RUNNING HEAD: Budgeting for Enterprise Resource Planning Systems

Transcription

1 McKenna 1 RUNNING HEAD: Budgeting for Enterprise Resource Planning Systems Budgeting for Enterprise Resource Planning Systems in Higher Education Doug McKenna EAD 876: Budget and Finance Michigan State University

2 McKenna 2 Budgeting for Enterprise Resource Planning Systems in Higher Education Introduction Institutions of higher education are complex entities that are constantly being challenged by various constituencies to do more with less. One of the ways institutions are attempting to accomplish this feat is to combine the various business functions and data stores necessary for running an institution under one enterprise-wide information system. Enterprise resource planning (ERP) systems are not new, but higher education has been slower than the corporate world to adopt this strategic and systematic approach to managing the data generated by information systems, and the effects of ERP system implementations in higher education settings are only recently being studied. This paper will introduce the reader to the nature of ERP systems and some of the factors involved with adopting them. It will address the way higher education institutions have adopted them, especially what is required for budgeting and pre-implementation planning. This paper will explore some of the ways that ERP systems affect an institution financially, and some of the hurdles involved with implementing them. Finally, this paper will argue that the benefits of a well-planned implementation of an ERP are worth the expense and can be leveraged by an institution to benefit its strategic plan. Enterprise Resource Planning Systems Enterprise resource planning systems, also called enterprise information systems (Okunoye, Frolick, & Crable, 2008) or enterprise systems (Sawyer & Southwick, 2006) are computer-based technologies that integrate data across an organization (Okunoye, Frolick, & Crable, 2008, p. 11). They are characterized by a suite of integrated software modules and a common database used to help manage a company s (Sawyer & Southwick, 2002, p. 264)

3 McKenna 3 business functions. Those functions include financial accounting, sales and distribution, human resources planning, decision support applications, regulatory control, quality, elements of supply chain management, and maintenance support (Okunoye, Frolick, & Crable, 2006, p. 116). ERP systems impose standardized procedures on the input, use and dissemination of data (Okunoye, Frolick, & Crable, 2008, p. 11). ERP systems were developed in the 1980s and 1990s, and this development was made possible by the advancement in computing technology and the falling price of computer hardware (Okunoye, Frolick, & Crable, 2006, p. 116). As organizations began to adopt ERP systems, they did so for a variety of reasons. In the 1990s, leaders increasingly chose to adopt enterprise systems with the belief that they would improve the ability of their organization to achieve its goals and to respond to technical issues with each existing system s compliance (Sawyer & Southwick, 2006, p. 264). Technological factors that lead to the implementation of ERP systems include, replacement of disparate systems, simplification of integration of processes and systems, simplification of integration of technology infrastructure, replacement of older, obsolete systems (Okunoye, Frolick, & Crable, 2006, p. 117). Scott Kirner, Director of Enterprise Systems at the University of Notre Dame provides the following explanation for that institution s decision to implement an ERP. The main reason for choosing a new system was the end-of-life announcement for the HP/3000 There was no migration path to a new hardware/os (Kirner, 2009, personal communication). The University of Notre Dame implemented the Banner software suite developed by SunGard Higher Education from (Kirner, 2009, personal communication). SunGard is one of the leading providers of ERP systems for higher education

4 McKenna 4 institutions, serving some 1,600 institutions of higher education around the world (SunGard, 2009). Operational factors are also involved in the decision to implement an ERP system. Some of the operational factors include process improvement, simplification of ineffective and complex processes, provision for new processes, and standardization of processes (Okunoye, Frolick, & Crable, 2006, p. 117). Higher education institutions have a variety of factors that coincide with these general factors. They include replacing aging legacy systems, moderinizing campus IT environments, providing for better management tools, increasing customer satisfaction, improving efficiency, and fixing Y2K problems (Okunoye, Frolick, & Crable, 2008, p. 13). While many institutions choose to implement an ERP system for strategic reasons, adoption often leads to substantial changes (in process and structures) that have strategic implications (Sawyer & Southwick, 2006, p. 264). This means that strategic planners have to envision the way that business processes will be handled post-implementation and not simply attempt to reconstruct the current business processes in the new system. Scenario planning is a vital part of the strategic plan and may make the difference between being prepared for success or caught off guard in the long term (Zastrocky and Rust, 2008, p. 2). Scenario planning is loosely described as the asking the question what if? followed by the equally important, then what? (Zastrocky and Rust, 2008). Budgeting for ERP Systems Budgeting for information technology (IT) at an institution of higher education is a complex process that must weigh many factors. ERP system implementations are long, expensive, and complicated endeavors. The complexity depends on the scope, including the

5 McKenna 5 number of business functions affected and the extent to which ERP implementation changes business processes and the ways people work (Ferratt, et al., 2006, p. 458). Based on the complexity, there is a fairly broad range for duration and cost of implementation. ERP projects achieving real transformation average one to three years in [implementation time s] duration with estimates of their cost ranging from $0.4 million to $300 million, with an average of about $15 million (Ferratt, et al., 2006, p. 458). Funding a project that must be accounted for over several years budgets during initial implementation, and in perpetuity as a consideration for ongoing usage (Oberlin, 1996), requires collaborative strategic planning. As institutions begin to look at the new economics of information technology (Oberlin, 1996, p. 362) and how they relate to ERP systems, a greater sense of the complexities must be accounted for. Information technology continues to change at an increasing rate. Combined with the increased expectations of technology-enabled campuses from digitally native students (Zastrocky, et al, 2007), institutions must develop financial strategies to support technological evolution so that technologists can optimize campus investments over time (Oberlin, 1996, p. 364). The essential aspect of IT spending that must be communicated to decision-makers is that IT spending must be considered in terms of a cost/benefit relationship, not as a cost alone. Oberlin points out, the investment is in the goals of the institution as well as the individuals charged with advancing them. No dean or department head would fill a faculty vacancy based solely on the fact that one applicant might be less expensive than another (Oberlin, 1996, p. 363). Senior management s tendency to see IT only as a cost stands in the way of innovative investment in IT as a tool to support the institution s goals (Lowendahl, Zastrocky, and Harris, 2008, p. 1). Chief Information Officers (CIO) must be able to translate the cost of an investment

6 McKenna 6 in something as expensive and resource-dependent as an ERP system into terms of what that investment can yield for the institution. Gartner, Inc., a leading technology research and advisory company, advocates for an institutionally aligned budgeting process as a tool for cost optimization (Lowendahl, Zastrocky, and Harris, 2008). Oberlin reinforces this idea, focusing on the idea that rapid IT change is a constant, and in fact, the rate of technological innovation has accelerated in recent years (Cannon, et al., 2004, p. 93). Rather than ignoring the changes, the changes must be incorporated into the plan for the institution, especially the budgeting process (Oberlin, 1996). No one is ever going to get all of the money they want or need, and therefore a financial model for technology must be designed with sensitivity to what is possible and practicable, given an institution s financial constraints (Ringle, 1997, p. 354). As Leslie and Rhoades note, those administrators possessing the authority to make allocation decisions are forever faced with the opposing realities of scarce resources and insatiable resource demands (Leslie and Rhoades, 1995, p. 202). The benefits of these [ERP] systems will be found in improvements to the fundamental business processes and the ability to provide better service, not from cost reductions in the computing infrastructure or in distributed departments (McCredie and Updegrove, 1999, p. 7). Brad A. Myers, University Registrar and Interim Director of Student Financial Aid at Ohio State University describes the budgeting process for that institution s recent implementation of the Oracle PeopleSoft Enterprise Applications as follows: A small workgroup was established among the business sponsor groups to map out a planning strategy and budget planning process. Recommendations were vetted before reviewing them with central administration. Eventually a final budget proposal emerged which was then forwarded to the Board of Trustees for approval (Myers, 2009, personal communication). Because of the way

7 McKenna 7 resources are allocated at Ohio State, and because some funding for the implementation came from academic resources, the deans signed off on the project as something worth their fiscal support (Myers, 2009, personal communication). ERP systems are both a cause of and a partial solution to increased administrative costs. The term administrative costs is subject to debate, but can generally be explained as institutional support or the combination of institutional support, academic support (minus libraries), and student services (Leslie and Rhoades, 1995, p. 189). One theory for the increase in administrative costs deals with the complexity of higher education institutions as organizations. As the organization becomes more complex, the administrative resources required to manage the organization also increase. Increased administrative costs are due to changing external demands and internal developments that have led colleges and universities to become increasingly complex in terms of their nonacademic responsibilities and their academic structures (Leslie and Rhoades, 1995, p. 195). The IT landscape is increasing in scope and complexity as more services and technologies enter the scene (Lowendahl and Harris, 2009, p. 5). And within higher education, which has some of the most numerous and demanding users of any industry (Lowendahl and Harris, 2009, p. 5) this means that the costs for supporting these users are also increasing. Implementation Issues with ERP Systems Because the implementation of an ERP system allows for the standardization and simplification of processes, there is potential to reduce the cost of administrative functions (Okunoye, Frolick, & Crable, 2006). But there are also significant pitfalls that can occur during an implementation that cause costs to increase, the scope to creep, and the duration to extend. These pitfalls have been well-documented and have resulted in the identification of critical

8 McKenna 8 success factors (Okunoye, Frolick, & Crable, 2006, p. 117) that can help to improve the chances of a successful ERP implementation. Among these factors are ERP teamwork and composition, change management program and culture, top management support, business plan and vision, business process re-engineering, minimum customization, effective communication, project management, software development, testing and troubleshooting (Okunoye, Frolick, & Crable, 2006, p. 117). Each of these critical success factors seems manageable when considered in isolation. Unfortunately, ERP implementations at institutions of higher education do not take place in a vacuum. Additionally, these factors were identified primarily through the study of ERP implementations in private industry, not public entities. And in general, public sector organizations tend to be more cautious and more concerned with rules and regulations, whereas private organizations tend to be more comfortable with risk (Chae and Poole, 2005, p. 92). There are several differences between businesses and institutions of higher education. Cultural differences, management philosophies, as well as hierarchical structures all complicate the implementation of an ERP system for institutions of higher education. The business model generally emphasizes a management-driven approach (Chae and Poole, 2005, p. 91), and the decisions that must be made in order to keep the implementation on track are often made at the top and directives are given. By contrast, university management is based on shared governance by faculty and administrators that is for the most part temporarily drawn from the ranks of faculty (Chae and Poole, 2005, p. 91). This can be a hindrance to the efficiency with which complex data and configuration decisions are made. Both Kirner and Myers indicate the need for strong leadership in conjunction with the implementation of an ERP system. Strong executive leadership is essential (Kirner, 2009, personal communication). You need to have

9 McKenna 9 broad institutional commitment to the project and clear decision-making strategies for the project (Myers, 2009, personal communication). ERP systems are provided by commercial vendors, and therefore frequently require modifications to the business practices of the institution installing the system. Replacing a legacy system that was never intended to be integrated with an ERP ensures that business process changes will occur. Once purchased, these systems often require extensive tailoring of both the package s functions and the organization s work practices (Sawyer and Southwick, 2002, p. 267). Changes requested by the institution to the vendor s base product are called customizations. Customizations are usually associated with increased information systems costs, longer implementation time, and the inability to benefit from vendor software maintenance and upgrades (Yang, Ting, and Wei, 2006, p. 161). Overcoming the resistance to business process change is a significant hurdle in an ERP implementation (Yang, Ting, and Wei, 2006) and is addressed in several of the critical success factors. Information systems integration involves changes in business process resistance to business process change, particularly when such business processes have become engrained in the organization, can be difficult to overcome (Lam, 2007, pp ). In order to address this risk, managerial assessment of the risks associated with changes in business processes and technology should include the behavioral challenges of implementing changes in business processes and technology (Ferratt, Ahire, and De, 2006, p. 466). Communication about the status of the implementation as well as end-user training are vital to the success of any ERP implementation. System users will be asked to execute operations or jobs differently and they need more training on how the system would change business processes and to [how] use the system (Yang, Ting, and Wei, 2006, p. 161). User

10 McKenna 10 support can be another area where hidden costs of an ERP implementation appear. If a campus has followed the guidance of standards, simplification, and limitations on customization for infrastructure and enterprise systems, the college will be in a strong position to minimize support. Nevertheless, support will still be needed (Smallen and Leach, 2004, 16). According to Brad A. Myers, communication with and involvement from the campus community is critical for buy-in, support, etc. (Myers, 2009, personal communication). Benefits of ERP Systems and Conclusion In spite of the significant risks involved with undertaking an ERP implementation, there are some very clear benefits once a successful implementation has been realized. ERP systems in a university environment can streamline processes, improve services, and reduce administrative costs. Reducing administrative costs in a not-for-profit university allows the institution to increase the financial resources devoted to servicing its students, improve its facilities and infrastructure, and control the growth in its tuition (Okunoye, Frolick, & Crable, 2008, p. 13). ERP systems have the ability to automate and to integrate an organization s business processes, to share common data and practices across the entire enterprise, and to produce and access information in a real-time environment (Okunoye, Frolick, & Crable, 2006, p. 117). Additionally, they can speed decision making, reduce costs, and give managers control of organizational processes and operations (Okunoye, Frolick, & Crable, 2006, p. 117). ERP systems are complex and their implementation requires serious thought, consideration, and planning. The implementation itself must be carefully managed with close adherence to the critical success factors while still allowing for flexibility to account for the cultural differences between businesses and higher education institutions. Post-implementation support is a critical aspect of the project s overall success. The benefits of a successful

11 McKenna 11 implementation are worth the risks, and have the potential to change not only the IT budget of an institution, but also the strategic plan.

12 McKenna 12 REFERENCES Cannon, D., Klein, H., Koste, L. and Magal, S. (2004). Curriculum integration using enterprise resource planning: An integrative case approach. Journal of Education for Business 80(2): Chae, B. and Poole, M. (2005). Enterprise system development in higher education. Journal of Cases on Information Technology 7(2): Ferratt, T., Ahire, S., and De, P. (2006). Achieving success in large projects: Implications from a study of ERP implementations. Interfaces 36(5): Lam, W. (2007). Information systems integration and enterprise application integration adoption: A case from financial services. Journal of Information Systems Education. 18(2): Leslie, L. and Rhoades, G. (1995). Rising administrative costs: Seeking explanations. Journal of Higher Education 66(2): Lowendahl, J., Zastrocky, M., and Harris, M. (2008). Financial Slowdown Emphasizes Budget- Planning Effectiveness in Higher Education: But It s About Yield, Not Cost. Gartner, Inc. Industry Research, ID Number G Electronic version. Accessed on March 23, 2009 from financial_slowdown_emphasize_ pdf Lowendahl, J. and Harris, M. (2009). Key Issues for Higher Education, 2009: The Future Is Now, Strategic Planning Capabilities Are Crucial. Gartner, Inc. Industry Research, ID Number G Electronic version. Accessed on March 23, 2009 from pdf

13 McKenna 13 McCredie, J. and Updegrove, D. (1999). Enterprise system implementations: Lessons from the trenches. CAUSE/EFFECT 22 (4). [electronic version] Oberlin, J. (1996). The financial mythology of information technology. In J.L. Yeager, G.M. Nelson, E.A. Potter, J.C. Weidman, & T.G. Zullo (Eds.), (2001), ASHE Reader on Finance in Higher Education (pp ). Boston: Pearson. Okunoye, A., Frolick, M., and Crable, E. (2006). ERP implementation in higher education: An account of pre-implementation and implementation phases. Journal of Cases on Information Technology 8(2): Okunoye, A., Frolick, M., and Crable, E. (2008). Stakeholder influence and ERP implementation in higher education. Journal of Information Technology Case and Application Research. 10(3): Ringle, M. (1997). Forecasting financial priorities for technology. In J.L. Yeager, G.M. Nelson, E.A. Potter, J.C. Weidman, & T.G. Zullo (Eds.), (2001), ASHE Reader on Finance in Higher Education (pp ). Boston: Pearson. Smallen, D. and Leach, K. (2004). Information Technology Benchmarks. A Practical Guide for College and University Presidents. The Council of Independent Colleges. Sawyer, S. and Southwick, R. (2002). Temporal Issues in Information and Communication Technology-Enabled Organizational Change: Evidence From an Enterprise Systems Implementation', The Information Society 18(4): SunGard Higher Education. (2009). Corporate website. Retrieved April 28, 2009 from Yang, C., Ting, P., and Wei, C. (2006). A study of the factors impacting ERP system performance from the users perspectives. Journal of American Academy of Business,

14 McKenna 14 Cambridge 8(2): Zastrocky, M., Harris, M., Lowendahl, J., and Rust, B. (2007). Predicts 2008: Changes in IT Support for Education Beyond Gartner, Inc. Industry Research, ID Number G Electronic version. Accessed on March 23, 2009 from pdf Zastrocky, M. and Rust, B. (2008). Scenario Planning: Exploring Possible Futures for Education. Gartner, Inc. Industry Research, ID Number G Electronic version. Accessed on March 23, 2009 from /163310/scenario_planning_exploring pdf