Enterprise resource planning (ERP) diffusion and characteristics according to the system’s lifecycle: A comparative view of small-to-medium sized and large enterprises Edward W. N. Bernroider, Michel J. Leseure Arbeitspapiere zum Tätigkeitsfeld Informationsverarbeitung und Informationswirtschaft Working Papers on Information Processing and Information Management
Nr./No. 01/2005 Herausgeber / Editor: Institut für Informationsverabeitung und Informationswirtschaft Wirtschaftsuniversität Wien · Augasse 2-6 · 1090 Wien Institute of Information Processing and Information Management Vienna University of Economics and Business Administration Augasse 2-6 · 1090 Vienna
Enterprise resource planning (ERP) diffusion and characteristics according to the system’s lifecycle: A comparative view of small-to-medium sized and large enterprises
Edward W.N. Bernroider Department of Information Business Vienna University of Economics and Business Administration, Augasse 2-6, A-1090 Vienna, Austria Tel: ++43-1-31336 Ext. 5231, Fax: ++43-1-31336-739, Email:
[email protected]
Michel J. Leseure Aston Business School Birmingham, B4 7ET ,United Kingdom Tel: (44) 121 204 3153, E-mail:
[email protected]
Abstract This report represents the next step of Enterprise Resource Planning (ERP) related research at the Department of Information Business at the Vienna University of Economics and Business Adminstration following previous work on the selection process. Based on 209 datasets originating from a primary, national and industry independent survey, it provides a descriptive oriented overview of main characteristics of ERP in all stages of the system’s lifecycle, emphasising differences between small-to-medium sized and large enterprises (SMEs and LEs). The given research topics in particular comprise software diffusion, resources allocated, strategic project guidance, investment drivers, considered and chosen solutions, team structures, selection criteria, information gathering, methodical support, implementation approaches, acompanying business strategies, implementation problems, perceived utilisation of ERP benefits, firm level ERP impact, and the role of ERP systems as technology enabler. Future work based on the gathered data will document analytical projects undertaken in particular focusing on ERP success, enterprise integration, organisational fit of ERP, and BPR/BPI related questions. Keywords: ERP, IS evaluation, IS implementation, Empirical Survey, SME
Contents
Introduction ___________________________________________________________ 3 Literature Review _______________________________________________________ 3 Relevance of the Undertaken Research_____________________________________ 6 Research Objectives ____________________________________________________ 7 Methodology ___________________________________________________________ 9 Empirical results ______________________________________________________ 11 Sample demographics _______________________________________________ 11 General information _________________________________________________ 12 Adoption Decision___________________________________________________ 15 Acquisition ________________________________________________________ 16 Implementation _____________________________________________________ 19 Use and Maintenance________________________________________________ 22 Evolution__________________________________________________________ 26 Summary and ongoing research _________________________________________ 27 References ___________________________________________________________ 28
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INTRODUCTION An Enterprise Resource Planning (ERP) system is a software infrastructure embedded with "best practices", respectively best ways to do business based on common business practices or academic theory. The aim is to improve the co-operation and interaction between all the organisations' departments such as the products planning, manufacturing, purchasing, marketing and customers service department. ERP is a fine expression of the inseparability of IT and business. As an enabling key technology as well as an effective managerial tool, ERP systems allow companies to integrate at all levels and utilise important ERP applications such as supply-chain management, financials and accounting applications, human resource management and customer relationship management [11]. They represent large, complex, computerised and integrated systems, which can strongly influence long-term business success. This study represents the next step of ERP related research at the Department of Information Business at the Vienna University of Economics and Business Adminstration following previous work on the ERP decision making process [6, 7]. It provides empirical information on various stages of the ERP systems’ lifecycle and provides more accurate details in particular on the different situations in in small to medium sized enterprises (SMEs) compared to large enterprises (LEs).
LITERATURE REVIEW The literature overview pertains to the stages in the ERP system lifecycle. According to [26], the lifecycle covers six different stages that an ERP system passes during its life within an organisation (see Fig. 1).
Fig. 1. An ERP Lifecycle model [26] Concerning the stage of adoption decision a need for further research into the planning phase of the adoption process is expressed by [53]. They also outline some of the principles that should form the basis of empirical research in this area and provided a qualitative analysis of ERP adoption within universities. Other researches describe the 3
significance of ERP systems with case-based approaches [33]. The question whether data quality is a reason to acquire an ERP system and other aspects relating to data quality are investigated in [76]. Based on structured interviews with 10 Canadian government organisations [44] analyse the ERP adoption as an organisational innovation process and apply an "ERP System Experience" model, which was originally proposed by [67] and then adapted by [45] and reflects an organisation's experience with ERP systems from adoption to success. Therefore [44] also give interesting insights into other stages of the lifecycle model. But due to the limited number of analysed units, the results are not generisable. Previously published material in the acquisition area focused on an ERP methodological acquisition approach [65, 66], frameworks for the selection process [9, 68], purchasing criteria [12], game-playing behaviour [51] and case studies [71, 72]. A review of the work published in the main information systems journals and conferences showed that research conducted in the area of ERP systems has concentrated on issues related to the implementation phase of the ERP lifecycle [25]. Issues attributed to the implementation stage can be classified in implementation approaches [32, 61], implementation success [10, 23, 34], case studies [29, 47, 70], empirical surveys [15] and other issues such as the role of consultants [75], information technology architecture options [17] and change management strategies during implementation [1, 2]. The attention of scholars in the IS area is much higher in the post implementation stages compared to the stages prior to implementation. Contributing to the use and maintenance stage benefits, risks, limitations and factors that affect ERP usage and organisational performance have been analysed [5, 55, 56, 64]. Scientists have analysed technological aspects such as architectural issues, maintenance tasks, databases performance, security and fraud prevention [36, 50]. During the evolution phase ERP applications can act as a technology enabler for ERP extensions or applications and systems such as SCM [11, 41]. Not all publications on ERP can be directly related to a specific ERP lifecycle phase. They can consider aspects attributable to the lifecycle as a whole. For example, the application of decision models during the life of ERP projects was analysed by [63]. [52] focused on knowledge management across the whole lifecycle of an ERP solution. Several researchers point to the linkages between ERP and BPR, where the former is 4
considered a driving technology of BPR [3, 35, 42]. An important research issue which can be related to any stage of the lifecycle model are proposals on how to analyse the value of ERP applications [46]. Although a considerable amount of articles contribute towards analysing the value of information systems, packaged software solutions or commercial off the shelf (COTS) products [48, 73] in general, only a few have focused on the special case of ERP systems. Some studies investigated certain factors in the ERP context special to smaller organisations mainly for the area of implementation [28]. Contributing to the acquisition stage, work was published concerning a methodological approach to the acquisition of ERP solutions by SMEs [66] and certain specificities in the acquisition process of Austrian SMEs [7]. In response to the widespread application of ERP systems, academic institutions introduce ERP system gradually in their IS curriculum [3]. This also originates from the market demand for highly qualified ERP specialists. ERP vendors provided a special arrangement that encourages universities to incorporate their ERP systems helps to integrate the teaching of these emerging technologies into their current education processes [74]. As a consequence, researchers also focused on the processes and mechanisms that some universities implemented to introduce ERP into education [4, 31]. Although all major IS conferences dedicate at least a track or mini-track to ERP systems, the number of publications within the information systems community on ERP systems appears small compared to the size of the business they generated [25]. As the widespread application of ERP systems continues, research in the ERP area is still lacking and the gap in the ERP literature is huge [3]. Considerable research effort has been directed towards the implementation and to large parts of the post-implementation phases. The lack of attention especially applies to the stages of system adoption and acquisition as well as on how to analyse the value of ERP systems and to the special situation faced by SMEs.
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RELEVANCE OF THE UNDERTAKEN RESEARCH Enterprise resource planning software solutions have become the central nervous system for almost any major large company. The effectiveness of these software applications directly translates to the effectiveness and competitiveness of the firm and its long term viability. ERP systems promise the development and sustainment of competitive advantage in the global marketplace through enhanced decision support; reduced asset bases and costs; more accurate and timely information; higher flexibility or increased customer satisfaction [20, 21, 55, 59]. A empirical survey reported that two-thirds of the interviewed IT managers responsible for their organisation’s ERP projects viewed the ERP systems as their organisation’s most strategic computing platform [69]. The acquisition and implementation of ERP systems are very effort-intensive processes. An empirical analysis of the implementation process in European companies revealed mean implementation costs of EUR 5 Mio. and a mean implementation time of 13.5 months [15]. In addition, also high risks are involved in every ERP project. The farreaching structural changes following an ERP software implementation can be disastrous as examples [10, 13, 62] show. A market research company reported that 70% of ERP implementations fail to achieve their corporate goals [13]. It can be expected that major mistakes were already made in the early stages of the ERP lifecycle prior to the implementation process. Despite the importance of ERP systems, the high effort expended by companies to implement these systems and the high risks involved, to many questions regarding different aspects especially in the early stages of the lifecycle of ERP systems remain unanswered.
For
example,
the
relationship
between
decision
approach
and
implementation as well as usage success or the area of analysing the value of ERP systems [46]. The situation faced by small and medium-sized enterprises (SMEs) in their IS/IT decision processes is different to LEs. They face much greater constraints in terms of resources that can be commited to the all stages of the system’s lifecycle. In general, decision making in SMEs features much greater constraints on the ability to gather information in order to reduce uncertainty about their investment [19]. Nevertheless, the complexity and amount of IS/IT requirements are often similar to the cases found among LEs. SMEs more and more experience the need for integration, especially for inter6
organisational integration, and expecting ERP software to fulfil these needs. The availability of relatively inexpensive hardware is fostering this situation [28]. ERP vendors are in search for new challenges to generate higher revenues and have turned to the small and medium-sized market segments. A saturation of the market as most large organisations have already implemented an ERP solution decreased the annual ERP market growth [54]. By 1998 approximately 40% of companies with annual revenues over 1 billion USD had implemented ERP systems [16]. The small and mediumsized market segment is far from being saturated [54]. The total European midsize market for IT products and services surpasses 50 billion dollar per year [27] Due to the pervasive nature of ERP systems, our results should be of interest for a wide range of professional and scholarly communities (from software engineering to accounting), apart from the IS field. The results presented should especially help practitioners (in SMEs) facing the important task to introduce an ERP system to their company. Another aspect is that results would also contribute to the development of any einitiative (CRM, SCM, etc.) on the basis of ERP systems and to handling decision problems regarding any other type of enterprise wide standard software package.
RESEARCH OBJECTIVES This research proposal seeks to close some of the mentioned gaps in ERP research by providing a holistic overview of the whole ERP lifecycle. To advance the state of the art, this research report was primarily guided by the following topics. The first category contains general topics not pertaining to a single stage of the ERP system lifecycle. (1) General information (Topic.i)
ERP diffusion among SMEs and LEs
(Topic.ii)
Diffusion of other software applications
(Topic.iii)
Resource allocation
(Topic.iv)
Strategic project guidance/characteristics 7
(2) Adoption Decision (Topic.v)
Drivers for the decision to implement ERP
(2) Acquisition (Topic.vi)
Considered and chosen ERP packages
(Topic.vii)
Composition of project team
(Topic.viii)
Importance of decision making criteria (including intangible costs and benefits)
(Topic.ix)
Applied information gathering methods
(Topic.x)
Methodical support in particular the use of formal evaluation techniques
(3) Implementation (Topic.xi)
The implementation approach chosen.
(Topic.xii)
Accompanying
business
strategies
such
as
process
improvement (BPI) or reengineering (BPR) efforts (Topic.xiii)
Accounted implementation problems
(4) Use and Maintenance (Topic.xiv)
The perceived utilisation of ERP benefits
(Topic.xv)
Firm level ERP impact
(5) Evolution (Topic.xvi)
ERP as technology enabler
To provide information on these topics, an empirical survey covering a reasonable share of SMEs and LEs in the Austrian marketplace was undertaken. The methodical design of this study is given in the next section.
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METHODOLOGY The methodology employed is an industry independent empirical survey undertaken in the years 2003 to 2004. The target group was defined as containing Austrian SMEs as well as LEs. To avoid under representing the large enterprises in the sample, a stratified and disproportional sample with subgroups according to company size was defined. One thousand Austrian SMEs and LEs were randomly selected from firms listed in a comprehensive, pan-European database containing financial information on 7 million public and private companies in 38 European countries [14]. The questionnaire developed for this study was based on a previously undertaken ERP related study [6], on a review of the literature and on recommendations of a panel of ERP experts from two universities in Austria and the UK. Following an empirical design method, the panel was asked to critique the questionnaire for content validity [22]. According to their suggestions, the questionnaire was revised and used in Pre-Tests applied in the UK and Austria. Responses were examined to optimise the formulation of each question and ensure consistency in the way they were answered. The questionnaire contained a general section assessing the background information on the company especially IT/IS related and performance related questions. The assessed topics were structured in four sections
following
the
ERP
system
lifecycle:
adoption
decision,
acquisition,
implementation, use and maintenance. Companies were contacted through a multi-staged procedure. A cover letter, the hardcopy questionnaire, and a self-addressed stamped return envelope were sent to business management of the 1000 companies. The package explained the purpose of the study, promoted participation in the survey, assured confidentiality, and offered an ERP-related collection of material on CD as well as a summary of the results together with an opportunity to engage in further research activities with our research department. The questionnaire was also provided in an electronic version to further strengthen the participation. Two weeks after the initial mailing, follow up calls were made to all companies that could not be identified as respondents, asking them for their interest in participating and if cooperative for an email address. Short after these calls, reminder/thank you emails were sent out. The next round of contact consisted in reminding 400 randomly selected companies via telephone calls that they had not yet responded, and again giving them the address and logins for the online questionnaire. Finally, 209 valid returns were registered, resulting in an above average response rate of 22%. Some companies could not be contacted, because they had ceased to exist, the 9
address was wrong or could not be found, etc. These neutral dropouts (49 companies) were considered in the calculation of the response rate and therefore did not decrease the return quota. To test for non-response bias, known distributions of variables available through the used corporate database were assessed. The analysis revealed no significant different characteristics between non-respondents and respondents. The data was analysed using a statistical package offering the ability to work on complex samples. It should be noted that in practice, most scientific papers utilize the default significance tests generated by software packages based on the assumption of simple random sampling even if multi-stage, cluster, or other complex sampling designs were employed [18, 40, 43]. To avoid biased estimates, this work uses a SPSS module called Complex Samples where adjusted tests including chi-square (χ2) are provided. However, since the range of procedures is limited, analysis was also conducted with the use of sampling weights [58].
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EMPIRICAL RESULTS After giving sample demographics, this section presents preliminary results contributing to each of the stated research topics stated in the previous section.
Sample demographics Following a commission recommendation of the European Communities concerning the definition of micro, small and medium-sized enterprises [24], this research classified as SME an enterprises which employs fewer than 250 persons and which has an annual turnover not exceeding EUR 50 million. Table 1 denotes the firm size and branch distribution of the data sample. The branch classification was based on the core codes given in brackets of the North American Industry Classification System (NAICS) which has replaced the U.S. Standard Industrial Classification (SIC) system in 1997 [49]. Table 1. Firm size and branch distribution
Size SMEs LEs Total
No. of companies (rel. in %)
No. of companies (abs. unweighted N)
92.8 7.2 100
129 79 208
22.6 21.0 20.5 15.7 7.6 4.5 1.9
58 60 20 30 8 8 4
1.4 4.8 100
8 12 208
Branch Trade (42,44-45) Manufacturing (31-33) Construction (23) Services (54) Transportation and Warehousing (48-49) Information (51) Health Care and Social Assistance (62) Management of Companies and Enterprises (55) Other Total
The observed distribution of management structure is given in Table 2. The traditional functional management structure was observed in 64.7% of the cases followed by the project/team structures in 16.1% of the enterprises.
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Table 2. Management structures Management structure
Rel. in %
Functional Divisional Geographic Project/Team oriented Matrix Network (core and periphery) Virtual Other
64.7 5.1 1.0 16.1 7.6 0.8 0.0 4.7
General information ERP diffusion among SMEs and LEs ERP diffusion along the system’s lifecycle stages is denoted in Table 3. 15.5 % of all SMEs have already selected an ERP system, i.e. have reached at least the stage of implementing the system, comparing to 67.6 % of all LEs. As expected, the observed differences between SMEs and LEs are highly significant (χ2, p=.00). The company’s positions in the lifecycle correlate positively with organisational size (corr=.16, p=.03). Table 3. ERP diffusion among SMEs and LEs
Stage Consideration Evaluation Implementation Stabilisation Usage and maintenance Extension No ERP
All companies % cum. % 6.6 6.6 .5 7.1 1.2 8.3 1.8 10.1 13.4 23.5
% 6.6 .3 .4 1.8 11.4
cum. % 6.6 6.9 7.3 9.1 20.5
% 6.4 2.0 10.5 2.0 39.0
cum. % 6.4 8.4 18.9 20.9 59.9
2.9 73.6
1.9 77.5
22.4 100
16.1 23.9
76 100
26.4 100
SMEs
LEs
Diffusion of other software applications Table 4 considers the usage of three specific types of software applications apart from the ERP context. In terms of CRM and SCM, more SMEs than LEs compared in relative terms have these specialised software applications in place (not significant, p>.05, χ2).
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This hints at the wider adoption of specialized applications in smaller firms where requirements in CRM and SCM need to be met.
Table 4. Diffusion of specific other software applications Software applications in use CRM (Customer Relationship Management) SCM (Supply Chain Management) KM (Knowledge Management)
All (%) 41.6
SMEs (%) 43.6
LEs (%) 28.5
p (χ2) -
35.7 12.9
37.7 11.1
22.6 24.0
.08 -
Resource allocation The expended efforts in terms of all assessed variables were lower in SMEs than in LEs as can be seen in Table 5. In this study, the durations, expended man months, and costs of both the software acquisition and implementation stages were assessed directly. In terms of actual costs most organizations were not able or not willing to answer. Only 10 organizations were able to give acquisition costs and 20 their implementation costs. In terms of durations the number of observations was 68 for system acquisition, respectively 75 for implementation. Based on the experience from the previous ERP study, the new survey also accounted for an indirect assessment of exploited personnel costs. Expended personnel efforts were assessed in terms of man months together with information on the structure of the project team, i.e. the proportion of external and internal assistance Table 6. Based on salary related publications [15, 30], the costs associated with an external man month were 23,100 EUR, related to an internal man month 6,000 EUR. By using this information together with the inquired data the following rough estimation of personal costs was achieved: Among SMEs, personnel costs for the whole ERP implementation including decision making in the mean amounted to 153 tsd. €, in the case of LEs to 643 tsd. €.
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Table 5. Resource allocation Variable Duration of ERP system acquisition (months) Duration of ERP system implementation (months) Duration of overall project (months) Man months expended for ERP system acquisition Man months expended for ERP system implementation Man months expended for overall project Given acquisition costs (tsd €) Given implementation costs w/o licence costs (tsd €) Given project costs (tsd €) Estimated personnel costs for acquisition (tsd €) Estimated personal costs for implementation (tsd €) Estimated personnel costs of overall project (tsd €) *
p
