Edward W. N. Bernroider
Vienna University of Economics and Business Administration, Austria
Vienna University of Economics and Business Administration, Austria
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This chapter introduces the ERP software acquisition process based on a rational or normative decision-making approach embedded within the wider ERP system lifecycle. It presents five hypotheses closely related to practical problems during ERP system acquisition, which were derived from a review of recent academic literature and suggestions from students, practitioners and researchers. Based on perceptions of an empirical survey of Austrian organizations, the hypotheses and every stage of the proposed acquisition process model were investigated. Special consideration was given to the differences between small to medium and large organizations. It was assumed that these differ in several phases of the acquisition process. As most ERP system suppliers are today striving to penetrate the market segment of small to medium enterprises, with the market for large organizations mostly saturated, this point warrants particular interest.
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 cooperation and interaction between all the organizations' 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 utilize important ERP applications, such as supply-chain management, financials and accounting applications, human resource management and customer relationship management (Boubekri, 2001). 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 (Davenport, 1998; Davenport, 2000; Poston & Grabski, 2000; Rizzi & Zamboni, 1999). But the far-reaching structural changes following an ERP software implementation can also be disastrous, as examples (Bingi, Sharma & Godla, 1999; Buckhout, Frey & Nemec, Jr., 1999; Scott, 1999; Scott & Vessey, 2002) show. A market research company reported that 70% of ERP implementations fail to achieve their corporate goals (Buckhout et al., 1999). Because of the high risks involved, exploring early stages of the ERP lifecycle becomes very important.
In this chapter we focus on the early stage of evaluating and selecting an ERP system prior to implementation. We also focus on the decision-making situation faced by small and medium-sized enterprises (SMEs). This is of particular importance because SMEs are more and more experiencing the need for integration, especially for inter-organizational integration, and expecting ERP software to fulfill these needs. The availability of relatively inexpensive hardware is fostering this situation (Gable & Stewart, 1999). In general, decision-making in SMEs features much greater constraints on the ability to gather information in order to reduce uncertainty about their investment (Cobham, 2000).
On the other side, ERP vendors are in search for new challenges to generate higher revenues and have turned to the small and medium-sized market segments. In the last years, ERP software packages sales flattened. A saturation of the market, as most large organizations have already implemented an ERP solution, decreased the annual ERP market growth (PDC, 1999). By 1998 approximately 40% of companies with annual revenues over one billion USD had implemented ERP systems (Caldwell & Stein, 1998). The small and medium-sized market segment is far from being saturated (PDC, 1999). The total European midsize market for IT products and services surpasses 50 billion dollars per year (Everdingen, Hillegersberg & Waarts, 2000).
In this chapter we will analyse the ERP software acquisition by firstly introducing an acquisition process model embedded within the wider lifecycle of an ERP solution. Secondly, we show characteristics and, especially, specificities attributed to small to medium-sized enterprises (SMEs) for each stage of the ERP system acquisition process. The chapter concludes with the discussion of the research findings and implications for further research and practice.
This chapter draws on results from recent studies published in academic literature and from results of an empirical investigation of ERP decision-making in Austrian organizations conducted by our research institute between December 1998 and March 1999. For the empirical work a design of a questionnaire was employed. On completion of the pilot testing, the mailing, together with separate, prepaid envelopes, followed. In all cases, the senior management of the IT-department was contacted. 813 Austrian small/medium and large-size organizations were addressed and a return rate of 17% was achieved, which corresponds to 138 valid returns. The data was analyzed using a statistical package. Non parametric statistics, such as chi-square, were calculated to test the independence of responses between small or medium-sized and large organizations. When analyzing the strength of a relationship between two variables the Spearman rank correlation coefficient has been used instead of the Pearson correlation coefficient because this analysis has been conducted only with ordinal scaled variables. For comparison of two independent samples that were not normal distributed (tested using Kolmogorov-Smirnov), a Mann-Whitney U-test was employed.
Of the 138 answers received, 22 (or 15.9%) belonged to small or medium-sized organizations. The remaining majority (116 questionnaires or 84.1%) was classified as large enterprises. Classification was performed using data on number of employees and turnover following the definition proposed by the Commission of the European Community (EC, 1996). A consequence arising from the different group sizes is that the precision of the estimates concerning the population characteristics of large organizations is likely to be more reliable compared to the case of smaller organizations, but the statistical tests employed account for the different sample sizes.
Firstly, we want to position the acquisition process within a wider ERP system lifecycle, which was originally proposed by (Esteves & Pastor, 1999). It covers six different stages that an ERP system passes during its life within an organization (see Figure 1).
Figure 1: An ERP lifecycle model (Esteves & Pastor, 1999)
In the adoption decision phase managers decide to invest in a new enterprise resource planning system to replace the current information system infrastructure in place. The new ERP system is expected to address the organizations' critical business challenges and to improve the organizational strategy and performance. The rational decision-making process begins with the statement of problems and situational goals. Thus, the phase includes the definition of system requirements, its goals, allowed costs and expected benefits.
The acquisition phase comprises the selection of the ERP package that best fits the requirements of the organization to minimize the need for customization. This decision is based upon an different sub-stages covering the gathering of all necessary information, the evaluation and comparison of the considered system alternatives (Stefanou, 2001) and making the choice. If a consulting company has not been engaged already in the first stage of the ERP lifecycle, it is likely that it will enter at this stage to support the organization and especially to follow in the implementation phase.
The implementation phase deals with the customization, respectively parameterization and adaptation of the ERP package chosen. The implementation phase is usually undertaken with the help of consultants who provide "best ways" to implement and offer trainings. This area also comprises the implementation of all hardware and software related resources needed to introduce the ERP system to the organization. Besides these technical changes, the implementation of an ERP system induces organizational changes, which causes direct consequences on information flow, knowledge, culture, people, and tasks. There is a mutual, bi-directional relationship between the technical and organizational aspects (T. H. Davenport, 1998).
In the use and maintenance phase the product should be used in a way that returns expected benefits and minimizes disruption. Therefore the system in use and the effected business processes should be regularly controlled and verified with the goals and benefits formulated in earlier stages of the lifecycle. The functionality, usability, and adequacy to the organizational processes must be monitored and maintained, because malfunctions need to be prevented or corrected and special optimization requests must be met. Also, general systems improvements have to be implemented.
In the evolution phase additional capabilities are integrated into or extended to the ERP package to obtain additional benefits. Such an extension, for example, can be customer relationship management (CRM) or supply chain management (SCM) modules.
The substitution of the chosen ERP system will become necessary in the retirement phase, when new technologies appear or the ERP system becomes inadequate to the business' requirements. The lifespan of an ERP solution varies greatly depending on the success of the earlier stages in the lifecycle model (Al-Mudimigh et al., 2001). Examples have shown that the far-reaching structural changes following an ERP software implementation can also be disastrous. It may be even be necessary to roll back the entire implementation process if important organizational needs can not be met by the newly introduced enterprise information system. Considering ERP software decisions with its complex and far-reaching implications, poor decision-making can result in disastrous situations. Therefore, especially in the early stages of decision-making, the right actions must be taken to avoid expensive and business threatening consequences. This chapter focuses on phase two of this lifecycle, which involves the selection of the "best" ERP solution as perceived by the decision makers. The framework outlined in this chapter and the investigated research questions represent a further step towards understanding the decision-making process for ERP investments and differences made by SMEs and large organizations. The stage of system acquisition will be analysed based on a general process model for decision making derived from literature, which was slightly adopted for the special needs of selecting an ERP system. For all relevant stages within this model the findings contributing to the introduced research hypotheses will be analyzed.
It has to be noted that various feedback relationships exist in the described ERP lifecycle model. For example, the adoption decision phase should also include an analysis of the impact of adoption at a business and organizational level. Because of the many specificities of different ERP solutions, a thorough understanding of the impact after implementation can only be achieved with a concrete solution as basis for the analysis. The definition and evaluation of system alternatives are steps which take place in the next stage covering the acquisition of the required solution. Therefore an information feedback loop would be necessary between stages one and two (see Figure 2).
Figure 2: Feedback from stage 2 to 1
All relevant feedback connections concerning the acquisition stage were incorporated in the following ERP software acquisition process model.
The acquisition stage of the ERP lifecycle model involves the evaluation and thereafter selection of the ERP system. Factors such as functionality, price, training and maintenance services are analyzed and the contractual agreements are also defined. In this phase, it is also important to analyze of the return on investment of the product selected. Thus, the acquisition stage is not a single activity that takes place all at once. The process consists of several different activities that take place at different times and that may be repeated. Based on general purpose stage models (Griffin & Pustay, 1996; Moorhead & Griffin, 1998; Simon, 1960) an ERP package decision model was designed (Bernroider & Koch, 2000) (see Figure 3). This model was formalized by the Event-driven Process Chains (EPCs) (Aalst, 1999; Scheer & Habermann, 2000) process modeling technique used by some of the leading tools in the field of business process engineering such as SAP R/3 (SAP AG), ARIS (IDS Prof. Scheer GmbH), LiveModel/Analyst (Intellicorp, Inc.) and Visio (Visio Corp.). This rational or normative model of decision-making follows a systematic, step-by-step approach and suggests that managers apply logic and rationality in making the best decisions. Rationality implies that individual behavior has some purpose and that individual actions are systematic and logical in the pursuit of goals. Rationality has been a fundamental assumption in many disciplines like economics, organizational theory and corporate strategy (Ranganathan & Sethi, 2000). At the level of individual decisions, rationality implies gathering information pertinent to the decision, analyzing the information gathered, and generating and evaluating alternatives to make a final choice. Boynton & Zmud (1987) reported that many of the assumptions and premises that underlie the current planning literature reflect a rational model of organizational decision processes. Recent findings report a positive impact of rationality on decision effectiveness in IT decisions (Ranganathan & Sethi, 2000) and in the strategic management area (Dean & Sharfman, 1996; Priem, Rasheed & Kotulic, 1995).
Figure 3: An ERP software acquisition process model
The rational decision-making model supplies a structural design for the second stage of the described ERP lifecycle model, namely the ERP acquisition phase, and comprises the following five steps:
In the next section we will describe characteristics of the acquisition model with an emphasis on differences between small to medium and large organizations.
The research hypotheses presented below were derived from recent findings published in academic literature and suggestions from students, practitioners and researchers of our institute in the field of information system evaluation (see also Bernroider & Koch, 2002). The investigated hypotheses were closely related to practical problems, especially management pitfalls, often showing up when implementing and thereafter operating the chosen system, e.g., a low employee motivation.
An ERP decision produces not only large technical changes, but also large organizational changes (managerial and institutional changes) that affect almost all employees in an organization. Many organizations have undertaken an ERP system decision and implementation (often together with major business process change initiatives) over the past 10 years. It has been indicated (Guha, Grover, Kettinger & Teng, 1997) that not only the technical aspects play a significant role in a successful decision and implementation process. The effective balancing of forces in favor of a change over forces of resistance is also an important task, which is also a major element in change management theory (Kettinger & Grover, 1999; Stoddard & Jarvenpaa, 1995). Organizations, groups, or individuals will resist changes that are perceived as a threat (Davenport, 1993; Guha et al., 1997). The principles of change management especially apply to ERP system implementation (Aladwani, 2001). It is important that the employees relate to the new software environment. On that condition, and with better change management practices, staff motivation will be higher. As has been argued (Appleton, 1997; Davenport, 1993; Hammer & Champy, 1993; Montazemi, Cameron & Gupta, 1996; Willcocks & Sykes, 2000), the participation of the people affected by the system, and knowing the business processes, leads to better decisions and a higher rate of acceptance later on (Guha et al., 1997). In Tayler (1998) possible benefits arising from a participative type of team structure include the motivational improvement of local participation and attention to individual quality of working life, as well as the necessary attention to strategic purpose and to reciprocal and coordinative social roles. On the other hand, it has to be noted that a participative form of decision-making might lead to game playing behavior if one or more parties try to influence the decision process to arrive at their preferred solution (O'Leary, 2000). Given this situation, we suggest that the majority of organizations implementing an ERP solution relied on a participative evaluation strategy. Based on this assumption we have already introduced the first stage "Composition of Project Team" in the ERP acquisition model.
The evaluation of information systems, especially ERP solutions, is one of the rather difficult problems to tackle in IT management. Nevertheless, at least one methodology from the vast set of evaluation techniques must be chosen in order to have a tool for an effective and transparent comparison of the different choices of action investigated. Only conventional financial and economic evaluation techniques alone will not suffice. Research in IT has extended the range of tools to include productivity measures, return on management and information economics, to name only a few, and various taxonomies of methods have been put forward (Bannister & Remenyi, 1999; Jones & Hughes, 1999; Kontio, 1996; Lawlis, Mark, Thomas & Courtheyn, 2001; Remenyi, 1991; Sedigh-Ali, Ghafoor & Paul, 2001).
Decision makers tend to describe their decisions as being based to a greater or smaller extent on instinct or individual experiences. The more complex the decision, the more likely this seems to be. We suggest that such a defection from the solid ground of rational decision-making should be avoided. For every ERP software decision, formal evaluation methodologies should be applied. It has been confirmed that IT executives who systematically collected information and analyzed it made more effective decisions than those who did not (Ranganathan & Sethi, 2000).
SMEs are usually much more informal and unstructured in their management style or definition of strategy. This allows them to compete in a very dynamic and competitive environment through high flexibility and responsiveness. This is a major premise for SMEs to be always close to their markets and customers. Regarding IT investments, many SMEs often seem to lack an explicit IT plan or strategy, or even a defined IT budget (Dans, 2001). Dans even states that decisions to adopt a particular technology are in many cases driven by personal attitudes or perceptions of the firm's owner, rather than by any formal cost-benefit or strategic analysis. Gable & Stewart (1999) proposed that a decisional specificity attributed to SMEs is less usage of formal models when evaluating SAP R/3 systems. Thus, we propose that SMEs apply less formal and less complex evaluation techniques than large organizations in the ERP system selection process.
As already noted, smaller organizations tend to be more flexible than larger ones. Their organizational structure is less rigid and can be changed more easily. The same applies to their business processes. Therefore, and also because they face greater environmental uncertainty due to lesser influence (Gable & Stewart, 1999), smaller organizations have the need and also the means to be more flexible. As the information systems in use have to be aligned with the business strategy and the current business processes, they have also to offer more flexibility to fulfill this requirement. The information systems in smaller organizations should therefore offer the possibilities to implement the current business processes, which might not necessarily follow the standards which are derived from larger organizations, and to be changed easily in order to accommodate changes to these processes. It can be assumed that this necessary requirement for increased flexibility will also affect the evaluation and selection of ERP packages.
Smaller organizations face more severe restrictions on their resources, including, among others, financial and human resources. This "resource poverty" also constitutes part of the organizational specificity of smaller organizations (Gable & Stewart, 1999). Slack resources are often scarce or nil (Dans, 2001). It can therefore be assumed that this factor plays a role in the context of ERP selection. This might include, for example, the ways in which information regarding alternatives and their respective quality is gathered, and also the composition and size of the project team responsible for the decision-making.
In this section and for every stage of the ERP decision-making process model, we will report findings contributing to the proposed research hypotheses. We show the results of our empirical investigation, which we also compare within the proposed acquisition model with recent findings from other empirical studies in order to receive an up-to-date description of important aspects concerning ERP software selection.
As shown in Bernroider & Koch (2000), four different types for the structure of the selection group were identified from more specific data gathered:
Hypothesis 1 ("Most companies are choosing a participative evaluation strategy in the ERP system decision-making process") is strengthened by the fact that participative decision-making has been employed by the majority of the organizations. No differences were found indicating that SMEs utilize the participative form more or less extensively than large organizations. In each of the four cases analyzed in Verville & Halingten (2002), the acquisition teams' composition was also interdisciplinary, with team members coming from various departments.
Considering Hypothesis 5 ("Smaller Organizations spend less effort during all stages of the decision-making process"), the study has shown that smaller organizations use project teams for evaluation and decision-making which are considerably smaller (Bernroider & Koch, 2000). In SMEs, the team size is in the mean 4.82 compared to 9.82 persons for larger organizations. As fewer persons mean less costs, this already contributes to the hypothesis in this early stage of the decision-making process. It can also be noted that SMEs tend to adopt a centralized decision within the IT and organizational department more often in relation to large organizations, maybe because of either a resulting reduction in costs or a lack of know-how in other departments.
The results of the empirical study strengthen Hypothesis 5 ("Smaller organizations spend less effort during all stages of the decision-making process") in the context of information gathering. The data showed that smaller organizations employ less diverse approaches, and also show a tendency for less expensive methods (Bernroider & Koch, 2000). For example, the analysis of a prototype or an evaluation by external consultants are used extensively by larger organizations only. Methods such as presentations by ERP system vendors and sending of a requirements catalogue are, in contrast, used by nearly all organizations. In the mean, smaller organizations used 3.05 different approaches, larger ones 3.88 (out of eight different possibilities provided). To obtain data from different information sources is pointed out as being very important for companies engaged in ERP software selection in order to be able to cross-check and verify information, which might be crucial for implementation and usage success later on (Verville & Halingten, 2002).
Considered alternatives in the decision-making process of Austrian enterprises were ERP solution from SAP (87.5% of the organizations), BaaN (44.5%), Oracle (32.5%), Navision (16.0%), J.D. Edwards (9.2%), Peoplesoft (5.0%) and other, smaller suppliers (47.1%) (Bernroider & Koch, 2000). A similar situation was presented by the Department of Information Engineering at the Institute of Information Systems at the University of Bern (Knolmayer, von Arb & Zimmerli, 1997) for Swiss organizations. In both studies a strong presence of other, smaller suppliers was detected. This hints at a need for more specialized and less complex systems.
Seventy-seven point three percent of the organizations used some sort of formal evaluation model in the ERP decision-making process. When excluding conventional financial methods, the rate drops to 30%, which contradicts Hypothesis 2 ("Organizations apply formal evaluation techniques other than conventional financial methods in the ERP system selection process").
In order to investigate Hypothesis 3 ("SMEs apply less formal and less complex evaluation techniques than large organizations in the ERP system selection process") the different types of formal evaluation approaches in SMEs and large organization need to be analyzed. The data showed that smaller enterprises use, for the most part, only static investment methods, while large organizations also employ dynamic methods or other methods, such as utilization ranking analysis or even Real Options (Taudes et al., 2000; Trigeorgis, 1996). The use of these methods correlates significantly with the size of the organization. Hypothesis 3 is therefore strongly supported by the results of our study. It can be assumed that smaller organizations often rely on hermeneutic approaches (Bannister & Remenyi, 1999), defined as methods of interpretation of data which use non-structured and non-formal approaches to decision-making at the expense of the usage rate concerning more complex methods.
The last statement indirectly supports Hypothesis 5 ("Smaller Organizations spend less effort during all stages of the decision-making process"), as the application of more complex models would necessitate more effort.
Using the results of the study undertaken, differences in the weights attributed to selection criteria were observed (Bernroider & Koch, 2000). Contributing to Hypothesis 4 ("Higher flexibility is valued higher by smaller organizations") several aspects dealing with flexibility were rated differently. Goals to be achieved by the ERP implementation dealing with this point, e.g., increased organizational flexibility or improved innovation capabilities, were rated as less important by smaller organizations. While this might seem counter-intuitive at first glance, it supports the notion that smaller organizations are more flexible from the start and therefore do not perceive an ERP package as a means to increasing their flexibility, in contrast to larger organizations. On the other hand, characteristics of the ERP systems concerned with the flexibility of the software itself, e.g., adaptability to business processes and flexibility to future changes, are rated higher. It can be seen that achieving a fit between the processes implemented by the ERP solution and the organization's idiosyncratic ways of working is more important for smaller organizations, which more often have some specific, not industry-standard processes. These results are also in accordance with the findings of another survey on ERP adoption in European midsize companies (Everdingen et al., 2000). The authors also found that fit with current business processes and flexibility were the highest rated criteria for information system selection.
The situation regarding the solutions chosen is similar with the solutions considered. SAP's dominance of the market place was clear (chosen by 69.8% of the organizations). Again, smaller companies have captured quite a large market share (23.3%), with Oracle (13.8%) and BaaN (11.2%) being the only other contenders of larger size (Bernroider & Koch, 2000). Both the leading position of SAP and the relatively large market share for smaller suppliers are in accordance with the findings of a comparable European survey of midsize companies (Everdingen et al., 2000).
Pertaining to Hypothesis 4 ("Higher flexibility is valued higher by smaller organizations") and in accordance with the results detailed for Stage D ("Evaluation and Comparison of Alternatives"), the higher rating of SMEs for flexibility-related criteria concerning ERP system alternatives also affects smaller organizations' selection of vendors. For example, the software supplied by BaaN, which is believed to be more flexible than the rival SAP product (Markus & Corenelis, 2000), is chosen more often. SAP R/3, on the other hand, is selected more often by large organizations.
Hypothesis 5 ("Smaller organizations spend less effort during all stages of the decision-making process") concerning Austrian companies is proved when investigating overall duration and costs for decision making including all phases, which is significantly lower for SMEs. The mean duration is 17.57 weeks compared to 30.04 weeks, the costs are about 30.000 Euro compared to 77.000 Euro for larger organizations. While the results given for several phases above have also hinted at the correctness of this hypothesis, these findings prove the difference between organizations of different size.
In this chapter the acquisition process for the evaluation and selection of ERP packages was explored. We have presented an ERP software acquisition process model. Special consideration was given to the differences between small/medium and large organizations. It was assumed that these differ in several phases of the decision-making process. As most ERP system suppliers are today striving to penetrate the market segment of small to medium enterprises, with the market for large organizations mostly saturated, this point also warrants particular interest.
We have formulated five hypotheses closely related to practical problems, which were derived from a review of recent academic literature and suggestions from students, practitioners and researchers. Using the acquisition process model and results of empirical studies, the hypotheses relevant for each stage were investigated. In Table 1 the investigated research hypotheses and the verdict from our analyses is summarized.
Most companies are choosing a participative evaluation strategy in the ERP system decision-making process
Organizations apply formal evaluation techniques other than conventional financial methods in the ERP system selection process
SMEs apply less formal and less complex evaluation techniques than large organizations in the ERP system selection process
Higher flexibility is valued higher by smaller organizations
Smaller Organizations spend less effort during all stages of the decision-making process
The organizational specificities of smaller organizations, e.g., their lack in resources of both financial and human nature, had a great effect on the characteristics of the acquisition process. For example, it has been found that while a high percentage of organizations adopt some sort of participative form of decision making, as is also proposed by many researchers and practitioners, smaller organizations show a higher tendency to a centralized form centered in the IT department, and also use teams of much smaller size in the whole process. In addition, the decision in this group of smaller organizations is based on less complex models and less diverse and less expensive methods of information gathering. The criteria for the selection of a particular ERP system were also different, as smaller organizations, which mostly are more flexible today and have a pressing need to conserve this, do not see an ERP package as offering them a chance to become more flexible, but demand a high flexibility from the software itself, so as to be able to adapt it to their current, not necessarily industry standard business processes, and to be able to quickly adapt to new process changes the environment might make necessary. The decision-making process overall can be shown to take both less time and cost for smaller organizations.
Further research would be needed to deal with the differences between small/medium and large organizations for every stage of the ERP system lifecycle. Especially the stage usage and maintenance of the chosen package might also differ between these types of organizations. The findings should then be condensed into one coherent process framework for the whole ERP lifecycle in organizations.
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Part I - ERP Systems and Enterprise Integration
Part II - Data Warehousing and Data Utilization