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20 Seiten, Note: 7.5
2. Enterprise Resource Planning System – Advantages and Disadvantages
2.1. Advantages of Enterprise Resource Planning Systems
2.2 Disadvantages of Enterprise Resource Planning systems
3. Justifying ERP adoption at universities by Oliver & Romm (2002)
4. Critical issues affecting an ERP implementation and its success
5. Conclusion – Enterprise Resource Planning Systems: Curse or Blessing?
In the era of increasing international network and economic systems, there is no question about the importance of information systems supporting operations, be it public institutions such as universities or companies. Due to rising complexity and interdependencies between stakeholders and socio-economic systems, the demand for tools to effectively manage organizational activities grows.
One of the most known information systems in business environment for more than a decade is the Enterprise Resource Planning system (ERP).
Although ERP systems have existed for quite some time, there is still a great discussion going on whether this type of system proves beneficial or rather detrimental. Does an ERP represent a guarantee to competitive advantage or the beginning of the end of an enterprise: ERP systems – Curse or Blessing?
Building on frameworks and academic articles, this paper discusses different points of view of scientists concerning the question, whether ERP systems are a curse or rather a blessing. In addition to the provided literature, the paper references several scientific articles and publications in order to enhance the quality of depth of the discussion. First, after a short introduction, advantages and disadvantages of ERP systems are examined. Second, the way organizations justify an ERP adoption is discussed and subsequently compares the reasons with the benefits provided in the previous section. Third, critical issues that affect a successful ERP implementation are investigated and build upon this by introducing a revised framework. Success factors that may increase the probability of a successful ERP system implementation process are derived in order to provide the reader with added value for an ERP adoption. Given the potential benefits, disadvantages and justifications for an adoption a conclusion is provided to see if there is a definite answer to the question whether ERP systems are a curse or a blessing.
ERP systems have been touted as the comprehensive packaged software solutions that seek to integrate the complete range of a business’ processes and functions, in order to present a holistic view of the business from a single information and IT architecture (Gable, 1998). ERPs are structured into different modules such as human resources or logistics. One of the central characteristics of ERP software is the integration between these modules, that facilitates the exchange of information and enables easy data access and retrieval.
An ERP system, hence, is designed to replace stand-alone patchworks of legacy systems and connect all functions or departments through a synchronized suite of enterprise-wide applications. It provides a holistic view of the company and its processes by improving the data and information access and consequently increases effectiveness and efficiency through integration (Hunton et al., 2002).
In the following part the paper provides some advantages of an ERP implementation.
The standardized and integrated properties of ERP software environment and its ability to disseminate timely and accurate information enables a high level of interoperability. An incoming order releases change in production plans and inventory levels in both internal and external environment, i.e. automates orders for suppliers etc. (Hitt et al., 2002).
Small and Large, Healthy and Unhealthy firms
Hunton et. al (2002) state that potential benefits of an ERP adoption include productivity and quality improvements in e.g. customer service and knowledge management. Thus, according to Hunton et al. (2002), firm performance is de facto greater for adopters than non-adopters, given the fact that revenues of firms that do not adopt ERP systems decline by comparison. Furthermore, Hunton et al. (2002) show that large and unhealthy firms and small and healthy firms do benefit most by an ERP system implementation. The reason for this is that for large and healthy firms there is less room for improvement whereas unhealthy large firms can expect higher efficiency and effectiveness gains. For small firms, the situation is different. Small and unhealthy firms may face resource constraints, i.e. they do not have the financial power to implement an entire ERP system. Thus only partial implementation is feasible which reduces the potential impact of ERP software. Whereas small and healthy firms do have the resources to make maximum use of an ERP system implementation.
Performance over a three-year period
A study was conducted by Poston and Grabski (2001) in order to investigate the future performance over a three-year period of a company after adopting an ERP system. The results show that there is in fact a decrease in the ratio of employees to revenues, i.e. fewer employees account for a given level of revenues for 1-3 years after implementation. However, they did not find significant improvements in ratios of selling, general and administrative expenses to revenue. These findings are similar with the research outcome of Hunton et al. (2002), in which no pre- to post-implementation improvement was reported, rather the decrease in financial performance of non-adopters. At this point it has to be mentioned that the 3-year research time frame of Hunton et al. (2002) may not be sufficient to capture the entire effects of ERP adoption on firm performance. Poston & Grabski (2001) express some concerns in the limitations part of their work, stating that ERP implementations might take up to 4-5 years (even after implementation) to fully release benefits, referring to Knorr (1999), Wah (2000) and Wortmann (1998).
Data inconsistency, improved decision making and timely data
Poston and Grabski (2001) and Huq, Huq and Curtright (2006) state that by implementing ERP software, redundancy and inconsistency of data are reduced through the installation of a central database storing the entire corporate information. The authors go on and emphasize the fact that employees have access to current data and errors are reduced, which improves the quality of decision-making and above all better customer service (Huq, Huq, & Cutright, 2006), which corresponds with Hitt et. all (2002), in terms of process automation and timely information.
These mentioned features should improve the firm performance, in particular reduce costs and improve decision-making. Oliver & Romm (2002) and Sheppard (1990), too, mention improved information access and cost reduction as benefits for investing in IT.
Higher ROA of adopters versus non-adopters
Hitt et. al. (2002) find that firms that are ERP adopters gain benefits in terms of higher performance on a wide variety of measures, such as sales per employee, profit margins, return on assets (ROA) etc., than non-adopters. Most gains are achieved during the implementation phase, hence these benefits occur due to effects during the ERP implementation rather than driven by preexisting characteristics of the firm.
Outsourcing of Maintenance
ERP systems offer – among other things - the ability to outsource maintenance efforts and costs associated with legacy systems and custom developments to vendors. Maintenance problems and responsibilities can be shifted to ERP vendors, allowing the company to focus on its core business (Light, 2001; Romm & Oliver, 2002) Outsourcing the entire IT department could be a possibility since there is a reduced reliance on the internal IT function, which may lead to a reduction in labor costs and costs for trainings. Another important point is that companies are provided with current technologies through upgrades (Light, Holland, Wills, 2001).
There is a positive reaction of financial markets, rewarding the effort and risks taken to implement an ERP system. First, when an organization announces the plan to implement an ERP system and second after this implementation has been completed. This is reflected in a 13% higher value of adopter firms compared to non-adopters, according to Hitt et al. (2002). More specifically, not the implementation itself is rewarded, but the improved organizational structure, business processes, provided training and education of employees.
The decision about engaging in an ERP system implementation or not has to be well thought and planned. An implementation requires a substantial investment of several key resources, particularly money, time and labor force and represents a huge commitment to any organization (Huq, Huq, & Cutright, 2006). A failed implementation cannot only can lead to enormous costs but also endanger the survival of the company. Below, the paper provides some important disadvantages of ERP systems.
According to Rettig (2007), an ERP system installation costs around 15$ million dollars on average, which is consistent with findings of Hitt et al. (2002). Rettig continues and states that large organizations may face tremendous additional costs around hundreds of millions of dollars, since knowledge and expertise needed for an adequate implementation have to be gathered and included. This takes place in the form of outside consultants, which are hired for a longer period of time to ensure the software to be running. By hiring consultants the firm has to pay high hourly wages, which leads to enormous costs (Schwartz, 1998). Besides, effective collaboration between internal business experts and external IT consultants is imperative otherwise ERP implementation projects can end in disaster (Hitt et al., 2002), which is aligned with Nah (2002), stating that good communication maximizes the use of resources from ERP.
Business process re-engineering and “Best Practices”
The implementation of ERP systems is very complex and risky because systems may induce significant changes within organizations, its working procedures and culture (Fowler, 1998; Luo and Strong, 2004).
When a company, in the past, urged a new information system, it was first decided on how to do business and then choose a software package that supports certain business processes to the highest extent. The software code was adjusted to meet the process peculiarities and ensure a tight fit. With enterprise systems offered by large vendors such as SAP or Oracle, the business and its processes now have to be modified to fit the system (Davenport, 1998).
An enterprise system is a generic solution, based on assumptions and procedures about the way business is done in organizations (Luo & Strong, 2004). However, these predetermined business processes do not represent the actual processes of the organization, which leads to major difficulties.
The business processes of the ERP vendors’ systems represent the industries’ “Best Practices” and claim to provide a more competitive business model (Light, Holland, Wills, 2001). These best practices ERP models focus on streamlined processes, which might lead to rigidity and hence less creativity and innovation (Arnold, 2000). A large part of companies implements the generic ERP solutions, including business process re-engineering (BPR), which increases the complexity of the entire undertaking (Holland and Light, 1999b; Davenport 1998).
Business Process Re-engineering is closely related to the fit between the selected ERP software and existing business processes. Oliver & Romm (2002) describe it as radical rethink of established working practices. The most suitable ERP packages only give a maximum of 80 per cent match between the ERP software and current processes, hence some process re-engineering can be required (Subramoniam, Tounsi, Krishnankutty, 2009; Luo and Strong, 2004). According to Luo and Strong (2004), researchers suggest that it is easier and less costly to adjust business processes to ERP systems rather than vice versa.
Hitt et al. (2002) found that an ERP installation takes around 21 months on average. However, more time is required to recover from and fine-tune the organization following the re-engineering process. Light, Holland and Wills (2001) say that firms do question whether single vendor ERP systems actually represent best practices in core areas. They start to realize that the strategic consequences of implementing a single vendor’s ERP system bring along similar business processes and IT infrastructures that diminish the competitive advantage of a firm. If a firm’s competitive advantage derives from distinctiveness of products and processes, then an ERP system that pushes a company towards generic processes erases the firm’s sources of differentiation. If, then, ERP packages are used by many companies in one industry, Davenport (1998) suggests that companies should ask themselves how similar their information flows and processes should be compared to those of their competitors before losing these sources of differentiation and thus their competitive advantage in the market. Davenport (1998) refers to a CEO of a chemical firm, who says that doing the best and cheapest job at implementing a vendor’s ERP system might already provide a competitive advantage. Or, according to Rettig (2007) and Hitt et al. (2002), who formulated it similarly, firms that are actually successful in implementing an ERP system gain a competitive advantage over those firms unable or unwilling to finalize an implementation due to its high difficulty and failure rate.
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