Lit Review ERP

8/9/2019 Lit Review ERP

1/9

2.1 INTRODUCTIONAn Enterprise Resource Planning (ERP) system is an organizational and management

solution based on information technology towards challenges and problems in the businessenvironment (Laudon et al. 1998). An ERP in itself is a massive entity spanning the entire

organisation and imposes disruptive changes in the organisation when implemented (Barnes,

1999). They have rapidly become the de facto industry standard for replacement of legacy

systems (Parr & Shanks, 2000). ERP systems are currently the prevailing form of business

computing for many large organisations in the private and public sector (Gable, 1998). ERP

systems support the process based view of the firm. They enable businesses to eliminate the

functional silos existing in their organisation thus enabling them to be more flexible and

productive (Hammer & Champy, 1993).

An ERP manages and integrates all the business functions in an organisation and this makes

it much more than simple software that take no thought to acquire (Boykin, 2001; Chen,

2001; Yen, Chou, & Chang, 2002). Organizations view ERP-enabled standardization as a

vital means to integrate dispersed organizational systems and provide a seamless access to

information organization-wide (Osterle et. al, 2000). ERP stores and processes data and

allows it to be accessed in an appropriate format, while stretching beyond the organisational

boundaries (Gupta, 2000) (Al-Mashari & Zairi, 2000) (Gardiner et al, 2002). Because these

systems touch so many aspects of a companys it internal and external operations, their

acquisition, successful deployment and use are critical to organizational performance and

survival (Tanis et. al, 2000).

To decide upon the most appropriate solution, the potential impact of such systems should be

understood and evaluated from a business point of view so that the best solution can be

acquired and implemented from the several options that might be available. This is a semi

structured decision problem because only part of the problem can be handled by a definite or

accepted procedure such as standard investment calculations and on the other hand the

decision maker needs to judge and evaluate all relevant (and intangible) business impact

(Bernroider & Koch, 1999). As such, there are no existing standardised metrics that could be

used to evaluate such a problem and its options (Laudon & Laudon, 1998 ; Hecht, 1997).


2/9

2.2 ORGANISATIONAL EXPECTATIONS OF AN ERPThere could be various reasons for the acquisition of an ERP by an organisation, be it an off

the self solution or a cloud based solution. Even though various ERP software have been

adopted by a large number of organisations, there have been a limited number of field studiesthat actually investigated the factors emphasized during the acquisition of one (Van

Everdingen et. al., 2000 ; Bernroider & Koch, 1999). Ross & Vitale(2000) synthesized the

fact in one of their study that the chief reason to implement an ERP software across the

organisation is to achieve a common technological platform from where the organisation can

move forward and build on it. Some of the other reasons also included a need for process

improvement, data visibility, operating cost reductions, increased responsiveness to

customers and improvements in strategic decision-making. Nelson (2005) in a novel

approach analysed from an emotional point of view the factors that influenced the purchaseof an ERP taking into account the stakeholders perspective as well. Another set of criteria by

Kumar et. al., (2003) mentions vendor reputation along with quality of support that it

provides. Brown et al (2000) identified several businesses and IT related factors that

influence the purchase of ERP systems. A similar set of factors, though a bit more

comprehensive, is distilled by Hallikainen et al, (2002) in their study which analysed the

various criteria that are considered while acquiring an ERP software and categorised these

into technical and business reasons. These reasons may apply to an organisation that is either

phasing out an age old mainframe system or is acquring its first piece of IT framework.

2.2.1 TECHNICAL REASONS

Technical reasons might include the reduction of IT costs through standardisation of the

software/platform used in the organisation (Sumner, 2000 ; Ross & Vitale, 2000) and

improved efficiency which leads to better output and productivity and this also factors in the

aspect of the reduction in maintenance costs (Parr & Shanks, 2000 ; Sumner, 2000),

avoidance of periodical updates in the applications already implemented in the organisationas these cause a lot of compatibility issues leading to performance problems, a clean slate

approach to have a better overall software system implemented in the organisation that works

much better (Holland & Light, 1999 ; Davenport, 1998 ; Light, 2001), can be developed

further and poses lesser maintenance issues. There could also be an intent to phase out the

age old IT infrastructure as it may be at the end of its lifecycle, may consist of an obsolete


3/9

technology that may be inconsistent with the current technological advances (Brown et. al.,

2000 ; Kremers & Dissel, 2000), or more simply, it stands to receive no further support from

the developer (Holland & Light, 1999). SAP R/3 introduced the client server model that is

much more scalable and flexible to adopt (Doane, 1998 ; Levis & von Schilling, 1999). ERP

packages allow the organisations the opportunity to move from traditional mainframes to aclient server which is less expensive and more responsive to the organisational requirements

(Davenport, 1998 ; Koch, 1996 ; Levis & von Schilling, 1999).

2.2.2 BUSINESS REASONS

Brown et. al., (2000) mentions three prime reasons that an organisation expects out of an ERP

: to achieve competitive advantage over its rivals, to reengineer the existing business

processes and to collate the organisational information in a integrated format. The existing IT

framework may be a barrier to the changes that may have to be implemented (Hecht, 1997).

If such case, ERP could be acquired to achieve strategic change, flexibility and agility

(Bancroft et. al., 1998 ; Holland & Light, 1999) which may lead to competitive advantage,

not possible with the legacy systems (Norris et. al., 1998). The move to acquire an ERP may

also be motivated from the fact the organisation may want to implement the best practices

available for a certain industry (Bancrof et. al., 1998 ; Parr & Shanks, 2000 ; Sumner, 2000)

as well as employing a common set of processes and interface for every business and unit of

an organisation, globally (Bancroft et. al, 1998). It also allows the organisations to remove

the legacy systems and reengineer the organisation (Davenport, 1998 ; Doane, 1998). Also,

business should be matched to suit the ERP and hence allows the organisation to reengineer

itself (Davenport, 1998 ; Hammer & Champy, 1993). ERP also allows the more informed

decision making due to increased data visibility (enterprise wide data availability removing

the geographic barriers) (Kremers & Dissel, 2000 ; Sumner, 2000). Apart from this, it allows

for speedier handoffs in the supply chain and smoother transition along with better networked

suppliers and other business partners (Hayman, 2000 ; Kumar & Hillegersberg, 2000).


4/9

If t organ i ation p lans inorgan i grow t compa ti ilit wit t new sys tems and sca lab ilit y

to incl de new lines of produc ts may be an issue t atpromp ts t e organ isation to look beyond

t e legacy app lications to bus iness re lated ones such as bus iness, such as the necess ity to

acqu ire sof tware, wh ich can suppor t a cer tain produc tion mode ( Markus & Tan is, 2000).

2.3 PRODUCTIVITY PARADOX??

A good E R su ite wou ld be expec ted to so l e many of the issues that the organ isation m ight

be fac ing a t the momen t. However a lot of bus inesses f ind themse lves to be dea ling w ith wha t

is ca lled as the Produc tivity Paradox. Th is term was introduced by Er ik Bryn jolfsson.

R ober t Solow, in a famous quo te in 1987, remarked that You can see the compu ter age

everywhere bu t in the produc tivity s tatistics. To unders tand the concep t of the produc tivity

paradox, it is impor tan t to lay the ground for the term produc tivity. It is the bas ic un it of

measuremen t of the con tr i bu tion of IT in an en terpr ise. Produc tivity is no t the end ou t pu t of a

bus iness. Ins tead it is the va lue that is crea ted for the cus tomers ( Bryn jolfsson & H itt, 1998)

when an IT is emp loyed in a bus iness. A cadem ic research has conf irmed the pos itive

Businessreasons

Technicalreasons

ERPPACKAGE

ACQUISITION


5/9

influence and the benefits that the information technology on the businesses that use it as an

enabler (Brynjolfsson & Hitt, 1998 ; Dewan & Kraemer, 1998).

It is certainly not being implied here that IT does not help a business to be more productive.

However, there is no definite and quantifiable metrics or means to identify the benefits and

the costs of the ERP that impact the organisation through the entire lifecycle (Stefanou, 2001

; Powell, 1992). This has created problems for an organisation to justify the high upfront

investment and the process of putting the organisation through all the changes. Even though

the ERP may seem to increase the productivity, major benefits do not emerge from this.

Instead the benefits may actually be derived from the organisational change that is introduced

by deployment of ERP (Donovan, 2000 ; Remenyi, 2000). This fact may even signify and

highlight the fact that the value added by an ERP to an organisation may differ from one

organisation to another which may be based on several relevant factors.

2.4 TRADITIONAL ERP DISADVANTAGESTraditional ERP software brings with a host of advantages but also some glaring issues that

need to be considered before actually plunging in along with the competitiors. Even though

ERP softwares have many number of potential advantagess, there are a lot of drawbacks

when dealing with them. According to Wilder and Davis (1998), ERP implementation

projects are one of the toughest development projects as these have high upfront costs, high

complexity and scope of these projects involves the entire organisation which might tanscend

the geographical and cultural boundaries. Even though ERP systems have been popular, there

have been trouble with successful implementation (Themistocleous et. al., 2001 ; Chan,

2002). This leads to either modular implementation where a certain specific functional

module is implemented or a partial implementation where a set of functional module is

implemented. Some have even led to abandonement of ERP altogether (Davenport, 1998 ;

Bingi et. al., 1999).

2.4.1 HIGH INVOLVED COSTS

The selling point of ERP software suits is the cost reduction, efficiency gained in the

departments such as accounting, sales, production etc along with reduction in the inhouse IT

personnel. The peception of the costs involved is a major factor in the adoption of the ERP

software. The upfront costs are heavy due to the comprehensive nature of the ERP software,


6/9

instead of being spread over the time, and these are much more visible than the latter

(Lindley & Topping, 2009). High involved costs which are quite prohobitive, especially

when the software has to be upgraded or modified to suit the business strategy, deter SMEs

to adopt these software suits. The decision making and justification for an ERP itself

contributes to one third of the total involved cost and the actual decision on which ERP toacquires may cost the organisation in terms of time and money (Stefanou, 2001 ; Hecht,

1997).

Gupta (2000) illustrates a lot of problems that occur with the ERP implementation. The first

two deal with the problem of change management which is a generic problem, whether it is a

cloud ERP or a traditional ERP. However , he mentions a lot of cost overruns, that occur

while the ERP implementation is going on which relates to bugs in the software. Failures of

ERP system implementation and integration (Glass & Vessey, 1999) have been known to

lead to organizational bankruptcy (Bulkeley, 1996 ; Davenport, 1998 ; Markus & Tanis,

2000). Since the costs evolve over the time (Stefanou, 2001) during an ERP implementation

and may be either tangible or intangible, it becomes difficult to estimate an exact budget for

the process itself.

Every organisation in todays world bears costs related to its IT infrastructure to stay

competitive in the market. However IT is a fast changing field and this fact translates to high

maintenance costs from the perspective of an organisation. One of the ways for an

organisation to stay competitive or gain competitive advantage is to reduce its IT expenses

while deriving the same advantage that is gains from its current IT setup (Chou D. , 2007).

Information systems outsourcing have been prevelant from past many years to achieve this

effect. Though there were a various set of motivation and reasons for different organisations

for this (Saunders, Gebelt, & Hu, 1997 ; Robinson & Kalakota, 2004), the primary reason that

emerged from this review was the attempt to reduce the costs that are associated with the IT.

There are various reasons as to why an organisation may go for cost savings which my

include fierce market competition , economic downturn or to gain a competitive advantage

(Chou & Chou, 2008).


7/9

2.4.2 PROJECT MANAGEMENT :

Budget allocated to the project can overshoot and time delays incurred can add to the costs

(Davenport, 1998). Implementation costs are dependant on the approach taken as well and

this also takes in the consideration of the risk appetite of the organisation (Holland & Light,

1999 ; Stefanou, 2001). Whenever the project runs into trouble, instead of reporting the

problems, there is a inclination to keep pouring resources into it in hopes of salvaging

whatever is left of it (Motsios, 2001 ; Ewusi-Mensah, 1997). This may happen due to social

or peer pressure and just plain short sightedness. Despite the considerable investment in t ime,

capital, and resources the return on system investment is not clear (Murphy & Simon, 2001 ;Donovan, 2000) which may make the organisations reluctant to invest in such an endeavour.

Also, lack of expertise and ERP software specific knowledge while deploying such systems

increases the risk of failure or time overruns during the implementation phase of the ERP

regardless of the approach (Big Bang or Phased) (Ewusi-Mensah, 1997). This might lead to

increased costs as well when the salary caps are taken into consideration.

2.4.3 FLEXIBILITY AND CUSTOMISATION

The functionality that is provided by the commercial software does not often fit the

requirements of an organisation that may have its own set of practices which might provide it

competitive advantage. This may lead it to customize its business practices to suit the

software or customize the software to suit its own requirements (Francalanci, 2001 ; Soh, et.

al., 2000). Brady et. al. (2001) mentions that the ERP software improvises its own logic on

the organisation in which it is implemented.

Whenever an organisation is willing to expand, either through organic or inorganic means

such as mergers and acquisitions, existing IT systems in the two organisations may make it

very difficult and time consuming to homogenize IS framework . One of the major challenges

in ERP adoption is flexibility with the integration of newly-acquired business functionalities

into its data processing systems with the minimum time possible (Gupta, 2000). The


8/9

flexibility of ERP systems refers to the extent to which an ERP system may be dynamically

reconfigurable to define new business models and processes (Stedman, 1999). A lot of

literature stresses on the strategic alignment of the information systems to the business or vice

versa (Davenport, 1998 ; Hammer & Champy, 1993 ; Hirschheim & Sabherwal, 2001 ;

Francalanci, 2001). This is an important factor in the successful implementation of ERP in anorganisation. To implement an ERP in an organisation without any modifications is the best

way (Nah & Zukcweiler, 2003) and has a higher chance of success. However, Soh et. al.

(2000) argue that the ERP implementation beyond Europe and North America may suffer

from what is known as cultural misfits as these packages are find it very difficult to cater to

specific needs of many organisations.

Henderson and Venkatramen (1994) mention that as IS framework with all its modifications

should complement the overall business strategy. Organisations resort to customisations to

cater the unique requirement of the organisation (Light, 2001). Customization is meant to

describe changes or additions to the functionality available in the standard ERP software

(Glass & Vessey, 1999) However, customization is very difficult when an organisation wants

to implement a whole new set of modules as this process results in maintenance and upgrades

that has to be taken care of for the smooth operation of the ERP software (Glass & Vessey,

1999). Each time a customisation is made to the system, it will result in upgrades and costs

and this has to be assesed by the organisation itself (Zrimsek & Geishecker, 2002). Even

though organisation cannot choose to ignore any such upgrades even if it has to be done atthe expense of redirected labor and business standstill, it stands to gain a lot of benefits from

this in long term as the business processes and the information system framework is in

synchronisation with each other (Davenport, 1998 ; Hammer & Champy, 1993).

2.4.4 SME PERSPECITVE AND COMPETITVE ADVANTAGE.

Various frameworks have been used to describe competitive advantage. Porter & Miller

(1985) propose that competitve advantage stems from either performing value creating

activies in a different way or doing them in a way that is more cost effective than the

competition. This approach chiefly relates to the factors external to the organisation and the

defences that it can setup to counter those. A different approach based upon the

organisational resources, was more dominant in later years that emphasized the developement

of resources and capabilities internal to organisation on the basis of which competitive


9/9

advantage could be sustained (Barney, 1991 ; Teece et. al., 1997 ; Prahalad & Hamel, 1990).

ERP systems allows SMEs to gain competitive advantage over its rivals through due to

benefits such as integrated information which is globally accessible, reduced asset bases and

costs, better customer service and enhanced productivity (Davenport et. al., 2004; Davenport

T. , 2000a ; Poston & Grabski, 2000). A SME may achieve competitive advantage through anERP but this is easily lost due to the factor of best practices that is like a template waiting

to be adopted by the competitors (Benders, et. al., 2006) (Carr, 2003) and thus need to focus

more on the organisation practices and structures that compliement the IT framework rather

than on IT itself (Brynjolfsson & Hitt, 2000).

Competitve advantage assume a far greater significance in a SME field where the

competition is much more intense (Tagliavini, et. al., 2002). SMEs face a daunting task and

a tough decision making scenario when they think of adopting an ERP to gain competitive

advantage over their rivals as failure of the process of adoption and implementation has the

capability to bring them to their knees (Gable & Stewart, 1999 ; Bernroider & Koch, 1999).

ERP vendors are now shifting focus to these businesses as there is a saturation from larger

companies to focus on SMEs to provide cheaper solutions (Gable & Stewart, 1999). Even

though there are cheaper offerings that available in the market, the entire process of

implementation and customization involves costs that is quite steep for an SME and

sometimes entails the risk of the partial implementation or total failure (Van Everdingen et.

al., 2000 ; Bernroider & Koch, 1999 ; Davenport T. , 2000a).

Irrespective of all the potential benefits that an ERP suite is projected to provide an

environment with, to justify the high investment in a ERP suite, an organisation needs to

make sure that the investment will allow them to gain competitve advantage in a long run.

Lit Review ERP

Documents

Transcript of Lit Review ERP