Influence of Business Process on the ERP Project Effectiveness

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1 Influence of Business Process on the ERP Project Effectiveness Jun-Der Leu*, Wen-Hsien Tsai*, Ping-Yu Hsu*, Julian Cheng*, Yi-Wen Fan** *Institute of Business Administration, National Central University **Institute of Information Management, National Central University Chung-Li 320, Taiwan Abstract ERP projects require a large amount of IT investment and their effectiveness is hard to evaluate. One of the reasons is that the ERP system implementation involves almost all aspects of an enterprise and an efficient performance evaluation schema is lack, thus the relationship between influence factors and project effectiveness can not be well described. ERP is an integrated information system based on the concept of business process. In it, all of enterprise resources and operations are organized in an integrated manner to achieve the business goal. In implementing an ERP project, many companies faced the problem of reorganizing their business process in which the processes have to be adapted to the capability of standard software to achieve a good coordination between the value-added process of company and the selected ERP systems. On the other hand, business process modeling is used as a base for the conceptual design, selection as well as configuration of ERP system for an enterprise. However, for a company, the business process reengineering (BPR) takes amount of efforts and the translation of reengineering concepts into reality is difficult because of the technological and culture change that it entails. In this paper, the ERP project effectiveness will be studied in the viewpoint of business process. Keywords: ERP (Enterprise Resource Planning), ERP implementation, Business Process, BPR (Business Process Reengineering), Effectiveness 1. Introduction ERP projects require a large amount of IT investment and their effectiveness is hard to evaluate (Wagel 1998). One of the reasons is that the ERP system implementation involves almost all aspects of an enterprise and an efficient performance evaluation schema is lack, thus the relationship between influence factors and project effectiveness can not be well described. ERP is an integrated information system based on the concept of business process. In it, all of enterprise resources and operations are organized in an integrated manner to achieve the business goal. ERP implementation is different from that of application of information system or advanced manufacturing technology, in which the technology or system plays certain given functions and achieve some benefit. However, ERP implementation goes generally with a BPR (Business Process Reengineering) project. BPR means a fundamental rethinking and radical redesign of the value-added process of a business to obtain dramatic and sustained improvement in quality, cost, service, lead time, flexibility and innovation (Gunasekaran and Kobu, 2002). Instead of function- or department-oriented approach, business process means a collection of related activities that together create value for an enterprise, wherein the activities can be in the same or different functional departments. In many ways, such a process-oriented approach enables the flexibility of company operations as well as rapid reaction to market. For an enterprise, common business goals normally include customer satisfaction, return on investment and market share. To achieve these goals, processes in the enterprise must be considered in an inter-dependent manner so that the various business processes can be integrated. By this way, the non-value added activities in an enterprise can be reviewed and eventually be reduced, and on the other hand, the processes capable of creating value can be improved by application of information technology. ERP systems are essentially developed as instruments for supporting business processes such as manufacturing, purchasing, or distribution, so ERP implementation and BPR should be closely connected. In implementing an ERP project, many companies faced the problem of reorganizing their business process in which the processes have to be adapted to the capability of standard software to achieve a good coordination between the value-added process of company and the selected ERP systems. Next, business process modeling is used as a base for the conceptual design, selection as well as configuration of ERP system for an enterprise. For example, by implementation of the ERP systems provided by the business solution company SAP AG, the

2 functional modules are constructed based on the business process models. To it, a methodology for modeling of business processes named IPP (Iterative Process Prototyping) is developed to model the value-added processes of an enterprise. But, for a company normally the BPR takes amount of efforts and the translation of reengineering concepts into reality is difficult because of the technological and culture change that it entails (Love and Gunasekaran, 1997). Krallmann and Frank (2002) use the concept of business system analysis to describe the methodology of an enterprise constructing their business model, organization as well as integrated information system. This systematic methodology is mainly composed of three phases, the As-Is analysis, the To-Be analysis and the integration phase. Gunasekaran and Nath (1997) and Gunasekaran and Kobu (2002) gives a conceptual model for BPR, in which the relationship between business process, organizational restructuring, behavior change and role of information systems is discussed (Fig.1). In this model, all of the aspects, business process reengineering, information systems, organizational restructuring as well as behavior change stand in the same level and have their inter-dependent influences. In addition, the role of information system in the model is an enabler for realization of this schema. It supports the business processes and has impact on organizational behaviors. Gunasekaran and Kobu (2002) submits the framework for BPR modeling and analysis, which includes the following phases: 1. Strategy formulation, 2. Business process design, 3. Project management, 4. Reengineering business process, 5. Design of information system, 6. Understanding of the business process system. Fig. 1. Conceptual model of BPR (Gunasekaran and Kobu, 2002) Sarkis et al. (1997) gives a consensus enterprise engineering methodology, in which the relationship between consideration of organizational behavior, integration of business activities and development of technology solutions is described. By these models the role of information system is well identified, and based on this schema the influence of business process on the ERP systems effectiveness is studied. In the BPR framework given by Chan and Choi (1997), information technology is identified as an enabler of BPR project, it enables improvements in the collection, storage, analysis and transmission of information. Love and Gunasekaran (1997) gives a conceptual model to illustrate the enablers of BPR, in which the enablers are classified into organizational, IT, human resources and total quality management aspects. The business solution company Prof. Scheer AG developed a methodology and tool ARIS (Architecture of Integrated Information Systems) to support the business process reengineering. Based on this tool, amount of reference models from benchmarking enterprise are available and the company can execute the EPR project as well as construct their ERP systems (Scheer, 1998). To sum up, the implementation of ERP systems is not just application of an information system, it has the following characteristics: Integration of enterprise resources Management-oriented Process-oriented Not simply a technology application issue Having influence on organizational behavior Implementation methodology is necessary

3 2. Research Framework and Hypotheses An ERP system implementation project is system engineering for an enterprise. It is a socio-technical challenge that requires a fundamentally different outlook from the technologically-driven innovation as well as a balanced perspective of the organization. At least three phases are involved: preparation, construction as well as effectiveness evaluation. Al-Mudimigh et al. (2001) gives an integrative framework for ERP implementation, wherein the implementation is composed mainly of three levels: the first level decides the business vision and the implementation strategy, the second level redesign the business process redesign and selects ERP vendor, and in the third level the ERP system is configured and the complete operations of business process to support business activities based on the ERP system is descript. Teltumbde (2000) gives a framework for evaluation of ERP projects, which evaluate the ERP project effectiveness by ten evaluation criteria and an evaluation process. Basically this framework is for the strategy phase of an ERP project. Mabert et al. (2003) studies the influence of strategic decision variables and ERP implementation management variables on the project on-time and on/under-budget implementation. Saarinen (1996) submits an instrument for evaluation of information system success. In this instrument, the success is measured by costs and benefits, and the influence factors are considered by four dimensions: development process, use process, quality of the IS product and impact of the IS on the organization. Al-Mashari et al. (2003) gives a taxonomy to present the critical factors of ERP projects success, in which the issues refer to project setting-up, implementation and evaluation are summarized and the business process management is considered. However, this taxonomy summarizes only the influence factors, yet the relationship between factors and project outcomes are not mentioned. The business solution company SAP has a methodology for the ERP implementation, in which the life-cycle of an ERP project is considered to be the Pre-implementation stage, the implementation stage as well as the post-implementation stage (Kale, 2000). In this methodology, The pre-implementation initializes the project, and in the implementation stage a project management methodology ASAP (Accelerated SAP) is applied to realize the project in a more efficient manner. The post-implementation stage deploys the ERP system, including optimizing the processes, continuous change et al. However, in all of these stages, the business process issues are well considered. ERP systems are process-oriented integrated information systems. Since an ERP project can be considered in three stages, this paper studies the business process influence on the ERP project effectiveness based on the three stages schema. In the pre-implementation stage, basically the strategy goal of ERP projects must be defined and the software vendor is to be selected. The strategy goals are classified into: 1. Business process reengineering, 2. Improvement of information system, and 3. Improvement of business operations, cost and decision quality. In the implementation stage, we concern mainly the occurrence of business process problems, such as compatibility of corporate business process with the standard process of ERP systems, business process changes considering the software capability, et al. For the effectiveness evaluation of an ERP project, the performance measurement schema of information systems is applied. Mabert and Venkatatmanan (2000) survey the ERP projects of 479 U.S. manufacturing enterprise, by which the performance outcomes and the benefits from ERP are summarized. Their result shows that the ERP benefits appear mainly in information efficiency, business operations and finance. DeLone and McLean (1992) gives a success model of information systems (IS), in which the IS success is evaluated by a schema composed of six dimensions: 1. System quality, 2. Information quality, 3. Use, 4. User satisfaction, 5. Individual impact, and 6. Organizational impact. This schema is updated by DeLone and McLean (2003) in which the service quality and the intension to use are included and closely interrelated. In this updated model the net benefits in terms of use and user satisfaction are considered. This paper applies the IS success model of DeLone nad McLean (1992) to construct a ERP effectiveness measurement schema. The analysis schema is presented by the Fig. 2. Based on the schema, following hypotheses refer to the influence of business process on ERP effectiveness are proposed to test:

4 Fig. 2. The framework of ERP implementation in terms of business process and effectiveness evaluation Hypothesis 1: Considering the business process issues in the first implementation stage is positively related to ERP effectiveness. Hypothesis 2: An ERP project which considers the business process issue in the first phase in a more widely manner has a better effectiveness. Hypothesis 3: The effectiveness of an ERP project considering both of the business process and the information technology in the first implementation stage has a better effectiveness than projects consider only the business process issues. Hypothesis 4: By choosing the ERP software, if the business process issue is considered, then the project will have better effectiveness. Hypothesis 5: An ERP project having business process problems in the second implementation stage will have a poor effectiveness. To study the hypotheses, a questionnaire based on the ERP implementation stage model is developed to test the hypotheses above. In it, business process issues are included in the pre-implementation as well as the implementation stage. The effective measurement schema is based on the information system success measurement category by DeLone and McLean (1992) and the idea of Balanced Scorecard (Kaplan and Norton, 1996). Table 1 gives the schema.

5 Table 1: Measurement category of ERP systems effectiveness 3. Data Analysis and Hypothesis Testing The sample was acquired from a questionnaire survey concerning the ERP implementations in Taiwan. In this survey, 3597 questionnaires were sent to the companies of manufacturing and services industries, listed in the TOP 5000 The Largest Corporations in Taiwan on Of the 3597 questionnaires mailed, 657 (18.27% of 3597) were usable responses. Among 657 usable responses, 93 (14.16% of 657) were under implementation and there were no module go-live, 137 (20.85% of 657) had implemented partial modules, and 146 (22.22% of 657) had implemented all the planned modules. Of 376 responses that were implementing or had implemented ERP systems, 225 leaved the respondent s and the related information, which was used as the subjects of this study. Characteristics of respondents in terms of number of employee, sales and selected systems are summarized by Table 2, Table 3 and Table 4 respectively.

6 Table 2. Characteristics of respondents in terms of number of employee Table 3. Characteristics of respondents in terms of sales Sales (1000 $) < $5,000 cases $5,000-15,000 $15,000-25,000 $25, ,000 $125, ,000 $250, ,000 above $750,000 Table 4. Characteristics of respondents in terms of system Table 5. Testing results of hypotheses, *: The testing shows a significant result

7 The testing result of the first hypothesis shows that consideration of business process in the pre-implementation stage has no significant influence on ERP effectiveness in terms of system quality, use of ERP system, information quality, user satisfaction as well as individual impact. However, the influence on financial perspective, internal business process perspective as well as learning and growth perspective is significant. From the testing result of second hypothesis, it can be concluded that the completeness of considering business process has no significant influence on the project effectiveness. The testing result of hypothesis three shows that the effectiveness of an ERP project considering both of the business process and the information technology in the first implementation stage has a better effectiveness on some aspects refer to individual impact and organizational impact. About the hypothesis four, the testing results shows that consideration of business process by choosing ERP systems has no any significant influence on the Effectiveness. The fifth hypothesis tests the influence of business process in the implementation stage. Its result shows that in case business process problem occurs in the implementation stage, the project will have a worse effectiveness 4. Implications and Conclusions The results of five hypotheses can be applied to ERP project implementation. Basically the results are compatible with the BPR model given by Gunasekaran and Kobu (2002). In it, the ERP system is considered to be an enabler of BPR project. These results are also compatible with the concept of business solution ARIS of the company Prof. Scheer AG.. To implications of the results: The business process issues should be considered in the pre-implementation stage, by this way the project will have a better effectiveness in terms of financial, internal process, customer as well as learning and growth perspective. And in case both of business process and information system issue are considered in the pre-implementation stage, the project effectiveness could be better than cases which consider only the business process. The business process problems occurrence in the implementation stage has significant influence on the ERP project effectiveness refers to all aspects. However, these five hypotheses are derived from cases of small and medium-sized enterprises (SME). In addition, most implemented systems are from local ERP vendors. For the cases of large ERP systems, such as SAP, should be further studied. Acknowledgement This paper is supported by the MOE Excellence Research Project: Electronic Commerce Environment, Technology Development, and Application; 91-H-FA

8 References 1. A.-W. Scheer, Wirtschaftsinformatik, 2ed., Springer-Verlag, Berlin Heidelberg, H. Krallmann, Systemanalyse im Unternehmen: Geschaeftsprozessoptimierung, Partizipative Vorgehendmodelle, Objektorientierte Analyse, 4ed., R. Oldenbourg Verlag, Muenchen Wien, G. Keller, SAP R/3 prozessorientiert anwenden, 3ed., Addison-Wesley, M. Al-Mashari, A. Al-Mudimigh and M. Zairi, Enterprise resource planning: a taxonomy of critical factors, European Journal of Operational Research 146, 2003, pp V. A. Mabert, A. Soni and M. A. Venkataramanan, Enterprise resource planning: managing the implementation process, European Journal of Operational Research 146, 2003, pp A. Teltumbde, A framework for evaluating ERP projects, International Journal of Production Research 38(17), 2000, pp V. Mabert and M. A. Venkataramnan, Enterprise resource planning survey of U.S. manufacturing firms, Production and Inventory Management Journal, 2000, pp T. Saarinen, An expanded instrument for evaluating information system success, Information & Management 31, 1996, pp W. H. DeLone and E. R. MaLean, Information system success: A Ten-Year Update 19(4), 2003, pp W. H. DeLone and E. R. MaLean, Information system success: the quest for the dependent variable, Information Systems Research 3(1), 1992, pp A. Gunasekaran and B. Kobu, Modelling and analysis of business process reengineering, International Journal of Production Research 40(11), 2002, pp P. E. D. Love and A. Gunasekaran, Process reengineering: A review of enablers, International Journal of Production Economics 50, 1997, pp A. Gunasekaran and B. Nath, The role of information technology in business process reengineering, International Journal of Production Economics 50, 1997, pp S. L. Chan and C. F. Choi, A conceptual and analytical framework for business process reengineering, International Journal of Production Economics 50, 1997, pp J. Sarkis, A. Presley and D. Liles, The strategy evaluation of candidate business process reengineering projects, International Journal of Production Economics 50, 1997, pp V. Kale, Implementing SAP R/3: The guide for business and technology managers, Sams publishing, R.S. Kaplan and D.P. Norton, Balanced Scorecard: Translating strategy into action, Harvard Business School Press, A. Al-Mudimigh et al., ERP software implementation: an integrative framework, European Journal of Information Systems, 10, 2001, pp

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