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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).
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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
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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).
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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
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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,
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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).
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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
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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
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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.