Study of ERP Implementation at Apple Computers, Inc.
Analysis of an IT contract
Report prepared by
SAP R/3 Implementation at Apple Computers, Inc.,USA
Which company are you analyzing? What is the company's business? Give some brief
background introduction to this company.
We have chosen the implementation of SAP R/3 at Apple Computers Inc. USA for our analysis.
Apple Computer, Inc., incorporated on January 3, 1977, designs, manufactures, and markets
microprocessor-based personal computers, related personal computing, and communicating
solutions. The company‟s products are sold to education, creative, consumer, and business
customers worldwide. Apple Computer reported sales of $7.98 billion for the fiscal year ending
The Company offers a range of personal computing products including desktop and notebook
personal computers, related devices and peripherals, networking and connectivity products, and
various third-party hardware products. All of the Company's Macintosh products utilize
PowerPC RISC-based microprocessors. The company‟s offering include
Power Mac line of desktop personal computers targeted for professional users
PowerBook line of portable computers for mobile computing needs
“iMac” line of desktop personal computers targeted for educational users
“iPod” digital music player
Certain associated Apple-branded computer hardware peripherals, including flat panel
TFT active-matrix digital color displays and AirPort wireless networking base stations
and add-in cards. The Company also sells a variety of third-party Macintosh-compatible
hardware products directly to end-user
MAC OS operating system
Final Cut Pro 3 video authoring/editing software
“iDVD 2” is a consumer oriented software for making iMovies into DVD format
“iTunes 2” is a digital music application for the Macintosh that lets users create and
manage their own digital music library.
AppleWorks 6.2 is an integrated productivity application that incorporates word
processing, page layout, image manipulation, spreadsheets, databases and presentations
in a single application.
FileMaker Pro database software and related products offer strong relational databases
and advanced desktop-to-Web publishing capabilities.
QuickTime 5 Player, the Company's current version of its multimedia software for
Macintosh and Windows platforms.
WebObjects, the Company's Java-based application server for Web publishing and
enterprise application development, offers a complete solution for rapid development and
deployment of Web applications.
Apple currently offers three free Internet services collectively called iTools. Mac.com is
an e-mail service run by Apple. iDisk offers users 20 megabytes of private or public
storage on Apple's Internet servers. HomePage allows users to create their own personal
Website hosted by Apple with personalized content including data, pictures and movies.
Apple also currently offers on its corporate Website, iCards, an electronic greeting card
Why the company chose SAP? If the company did not choose SAP, instead the company
chose SAP's competitor, what was the reason?
Apple Computer‟s business operations were distributed over 16 legacy applications operating on
a legacy platform. Apple had a vision for a new business model centered on an integrated supply
chain. That vision included the implementation of an enterprise resource planning system from
SAP. However, implementation of a large-scale SAP system would typically require two to three
years of concentrated effort. That wasn‟t fast enough for Apple.
When they began/finished SAP implementation? I.e., what was the date started, and what
was date finished? Was the implementation publicly announced?
Start Date: December /January 1998
Date Finished: January 1999
SAP system was officially launched on January 2nd 1999. The launch was publicly announced.
The implementation was done within 12 months.
The launch date of the SAP system coincided with two other events: major product launches of
the new Macintosh G3 and colored iMac models on Apple‟s on-line store, Apple.com
Which consulting partner helped the implementation?
KPMG Consulting (now known as BearingPoint)
How much did the company spend? E.g., license fees (software) and implementation fees
(consulting and other charges).
- Unable to capture the exact cost figures
- We estimate around 45 to 50 million dollars based upon the size of the company, the 12-
month implementation time frame and the KPMG implementation team size of 35
What were the modules implemented?
KPMG helped Apple implement a SAP enterprise resource planning (ERP) solution, the scope of
which included the following functional modules: finance, sales, distribution, and
manufacturing. In 12 months, the team replaced 16 legacy applications and Apple‟s core legacy
hardware platform. The solution included an electronic data interchange, linking 80 interfaces to
Apple‟s new SAP system.
What is the performance impact of SAP implementation for this company?
STOCK Quotes between Jan 98 to Jan 02
APPLE COMP INC (NasdaqNM:AAPL)
Stock Price before implementation (January 1998) was $9.16
Stock Price after Go-Live with the new SAP system (January 1999) was $20.59
Chart of Stock Prices between Jan 98 to Feb 99
Date Open High Low Close Volume Adj. Close*
Feb 99 41.31 41.44 39.09 39.19 3,987,650 19.59
Jan 99 41.69 46.91 37.91 41.19 7,222,800 20.59
Dec 98 33.06 41.16 31.81 40.94 5,355,436 20.47
Nov 98 37.56 38.91 31.84 31.94 4,770,095 15.97
Oct 98 36.22 39.34 29.66 37.12 5,376,854 18.56
Sep 98 32.75 39.75 32.38 38.12 3,506,590 19.06
Aug 98 34.69 43.28 31.09 31.19 5,990,261 15.59
Jul 98 29.41 37.81 29.00 34.62 4,509,240 17.31
Jun 98 26.38 28.75 25.94 28.69 1,639,977 14.34
May 98 27.75 31.28 26.19 26.62 3,133,955 13.31
Apr 98 27.47 29.25 24.84 27.38 3,512,685 13.69
Mar 98 23.16 28.00 22.38 27.50 4,420,809 13.75
Feb 98 18.09 23.75 17.53 23.62 3,700,078 11.81
Jan 98 14.94 19.84 14.88 18.31 4,631,260 9.16
On the internal front, a wide range of business improvements were observed:
1) Improvements in manufacturing processes
Since its SAP system went live on January 2, 1999, the company has experienced substantial
benefits in many business areas, starting with measurable improvements in manufacturing
processes. Cycle times have shrunk by 60 percent in the areas of build-to order and
configure-to-order, and this was achieved while processing more than 6,000 orders a day.
Newfound efficiencies have rippled through to Apple‟s supply and demand chains.
2) Complete Integrated Solution
Today Apple has one integrated solution for their complete supply chain, and new Web-
based ordering capabilities put them in direct contact with their true customers. They now
have more knowledge about, awareness of, and interaction with the true customer. In
addition to enabling Apple to keep its finger on the pulse of customer demand, users from
across the company are discovering the powerful benefits of access to real-time data. Today
they have instant access to a wide range of data, from manufacturing to financial.
In the past, because they had so many disparate systems sometimes they would get two
different answers to one question, depending on where they looked. Now Apple can look
directly into the manufacturing process to check order status, investigate credit issues, and
perform countless other activities.
3) Better Relationships with Business Partners
These kinds of improvements, and especially configure-to-order manufacturing, have
enabled Apple to enhance relationships with its business partners. Their channel partners are
happier because now Apple offers greater predictability in filling orders. They can also rely
on Apple for better inventory management, reducing the need to carry large amounts of
stock. The new SAP system also enables Apple to deploy their IS resources more effectively.
Having one system on which they can run their business meant that when they wanted to
make a change, they only need to change it in one place. The previous environment had 16
systems providing the capabilities that they now get from R/3.
Applying the Matrix of Change to this Case
The goal of the Matrix of Change is to help managers visualize how to address changes in
business processes and system changes. Change invariably disrupts existing business processes,
and business process and system changes must be aligned and managed effectively to achieve
intended performance gains. The Matrix of Change captures the key elements of a proposed
change and presents it in a framework, which makes it easier to investigate the complementary
and conflicting processes. The Matrix of Change presents a way to capture connections between
practices. It graphically displays both reinforcing and interfering organizational processes.
Apple Inc. did not follow the Big Bang approach of SAP implementation. They determined the
„sweet spot‟ for the scope of their SAP implementation and in the first 12-month period they
focused on those SAP functions that would most significantly benefit their business.
The key impact areas identified for initial SAP implementation were:
Sales & Distribution
Existing Business System of Apple Inc (before Jan 1999)
Logistics support to Business Customers and Third Parties
Order Status Tracking
Target Business System of Apple Inc (within 12 months)
Target Business System of Apple Inc
Electronic Tracking of Customer Orders
Information Enhanced Database connectivity (Integration to Advanced Planning
Build-to-Order and Configure-to Order manufacturing capabilities
Available-to-promise and rules-based allocations
Web-enabled Configure-to-Order Order Entry
Real – time credit card authorization
Using the MOC Software Version 4.014 by John Quimby we have developed the following
MOC diagram. As you will see the transition matrix is highly positive (reinforcing) in this Case
Study indicating that the transition to the new system would be a worthwhile and advantageous
implementation for Apple.
Part 2: Analysis of an IT Contract
What is the industry selected?
Value added Electronic distribution industry; however it also provides a diverse mix of products
and services that include:
Custom assembly of electronic components
Integrated, custom production resources for complex assemblies, sub-systems and other
out of the ordinary needs
Contract manufacturing aimed at supporting customer design and manufacturing needs.
Electrical and mechanical assembly of interconnection products and switches
Wire cutting and stripping services
Custom or standard bar coding
Military and customer specific intermediate and outer-level packaging that are water,
vapor and weather proof. Including packaging for aerospace and defense contractors.
What are the key motivations or driving forces for the industry to implement
ERP/CRM/SCM or similar e-Business projects?
To provide connectivity to their existing SAP ERP system via wireless medium such as PDAs,
Cell phones and the Internet on any computer to facilitate easy electronic ordering, checking of
order status and shipment tracking for their key customers and their mobile sales and workforce.
How the vendor and consulting firms selected and what are is the negotiation procedure?
The vendor approached the customer with a unique solution and offered to develop it as per the
What are the key terms in the IT contract?
The key terms of this contract between the vendor and the customer are:
An initial payment upon execution of the agreements
Subsequent payments based on three milestones set in the contract.
Telephone and email maintenance and support for the first year of the contract.
The contract agreement is in force for ten years from the date of execution
The software provided remains under the ownership of vendor
There are no warranties on any client equipment, hardware or network.
The supplied software is under limited warranty that does not guarantee compatibility
with future versions.
What are the deliverables in the IT contract and how does the firm enforce them?
The deliverables set out in the contract are the web-based/wireless SAP connectivity software for
up to 50 users, a SAP adapter, PDA and a PC/WEB front end device.
In order to enforce the contract the customer has set out a milestone payment system. Only as
the milestones completed is payment made. By pegging the milestones to a payment system, this
in essence ensures that the major features of the project are completed to the customer‟s
satisfaction before any further remuneration is given to the vendor.
An initial down payment is made at the beginning of the contract. Then as each of the three
critical milestones is completed, payment is made. These milestones are:
Re-vamping of the HTML front end
Configuration of basic warehouse management functionality for PDA use
What are the several main pricing structures for representative IT contracts, and how are
IT project risks managed in the contracts? Compare the advantages and disadvantages of
The main pricing structures for representative IT contracts and how risk is managed and their
advantages and disadvantages are :
One stage and two stage in-souring fee structures – this involves the project being
handles in-house by the IT/IS department. This has the advantage of being able to
control risks and project life cycle. This has a better assurance that the project will be
more successful because control and management is kept in-house.
One stage outsourcing with a fixed fee structure – this involves a single lump sum
payment from the customer to the vendor regardless of the outcome of the project.
The advantage of this pricing structure lies in the fact that even if the costs increase,
the price stays the same as set out in the contract. However, the disadvantage lies in
that there is risk management is minimal and the prospect that the project will be over
the schedule and will not meet customer needs and satisfaction is very high.
One stage outsourcing with fixed incentive – this stipulates that payment will be
made based on the successful completion of the project. The advantage here is that
the success of the project is pegged to payment hence if the customer is not satisfied,
then payment is not made. Risks and expectations are better managed in this situation
because payment is not guaranteed.
One stage profit dependant incentives – this involves the vendor or agent providing
some upfront investment such as training to the project so that it is a joint venture
between the customer and vendor and both parties have a stake in the project‟s
outcome. This has the greatest advantage because the vendor has a stake in the
project hence it is more likely to succeed because the vendor is likely to loose its
investment is the project is not successful.
Two stage outsourcing with options – this involves a basic fixed fee structure and
allows the vendor the option to continue to the second phase of the project using the
same fixed fee set out in the first phase. Hence the project has two phases to it. The
advantage here is that the customer can contract another vendor to perform the second
stage if the first was not completed to customer‟s satisfaction. If the risk of
continuing on with the vendor to the second stage is too great then another can be
contracted hence reducing the risk considerable.
Two stage outsourcing with co-investment – this is also a two phase contract in
which the vendor provides investment in the first phase in exchange for first refusal
rights for the next phase of the project. As with the one stage outsourcing with co-
investment, both parties are stakeholders in the project hence the risk of project
failure is reduced. However, the vendor gets the first option to continue to the next
phase. This is a disadvantage to the customer in the event that customer is not
satisfied with phase one and the vendor opts to continue to phase two.
Two stage outsourcing with rebate – this uses a fixed fee structure and the vendor‟s
agreement to provide a rebate and discounts to the customer in there event of the
second phase being award back to that vendor. This is advantageous to the customer
because they are able to decide whether to proceed with that vendor to the next phase
which would significantly reduce the cost of the second phase because of the rebates
What specific pricing structures are in the contract collected?
The contract collected is one stage outsourcing with a fixed incentive. There is an initial
payment at the beginning of the contract and then subsequent payments are based on completion
of three milestones specified in the contract. This is very advantageous to the customer because
it sets out the areas that are critical to the customer to be completed and hence satisfied. As each
milestone is completed successfully payment is made reducing the risk of project failure because
success is explicitly specified and checked off as it happens and then payment is made. This
contract fits perfectly into the Ding-Wu-Hitt classification i.e. class 3.
What are the lessons learnt in IT investment?
IT contracts are key to managing project risk and success. The way in which risk is
managed within the project is directly derived from the contract for example one stage
outsourcing with a fixed fee structure does not mandate that risk is managed in any way
but one stage outsourcing with fixed incentives specifically sets out how to manage risk
and success because the benchmarks for success are laid down clearly in the contract.
IT contracts can be structured with a mix of features to get maximum benefit from the IT
project. It was previously thought (by our group) that one standard type of IT contract is
used for all projects but it is clear that is not the case.
How could practical IT contracts be improved?
IT contracts can be improved by mixing different elements into one contract for maximum
benefit to the customer and vendor. For example, using two-stage outsourcing contracts which
include options, rebates and discounts for the second phase in the event that the vendor continues
onto the second phase. In addition, the contract could also set out milestones for project‟s
success with fixed incentives to the vendor on completion of these milestones.
1. Ding M., Wu D.J., Hitt M.L., ERP Outsourcing Efficient IT Contract Structures In: Extended
Abstracts for WISE 2002: Workshop on Information Systems and Economic. Barcelona, Spain.