In December 1995, FoxMeyer Drug was a $5 billion-a-year company, one of the leaders among distributors of pharmaceuticals. A year later, it had gone into Chapter 11 bankruptcy proceedings, and a renowned turnaround artist had thrown up his hands in despair. The company was later sold for just $80 million to archrival McKesson.

How could such a huge corporation have gone so wrong so fast? Some former officials of the Carrollton, Texas, company say they know. They place the blame squarely on the ambitious new $100 million computer system that the company installed to handle its rapid growth. Executives at FoxMeyer's former parent, now known as Avatex, have sued, claiming deficiencies in the software it bought.

The claim of catastrophic technology problems resonates in an age when information technology is at the heart of what many companies do. Certainly, managements increasingly are inclined to blame their computers when there is an earnings or operations problem—Dell Computer, Oxford Health, Westinghouse, and even the once-luggage-eating new Denver International Airport have all done so.

But former FoxMeyer executives, industry experts, and securities analysts say FoxMeyer had deeper problems than technology. They say FoxMeyer was so desperate to expand that it made absurdly aggressive assumptions about how much it would save by using an untried computer system that it was ill-equipped to install.

It's useful to take a look at the FoxMeyer catastrophe to see just where technology is—and isn't—to blame.

FoxMeyer, which was more than a century old, was nearing a crossroads by the mid-'90s. Thanks to the aging of America and a stream of new wonders from labs, pharmaceutical sales were exploding. But pharmaceutical distributors' profit margins were thin as political and social pressures on health care costs mounted and as the cutthroat distribution business began to consolidate. FoxMeyer wanted to be a survivor.

To become one, management decided that it needed to replace the brains of its far-flung distribution system. Orders were beginning to total a half-million different parcels each day, and success was predicated on handling extremely complex, jigsaw-puzzle-like shipments with exact timing. "Shipping pharmaceuticals isn't like shipping bananas. There are a lot of government controls and procedures in different states," says Wade Hyde, a former investor relations executive with FoxMeyer. "Many drugs are heavily secured. Some quickly expire. Meanwhile, hospitals [have to get a steady stream of] these drugs, because they're literally dealing with life and death. You can't make arbitrary or late shipments."

FoxMeyer's old Unisys mainframe was creaking under the strain. It could only track inventories daily, for example, as shipments came and went-not minute by minute, as had become the standard at some competitors. Many of its 30 warehouses across the country were older buildings operating on clunky software.

So FoxMeyer decided to invest in Enterprise Resources Planning (ERP), which has become the Big Business Fix of the '90s. The idea is to knit all of a company's diverse operations into a single, sophisticated reporting and planning system. When a product is manufactured, for instance, a database would be updated automatically so that the shipping department would know it had one more gizmo to deliver. The purchasing department would know that one more gizmo had come off the assembly line, helping it decide when to order more parts. The finance department would know to generate an invoice to go out with the gizmo. And so on.

Many companies not only implement ERP systems to attempt long leapfrogs in efficiency but to transform their cultures. "In the last couple of years, we've seen more and more larger companies decide that they're going to take ERP to the wall," says Chris Jones, vice president of manufacturing applications for Gartner Group, a Stamford, Conn.-based information-technology research and consulting concern.

Because of the complexity of ERP software and because of the vast changes that the systems often require companies to make in the way they operate their businesses, ERP projects are complicated even under the best of circumstances—and FoxMeyer didn't benefit from the best of circumstances.

FoxMeyer started with the idea that it would install an ERP system to process the hundreds of thousands of order requests that the company received each day. The system would manage the packaging and routing of pharmaceuticals from dozens of vendors to thousands of hospitals, clinics, drug stores, and other customers. FoxMeyer purchased software from the dominant supplier, SAP. The company hired Andersen Consulting and other consultants to help with the installation.

Simultaneously, FoxMeyer decided to install a new warehouse-automation system, increasing the complexity of its plans. FoxMeyer bought from an experienced vendor, McHugh-Freeman, whose system was to automatically "pick" more than 80% of outgoing orders from shelves in warehouses.

Robert R. Brown, the chief information officer at the time, told the trade publication Computerworld in 1994: "We are betting our company" on these systems.

At the same time as it was installing those huge automation systems, FoxMeyer was pursuing an enormously important contract, a $1 billion-a-year deal from University HealthCare, a huge consortium of teaching hospitals across the country. FoxMeyer's trump card was the promise of bargain-basement prices because it was anticipating $40 million a year in cost savings from the ERP implementation. FoxMeyer won the contract.

But, in addition to increasing significantly the expected load on the ERP system, the new contract prompted management to order a speed-up of implementation of some parts of the SAP software package by three months. Thus, a new software system that originally had been expected to provide a cushion for order growth for the next several years instead became an immediate necessity just to service business that the company already had taken on.

By early 1996, the new systems already were taking on water. Nowhere were the problems more apparent than at the company's sprawling new distribution center in Washington Court House, Ohio. The warehouse began to mishandle millions of dollars worth of orders. Sometimes, the orders didn't go out at all. Sometimes, orders were sent twice. The picking and packaging equipment often broke down, at times forcing troops of temporaries to put orders together by hand.

It became apparent that FoxMeyer couldn't service the entire University HealthCare contract, so it had to release some regions of the country, such as the Northwest, to competitors.

In August 1996, the company brought in Robert Peiser as chief executive to help clean up the mess. As chief financial officer of Trans World Airlines, Mr. Peiser had established a strong reputation as a corporate turnaround expert.

On the first day he showed up at headquarters, he filed for protection from creditors under Chapter 11 of federal bankruptcy laws. Mr. Peiser says he "felt the company had a pretty decent business base, and I'd have the opportunity to turn it around" thanks to the breathing room provided by Chapter 11. But, only a few weeks into the new job, Mr. Peiser decided the problems at FoxMeyer were too deep. By the end of November 1996, he had departed.

In early 1997, FoxMeyer announced that it would swallow a $34 million charge related to uncollectible costs on customer orders and to inventory problems. Stock in FoxMeyer's parent, which had risen to $26 a share in December 1995, crashed to around $3. McKesson agreed to pluck FoxMeyer's assets out of Chapter 11 for just $80 million.

So what exactly went wrong?

Avatex, FoxMeyer's former parent, says in its lawsuit that McKesson conspired with other FoxMeyer competitors to put FoxMeyer out of business. The suit also maintains that the SAP and McHugh-Freeman systems simply couldn't handle the vast number of orders that the suppliers said they could process. Federal bankruptcy trustee Bart Brown, who declined to return phone calls seeking comment, is determining whether Avatex or its creditors have grounds for a suit against SAP, Andersen Consulting, and others.

"We weren't happy with what we got for our $100 million-plus," says Ed Massman, chief financial officer of Avatex. "We don't believe [the suppliers] delivered what the commitment was, and somebody should be held accountable."

Former FoxMeyer Drug executives, Wall Street analysts, executives at companies that implement ERP systems, and independent consultants tell a very different story. They say FoxMeyer was too intent on expanding at all costs, didn't want to hear about the inherent limitations of the technology, and bungled the implementation of the software.

For their part, SAP and Andersen say their systems performed as promised. They say, for example, that at former FoxMeyer Drug facilities, McKesson is using essentially the same system that SAP and the consultants installed for FoxMeyer. They say the systems are operating smoothly.

The ERP providers say the real root of FoxMeyer's "technology problem" was the innate aggressiveness of two Texans, financiers Melvyn Estrin and Abbey Butler, who were co-chairmen and the largest shareholders of FoxMeyer's parent. A former FoxMeyer Drug executive also blames Thomas Anderson, who was the parent's president and chief executive. "It's his aggressive management style that really drove the company into the ground," the ex-FoxMeyer Drug executive says. "He was determined to be No. 2 or No. 3 [in the industry], whatever it took, and he had pressure from Mel and Abbey, too." Mr. Anderson, who left in February 1996 and is now president of the U.S. pharmaceuticals division of Alpharma, a New Jersey-based drug company, didn't return phone calls seeking comment. Messrs. Estrin and Butler weren't available for comment.

The ERP providers and consultants also argue that FoxMeyer placed an egregiously risky bet by counting so heavily on realizing efficiencies from the new computer systems. "They were putting out brochures saying (they had) the highest-volume facility in the nation, and it hadn't even opened yet," says Donald Spindel, a drug-distribution analyst for A.G. Edwards, St. Louis. "You don't see too many companies that price according to the expectations about a new facility. Just how strategically intelligent was it to put all their eggs in one basket as they did?"

Avatex's Mr. Massman says Andersen Consulting "developed the economics" undergirding the University HealthCare contract and says FoxMeyer Drug didn't count on any efficiencies beyond "what we were led to believe the systems and technology could deliver." He adds that "it only made sense to incorporate those projections [in the bid] because we were looking at five years out."

Industry executives say FoxMeyer's third mistake was that it bungled the implementation of its systems. FoxMeyer executives "didn't want to hear" about "functional holes that required a lot of modification" of the out-of-the-box SAP system if FoxMeyer really was going to vault past the competition's capabilities, says Kenneth Woltz, a Chicago-based consultant who had worked with FoxMeyer before the big ERP project began. He says FoxMeyer also "let the fox watch the henhouse." Rather than do its own quality assurance on Andersen Consulting's work, FoxMeyer let Andersen do it.

Mr. Woltz and others say caution and thoroughness about technology fell by the wayside because FoxMeyer management had committed itself to getting the ERP system up and running perfectly and quickly. "Somewhere along the line, it became, 'Let's meet this big new contract we've got,'" Mr. Woltz says. "It just put them in a bind."

Project overseers for FoxMeyer didn't ensure that the ERP system and the warehouse-automation software would work together smoothly, says Martin Piszczalski, industry analyst for Sextant Research, Ann Arbor, Mich. Also, FoxMeyer should have improved some processes before automating them but didn't, exacerbating problems at the warehouses, says Chris Cole, chief operating officer of Pinnacle Automation, a St. Louis-based company that supplied some software and equipment to FoxMeyer.

Once distressed, this line of argument goes, FoxMeyer bared another underlying weakness: It was short of technical people who could make sure their company was getting its money's worth out of the ERP system. In 1996, FoxMeyer even resorted to dangling 40% bonuses in front of dozens of key employees, mainly technical ones, but to little effect. "They had good people, just not very many," Mr. Cole says. Mr. Hyde, the former FoxMeyer investor relations executive, says: "When you've got a revolving door, it's tough to keep a major system implementation on line."

He adds: "A lot of people have tried to blame technology, saying that the system failed and caused the company to crash. But what really happened was that we created contracts that weren't feasible. Our pricing structure was ridiculous. We had overzealous management trying to increase market share. And they really believed projections of what the new warehousing systems and accounting systems would do." In an industry undergoing such competitive consolidation, those proved to be fatal mistakes.

Dale Buss is a freelance writer based near Detroit, Mich. He can be reached at Veritas@aol.com.

DANGERS ABOUND

"If [an Enterprise Resources Planning] project costs more than $10 million, your chances of coming in on time and on budget are statistically zero," says Jim Johnson, chairman of Standish Group International, which has surveyed more than 8,000 software-application projects over the past few years. "You also have a 50/50 chance of its being canceled before it's completed after you've spent 200% of your budget."

Chris Jones, a vice president of Gartner Group, another research firm, is somewhat more optimistic. "A few [ERP projects] are total disasters. Fewer still are unqualified successes. Most are somewhere in between," he says. "In many cases, no one has ever done some of these massive installations before—not the software vendors or the consultants."

Yet ERP projects keep growing and growing. The potential benefits of ERP are so great that it is becoming to the late 1990s what management information systems were to the 1980s and industrial-process controls were to the 1970s. In their silicon-sinewed muscularity, ERP systems can orchestrate everything from inventory levels to currency translations. Their brains send information rippling through a corporate-wide matrix that controls the tiniest single process—while providing a clear and real-time view of the big picture. And many ERP installations succeed, to at least some level.

Sales of such systems increased about 37% in 1997, to more than $6 billion in software alone, Mr. Jones says. Growth was at 30% in 1995 and in 1996. The total ERP "ecosystem"—which consists not only of sales of software but also of consulting services, hardware, and related products—is $25 billion to $30 billion annually, Mr. Jones says.

The German company SAP is by far the ERP industry leader, with systems installed in nearly half the world's 500 largest companies and with $2.5 billion of the 1997 software market. The company says it expects a 50% revenue jump this year, partly because of the Year 2000 problem.

But as the top dog, SAP also is taking the most black eyes. Mr. Jones says that SAP's prospects, and the ERP market in general, may finally begin cooling later this year. If so, analysts say, SAP and the entire industry can blame badly managed projects like FoxMeyer's for much of the loss of momentum.

- Dale Buss

HOW TO DO IT RIGHT

Interviews with Enterprise Resources Planning experts, organizations implementing ERP, and vendors of ERP software and services suggest that four things need to be done to make ERP succeed:

DO A BUSINESS CASE. A senior executive at a Fortune 100 company said he was spending $400 million on an ERP system but acknowledged that he didn't know just what return he expected on the investment. Even though ERP is heavy-duty technology, the expected return must be specified to provide discipline. The expectation should also be updated repeatedly as the ERP project progresses and mutates (which always happens).

FIND THE TECHNICAL LIMITATIONS EARLY AND AVOID SURPRISES. Most ERP implementations face serious challenges as they are deployed globally, which can raise costs and slow deployment. For example, companies using a popular version from SAP find they can't manage centrally their Korean, Japanese, and English ERP systems.

PLAN FAR, FAR AHEAD. Consulting firms often manage ERP implementation. The first involvement of internal I/T management may not be until 60 days after the project is finished, which creates all manner of support problems. The solution: Plan the post-implementation world long before you implement.

DON'T DECLARE VICTORY. When an ERP implementation is successfully completed, a champagne toast is certainly deserved. But that toast really marks the beginning, not the end, of the work. The value of an ERP system will be wasted unless a company keeps working to use the newly available information to improve decision making, measure progress, and refine processes.

- Ken Sansom