ERP USAGE IN THE IT SERVICE INDUSTRY: AN EXPLORATORY STUDY

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1 ERP USAGE IN THE IT SERVICE INDUSTRY: AN EXPLORATORY STUDY Hintsch, Johannes, C-VLBA, Otto-von-Guericke-University Magdeburg, Germany, Schrödl, Holger, Faculty for Informatics, Otto-von-Guericke-University Magdeburg, Germany, Turowski, Klaus, MRCC, Otto-von-Guericke-University Magdeburg, Germany, Abstract IT service providers support the business needs of their customers with offerings such as infrastructure, platform or software as a service. They may attain a competitive advantage by serving specific customer needs or providing standardized services at competitive prices and in high quality. Individualized offerings require a tight information flow from sales to delivery. Competitive prices may be achieved by providing a high level of automation in service provisioning. Enterprise resource planning (ERP) systems are a crucial means to integrate corporate departments and automate processes. They serve as a foundation for an industrialized production and service environment. Although IT service management is frequently discussed in literature, insights into the industrial production of IT services supported by enterprise systems in general and ERP systems, in particular, are limited. This research in progress paper reports on an exploration of the usage of ERP systems at IT service providers. It elaborates on the collected data of the first case and gives an outlook on a follow-up large-scale industrial survey. Keywords: Enterprise Resource Planning, ERP, IT Service Management, IT Service Industry, Exploratory Case Study.

2 1 INTRODUCTION In the debate of the IT industry s future and its challenges, parallels are being drawn towards industries in which handicraft businesses have already successfully transformed to highly efficient manufacturing companies. Part of these debates is that various proven concepts and methods from the industrial production of goods and services can be transferred to the creation of IT services. For instance, activity based costing, borrowed from industrial manufacturing, leads to more transparency regarding the effectiveness of processes (Wiggers et al. 2004). Standardization of computer architectures, comparable to standardization of parts in manufacturing, has enabled the widespread use of virtualization, which in turn enabled the cost savings, which, for instance, are achieved by infrastructure as a service and its resulting economies of scale (Hammond 2013). Especially in the industrial goods production of the last century, one phenomenon was observed: continuous industrialization led to enormous increases in productivity. With more competition and higher cost pressure, IT service providers are encouraged more and more to also industrialize their value creation. This concerns external IT service providers that compete in a global market, as well as in-house IT service providers who are faced with the demands of modern IT support. In order to examine these phenomena in relation to the particularities of the IT industry, a structured approach must be taken in order to study the concepts and possibilities of industrialization in the context of IT service providers. Some time ago, the first discussions about the industrialization of IT service provision, in practice and in the scientific community, were started (Lamberti 2004; Mertens 2006; Hochstein et al. 2007). IT services aim at the effective and efficient satisfaction of the information demand by planning, acquiring, and operating IT applications and infrastructure (Walter et al. 2007). The basis of these discussions was due to the tremendous success of industrialization in traditional sectors. According to Hochstein et al., there are four principles that are essential to the success of industrialization in traditional industries that should be examined from the perspective of the IT service industry: standardization and automation, modularization, continuous improvement process, and the concentration on core competencies (Hochstein et al. 2007). When considering these four principles from an IT service perspective, several IT concepts exist (Hochstein et al. 2007), which act as an enabler for the corresponding industrialization principle (Table 1). Industrialization principle Standardization and automation Modularization Continuous improvement process Concentration on core competencies Table 1. IT concept Cloud computing, IaaS, PaaS, SaaS, CMMI, ITIL, COBIT Grid computing, blade computing, utility computing, SOA ITIL Continual Service Improvement, Six Sigma IT outsourcing, cloud computing Principles of industrialization and correlating IT concepts From the perspective of IT service creation, there are differences between the development and manufacturing processes of tangible goods and goods that have intangible parts, such as IT services (Bruhn & Strauss 2007). Intangible assets are easily reproducible at no or very low production costs (Picot et al. 2010), and they are usually not storable (Engelhardt et al. 1993). From the perspective of a scientific discussion, established concepts and models have to be examined and evaluated in the context of an industrialized IT service delivery. Findings in this research gap simplify the design of the delivery of IT services at reduced effort and cost while increasing customer satisfaction. The current state of the art does not deliver the responses for the necessary improvements.

3 One of the open questions is how the provisioning of IT services should be organized. ERP systems are integrated information systems that support all business processes within a given company (Gronau 2004). It has been stated that ERP is the most important development in the corporate use of IT (Davenport 1998). ERP systems incorporate different types of business applications into one holistic system. The systems are comprised of several functions and implement requirements that are needed in the company. ERP offers the possibility to manage the entire companies value chain through the employment of a common database, implemented business rules, and information access in real-time for all companies stakeholders (Davenport 2000; Aloini et al. 2012). Moreover, the usage of ERP in a corporate environment provides greater job flexibility (Robey et al. 2002), faster response times, and improved decision-making (Shang & Seddon 2002), improved competitiveness (Powell et al. 2013), and improved coordination and accountability (Ram et al. 2013). The question now is how the potential of ERP systems can be used in the IT service industry. In industries that produce tangible goods, ERP systems are a proven means to support the whole value chain of products and services. They are one of the core elements of the industrial success. Leveraging the industrialization principle of standardization, complex, highly customized IT solutions are designed more and more from standardized components through orchestration. This way of IT service provisioning is very similar to production of goods in a mass customization mode. If the provisioning of such IT services is now understood as a production process, this research asks how ERP systems can facilitate this process for IT service providers. To elaborate on this question, this paper provides preliminary results of an exploratory study on ERP usage in companies that provide IT services. The structure of the paper is as follows: In section 2, the research background on ERP usage in the IT service industry and the industrialization of IT services is given. In section 3, the research approach is described. In section 4, the results of this research in progress study are given. These results are discussed and an outlook is given in section 5. 2 RESEARCH BACKGROUND 2.1 ERP in the IT Service Industry ERP research has reached a certain level of maturity with a large body of accumulated academic knowledge (Schlichter & Kraemmergaard 2010). The field is classified into eight categories by Esteves and Pastor: general, adoption, acquisition, implementation, usage, evolution, retirement, and education (Esteves & Pastor 2001). The general category has four sub-categories: research issues, organizational knowledge, business modelling, and ERP product development issues. The category which is most researched is ERP implementation (Eden et al. 2013). The goal of the framing research of this paper is to develop a model of an ERP system for IT service providers. This can be categorized as an evolution of existing concepts. Hintsch (Hintsch 2013) conducted a broad structured literature review, also taking the mentioned studies above and others (Moon 2007; Schlichter & Kraemmergaard 2010) into account. He searched for conference papers and journal articles that reported on ERP systems for IT service providers that also integrated IT service management into the concept of the respective ERP approach. Only preliminary research was identified, which is reported on in the following. Regarding standard commercial of the shelf (COTS) ERP software, Botta-Genoulaz and Millet (Botta- Genoulaz & Millet 2006) raise the question if a COTS ERP system serves a service organization better than an ERP system specifically designed for a service industry. Pilgrim and Vogedes (Pilgram & Vogedes 2012) provide a potential answer for the IT service industry by claiming that the ERP system SAP Business Suite satisfies up to 80% of the needs of IT service providers. Their statement is built on a fictional case study. Botta-Genoulaz and Millet, who wrote their paper about a case study

4 conducted at service companies from different domains, report that the companies do not use all ERP modules, i.e. not all functional areas of a company are integrated. All companies implemented finance modules. Other modules such as ones for material management or sales and logistics were also used. Wittgreffe et al. (Wittgreffe et al. 2006) report on the architecture of the operation support system (OSS) which is in operation at British Telecommunications (BT). The system shares characteristics with ERP systems like a common data model and the support of different functional areas within one system. With its system, BT automates activities such as service provisioning, change management, billing, and incident management. To support these different activities, specific platforms exist, many consisting of COTS software, that are integrated with each other following a service oriented architecture approach. The customers of BT require evidence of best practices; therefore the OSS is designed to be compliant with the IT Infrastructure Library (ITIL). Ebert et al. (Ebert et al. 2007) developed a conceptual model for IT services, which they say can be the first step towards applying the ERP concept to the IT service industry. A year later, they present their research on applying the ERP related concept of production planning and control (PPC) to the domain of IT service production (Ebert et al. 2008). They conduct a case study at Swisscom IT services, and specifically investigate how the company s production of its managed desktop services (shipping, onsite installation, and remote maintenance) may be supported by a PPC system. The authors are able to map PPC concepts to the production of Swisscom s IT service, but provide no evaluation about using the system at Swisscom. In a subsequent study, Ebert and Brenner (Ebert & Brenner 2010) conceptualize the use of a PPC system for the provisioning of SAP systems. They build their concept on a notional scenario based on a case study they conducted at T-Systems. They see a high degree of standardization of services, systems, and processes as the key requirement for the use of PPC systems. As part of their outlook they predict that the focus will shift from short-term production control to medium-term volume planning due to the increasing automation of IT service provisioning. 2.2 Industrialization of the IT Service Industry Becker et al. (Becker et al. 2011) study how industrialization principles are adopted by IT service providers. They made an exploratory case study among ten German IT service providers in August 2009, interviewing in total twelve employees. Semi structured interviews were conducted that were structured along the six identified approaches towards industrialization. These are product standardization, process standardization, modularization, automated and integrated service provisioning, sourcing, and quality management. The majority of companies offers IT services as clearly defined products, ITIL is used for process standardization by the majority of the cases, among other frameworks for process quality and project management. Products are modularized, but in some cases customer requirements are too individual for mass customization. The service provisioning is reported to be increasingly automated (on average it is at 47 %). In terms of capacity management, methods from IT service management are more predominant than from physical goods manufacturing such as PPC, which is used by eight companies. The companies mainly source hard- and software, and only a minority obtain IT services from other providers. The quality of services is measured by most of the companies, but only one company uses an established framework such as Six Sigma. Looking specifically at integrated service provisioning, one company is reported to use a proprietary method based on ITIL. The study does not report on any integrated IT systems supporting the companies. For standardizing IT processes, companies often use the ITIL framework as a reference. Marrone and Kolbe (Marrone & Kolbe 2011) research the benefits of implementing an ITIL in organizations. They conducted an online survey that was completed by 491 IT managers and professionals. The survey results indicate that there is a positive relationship between the number of implemented ITIL processes and the perceived maturity level of ITIL implementations. Furthermore, the challenges of implementing ITIL decrease as the maturity level of the implementation increases.

5 2.3 Production of IT services The process in Figure 1 is chosen as a structuring basis for inspecting the IT service production process in the context of the discussion of the IT service industry s industrialization. The process is aligned with industrial management theory (Zäpfel 1989; Kern 1992; Schweitzer 1994; Corsten 1995). Figure 1. Production typologies of IT service providers, adopted from Zarnekow (2007) Unlike software companies, IT service providers do not produce a software artefact that can be reproduced with virtually no cost. They set up applications with the necessary supporting resources such as networking, servers, and operating systems. The production process is then in operation when the customer accesses the service and uses it: for instance, when a customer uses a web application. Zarnekow differentiates two kinds of IT service providers: those who produce services under a frame order for specific customers (FA-ITSP), and those who produce services according to their product program for previously unknown customers (PP-ITSP). The FA-ITSP first conducts sales and marketing activities and generates a customer contact which is answered with a quote. Next, a frame agreement is negotiated. The PP-ITSP will conduct market research to decide which products may be in high demand, and based on the results plans its product program which is offered to its market. In cases of both provider types, the service is specified in the next step. The key properties of an IT service are its functionality and quality. The specified IT services are produced using applications that are individually developed or procured COTS software. Applications need to be integrated, maintained, and extended. Furthermore, release and configuration management is necessary. The management of production potential has four subcategories. Firstly, in capacity management bottlenecks need to be avoided. Secondly, before the transitioning the applications into production they have to be tested. Thirdly, in continuity management emergency plans have to be developed to cope with upcoming production problems. Fourthly, the configuration of the production infrastructure has to be managed. Following the management of the production potential the service is ready for production. For the PP-ITSP the same tasks that the FP- ITSP requires as the first steps are conducted now. With the exception that after the frame agreement, the PP-ITSP has to configure the service according to the frame agreement, for instance, the bandwidth at which the service is offered. Customers of both provider types activate the service during service call-off. During production the customer s users access the IT service. During this step, it is the task of the provider to manage the service s availability. If there are problems with a service or requests such as access requirements to a restricted service, the customer is supported in the step of service support. The last step of the production process is the maintenance and further development of the service.

6 3 RESEARCH DESIGN The research uses a case study research design aligned with the guidelines proposed by Yin (Yin 2009). It is segmented in three phases: first, there is a sampling of cases, second, data is gathered, and third, the gathered data is analysed. Its cases fit the following description of a business model: a case is an IT service provider that offers different solutions to its customers. This IT service provider acts independently in an open market and has both industrial and private customers. For these customers, the IT service providers offer at least three different products. Firstly, it offers a product like V-Server, a provisioning of a virtual server in possibly different performance variants. Secondly, it offers a web space solution for the operation of a web application. Thirdly, an service is offered. The reason for this selection of the cases is based on the content of the provider s product portfolio. Its products are aligned with the widely recognized cloud service stack (Mell & Grance 2011). V-Server is a typical representative from the IaaS level, the web space is a typical representative from the PaaS level, and the mail service can be seen as a typical SaaS solution. This selection may lead to insights into the differences and similarities of the provisioning of solutions from different levels of the cloud service stack. The cases were also selected according to the extent of their product portfolio and according to their corporate structure. Potential cases, like large telecommunication companies, which have a very diverse product portfolio such as additional consulting services, were not selected. Furthermore, internal IT service providers were not selected because it was anticipated that their IT systems would be more complex with different integrated company parts. The method of semi-structured expert interviews was chosen since there are currently only limited findings on this emerging topic, none taking a comparable approach to this survey. The research method allows more flexibility and the possibility to adapt to the course of the interview. There is the possibility to formulate open questions to gain insights, which might not be expected in advance, and perhaps opens new aspects on the core topic (Kvale & Flick 2007). The interviews are to be taken in a telephone call with a dedicated interviewee and two researchers providing the questions. The interviews are voice recorded and transcribed afterwards. All considered companies are located in Germany. In general, interviewees are selected by considering a diverse pool of experts in their companies to gain insights from different perspectives. To get as much of a holistic picture as possible, interviews should be conducted with representatives from the executive level as much as possible. This may give insights in strategic decisions, which can be considered as one of the main drivers for IT innovation (Kern et al. 2002; Dibbern et al. 2004). Representatives from middle management and heads of IT departments should also be included since they are in general responsible for the evaluation and selections of potential IT solutions (Willcocks & Fitzgerald 1993; Dibbern et al. 2004). After transcription of the interviews, the transcripts are returned to the interviewees for validation (Flick 2009). After the return of the validated transcript, the interview was analysed by iterative descriptive and interpretive coding (Myers 2013). Interviews are structured in three parts. Firstly, the general background of the companies is inquired, key figures and some general information of the products. Secondly, questions about the product and solution representation in the company s information system are asked. This should give insights into the way the company described their product for the selling side as well as for the production side internally. The content of the third part is the process of service provisioning as described by Zarnekow. For this, the questions are structured along the steps of the process model. The model in detail is not presented to the interviewees. If possible, follow-up questions are asked on issues that arise from previous interviews or from the interview itself. In order to increase the depth of analysis and to acquire experience with gathering of unfamiliar data, it was decided to focus on a smaller number of cases (Numagami 1998). 18 companies were approached and asked for an interview; unfortunately only two positive responses came out for the planned time frame. From these two positive responses, only one interview came out which is feasible for our analysis. Due to the time restrictions, it was decided to display the author s current stage of

7 knowledge as research in progress on this topic. The results from the interview justify the selected approach. In the following these results are presented. 4 CASE STUDY RESULTS Case A runs its own data center and operates its business with approximately 20 employees, five of which are located in product development. Most of the other employees are working in the support group of the company. Case A serves about 19,000 customers worldwide. The provider can be classified as an FA-ITSP, serving an anonymous market. They use an information system to support most of their business processes and all of their divisions. A process framework such as ITIL is not used due to anticipated constrained flexibility if ITIL was to be implemented. The information system was developed by the company itself. For specific functionality, third party software is integrated: free open source and commercial closed source software. A key competitive advantage the provider reports on is the extension of the open source software by functionality that is unavailable in the freely available software packages. From an architectural perspective, the information system in place can be divided into three different modules: a customer module, which gives an existing customer the possibility to manage its requests and products, a provider module, which gives the company the possibility to manage its customer accounts and to prepare the provisioning of the requested IT service, and a control module, which gives the provider the possibility to manage its service infrastructure. In conclusion, it can be stated that after the analysis of this case, several attributes were identified which have already been assumed by expert opinions on this topic. Firstly, an individual information system is used instead of a standard solution. Secondly, the service creation consists of a mixture of automated and manual steps. Thirdly, the complexity of the products is rather low and no side effects from shared components can occur. To enhance the quality and the richness of the implications, which are discussed in the following section, more data has to be collected. The data from Case A is presented in Table 2. Process Step Market study Product program planning Service specification Application development Management of production potential Service readiness Sales and marketing Customer contact Quote Frame agreement Service call-off Case A - n.a. - Portfolio: V-Server, webhosting with , groupware - Products are offered to customers and resellers - Resellers are able to generate their own product labels - n.a - The information system to provide the V-Server product is developed by the provider using open source software - The data center operation is automated, only limited personnel presence is required - There are individual program elements and scripts to manage the provisioning, e.g. of the virtual server - Based on the customer order, the provider uses the provider module to check available resources for the service provisioning and to prepare the service production - n.a - Marketing takes place on the provider s website; all products and their configurations are listed there - Customer request is handled in an extra order system (linkage between website and the provider module) - Possibility to order product variants - n.a. - Solvency check and licence management is done via the provider module (solvency check via external web service) - Detailed action plan for the service technician with automated and

8 Production Service support Maintenance, further development Table 2. manual steps to provision the service to prepare for service call-off - Usage of IT service by the customer - Monitoring of systems by provider - Done through dedicated support staff - n.a. Principles of industrialization and correlating IT concepts 5 DISCUSSION AND OUTLOOK Only one case s data could be acquired, which doesn t allow important case study techniques such as triangulation. Thus, this paper can only present the research at its current stage, which is why we labelled it as research in progress. Nonetheless, some discussion is possible, which, however, is to some degree subjective and assuming. The IT service providers that were targeted in this study offer very similar products. Thus, providers have to try to differentiate themselves from the competition. This can happen by offering these standard products at competitive prices. However, this is only economically feasible if the products are produced at low costs per unit. This is potentially achieved through very specialized information systems that the providers are hesitant to shed light on which may explain denied interviews. Pilgram and Vogedes claim that 80% of products, like SAP ERP, are applicable to the needs of the IT service industry (Pilgram & Vogedes 2012). If this is true, then some percentage of providers should be using such COTS ERP systems. British Telecommunications uses COTS software, however it was not reported that they use ERP systems. Case A integrates one COTS software product in their information system. Additionally, Botta-Genoulaz and Millet report that the companies they studied do not integrate all functional areas of their companies in the ERP (Botta-Genoulaz & Millet 2006). Modules for finance were implemented by all companies, but other modules only by some companies. ITIL is used by British Telecommunications, but not by Case A due to concerns of reduced flexibility. ITIL contains various technology considerations. An ERP for the IT service industry is even mentioned to be the goal state of current IT service management tools (Lloyd 2011). A commercial study conducted in Germany reports that 24% of 240 studied companies are IT and IT service providers (MATERNA GmbH 2010). However, details about the companies are not provided. It would be interesting to see how the business model of an IT service provider correlates with the usage of ITIL. This paper has argued that the adoption of ERP systems across the whole value chain to the IT service industry is valuable. The current body of literature does not sufficiently report on such tool support that providers have at their disposal. Therefore, an exploratory case study research approach was selected in order to gain practitioner insights. Only data from one case could be presented. In order to extend the body of knowledge regarding the use of ERP systems by IT service providers the authors plan to conduct a survey using this research design on an extended number of cases. It is planned to also incorporate employees of companies who sell COTS ERP software in the pool of potential interviewees because the authors anticipate that the software providers employees will be less reluctant to the interviews. However, special care must be taken to get objective results because of marketing interests of the providers. References Aloini, D., Dulmin, R. and Mininno, V. (2012). Risk assessment in ERP projects. Information Systems, 37 (3), Becker, J., Poeppelbuss, J., Venker, D. and Schwarze, L. (2011). Industrialisierung von IT- Dienstleistungen: Anwendung industrieller Konzepte und deren Auswirkungen aus Sicht von IT-

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