Measuring ERP success: evaluation and selection criteria by North Greek SMEs

Transcription

1 Measuring ERP success: evaluation and selection criteria by North Greek SMEs Supervisor: Dr A. Mandilas MSc student: MARIA KATSWNI Kavala 2011

2 Special thanks to Dr A. Mandilas 2

3 Table of Contents Abstract... 5 Introduction Aims and objectives Dissertation structure... 6 Literature Review Introduction Enterprise Resource Planning systems (ERP) - Overview ERP systems in the services sector ERP software evaluation and selection Methodology Introduction Similar methodologies Conceptual Framework Hypotheses Questionnaire Summary Data Analysis Introduction Descriptive statistics Factor analysis and reliability analysis Linear regression Discussion of the results Summary

4 Conclusions Description of the research Implications, Limitations and further research References Appendix A Appendix B

5 Abstract An ERP (Enterprise Resource Planning) is a wide information system aiming to integrate and combine all the important business functions of an enterprise. These functions could range from inventory control to sales management and human resources. In this study we illuminate the selection criteria that North Greek SMEs (Small and Medium sized Enterprises) have when it comes to the crucial decision of choosing the suitable ERP system. Confirmatory factor analysis and linear regression were conducted in order to test whether ERP product, vendor credibility and service and knowledge and involvement affect ERP success perception. Finally, the results indicate that the most important factor is the ERP product. Analytically, functionality, cost, reliability and compatibility mostly concern SME representatives for their selection. Less but also significant for the implementation decision are vendor credibility and service and knowledge and involvement. Key words: ERP system, SMEs, ERP product, vendor credibility and service, knowledge and involvement. 5

6 Chapter 1 Introduction 1.1 Aims and objectives E.R.P. stands for Enterprise Resource Planning and is a term that has been used wider and wider the last decade. An ERP is a wide information system aiming to integrate and combine all the important business functions of an enterprise. These functions could range from inventory control to sales management and human resources. In today s corporate environment, the stake for companies is not only to maximize their profits but also to decrease their costs and expenses. Therefore, enterprises are implementing ERP systems in order to achieve better customer-order integration, faster production process, less inventories, smaller preparation time and accurate information about their human resources (Yazgan et al., 2009). In this study we aim to illuminate the selection criteria that SMEs have, when it comes to the crucial decision of choosing the suitable ERP system. Is it the ERP system itself as a product more significant than supplier s reputation and support? Would SMEs choose their ERP system just because it is easy for employees to use it and understand it? Which one of the following criteria is most important for SMEs: functionality, cost, reliability, compatibility, technical support, supplier s position, supplier s name, supplier s methodology, user involvement or system understanding? All these are questions that triggered this research. The answers lie in the following pages. 1.2 Dissertation structure The present study is divided into five chapters. Each chapter presents different aspects of the research but altogether consist a unified approach concerning the ERP evaluation and selection criteria of SMEs. In the following chapter we provide the reader with a clear picture of relevant to ERP implementation studies. A complete review of the literature was attempted by referencing the main studies surrounding the topic of ERP implementation and selection decision, starting with what an ERP system is. According to Wylie (1990), the term ERP was introduced in the early 1990s by the software enterprise Gartner group. The term ERP was created in order to describe the new software which was able to integrate procedures across and within all the functional platforms. Then, a brief history of the ERP systems was presented by discussing the study of Jacobs and Weston (2006). Additionally, since we realized that ERP implementation is well documented in the private sector, while it is not in 6

7 the public sector, we presented the study of Griffin and Dempsey (2008) concerning an implementation procedure and a vendor s tender offer of a computerized integrated system in Cork County Council of Ireland. The last section of literature review dealt with the ERP evaluation procedure and the acquisition planning, discussing the studies of Yazgan et al. (2009), Verville et al. (2007) and Motwani et al. (2005). Verville et al. (2007), present a complete ERP acquisition planning based on six important activities, while Motwani et al. (2005), conducted a research in order to identify the most critical factors of ERP implementation. In the methodology chapter, relevant methodological approaches were presented and our own methodological path was marked. The conceptual framework of this dissertation was mainly based on three studies. The first one is conducted by Wu and Wang (2005) and aims to measure ERP success from the users viewpoint. What was found is that stakeholders satisfaction is related to systems success and they identified the constructs that comprises the users satisfaction evaluation and thus the success of the system. The second study was the one of Law and Ngai (2007) about the organizational factors of ERP systems success. Specifically, in their study the authors examined the relationship of the success of ERP incorporation, the business operations improvement and its overall organizational performance. Through the testing of their research framework they provided validating evidence for their initial research purpose. That is, they confirmed relationships among ERP success, Business Performance and Organizational performance. Also with their results they stressed the attention should be paid in planning, implementation strategies and managerial change when adopting an ERP system. Last but not least, the study of Valsamidis et al. (2009) was used as a compass to illustrate the effect on small and medium sized enterprises (SME) by the adoption of an ERP system. In chapter four the analysis of primary data, collected through the questionnaires, was developed. The sample was constituted by 217 SMEs located in the regions of Serres, Drama, Kavala and Xanthi. After the presentation of the descriptive statistics we conducted confirmatory factor analysis in order to classify the questionnaire items in factors. Finally, three factors were created (ERP product, Vendor credibility and service, Knowledge and involvement) each one having strong factor loadings. Accordingly, we incorporate these three factors into a linear regression model and the analysis proved that all three factors affect the affect positively the ERP success perception of SMEs. Lastly, what this research has revealed is that when the owner or the director of a SME in North Greece (Serres, Drama, Kavala and Xanthi region) has to make the choice of an ERP system, the product itself is the most 7

8 important factor for the decision. Therefore, we can conclude that functionality, cost, reliability and compatibility mostly concern SME representatives for their ERP selection. Less but also significant for the implementation decision are vendor credibility and service and knowledge and involvement. 8

9 Chapter 2 Literature Review 2.1 Introduction Reviewing the literature, the first thing to be explained is what an Enterprise Resource Planning system (ERP) is. According to the recent study of Yazgan et al. (2009) an ERP is a wide information system aiming to integrate and combine all the important business functions of an enterprise. These functions could range from inventory control to sales management and human resources. In today s corporate environment, the stake for companies is not only to maximize their profits but also to decrease their costs and expenses. Therefore, enterprises are implementing ERP systems in order to achieve better customer-order integration, faster production process, less inventories, smaller preparation time and accurate information about their human resources. This section reviews the literature that surrounds the notion of ERP systems. More specifically we seek answers on specific questions such as: what exactly an ERP system is?, in what extend does an ERP increases the productivity of an enterprise?, how does an ERP contribute to the growth of an enterprise?, what elements do the evaluation and selection procedure implies?, which are the most significant ERP evaluation and selection drivers based on the relevant literature? 2.2 Enterprise Resource Planning systems (ERP) - Overview Jacobs and Weston (2006), in their study provide the literature with a brief history of the ERP systems. Their throwback starts at 1960s, were the first computers showed up, it is continued with the predecessors of ERP systems (MRP and MRP 2) and it is finishing by predicting the future changes of the information systems. In the 1960s, along with the first computers and software systems, MRP (Material Requirements Planning) and MRC (Material Requirements Control), were initiated. As was mentioned before, MRP is the predecessor of MRP 2 and the ERP. It was created by the cooperation of J.I. Case, a truck manufacturer, and IBM. It was a reliable software system for developing and scheduling materials for the construction of complex engines. IBMs MRP was an excellent choice for inventory and production control. On the other hand, the first MRP solutions had two significant disadvantages as well. MRP systems were big and expensive. The installation of the Material 9

10 Requirements Planning system required higher capacity disks than the IBM 360s and 370s that existed then. Moreover, the installation procedure required an expanded technical staff and advanced skills by the users. The mid 70s was the period when many companies that today are the biggest software vendors, were created. Oracle Corporation, J.D. Edwards and Lawson software are some of the companies that were established around that period of time. Emphasis was given on two matters, more sophisticated marketing strategies and complete integration. In the early 80s, J.D. Edwards created a software compatible with the IBM 38 system. The new system was much cheaper than the previous one, due to the fact that it offered flexibility at the disk drivers. This way, even small and medium size enterprises were able to install it. Finally, the new system was called MRP 2. According to Wylie (1990), the term ERP was introduced in the early 1990s by the software enterprise Gartner group. The term ERP was created in order to describe the new software which was able to integrate procedures across and within all the functional platforms. In 1992 the SAP Corporation introduces the R/3 product. The significant about R/3 was that it used client-server architecture. This way the system was able to run on various computer platforms such as UNIX and Windows NT. Moreover, the architecture of SAPs R/3 was allowing the third-party companies to develop other software that could integrate with R/3. This fact along with the decline in the hardware costs boosted the sales of the ERP systems. By the end of the decade IBM was not in sector s leading position. The following statistics of 1999 are indicatory of the situation in the sector: J.D Edwards has more than 4700 customers located in more than 100 countries Oracle counts more than 41,000 customers around the world. From them 16,000 are in the USA SAP becomes the world s fourth largest software enterprise employing more than 20,500 employees. Baan enterprise had installed more than 4,800 ERP systems in clients around the world. According to Jacobs and Weston (2006) at the beginning of 2000, after the break down of the dot.com companies, software enterprises were seeking ways to increase their market share against the competition. At this situation, various software-vendor consolidations, mergers and acquisitions took place. By 2002 SAP, Oracle, PeopleSoft and 10

11 J.D. Edwards were the major players in the sector. Baan Enterprise was led to bankruptcy. As the years passed software companies, vendors and users have reached a significant level of maturity. Today, all the interested parties understand the demands of the system concerning human resources, costs and technical infrastructure. Unfortunately, today s ERP systems execute the old logic faster and in an on-line basis. In the future it is essential for software companies to produce more sophisticated products. This can only be achieved if users and vendors have a complete cooperation. 2.3 ERP systems in the services sector As it is generally known, the economic activity is divided into three sectors. The first sector is referred to the agriculture and the primary resources. The second sector covers the industrial transformation of primary sources and products into finished goods. And the third sector deals with services in general. When ERP systems were introduced in the early 1990s, enterprises from the first and the second sector started to adopt them with enthusiasm. On the other hand, enterprises from the services and administration activities sector did not show the same enthusiasm, due to the nature of their function. Lately though, service enterprises have also turned into keen ERP systems adopters, with significant benefits in their performance. Genoulaz and Millet (2005), conducted a case study research on six enterprises from six different industries. The enterprise pattern were a bank, a hospital, a non-profit organization in the health sector (hospital), a software enterprise, an insurance and financial services provider and an enterprise dealing with telecommunication and internet services. It was found that in all cases the adopted ERP systems, did not achieve a complete cooperation of all the enterprise s departments. Moreover, all the participated companies mentioned that only a complete integration could produce important benefits and a return on investment (ROI) increase. Figure 2 below, depicts the level of the ERP integration among the six enterprises. The initials for the departments are the following: HR: Human resources, FI-CO: Finance and control, PL: Planning, OP: Operations, SD: Sales and distribution, CRM: Customer Relationship Management, PDM: Product Data Management, MM: Material Management. 11

12 Figure 2 Integration levels of ERP systems among companies Finally, Genoulaz and Millet s (2005) findings indicate that the goal of a fully integrated ERP system cannot be achieved in the services sector. It is suggested that service enterprises should focus more on CRM (customer relationship management) and HR (human resources) management software rather than on software systems for the design and production of services. The reason for that is due to the nature of services, where materials are frequently handled as indirect costs. The human factor is of major importance in services and a software system should be human-oriented, in order to meet the needs of services companies. Figure 3 below presents the difference between the required procedure of an ERP system in the cases of a services and a manufacturing enterprise. As it can be seen, the needs for the two sectors significantly differ. We could simply imply that there are different priorities between the two sectors. Once the priorities are served by the ERP systems, both sector companies will operate effectively. Finally, the ultimate target for every organization is one, full integration. 12

13 Figure 3 ERP structure Griffin and Dempsey (2008), claim that, while private sector s ERP implementation is well documented, the implementation of ERP systems in the public sector has not been examined properly. Therefore, the implementation procedure and vendor s tender offer of a computerized integrated system in Cork County Council of Ireland is examined. Cork County Council is a local branch on the national government authority and its mission is to provide the habitats of County Cork with water, electricity, roads, rents, annuities and development contributions. Problem s very root was that Cork County Council was divided into three subdivisions: North Cork, South Cork and West Cork. Each one of the three sub-divisions had its own billing system and receipting procedures. As a result the three sub-divisions had variations in the billing and receipting techniques. Moreover, the debtor s legacy systems that had been used were not linked to the General Ledger system. To solve the problem, the head manager decided to acquire and implement an integrated and centralized Corporate debtors system that could combine the three debtors systems to a single one General Ledger. Moving forward, the most interesting, concerning Griffin and Dempsey s (2008) study, is the procedure that was followed in order for Cork County Council to choose the right supplier for the ERP system. Due to the fact that the required system was very complex Cork County Council decided to conduct a restricted competition instead of an open one. For that purpose, an assessment team was formulated. In the restricted competition the potential vendors had to answer to a pre-questionnaire. The assessment team gave emphasis on three specific vendors characteristics: a) economic standing, b) staff resources and c) track record and experience on similar projects. In simple words, the assessment team mostly evaluated the financial standing 13

14 of the suppliers (debts and capabilities), the number of employees that were employing by that time and last but not least what similar systems had implemented in the past. As a result, only a few vendors made it through the pre-questionnaire phase. Finally, on 21 September 2006 Cork County Council signed a contract with the vendor that mostly fulfilled the three criteria set by the assessment team. 2.4 ERP software evaluation and selection Since ERP systems are fundamental for the operation of an enterprise and the cooperation between its departments, the selection of the ERP system is a vital and complex task. Studying the ERP evaluation and selection literature it is obvious that various selection models exist. There are numerous studies presenting the ERP evaluation procedure and the acquisition planning, such as Baki and Cakar (2005), Uta et al. (2007) and Yazgan et al. (2009). For example, Yazgan et al. (2009) propose the analytical network process (ANP) as the most suitable tool for ERP software selection. The ANP method has several advantages such as consideration of tangible and intangible factors, pair comparisons, transformation of qualitative data into quantitative data and general stakeholders motivation to participate in the process. On the other hand, the study of Wu and Wang (2005) provides with a better approach to examine the relation between key user satisfaction and ERP system success. This section discusses the factors that lead to a successful ERP implementation, by presenting the findings of several academics. Verville et al. (2007), present a complete ERP acquisition planning based on six important activities. Apart from evaluation and selection criteria there were five more activities identified. These were the formation of a project team, requirements engineering, marketplace analysis, selection of acquisition strategy and anticipated acquisition issues. Analytically, concerning the formation of an acquisition team, Verville et al. (2007), highlight the importance of putting a person in charge of the whole procedure. This person could be the IT director, the CEO, or a skilled manager who will designate a project team (steering committee) with participants of all the enterprise departments. The first task of the project team was to define both the technical and the functional requirements. The third and most crucial step in the acquisition planning is the establishment of the evaluation and selection criteria. There criteria are numerous and depend on enterprise s needs and priorities. Wu and Wang (2005) stress on functionality, cost, reliability, compatibility, technical support, supplier s position, supplier s name, methodology, user involvement and system 14

15 understanding. Verville et al. (2007) also mention functionalities required to increase revenues (p.54). Additionally, the following step is the analysis of the marketplace. This activity simply implies to make a list of vendors (both big and small players in the market) that could be the suppliers of the ERP system. The fifth activity is the acquisition strategy. A common enterprise practice concerning the acquisition strategy is to present the requirements to the supplier before the demonstration sessions. Finally, the anticipated acquisition issues are what if scenarios in case something goes wrong. Motwani et al. (2005), conducted a research in order to identify the most critical factors of ERP implementation. Their study was based on four case studies conducted in four US enterprises that used ERP systems designed from the same vendor. Primary data were retrieved directly from the corporations with personal interviews, observations and questionnaires. The first enterprise (Enterprise A) was a pharmaceutical enterprise which also produces nutritional products. Enterprise A needed to upgrade its inventory control. Therefore, a new ERP system was adopted. Enterprise B was a leading footwear enterprise of casual shoes. This enterprise was using AS/400 system for the sales and marketing operations. A significant delay in the procedures was noticed, due to the fact that the system required a 6-8 hour process in order to conduct a simple transaction. This delay led the enterprise to implement the new ERP. Enterprise C was a huge energy enterprise having revenues of over 50 billion dollars. Prior to the ERP implementation, enterprise C had implemented various legacy systems. The lack of data visibility and software s poor cost control forced the enterprise to implement the specific ERP system. Enterprise D is a big automobile enterprise owning 28 construction facilities in America. Enterprise D was formatted by the merger of two Japanese automobile organizations. The enterprise was using a Japanese software system that was owned by one of the parent companies. The problem was that this system had a decentralized orientation and could not meet the needs of the new enterprise. As the enterprise was growing in size, a new ERP system implementation was completely necessary. Finally, the analysis showed that an ERP implementations should be accompanied by a cautious and bureaucratic implementation procedure. The factors that are highlighted are the change management, network relationships and cultural readiness. 15

16 Chapter 3 Methodology 3.1 Introduction Our study aims to reveal the evaluation and selection criteria, for a successful ERP implementation process based on a survey of the northern Greek small and medium enterprises (SMEs). Our research methodology follows the rationale of Wu and Wang (2005), Law and Ngai (2007) and Valsamidis et al. (2009). The conceptual model of our research is presented in figure 2.2 below. As shown in the figure we retrieve[u1] ten success implementation factors from a quite extended literature review. Namely the factors are: functionality, cost, reliability, compatibility, technical support, vendor s position, vendor s name, methodology, user involvement, system understanding. Each one of the proposed factors constitutes one section in our research questionnaire[u2]. We expect these factors to constitute three basic/major [u3]constructs namely ERP product, Vendor Credibility & Service, Knowledge & Involvement. These constructs are going to be tested for effectiveness and success of an ERP system implementation. In this section we review the three most seminal methodologies that our research follows plus the Umble, Haft and Umble s (2003) methodology. With their extended literature review they have provided a large list of success[u4] factors when implementing an ERP system. Moreover, we indicate our conceptual framework and the hypotheses that our research is based on. Finally, we elaborate on the questionnaire we use elaborating on each item we finally include through our literature review[u5]. 3.2 Similar methodologies Umble et al. (2003) conducted a relevant study where they identify [u6]success factors and procedures for the correct and effective selection of software and its implementation. In their study they note the pitfalls of the ERP implantation process and the most common mistakes in selecting the right software. Through a fairly extended literature review they examine the most critical factors of successful ERP systems. Finally, the authors base their statements on a case study for Huck Int. a manufacturer of proprietary commercial, industrial, and aerospace fastening systems. This enterprise successfully implemented an ERP system in 1999 and the authors examine the degree of adherence to the prior proposed in literature success factors. The authors identified ten categories of reasons why some ERP systems 16

17 might fail. They elaborated on the strategic goals of the enterprise and the benefit that would occur by the implementation of an ERP system. Their case study presents the commitment of top management highlighted by the decisiveness of the CEO to move forward with the implementation. Moreover, the authors examine some technical issues such as the project management and the incorporation of all running operations into a single system and the necessary managerial changes to support it. They present the implantation team, the test that the enterprise runs for data accuracy and the necessary training of all stakeholders. They analyze the performance measures, the implementation process, post implementation audit and ultimately they provide an implementation evaluation to conclude that the enterprise succeeded to adopt a new ERP system sticking to the principals. Additional to Umble s et al. (2003) research that highlights the most critical success factors for the implementation of ERP systems, we base our research on three other studies. The first one is conducted by Wu and Wang (2005) and aims to measure ERP success from the users viewpoint. Authors proposed a satisfaction measure built on two phases. At the first phase, they consider a list of ERP satisfaction items and characteristics retrieved from literature. Then, they submitted this list of items to five interviews of stakeholders to see if the items are clear and concrete in meaning. At the second phase, and after revising their initial collection of items, they conducted a pilot test with thirty key users. This way they had a widely revised instrument for a large scale survey of stakeholders from the top 1000 companies in Taiwan. However, authors ended up in a sample of 617 companies from the list of 1000 that were actually had implemented an ERP system. After collecting 205 valid responses achieving a response rate of 28 per cent they submitted them to exploratory and confirmatory factor analysis that produced a concrete satisfaction model for measuring ERP success. Finally, they concluded that stakeholders satisfaction is related to systems success and additionally it is a measure of systems success. Also, they identified the constructs that comprises the users satisfaction evaluation thus the success of the system. In This way they actually provide to vendors and managers a diagnostic tool for assessing the implementation of an ERP system to an enterprise. Finally, they also provided some useful managerial implications stressing the importance of users and stakeholders involvement and knowledge for the success of the system. Law and Ngai (2007) also conducted study about the organizational factors of ERP systems success. Specifically, in their study the authors examined the relationship of the success of ERP incorporation, the business operations improvement and its overall organizational performance. The authors also examined the relationships of these elements 17

18 and organizational factors such as strategic intent, senior management support, and the status of the IT function within the enterprise. The authors conducted interviews with the IT executives of three different companies that use ERP systems to identify their objective when deciding to adopt an ERP system as well as to discuss and distinguish the most common organizational issues when implementing an ERP system. After this process they concluded on their conceptual model as follows: Figure 2.1: Law and Ngai (2007): Conceptual Model The set of hypotheses they examined in order to reach their conclusions includes seven hypotheses which are the following: H01. ERP success as measured by user satisfaction is positively associated with the perceived performance of organizations. H02. The perceived extent of BPI is positively associated with the perceived performance of organizations. H03. The perceived extent of BPI is positively associated with ERP success, as measured by user satisfaction. H04a. Perceived senior management support of BPI initiatives is positively associated with the perceived extent of BPI. H04b. Perceived senior management support of IT initiatives is positively associated 18

19 with ERP success as measured by user satisfaction. H05a. CEO-IT distance is negatively associated with the perceived extent of BPI. H05b. CEO-IT distance is negatively associated with ERP success as measured by user satisfaction. H06a. CEO-IT distance is negatively associated with the perceived support of senior management for BPI initiatives. H06b. CEO-IT distance is negatively associated with the perceived support of senior management for IT. H07a. There is a difference in the perceived level of ERP success, as measured by the mean ERP user satisfaction indices, across [u7]enterprises with different strategic intents for ERP. H07b. There is a difference in the extent of BPI, as measured by the mean BPI indices, across enterprises with different strategic intent s for ERP. H07c. There is a difference in the perceived level of organization performance, as measured by the mean organizational performance indices, across enterprises with different strategic intents for ERP. The authors conducted a survey aiming 1000 companies in Hong Kong from a database of Through the testing of their research framework they provided validating evidence for their initial research purpose. That is, they confirmed relationships among ERP success, Business Performance and Organizational performance. Also with their results they stressed the attention should be paid in planning, implementation strategies and managerial change when adopting an ERP system. Finally, the study of Valsamidis et al. (2009), aims to illustrate the effect on small and medium sized enterprises (SME) by the adoption of an ERP system. For that reason, they identified fifteen critical factors pooled from literature on which SMEs base their selection of an ERP system. These factors are the following: functionality of the system, technical support offered by the supplier, cost of the system, service and support that the supplier provides, supplier s name (reputation), system s reliability, compatibility with other systems, adjustment (ease of customization), supplier s position at the market, better fit with organizational structure (match), domain knowledge of the supplier, reference of the supplier, implementation time of the system, methodology proposed by the vendor and consultancy offered by the supplier to facilitate the selection and the implementation process. Then the authors examine the relationships of these factors with the characteristics of SMEs in the region of research. To do that, they implement a survey of one stakeholder in each one of 19

20 thirty two SMEs in the region of East Macedonia. The practical implications of their research are that flexibility and functionality are the most distinguished selection factors when choosing an ERP system followed by the reliability and the service support. Also, the specific research reveals that cost is of the lowest importance when selecting an ERP system implementation highlighting the anticipation by the executives of generating higher value in the future by the implementation of the system. 3.3 Conceptual Framework In this section we present the conceptual framework of our research which refers to success factors of an ERP selection by a SME. We will [u8]review the constructs that we use in our research retrieved from relevant literature. Specifically functionality refers to the proper use of the variety of ERP modules for each enterprise. That is to use exactly the modules needed to cover all the enterprises operations. Cost refers to the cost of obtaining the system, installing the system and to primarily setting the system to function. An ERP system is reliable when it is stable, fast and meets all the technical requirements of an enterprise. Compatibility is another important feature referring to the ease of the system compliance with other systems and other exogenous systems and protocols such as with the General Secretariat of Information Systems or the International Financial Reporting Standards. Technical Support refers to the availability of the vendor to provide any kind of help regarding the function of the ERP system. Suppliers position indicates the position that the supplier maintains in the market. When a supplier maintains a large market share for an extended period of time or manages some respected client accounts it is considered of high reliability and trustworthiness. Suppliers name refers to the vendor s fame in the market for providing high expertise and quality services. Methodology refers to the procedure the vendor follows to implement the system into an enterprise specifically to the effectiveness, the speed of implementation and the convenient cost effectiveness rate. User involvement refers to the way and the degree stakeholders will interact with the system. An effective system means that the users are highly involved and the vendor should provide training and support to increase involvement. Finally system understanding has to do with the training on the system by the vendor. The last two characteristics are highly related to knowledge which is a fundamental component of a good ERP system. After performing a principal components factor analysis using Varimax Rotation in our survey data we ended up into grouping these ten items retrieved from literature into three 20

21 distinct constructs that will be used as the independent constructs on our regression research that will follow. The three constructs resulting by the factor analysis are the following: a) ERP products that occurred by four items, functionality, cost, reliability and compatibility, b) Vendor Credibility and Service that occurred by four items, technical support, suppliers position, suppliers name and methodology and c) Knowledge and Involvement that occurred by two items, user involvement and system understanding. In the next chapter we will elaborate on the factor analysis statistics and the loadings of all items. The conceptual model of our research is presented diagrammatically in the following figure. H1 H2 H3 Figure 2.2: Figure Conceptual model 3.4 Hypotheses The aim of our research is to examine whether the three constructs presented earlier: ERP product, Vendor Credibility & Service and Knowledge and Involvement are 21

22 prerequisites for a successful selection and implementation of an ERP system. To perform this test we will analyze a set of hypotheses using a two of the most widely accepted correlation measures, Pearson s and Spearman s. Furthermore, we perform a linear regression analysis to investigate the pattern that the three constructs we conceived, form and effect the dependent variable of our model. We expect that the model that will emerge can be used as an index for measuring an ERP implementation and selection success. Specifically, we are going to test how and to what extend the three main factors (ERP product, Vendor credibility and service, Knowledge and involvement) affect the ERP selection procedure. Our first hypothesis is formed as follows: H1: A cautious assessment of ERP product leads to a successful ERP package selection. This hypothesis is based on the four items that produced the factor ERP product, Functionality, Cost, Reliability and Credibility. According to this hypothesis if an enterprise carefully assess a system s functionality, effectively evaluate the cost effect rate and assess the reliability and credibility of both the system and the vendor it is highly likely that the performance of the system will meet the requirements at a satisfactory level. The second hypothesis of the research concept is formed as follows: H2: A cautious assessment of vendor s credibility and future service leads to a successful ERP package selection. This hypothesis is based on the four items that produced the factor Vendor s Credibility and Service, Technical Support, Supplier s Position, Supplier s Name, and Methodology. According to this hypothesis if the executives of an enterprise give emphasis on the quality of the vendor s after sales service and technical support and take into account the fame and the experience of the vendor then the selection and implementation of the ERP system will most likely be successful. follows: Finally, the third hypothesis of the research framework we propose is formed as H3: A cautious assessment of user s knowledge and future involvement leads to a successful ERP package selection. The third hypothesis is formed with the remaining two items that produced the third construct User s knowledge and involvement. The items are User Involvement and System understanding. This hypothesis assumes that the highest the quality of users knowledge on the implemented system and the highest the involvement of users, the higher the performance, thus the success of the system. 22

23 3.5 Questionnaire In order to test the hypotheses of our research framework and provide implications for the ERP users we conducted a survey of Small and Medium Enterprises in Eastern Macedonia. At this point it is crucial to decide when an enterprise should be considered small and medium. Valsamidis et al. (2009), clarify in their analysis when an enterprise should be considered small or medium enterprise following the definition of the European Commission 1. According to that definition small and medium are the enterprises that make sales and revenues of a specific range, employ a number of employees that lies into a specified range and own a total value of assets of a specific range. Enterprises are classified into micro, small and medium-sized as shown on the following Table 3.1. Table 3.1 Enterprise classification Enterprise category Headcount Turnover OR Balance sheet total Medium-sized < million million Small < million million Micro <10 2 million 2 million The data collection has been achieved through distribution of questionnaires. The questionnaires have been distributed to 860 SMEs of North Greece. That is the prefectures of Serres, Drama, Kavala and Xanthi. In this region numerous SME s are located. The contact has been achieved with the help of the local chambers of commerce and industry. Our study is based on the studies of Valsamidis et al. (2009) and Wu and Wang (2005) and is divided into two sections. The first section investigates general enterprise characteristics, while the second section includes the ten proposed items from which we build the three proposed constructs. The first question refers to the location of each responding enterprise to provide a variance of locations in the examined geographic area in order to 1 Last accessed 24 August

24 reduce bias and maintain representativeness. The second question refers to the number of employees of the responding enterprises and helps us with the determination of which of the responding enterprises are small or medium. The number of employees can lie between 0 and 250 employees in order to meet the specific criterion. The third question refers to the last year s annual turnover, again for the determination of the small and medium criterion. The fourth question refers to the years of operation in order to maintain representativeness. Fifth question refers to for the ERP selection, implementation and installation costs. The second section of the questionnaire examines whether functionality, cost, reliability, compatibility, technical support, suppliers position, suppliers name, methodology, user involvement and system understanding are significant criteria for a successful ERP selection. The questions in this section are classified according to the three factors of the research model. Therefore, ERP product is examined in four questions that examine the functionality, the cost, the reliability and the compatibility of the ERP system. The following four questions of the questionnaire comprise the factor Vendor credibility and service where technical support, suppliers position, suppliers name and methodology are questioned. Finally, the last two questions examine user s involvement and system understanding in order to form the knowledge and involvement factor. Respondent executives[u9] have to choose from a five point scale the significance of each criterion for the successful selection and implementation of the system. The options of the scale are Not at all significant, Enough Significant, Fairly significant, Much significant, Very much significant. Our survey was conducted through the distribution of questionnaires. Specifically we obtain a list of all the enterprises operating in the examined geographic region (Eastern Macedonia) from the Chamber of Commerce. Some of the enterprises did fall in the definition of small and medium so they were discarded from the beginning of the process. Questionnaires were finally distributed to 860 enterprises through post or attached to an e- mail message. Questionnaires either distributed by post or were escorted by a letter with the request to be answered by the IT executive of each enterprise or the most involved executive in the enterprise. s and printed questionnaires were sent out in June 2011 and a reminder phone call was made in late July so as to avoid the general absence of executives for the August summer break. Finally, we managed to collect a total of 232 completed questionnaires, fifteen of which were discarded because the enterprises did not fall in the definition of small or medium. The final dataset consisted of 217 valid responses and was encoded initially with the use of Microsoft s Excel 2007 in order to be entered in SPSS v.19 for further analysis. 24

25 3.6 Summary In this chapter we presented the methodological approach of our research. Initially we presented four methodologies of other researchers based on which we built our own research framework. Then we presented the conceptual framework after introducing the items and the constructs this is based on. After that we elaborated on the hypotheses that will support our research claims. Finally, we presented and analyzed the surveying methods that we used to collect data as well as the instrument we use to do so. In the next we will show our results after submitting our data in an extended statistics analysis. We will present several statistic measures guaranteeing for the items and constructs validity as well as for the sample size adequacy. Finally, we will provide several practical implications that will be further discussed in the last chapter, five. 25

26 Chapter 4 Data Analysis 4.1 Introduction In this chapter we present the statistical analysis of the collected data through the distribution of questionnaires. As was mentioned in the previous chapter we managed to collect 217 valid questionnaires that were encoded initially with the use of Microsoft s Excel 2007 in order to be entered in SPSS v.19 (Statistical Platform for Social Sciences). This chapter is structured as follows: section 4.2 presents the descriptive statistics of the analysis through tables and graphs, section 4.3 deals with the factor analysis and reliability analysis of data and section 4.4 describes the steps of the linear regression analysis. The findings indicate that SMEs pay greater attention on the ERP product itself, rather than vendor s credibility or employees knowledge and involvement. 4.2 Descriptive statistics In this section, descriptive statistics of the questionnaire items are presented. For the visualization of the results, tables and graphs were added in the analysis. The first question of section A of the questionnaire is about the location of the SMEs. As was discussed in the previous section the answers vary among Serres, Drama, Kavala and Xanthi as these are the prefectures that the original research has been conducted. In our research, 48 companies from Serres, 69 from Drama, 55 from Kavala and 45 from Xanthi, participated. The answers and the cumulative percentages are depicted in the following Table 4.1. Table 4.1 Location (Prefecture) Frequency Percent Serres Drama Kavala Xanthi Total

27 Graph 4.1 Location (Prefecture) The next question of the questionnaire concerns the number of employees in each enterprise of the research. It was extracted that, most of the enterprises have 0-5 employees (57.1%). Table 4.2 and graph 4.2 summarizes the results. Table 4.2 Number of employees Frequency Percent , , , ,8 Total ,0 27

28 Graph 4.2 Number of employees The following question concerns the operation years of each enterprise. Most of the enterprises operate for 6-10 years and a few operate for more than 15 years. Table 4.3 and Graph 4.3 depict the respondents answers. Table 4.3 Years of operation Frequency Percent , , ,0 Over ,8 Total ,0 28

29 Graph 4.3 Years of operation Question 4 examines the annual turnover (in thousand Euros) of each enterprise. Luckily, all enterprises that participated in the research answered the specific question even though traditionally it is a question that businessmen avoid to answer in academic researches. The answers can be shown in Table 4.4 and Graph 4.4. Most enterprises reported annual turnover up to 300 thousand Euros. Table 4.4 Annual turnover (in thousand Euros) Frequency Percent Up to Total

30 Graph 4.4 Annual turnover (in thousand Euros) In question 5 we seek answers concerning the implementation cost of the ERP system that each enterprise had employed. Choices vary across a range of up to 4,000 to over 25, 000. As can be seen in the table and the graph that follow, in most cases the cost was limited below 4,000 Euros since most enterprises were small and therefore had limited demands of their ERP system. Table 4.5 and Graph 4.5 depict the answers. Table 4.5 Cost of ERP implementation Up to Frequency Percent Over

31 Total ,0 Graph 4.5 Cost of ERP implementation In question 6 (How much were you influenced by the Functionality of the ERP system, for your selection?) most SMEs reported that were fair influenced by system functionality for their implementation decision. Table 4.6 Functionality Frequency Percent Not at all Enough Fair Much Very Much Total

32 Graph 4.6 Functionality Question 7 (How much were you influenced by the Cost of the ERP system, for your selection?) examines the importance of cost when it comes to an ERP installation procedure. It was expected that cost would be a significant determinant for the implementation decision, but the results indicate that cost has a medium importance for enterprises. Table 4.7 Cost Frequency Percent Not at all Enough Fair Much Very Much Total

33 Graph 4.7 Cost In question 8 (How much were you influenced by the reliability of the ERP system, for your selection) we examine the importance of reliability of the ERP system for the enterprise. Table 4.8 and Graph 4.8 below indicate that most enterprises consider suppliers reliability a medium factor for the implementation decision. Table 4.8 Reliability Frequency Percent Not at all Enough Fair Much Very Much Total

34 Graph 4.8 Reliability Question 9 (How much were you influenced by the Compatibility of the ERP system with your previous software, for your selection?) investigates whether compatibility of the new ERP with the existing software, concerns the enterprises. In most cases enterprises were much interested in compatibility. All respondents answers can be seen in the following table (Table 4.9). Moreover, Graph 4.9 depicts the frequency trend concerning compatibility of the new system with the existing systems. Table 4.9 Compatibility Frequency Percent Not at all Enough Fair Much Very Much Total