Case Study: How Revlon got sued by its own shareholders because of a failed SAP implementation
Cosmetics company Revlon’s roots stretch back to its 1932 nail polish launch by Charles Lachman and brothers Charles and Joseph Revson. Since its early days, much has changed.
The company’s products have found their way into the everyday lives of individual customers and onto the shelves (digital or physical) of major retailers across the world. Though best known for their makeup, Revlon sells a startling range of cosmetics including hair coloring kits, deodorants, and fragrances to both men and women globally.
Last year on a call following the announcement of the company’s first-quarter results for fiscal 2018, Revlon announced that its SAP ERP implementation was a disaster. This came on the heels of delayed financial reporting because of said SAP implementation failure.
The company’s stock fell 6.9 percent within 24 hours of reporting the news, which led to investor lawsuits against the company. Not good, especially for a publicly traded and well-known consumer product company.
Some four law firms have filed class action suits to date, based on the U.S. beauty behemoth’s quarterly results where it confessed it was unable to fulfil orders to the tune of US$64 million because of its inability to record and account for inventory.
“ In early February , we rolled out SAP for a large part of our North American business to integrate planning, sourcing, manufacturing, distribution and finance… However, we experienced issues during the SAP changeover that caused the plant to ramp up capacity slower than anticipated, “ Christopher Peterson, COO, told investors on this call.
“ As a result of the poor preparation and planning of the implementation of the ERP system, Revlon was unable to fulfill product shipments of approximately $64 million of net sales,” claims a lawsuit filed in the U.S. District Court in New York by Rosen Law Firm on behalf of an investor. The lawsuit was announced late last week and seeks class action status.
Revlon is the latest in a string of recent SAP enterprise resource planning (ERP) failures. Lidl, National Grid, and Haribo are just a few other companies that have experienced such massive challenges.
ERP problems, including implementation failures, are common. But an ERP problem that results in an investor lawsuit is rare. The more common disputes are between ERP customers and the system implementers.
So what happened at Revlon?
A timeline of events
In June 2016, U.S. cosmetics company Revlon announced its intention to buy Elizabeth Arden Inc. for US$870M. The acquisition was completed in September of the same year.
Revlon then kicked off 2017 with a major restructure, cutting jobs and streamlining operations as part of the acquisition and integration. This activity alone was projected to cost between $65 million and $75 million over the coming four years. Revlon also acquired the Cutex brands in the same year.
Elizabeth Arden was an early adopter of Oracle Fusion Applications according to a Forrester report of 2013. In the 2008 annual report for Elizabeth Arden, the chairman, president and CEO E. Scott Beattie was quoted as saying, “Our global efficiency re-engineering project remains on track and we currently anticipate savings of approximately $10 million to $12 million by the end of fiscal 2009 and additional savings of approximately $13 million to $15 million by the end of fiscal 2010. A significant component of our global efficiency re-engineering project is the implementation of an Oracle financial accounting and order processing system. During fiscal 2007, we successfully implemented the same Oracle solution in our Greater China business.”
Revlon had previously chosen Microsoft Dynamics AX which was an equal success story. Revlon ran 50 different business entities with a plan to collapse 21 separate ERP systems into one. Dynamics AX was to be implemented at Revlon to act as one unified organization under the leadership of David Giambruno, senior VP and CIO of Revlon back in 2013.
Giambruno was quoted as being in favor of a “no customization rule” within Revlon. The base implementation and the first company took a year to go live. The second country went live in 14 days and the third country in less than a day! Giambruno left Revlon in November 2013. Juan Figuereo, a new Revlon CFO, joined the company in April 2016 only to retire just over a year later in mid 2017.
Fast forward to today, and it comes as no surprise that off the back of the acquisition, Revlon considered migrating to something different. Colomer, the Barcelona-based hair and beauty products firm that was acquired by Revlon in 2013, ran on SAP. The subsidiary Red Door Spas, part of the Arden business, also ran on SAP. Colomer/Revlon implemented HANA in April 2014. In the middle of the project, Colomer was acquired by Revlon; this affected the project, in that the landscape had to be moved from Spain to the USA.
When exactly the decision to switch to SAP was made, or why, I can’t say; however, this decision was already on the cards per the fiscal year ending December 31, 2016 filing. Ahead of the implementation the filing even stated that
This system implementation subjects the Company to substantial costs, the majority of which are capital expenditures, and inherent risks associated with migrating from the Company’s legacy systems. These costs and risks could include, but are not limited to:
> inability to fill customer orders accurately or on a timely basis, or at all;
> inability to process payments to vendors accurately or in a timely manner;
> disruption of the Company’s internal control structure;
> inability to fulfill the Company’s SEC or other governmental reporting requirements in a timely or accurate manner;
> inability to fulfill federal, state and local tax filing requirements in a timely or accurate manner;
> increased demands on management and staff time to the detriment of other corporate initiatives; and
> significant capital and operating expenditures.
If the Company is unable to successfully plan, design or implement this new SAP ERP system, in whole or in part, or experience unanticipated difficulties or delays in doing so, it could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows.
While statements like this are not entirely unusual, it is a red flag to investors, or should be, indicating that the business anticipates problems and chooses to protect itself accordingly with such caveats.
Revlon said on its earnings conference call in March 2018 that while it remained on track with the Elizabeth Arden integration activities, it was seeing lower sales volumes, but that they expected the total estimated synergies to be impacted over the multiyear period.
At the time the specifics of the implementation of the new SAP ERP system, which went live at the beginning of February, was said to be overall on schedule in terms of the implementation steps. “ Production capabilities and inventory recovery has been slower than expected, affecting our current order fulfilment levels.”
Revlon said it had taken “ immediate actions to address the situation, have implemented a robust service recovery plan and have communicated with our key customers.” This suggests many temporary hands in warehouses to pick, pack and ship as well optimize and cut backorders.
As Revlon COO Christopher Peterson stated in 2018, Revlon had implemented SAP for a huge portion of the North American company for improved supply chain integration to increase efficiency and improve working capital management, but the SAP changeover resulted in an initial slowing of plant operations, disrupting the manufacture of finished goods and fulfilling orders to large retailers.
Revlon attributed to the changeover a reduction of $20M in net earnings in one quarter alone, accompanied by $10M in unplanned expenses including non-recurring labor to improve customer support. At the time (2018), Revlon had implemented SAP in 22 countries on the Revlon heritage side of the company. Apparently, the Arden switch-out of JD Edwards had not even begun at that stage.
A year later, in March 2019, CFO Victoria Dolan said Revlon had spent $32M in 2018 on operating activities in comparison to 2017, taking the costs of the migration to $54M; understandably, profits and stock prices dipped. Revlon reported increased losses. The fiscal year 2018 (ended on December 31) closed with $294.2 million dollars in the red, compared to $183.2 million-dollar losses registered in 2017.
Ironically the results were due to a drop in sales of all its business categories, except Elizabeth Arden, partly caused by the breaks in service levels directly attributed to the SAP implementation. Revlon also qualified the losses by saying that the rise in losses was also related to the re-acquisition of some rights connected to the brand Elizabeth Arden.
In March 2019, the United States Securities and Exchange Commission (SEC) made public Revlon’s first-quarter 10-K filing, thus illustrating to the wider world the dire SAP ERP issues in the Oxford plant and their wide-reaching effects on the business. Around the time of the SEC’s release, the company’s chief financial officer made clear to the public that the SAP ERP issues had been resolved and that the Oxford plant was up and running as normal.
After the March 2019 financial statement stock prices improved.
Yet, in May of 2019, Revlon faced a stream of painful class action lawsuits from firms Bragar, Eagel, & Squire; Rosen Law Firm; Wolf, Haldenstein, Adler, Freeman, & Herz; and Zhang Investor Law. Ouch.
In the class action suit, specific reference was made to the Oxford center in North Carolina where the business was supposedly unable to fulfil product imports of about $64M worth of revenue.
What went wrong?
As if the above weren’t enough Revlon also reported that:
> The company was unable to recover lost sales from the SAP failure
> Customer service levels were disrupted
> There were increased demands on its management team and staff, which cannibalized focus on other corporate priorities
> It incurred significant capital and operating expenditures
> It experienced difficulty processing payments to vendors
> It was unable to fulfill federal, state and local reporting and filing requirements in a timely or accurate manner
> It had greater than expected expedited shipping fees, resulting from the customer firefighting stemming from the SAP failure
> It suffered from an “inability to fill customer orders accurately or on a timely basis, or at all”
How could Revlon have done things differently?
Incremental Software Implementation Strategy
Perhaps Revlon should have considered starting small. The disaster that was their SAP ERP implementation in the Oxford plant might have been avoided if the company had used a narrow roll-out strategy for the software.
When a company utilizes an incremental roll-out strategy the former system is slowly replaced as the new SAP ERP is rolled in. The benefits of such a strategy are obvious: if the new software is implemented piece by piece, potential problems can be sussed out, understood, and handled on a small-scale without causing serious damage to the company’s reputation, efficiency, or bottom line. Even if large-scale issues occur in the future, the company will have experience getting such matters under control and will be more likely able to snuff out the problem quickly.
Furthermore, employee training may be more gradual and thorough should the company choose a roll-out rather than big-bang strategy. Opting for a big bang means that they have selected to implement the new SAP ERP across the board simultaneously.
Revlon could have chosen to implement a roll-out strategy on a less vital company entity first, thus working out the kinks of the software-business partnership, before gradually stepping into major company entities like the Oxford plant.
Risk Management Is Project Management for Adults
Revlon, like many companies implementing SAP S/4HANA and other ERP solutions, didn’t seem to understand the risks associated with their transformations. Worse yet, they must not have quantified or implemented effective strategies to mitigate those risks.
In this case, Revlon experienced shipping delays and lost sales due to production stoppages at its North Carolina plant — the location of the first phase of its SAP go-live.
Had Revlon understood, quantified, and mitigated the inherent ERP implementation risks, it would have taken action to ensure that its go-live didn’t materially affect its operations.
Had Revlon had a sufficient emergency plan in place, they might have amended the Oxford disaster in a far shorter period of time, and thus caused less damage to the company. How many of the issues which arose in 2018 could have been foreseen? Could solutions have been found in advance of implementation?
If Revlon had better planned for such problems, perhaps the problems could have been avoided in the first place or even simply nipped in the bud.
As Tim Lister says, risk management is project management for adults.
Organizational Implementation Readiness
Prior to implementing SAP, Revlon had some significant operational issues related to its acquisition and integration of the Elizabeth Arden brand. As it outlined in its financial filings, it was having trouble integrating the operations, processes, and organizational structure with its newly acquired company. An SAP implementation is likely to fail against this type of backdrop.
Instead of focusing on the futile attempt to roll out new SAP ERP software, the company should have built a stronger business blueprint and foundation for the overall transformation. This would have begun with defining how Elizabeth Arden would fit into its overall operations, as well as defining clear business processes for the implementation.
This SAP S/4HANA implementation readiness phase is a critical but often overlooked ingredient to transformation success.
While the circumstances surrounding the newest ERP lawsuit are unique, as are the plaintiffs, the events that led to the failure of Revlon’s SAP system are all too familiar.
It may be tempting to blame the SAP software or whoever the system integrator was, but Revlon and others should recognize that they ultimately have to own the results of these sorts of transformations.
For starters, it does not seem as if Revlon understood either the size of the projects nor any of the risks inherent in rolling out a new ERP software system. It doesn’t appear as if the cosmetics giant developed any strategies to offset the possible risks.
Complicating matters, the company was encountering major problems integrating the Elizabeth Arden brand into its business. Rather than focusing on getting the new ERP system up and running, it should have first addressed the operational problems. Any ERP implementation is likely to fail under these circumstances.
Furthermore, the company admitted in the SEC filing that it had “material weaknesses” with its own internal controls caused by the ERP implementation. Having an effective business plan before starting an ERP project can help companies to avoid this.
But without question, the largest problem for Revlon was that as a result of the ERP train wreck the project resulted in a negative ROI stemming from production and operational issues when Revlon brought the SAP system online.
Costly failures such as the one Revlon encountered can be avoided. Doing so requires top management to own the project and develop a plan to smoothly meld the technology into the business process, not the other way around.
Other project failure case studies
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Originally published at https://www.henricodolfing.com.