 934.858.000
Records about profit of the recent years are not available. The percentage of profit after tax of the total turnover is 4.7% in the year 2004. It is in alignment with the strategy to increase this percentage to 10% within the next two years. Fedics considers this percentage dangerously low and thinks to increase it by becoming a more integrated, efficient and flexible organization.
24
Deducted from an interview with; Anlia Naude, financial manager.
33
3.7 Other companies within Tsebo
Next to Fedics the Tsebo group holds two other companies, Invalu and Drake & Skull.
Invalu
Invalu is still a recently developed part of Tsebo, founded in 2004. Invalu is concerned with the
procurement for Fedics, as well as for Drake & Scull. She can be seen as a staff department and a cost center, but this is going to change. Invalu’s goal is to fulfill the needs in procurement of Drake and Scull and Fedics at the lowest price but also to become a profit center. The combined procurement share in the market of Fedics and Drake & Scull is big enough for Invalu to be a price maker. In order to gain more benefit from this position, it is therefore tried to make the procurement share of the total market even bigger. This is done by letting other companies do their procurement through Invalu. The value that is created by letting third parties join the procurement basket of Invalu will be shared equally between Invalu and the third party. This could have strange effects. Imagine that Mug and Bean (a breakfast-lunch chain) joins Invalu while one of its branches is opposite of an office building that is catered by Fedics. In essence these companies are competitors, definitely in this situation, but still they have joint procurement.
In a discussion with Tim Walters, director of Invalu, we talked about cooptation; fighting competition at the front but working together at the back. The possibilities of joint procurement with competitors are discussed within Fedics, but the general opinion is that the market is not ready for such a philosophy jet. But if it ever would be ready it is the opinion of Mr. Walters that big advantages can be made here.
2525
Deducted from an interview with; Tim Walters, CEO Invalu.
34
Drake and Scull
Drake and Scull is a company focused on all aspects of facility management. Drake & Scull used to be a joint venture between Fedics and Drake & Scull England. But around 1999 Fedics bought all shares of Drake & Scull England hence it became a 100% subsidiary.
Nowadays Drake & Scull is part of the Tsebo Group as an independent company which still has a “knowledge sharing deal” with the previous mother company in England. Drake
& Scull is specialized in all the facility management aspects one can imagine. In the Appendices you can see all the services they offer. What also can be seen in this list is that Drake & Scull does catering. These catering services are often outsourced by Drake &
Scull to Fedics.
3.8 Summarized
Tsebo is a holding company of which Fedics is a part. Fedics caters for the South African
market and provides many different services. Fedics is a company that started her business
in an era where she was almost an monopolist but has to cope with increasing competition
nowadays. Over the years the company has grown significantly and attempts have been
made to structure the company accordingly. Together with her sister companies Fedics
holds a strong and promising position in the market. In the next chapter a more specific part
of Fedics is described. The business process in terms of accounting system and the different
information systems Fedics uses are discussed.
35
4 Fedics business process and information systems
In this chapter I will describe old/current system Option3 and the other information systems Fedics uses, while illustrating this against the business process of Fedics. This information is important in order to comprehend the reason why certain problems do exist. Together with the previous chapter this must give a clear insight in the reason why Fedics wants to change its main information system, why change is necessary and why Fedics cannot change the current system.
Fedics currently runs an aged system, Option 3, as its core business management and reporting system. The system is well past its optimal replacement date and requires disappearing skills to support it. In the past twenty years the system underwent heavy customization, the adjustments were to patch gaps as well as to create new functionality that was not originally part of the system. Due a lack of documentation of the already made changes, the system has become a labyrinth. When the IT Manager, who was responsible for the changes within the old system left, the tacit knowledge left too
26.
There was another problem occurring at the same time. The hardware on which the system was based, really reached the end of its technological lifetime. It became dangerous to keep the system running on this old hardware. A decision was taken to re-host the whole system to a hosting company. The problem with this solution is that this is rather expensive.
The system was outsourced, but the outsourcer was truly reaching in the dark. They could not change the system because the risks of failure were too big. Fedics was moving on, but using a system that could not move on with her and was actually already far too old fashioned.
Together with Menu Tec, a distributed proprietary unit administration system, these systems form the foundation of an application systems portfolio that no longer adequately met the needs of the organization.
26
Deducted from an interview with; Sheila Redelinghuys, IBS project manager.
36
4.1 Fedics current Information Systems.
I will start the discussion on current IS with the smaller systems My Market and Menu Tec, after that Option3. All will be explained in a graphic model.
My market
My Market is the procurement tool used by Fedics. When the units know what they need to order, they log in to the My Market system and place their order. The system then will send this information to the supplier. The supplier receives the order and sends the goods to the Unit while the bill is send to the regional office. Since this system is relatively new, well received by employees and delivers a good job, it is decided that it must be imbedded in the new system.
27In other words, the system will not disappear in the new system but will be part of it. The figure below shows how the information and good streams between unit and suppliers flow.
MenuTec
Menutec is evolved from a software upgrade undertaken in June 2000 (MenuTec 2
ndedition). MenuTec is used at the various units for the administration of invoices and control of cost. All invoices received for payment of purchases are processed via MenuTec. Only if the unit does not have a running version of the software, the documentation is sent to another unit or the regional office for processing. Sales, in all forms, (e.g. cash, credit, free
27
Source: Request for Proposal Document.
Figuur 8
37
issues and “man-day charges”) are recorded. Stock issued from the unit stores to the kitchen is also recorded and captured.
28Option 3
Option 3 is the system used for financial administration. It captures the General Ledger, Debtors data, Creditors data, Contracts Ledgers, the Cash Book and Assets Register. All financial statements are generated through Option 3. At unit level information is captured from MenuTec that puts this information in spreadsheets in order to provide income statements and detailed information to clients as per their specific requirements
29.
Graphical explanation of Option 3
28
Source: Request For Proposal Document
Figure 9¾
Green arrows: the financial streams are summarized in a post called divisional expenses.
¾
Purple arrows: the financial streams are summarized in an ORN
¾
Red arrows: financial streams are summarized in an C&C SS
38 Explanation of model
The model starts when goods are ordered in My Market. My market sends the information to the supplier, who sends the goods to the Unit and a copy of the invoice to a company.
The goods are now in stock, and will be either directly sold directly(cans of coke, candy bars etc) or go to the Kitchen to be processed and to be sold later. There are 3 ways of receiving the money on the sold items. First, the customer pays cash at the till, this money will be banked. Secondly, the customer gives a function, receives a bill and pays it by transferring the money to the Fedics regional-account under the name of the Unit. Thirdly, the customer pays on credit (with card e.g.), the client will transfers the money after receiving the invoice to the Fedics regional-account under the name of the Unit. The Unit sends the information on what is purchased, on wages and other costs to company 1 who then will pay them. The company receives the banked money and books the transferred money over to the company 1 account. The company pays the suppliers according to what they have issued to the Unit. This whole system is summarized in a trading account monthly. This exists of four times a period result sheet (PRS) and the monthly expenses of the divisional offices. The PRS contains an Order and Receiving Note (ORN) and a Cash &
Credit sales summary (C&C SS). It is a summary of the following information: purchasing of the goods, the incoming funds of customers (cash, function, and credit), the banking of the money and the payment to the suppliers. In case the unit is under a management contract the cash inflow to the debtors’ office from the client is also put in the PRS.
29
Source: Request For Proposal Document
Figure 10 Figure 11
39
This trade analyses is the base for the contract ledger. Al the information of the contract ledgers is assembled into the general ledger. This gives the financial director the impression of the company’s performance. It is however not possible for the financial director to go from the general ledger into the contract ledger. If he wants to see the contract ledger, in order to see a single unit’s performance, he needs to go in to the carton boxes in which they are kept. This is very time consuming and the system gives not a clear overview on the units that are under or over performing. It is a manual job.
30This was my view of the desk I used in Randburg office at the debtors and creditors department. These boxes are filled with contract ledgers. Sometimes a financial employee would sit down and go through several boxes in order to find some part of a contract ledger. Although there are a number of cases one can think of where monitoring this information would be very practical for the organization, (think for example to see patterns in a certain unit, or to investigate fraud) due to its weak accessibility the information was seldom used. Other deficiencies Fedics has to deal with while using Option 3 are explained in the next paragraph.
30
Deducted from interviews with; Melissa Goldie Debtors department, Anisa Wasta debtors department,
approved by Jean Moodly accountant of the finance department of Company 1.
40
4.2 Deficiencies deriving from the old systems
From the deficiencies the whish to change the accounting system evolved. To continue with the old system is very dangerous, there are increasing risks and technical constraints.
The costs of the old system are too high and the old system does not support the business model of Fedics sufficiently anymore. Certain changes in the environment of Fedics had a lot of effect on the current system. Fedics as a company has also grown in size and age, which has impact on the organization. Looking at the present situation the following deficiencies that derived from the old system could be identified.
The shift from “management fee” business to “risk” business, and the ongoing need to drive volumes through the business, at appropriate margin levels, has shown the current system to be inadequate, as it does not allow the appropriate level of information or control to run the business in the current environment.
The changed business environment requires systems and skill sets that have not been present in Fedics in the past. Fedics thus needs to both change the business practices and culture and provide a system that supports the new business model. A new business system could be one of the drivers behind the skill/culture change
31.
By this Fedics intends the following; IT not only produces action but also symbolically renders events, objects and processes so that they become visible, knowable and sharable in a new way. This rendering visible of events, objects and processes, so that the use of IT itself produces new information, will inevitably set in motion dynamics that will ultimately reconfigure the nature of word and the social relationships that organize productive activity.
32In other words, if a common goal is set, in this case a new IT project, people will start to change more than only the IT project. Since IT must be embedded in an organization structure and culture will change with the implementation as well. This is in my opinion an argument for the question whether quantified benefit studies for information
31
Deducted from the Business case
32
