Prepared By: Kenneth K. L. Leung IT Research Paper on ERP

Transcription

1 Executive Summary: The following paper discusses issues concerning the implementation of Enterprise Resource Planning (ERP) software. The paper looks at various examples of implementation and identifies several common traits that are present amongst all successful attempts. For any ERP implementation, a business needs to conduct a through analysis of its own core operations. This process helps the company to prioritize areas for improvement as well as determining what the ERP should be used for. A risk assessment is then made surrounding the ERP. If the benefits of implementation outweigh the cost, the next step of the implementation cycles should be preceded. Realistic benchmarks and achievable goals need to be clearly defined and discussed with the management. The progress and budget of the project should be closely monitored. Often failing implementation examples have shown us that project teams lose focus and go off in tangent. It is then management s responsibility to disregard the sunk costs and assess whether the project should be continue. Lastly, other factors such as post implementation issues and involvement of external parties will be discussed. Introduction: Enterprise Resource Planning is a packaged business software system that enables one to manage the efficient and effective use of resources (materials, human resources, finance, etc) by providing a total, integrated solution for the organization s information processing needs. 1 The concept of ERP has been around for many years and extensive research has been conducted concluding that the existence of such system helps an organization achieve greater efficiency and profitability. However, the risks associated with an ERP have been down played to a large extent in the business world. Without a doubt, the successful implementation and integration of an ERP information system can bring competitive edge to an entity; however, the failure of integration can also be devastating. Recently, a study conducted in China found that only 10% of ERP systems were implemented successfully. 2 In extreme cases, some failures of integration have led to the scrapping of the whole project, causing the firm to take on losses ranging from ten to hundreds of million dollars. It is important to understand that ERP is a means of achieving a 1 Fulla, Shelly : Annotated Bibliography # 1 2 Xue, Yajoing, Liang, Huigang, Boulton, William R.: Annotated Bibliography # 2 1

2 goal and not the end itself. 3 The proper integration of the system can assist an organization to achieve its goal. This paper finds commonality amongst the different successful approaches introduced to implement an ERP. The common traits will then be corroborated with recent examples in the industry to demonstrate its viability. Internal Business Analysis: In the research conducted, a common trait noted is that most implementation approaches start off with an internal assessment and understanding of business management. In one paper, this step is referred to as identifying Critical Success Factors (CSF). 4 CSFs are activities a business must perform well in order for the business to succeed. To derive an accurate list of CSFs, a full review of all business processes is required. Involvement of employees from different divisions within an organization is a must as they are most aware of underlying problems with the current processes. Similarly, other scholars have extended this idea and suggested that weaknesses should also be analyzed in the same manner as CSF. Regardless of what is identified, the purpose of the internal analysis is to determine what processes within an information system are most important and identify where value can be added by using an ERP. The identification of CSF will allow the organization to prioritize its requirements out of the many changes that management wishes to make. In some examples, employees and management of the organizations were unfamiliar with the capabilities of an ERP. Thus, they took the initiative to provide assistance in understanding what an ERP is. 5 The result is a more detailed identification of areas where ERP can add value. Once the CSFs are defined, the organization should then establish measurements of success. ERP implementation includes technological, operational, managerial, strategic, and organizational constructed components. As a result, success models used for other typical IT systems evaluation may not be adequate for ERP systems. 6 Measurement schemes include and are not restricted to saving money by streaming operations, increase in revenues, increase in market share, and increased in employee efficiency. The purpose of establishing measurement schemes is to allow the business to continuously assess whether an improvement is made as a 3 Fulla, Shelly : Annotated Bibliography # 1 4 Xue, Yajoing, Liang, Huigang, Boulton, William R.: Annotated Bibliography # 2 5 Olson D. L Zhao, F : Annotated Bibliography # 8 6 Ifinedo, P. Nahar, N. : Annotated Bibliography # 3 2

3 result of the ERP implementation. It should be noted that many scholars have recommended that the schemes used should not be ambiguous. 7 Benchmarks that require judgment tend to be less precise in determining whether an ERP implementation is successful. It may be the case that the organization is misled into thinking an implementation is successful when in fact the increase in performance is due to an individual s bias. Once the internal analysis is performed, a consensus of the approaches suggests organizations to find the relationship between CSF and ERPs. Cost Benefit Analysis: Like any other major investment, organizations should consider how integrating an ERP with their existing business can improve their current business processes. Once the benefits have been identified, different costs associated with the integration should be investigated and considered. An organization should implement an ERP only when the expected benefits outweigh its costs. According to studies, many organizations can identify the sources and the nature of the benefits and costs, however, most have indicated problems with quantifying the cost and benefit. A study conducted by Behesti Hooshang reveals that the actual cost of the software is estimated to be only 10-20% of the overall implementation cost. Where does all the money go? 80-90% of the cost is attributable to integrating the product with the organization. Costs associated with the integration include process re-engineering, support, training, data conversion, and cost of employees adapting to the new system. A specific area that organizations have trouble quantifying is intangibles. ERP s in nature tend to change the fundamental operations of an organization. As a result, employees will experience and must accommodate to drastic change. Emotional effects such as stress and learning the new process are unavoidable but attempting to quantity the disruption and learning curve to the organization is extremely difficult. Sometimes employees can adapt to the change quickly, while other times employees do not buy into the new system and deliberately cause disruptions. If this happens, the organization should assess whether the project is worth continuing. On the other hand, the benefits derived from an ERP can be described as, its ability to improve the profitability potential of an organization by reducing the time and costs of 7 Ifinedo, P. Nahar, N. : Annotated Bibliography # 3 3

4 completing business activities. The system is particularity useful in providing management with the types of information necessary for making critical decisions. To be more specific, benefits can include the reduction of manual work, more timely forecasts to be produced, system wide data sharing, and integration of the organization s supply chain. However, it is difficult to quantify such benefits. For example, the dollar value of having information in a timely manner is difficult to quantify. The calculation becomes even more complicated when benefits derived from an ERP are continuously changing. As the business evolves and changes, the flexibility of an ERP system allows customized reports to be generated in a timely manner to meet specific users needs. The benefit derived from the flexibility cannot be quantified as there is no certainty whether this scenario will occur. Risk Assessment: The risk assessment phase is arguably one of the most important phases of the project as most implementation strategies have stressed its significance. Inherently, ERPs are very risky projects that require a substantial amount of investment in terms of money and employee participation. Its success and failure to integrate is influenced by a variety of factors. Potential risks exist in the entire process starting from the software selection to the final implementation. As a result, it is vital that an organization identify the risk, assess its effects, and establish controls to avoid, prevent, or mitigate it. In assessing risk, one should keep in mind that the concept of risk is organization specific. Risks occur as a result of the business process as an organization carries. The same set of risks identified for one company may not apply to another. Having said so, there are several risks that consistently appear in studies of ERP implementation. They will be discussed in the following paragraphs. One of the major risks that cause failure in ERP implementation is lack of acceptance. This risk happens at both the management as well as the employee level. Without the buy in of management, it is much more difficult to prioritize and force the implementation team to meet specific deadlines. Budget and allocation of resources also becomes a problem when management is skeptical about the ERP integration. Moreover, management should play a key role in oversight. They should continuously monitor the project as a whole and modify measures of success if business processes change. 4

5 The worst thing that can go wrong is when an ERP is installed but it doesn t meet the business needs. If oversight of the project is adequate, the incompatible functions can be identified earlier and corrected before it is too late. Similarly, employees lack of acceptance can cause disruptions to the implementation of the system. For example, employees may raise additional issues or concerns during the implementation. The sudden change in requirements may cause procedures to be re-performed, delaying the integration process. As mentioned before, employees may not accept the new methodology at all and refuse to utilize the system appropriately. The deliberate inappropriate use of the new system will prevent management from evaluating its effectiveness. This risk can be seen through a bottling company s attempt of ERP implementation. Throughout the initial planning, only senior management was involved with the ERP. Management did not seek the advice or concerns of employees. As a result, at implementation time, the employees were not aware of what was going on and did not like the changes being made to the existing business process. In the end, the implementation caused turmoil and high employee turnover. 8 The disruptions and delays significantly reduced the profitability of the company. Another risk that leads to failures is inadequate project management. An ERP involves the whole organization and thus, requires the coordination of all departments to work together. Coordination is required for the scheduling of discussions, implementation, and testing. Ideally the responsibility of coordinating the project should be assigned to a project team. However, for smaller organizations, at least one person should be held accountable for managing the project. The inadequacy of such a role can lead to significant delays of the project. This aspect is particularly important as an ERP requires the implementation team to work closely with each individual department. Without integrating the old information system of a particular department, the ERP will not be complete and ready for the next step. For example, all divisions must be integrated into the ERP before testing and performance evaluation can be conducted. In addition, departments themselves experience busy and non-busy seasons. During peak seasons, the capacity of the divisional information system as well as staff most likely will be at capacity. If the company force integration for divisions during their peak times, issues will definitely occur. It is the project manager s job to assess the timing of the integration for each business unit. 8 Barker, Traci. Frolick, Mark. N : Annotated Bibliography # 10 5

6 Implementation Process: With reference to Appendix I, the diagram depicts a general flow of an ERP implementation process. Once again, it should be noted that the steps required are not limited to the ones depicted in the diagram. All organizations are different and thus, the best implementation process is when adjustments are made to tailor to the needs of the organization. As suggested by, Li Zhang and Yue Chuan Li, the implementation process can be categorized into five phases. They include; pre-preparation, implementation preparation, customization and testing, conversion, and operation of the new system. 9 The focus is now shifted towards the technical aspects of implementation. The later part of Implementation Preparation and Customization and Testing are both technical in nature. The major concern here is preparing the necessary data, software, and hardware for the integration. With regards to data, various departments may have their own databases with different data definitions. Coming up with a universal data definition for the company is a critical and a time consuming process. Some organizations have tried taking short cuts by merging databases together. The end result is disastrous as the same type of data had different definitions, leading to data corrupted. Hence, redefining and converting the data into a new format prior to applying it to the ERP system is more effective. Similar to other aspects mentioned, by involving employees of different departments, relevant data can be captured while redundant data can be removed. Also in this phase, a group of IT personnel should be installing the new ERP system and related software on to the development network. The purpose of this step is to test the ERP functionality, capacity, and security purposes. If any problems or irregularities with the ERP are noted, it should be communicated immediately to related parties such as management, the vendor, or the in house development team. Problems identified earlier are less costly to fix compared to when the system is fully integrated. After the standalone test is performed, the ERP is tested for compatibility with other existing software and the network. As an example, HFC, a publicly traded company, confessed that the lack of testing is what caused the failure of their first ERP implementation. IT personnel at that time failed to adequately test the compatibility of the order taking and distribution system. 10 In the end, the two systems did not communicate properly and 9 Concept obtained from Zhang, Li Li Chuan Yue : Annotated Bibliography # 5 10 Dai, Zang Duserick, Frank : Annotated Bibliography # 7 6

7 caused delays as well as disruptions to the business. Once, again the importance of adequate testing can be seen. The Customization and Testing phase is the final phase prior to the conversion from the old system to the new ERP system. At this stage, the ERP will be customized to meet the requirements of the users defined in the internal analysis phase. After all the customizations have been performed, representatives from all departments will be invited to participate in the user acceptance test. The purpose of this is to ensure that all weaknesses have been attended with corresponding improvements. In addition, the employees are responsible for performing a walkthrough of their daily functions to ensure that the new ERP system meets their daily needs. Despite the number of improvements, if the daily routine functions cannot be satisfied, the ERP system is useless. Once employees have tested the functionality of the system, IT personnel are then responsible for drafting procedures and regulations relating to the ERP system. When all documentation is finalized, the whole project is submitted to senior management for signoff. A formal signoff is required prior to converting the old system to the new system. The conversion phase is where the tested ERP is integrated into the live production environment. There are many ways in achieving this such as parallel implementation or direct implementation. A consideration that should be made is when should the conversation take place? Ideally speaking, management would want to choose a low season to perform the integration, so the disruption caused by the new system can be minimized. Issues Related to Post Implementation: Once the implementation is complete and the system is up and running, several issues need to be addressed. First, continuous training should be made available to all staff on how to operate the new ERP system. This extends beyond employees and applies to management as well. If management does not know how to utilize the system and generate information, the value added from timeliness of information is significantly reduced. Next, assessing the performance of the ERP is crucial to evaluate if the system really did add value to the business. Management should give the ERP some time to reach a stable performance level and compare it with the benchmarks established in the internal analysis phase. In addition, qualitatively speaking, critical success factors and weaknesses should be revisited to see if improvements have been made. 7

8 Employees should also be interviewed to see if additional problems have occurred as a result of the implementation. Involvement of External Parties: Throughout different stages of the implementation, involving credible external parties such as auditors can help mitigate risks that are present. Studies have been conducted in this area and attempted to find relationships between accountants and ERP Implementation. 11 In the initial planning stage, auditors can play the role of consultants and provide valuable advice. Auditors tend to have a sound understanding of business processes because of the number of organizations they have audited. As a result, auditors can provide advice on internal control issues, data integrity issues, and bring to light business risks that have not been addressed by management. On the other hand, auditors can provide assurance related services post implementation. For example, an auditor can help a corporation assess whether data has been transferred from the old system to the new ERP completely and accurately. Auditors can also help organizations with performance evaluation of the system. The main benefit of this service is that the evaluation can be performed objectively and free from any bias. For large organizations, it is in the interest of management to report to the directors a favorable result for the implementation of the ERP. Hence, the evaluation performed by management may not reveal the true picture of the system. However, for the accounting profession, the extent of service that can provide may be restricted. Post the Enron and WorldCom scandals, the accenting profession no longer can provide consulting and assurance engagements for the same publicly traded company. This implies that if an accounting firm is hired to consult with the controls of the new ERP system, they cannot be the effective auditors. The basis for such is that an auditor should not be auditing their own work. The result is that accounting firms need to make a decision in terms of what service they would like to provide. In the future, as the demand for assurance on information system increases, it is possible that auditors will be called in to perform Systrust or Webtrust services for ERP. Conclusion: 11 El Sayed, Heba : Annotated Bibliography # 6 8

9 Based on the information gathered, many approaches on how to successfully implement an ERP have been introduced by studies. Of them all, there is no single approach that considers itself the best under every scenario. The effectiveness of the approach depends on the processes of the business and to what extent is the ERP system being implemented. However, various traits such as internal business analysis, cost benefit analysis, risk assessment, technical procedures, and performance evaluation can be seen in most of the approaches. These common procedures form a backbone to a successful ERP implementation. 9

10 Appendix I A systematic view of the ERP implementation process (Diagram obtained from Zhang, Li. Li, Chuan Yue : Annotated Bibliography # 5) 10

11 Annotated Bibliography Reference # 1 Author Title of Article Periodical/ website Fulla, Shelly Change Management: Ensuring success in your ERP Implementation Government Finance Review Vol. / No. Edition / Date accessed Year Pages Location, data base, website April 2007 Pg ABI / Inform Global Annotation The article talks about general issues and trends that government agencies have faced during the implementation of ERP systems. The article further talks about change management and 7 simple steps to successfully manage change in an IT environment. 2 Xue, Yajiong Liang, Huigang Boulton, William R. Snyder, Charles A. ERP Implementation Failures in China: Case Studies with implications for ERP Vendors International journal of production economics Vol. 97 July Pg ncedirect. com Chinese enterprise resource planning (ERP) vendors have been able to defend the challenge from global ERP leaders such as SAP and Oracle. This article seeks possible reasons for major international ERP vendors not being able to dominate the Chinese ERP market. Taking an ensemble view of technology, we conceptualize ERP systems as being embedded in complex social contexts, which heavily influence ERP implementation and use. Eight factors are identified which have contributed to ERP failure in recent implementation. 3 Ifinedo, P. Nahar, N. ERP Systems success: an empirical analysis of how two organizational stakeholder groups prioritize and evaluate Enterprise Information Systems Vol.1 February 2007 Pg oi.org/ / The objective of the paper is to determine whether differences exist between two organizational stakeholder groups, i.e. business managers and IT professionals, concerning how each group believe ERP success measures and dimensions are prioritized and evaluated in their respective organizations. The study indicates that no significant statistical differences exist 11

12 relevant measures. between the two groups with the exception of one dimension of ERP success, i.e. vendor/consultant quality. The implications of the findings for both practice and research are discussed. 4 Mahato, Sanjay Jain, Anoop. V. Balasubram anian Enterprise Systems Consolidation Information Systems Management Vol. 24 Fall 2006 Pg ABI / Inform Global The author proposes a framework providing a diagnostic and assessment-based roadmap for consolidating efforts, reflecting the collective engagement experience of Information system personnel in the role of enterprise system consolidation partners with client organizations. 5 Zhang, Li. Li, Chuan Yue Theory and Practice of Systems Methodology in ERP Implementation Systems Research and Behavioral Science Vol Pg science.wi ley.com The articles discusses about successful ERP Implementations. The paper claims that a successful ERP implementation requires knowledge on both ERP systems and business management. In implementing ERP, the business processes of those enterprises adopted ERP systems need to be examined. It is important to understand the ERP system itself and the business processes involved with the ERP systems and the enterprises-adopted ERP systems. In order to resolve issues that may appear in the process of implementing ERP system, this paper proposes that a systematic analysis of those significant factors involved with implementing ERP systems is a necessity, especially if such analysis is conducted in the framework of systems science. 6 El Sayed, ERP s and Journal of Vol Pg This articulation sets out to focus on the 12

13 Heba Accountant s Expertise: the construction of Relevance Enterprise Information Management ralidinsigh t.com/ htm mechanisms and dynamics of expertise constitution where it is understood as an accomplishment or an achievement. This understanding appears to be an important step in studying the interrelation of accountants and ICTs, while avoiding the traditional de-skilling or empowering accounts of technologies that still inform much of the current debate on the uses of ICTs. 7 Dai, Zang Duserick, Frank Toward Processoriented ERP Implementation Alfred University CF Vol Pg ABI / Informal Global This paper is a case study of ERP implementation, with a focus on the process perspective of the implementation. The research methodology employs a fact-based principle that combines quantitative and qualitative methods. Data was collected and examined at corporate level of the subject organization. A model of integrating ERP and business process has been developed based on the findings. The paper concludes with findings, implications and recommendations for the future research. 8 Olson, D.L. Zhao, F CIO s perspectives of critical success factors in ERP upgrade projects Enterprise Informations Systems Vol. 1 February 2007 Pg oi.org/ / Enterprise resource planning systems have required significant upgrades in the 21st century as many of the systems obtained prior to 2000 have become outdated due to vendor changes. SAP and Oracle have emerged as dominant vendors, and SAP has announced discontinuance of support in the future for its primary R/3 system. This study reports interviews with the chief information officers (CIOs) of 15 institutions that have undergone (or are undergoing) enterprise system upgrades, 13

14 with focus on discussion of major critical success factors for ERP upgrade projects. 9 Beheshti, M. Hooshang What Manager should know about ERP / ERP II Management Research News Vol. 29 No Pg raldinsight.com/ htm This paper aims to examine the impact of enterprise resource planning (ERP) on organizations and discusses critical issues that should be considered by managers and decision makers who are considering implementing an ERP/ERP II system. 10 Barker, Traci Frolick, Mark N. ERP Implementation Failure: A Case Study Information Systems Management Vol. 20 No. 4 Pg oi.org/ /1078 / / The article talks about a soft drink bottler company and how its ERP implementation turned out to be less than ideal. 14