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Chapter 4 • Development Life Cycle 137

APPENDIX B

BONUS REAL-WORLD CASE

Overstock.com

Overstock.com executives had to reinstate earnings for a five-and-a-half-year period, dating back
to 2003. Overstock incurred accounting mistakes during that period, which led to a $12.9 million
reduction in revenue and a $10.3 million increase in cumulative net loss. CEO Patrick Byrne
explained the $14.2 million third-quarter loss to investors this way: “My bad.” This was all due
to an overly aggressive CEO and a problematic Oracle ERP rollout that started back in 2005.
Overstock had previously used a homegrown system and rushed the Oracle implementation
project in order to get the new system live before the fourth quarter of 2005 and the busy shop-
ping season. “Honestly, it didn’t have anything to do with Oracle per se, it was the
implementation,” Overstock stated. “We had consultants and we had help, but it was all driven by
Overstock. We set the timelines.” The problems with the rushed implementation manifested
itself in strange ways. “Some things were going through okay and a lot weren’t,” CEO Patrick
Byrne said. “It was just spraying orders. Sometimes customers might not get a ship confirm.
Sometimes the order might not flow through the system. Sometimes the order got misrouted.”
After the restatement and delivery of the third-quarter financials, The Motley Fool financial Web
site named it as one of five stocks in a tailspin.
As part of their accounting module upgrade they changed from recording refunds to cus-
tomers in batches to recording them transaction by transaction. After the implementation, in the
instance of some customer refunds, this reduction wasn’t happening, and Overstock didn’t
“catch it.” Overstock uses internal “reason codes” that show why various customers get refunds.
Under the new system, not all reason codes were automatically recorded; some customer refunds
required manual entry in the financial system. Unfortunately, Overstock missed some of the
manual customer refunds and, as a result, did not record all that were occurring. Over time, this
error built up and, on a cumulative basis, eventually became material. In addition, the company
learned that the system failed to “reverse out” shipping revenue for cancelled orders, “and these
$2.95 charges also added up over time. Overstock had been under-billing its fulfillment partners
for certain costs related to product returns over the past two years, they weren’t recording some
customer refunds and we weren’t recouping some costs from partners on some returns. The
combined result was that the returns costs looked reasonable. One observer said problems like
those cited by Overstock.com can happen on any ERP project without the proper care and
planning.” The ERP system will do what you design it to do, which is why we often say it’s very
important to spend time on design and mapping. As you can see by these cases, not properly preparing
and setting realistic time lines can lead to a disastrous implementation. It only takes one module
to be corrupt to affect the entire organization. “Our 1st Commandment is ‘maintain a bullet-proof
balance sheet,’ but while the spirit is strong, the flesh made a mistake,” Overstock.com CEO
Patrick Byrne said in an October 24 letter to shareholders. “The short version is: when we
upgraded our system, we didn’t hook up some of the accounting wiring; however, we thought we
had manual fixes in place. We’ve since found that these manual fixes missed a few of the
unhooked wires.”