labels: infotech, management - general
Part I : Oracles or Saps?news
25 July 2005

It's on the 'must have' list of every mid-size company. In a three-part series, M Alagappan* outlines the plusses and minuses of enterprise resource planning (ERP) systems

Los Angeles city has a population of around 3.5 million. It has 600 city buildings, 44,000 city employees and a budget of just over $5 billion (Rs22,000 crore). Up to three years ago, each of the departments conducted its own purchasing. To put that in perspective, if we assume each invoice coming out of a Los Angeles city office to be a single A4-size sheet and if we arranged them one on top of the other, they would approximately stand at half the height of Mt Everest.

The city administration decided it was high time a software solution was implemented. It successfully did so in 2002. Immediately, cheque processing staff was cut in half, even as processing speed improved. The number of workers in the warehousing department was reduced to 40. Inventories tumbled from $50 million to $15 million. Vendors started interfacing with a single point of contact, not to cite other benefits too numerous to mention.

Enterprise resource planning (ERP) may well count as the most important development in the corporate use of information technology (IT) in the 1990s and beyond.

ERP market
What exactly is the market for ERP systems, and where is it going?

The global market for ERP software is predicted to grow by 10 per cent through 2006. The top five software vendors competing for the pie are SAP, PeopleSoft, Oracle, Microsoft and Sage.

A recent study by IDC - the premier global market intelligence and advisory firm in the information technology and telecommunications industries - surmised that this kind of accelerated market growth is a result of the general increase in IT spending, as well as repressed demand for integrating legacy systems to boost productivity. The analyst firm also predicted that by the end of 2008, the ERP market would touch $36 billion. Competition, it said, would heat up between vendors centred on specific industries and those selling more generic products.

Risks associated with ERP
Though the technical risk associated with an ERP implementation is lower than that experienced in development of normal software systems, critical business-related difficulties persist.

ERP implementations are usually large, complex projects. They involve a multitude of human and other resources, working together under severe time pressure. They also face many 'out of the blue', day-to-day development issues. Many of these implementations turn out to be much less successful than originally predicted.

To be precise, researchers have estimated that of any 10 implementations, at least nine end up being late or over budget, four achieve only partial implementation, and two are scrapped before completion. A worrying percentage of ERP adoptions can be considered failures in one way or the other.

What is so captivating about these seemingly all-proficient systems that promise to run your company for you, manage your supply chain, cajole your legacy systems, increase productivity and manage organisation-wide functional and business processes? How is it that despite creating disruptive changes and, sometimes, producing spectacular failures, they still manage to stay at the top of every chief information officer's (CIO's) priority list?

This three-part series of articles tries to address in part all these questions in some detail. The current article studies the evolution of ERP, discusses why ERP is so attractive and analyses the concept of infusion versus diffusion. It also looks at the impact of ERP on multinational corporations, surveys results from companies that embraced ERP, talks about organisational resistance to change and outlines critical factors for a successful ERP implementation.

The second article discusses something that is at the top of every chief executive officer's (CEO's) wish list: return on investment (ROI) from ERP. It also touches on change management strategies and methods of implementation in phases. The takeaway section includes a list of questions to be asked and answered at pivotal points of any implementation.

Of every 10 implementations, at least nine end up being late or over-budget. Four achieve only partial implementation. Two are scrapped before completion. Indeed, many ERP adoptions can be considered failures in one way or another.

The third article addresses the phenomenon of second wave ERPs, bolt-on software, as well as the shake up and consolidation in the vendor industry of today that you should know about. The takeaway section has briefs on integration of ERP with data warehouses, eBiz and customer relationship management (CRM).

This series of articles is intended to convey to business users, CIOs and CEOs, the business implications of adopting an ERP system. Since the system can make or break the IT unit of an organisation, its importance cannot be overemphasised. However, this is in not an authoritative industry analysis. It only intends to provide a snapshot of the huge body of existing industry insights and the extensive industrial research conducted in this field in the recent past.

The evolution of ERP
There are two schools of thought regarding the origin of ERP software. One says it came from the urge of the engineering department to gain control of inventory, while the other attributes it to the desire of the finance departments to control expenditure.

An ERP system is…
From a technical point of view, ERP systems are based on client-server architectures. They provide support to integrated business processes across various organisational functions.

ERP software can also be defined as a set of customisable and highly integrated business applications, which share a common database. They support the core business, production and administrative functions. These functions include logistics, manufacturing, sales, distribution, finance and accounting, among others.

Why is ERP so attractive?
The popularity of ERP systems stems from the fact that they appear to solve the very challenges posed by portfolios of 'disconnected, uncoordinated' applications. ERP packages also seem to fulfil the need to deal with legacy systems, disparate organisational processes and information.

Another reason, in part, might be the increased business trend towards globalisation, mergers and acquisitions. The ability to control and co-ordinate remote operating units become imperative for the businesses. These needs are well addressed by ERPs.

Infusion vs diffusion

Infusion is the degree to which an organisation becomes dependent on IT to carry out its core tasks and manage its business.

Diffusion, on the other hand, is defined as the degree to which IT has become distributed throughout the organisation. These axes reflect the contrasting forces of generic trends in industry.

ERP is considered low diffusion because it is an accrual force in the organisation, often chosen to consolidate disparate legacy systems and standardise business practices.

It is considered high infusion because it has the effect of spreading the tentacles of integration across business functions.

Consequently, ERP systems build effectiveness through tools by working with people close to the point of application. They increase efficiency by helping to control resources and skills across the organisation.

Multinational corporations
Large multinationals have been using ERP systems extensively to achieve:

  • Scalability
  • Standardisation of business processes
  • Centralised control of resources

The usual methodology consists of a phased rollout, in which logically partitioned modules are implemented organisation-wide, in slices.

The main issues faced can be summarised as below:

  • Front-end personnel - who form the contact points of the organisation's services - attract more responsibility in data validation.
  • A significant loss of productivity in the short-term and medium-term, owing to changes in responsibilities.
  • Rapid changes in business requires obliterating the software to aim at a moving target, rather than a stable environment.
  • A short-term to medium-term loss of flexibility in business processes.
  • Huge customisation costs, sometimes, for critical and specific customisation needs of the customer that are, very often, not in the standard suite of the software.

However, if these standard template implementations were to be forced on the users, they may steamroll unique fine-tuned solutions and annul the efficiencies gained over a period of time.

These constraints, typically, force users to fall back on legacy systems for local solutions, even after an implementation. Consequently, the integrity of the solution is compromised severely. They may also lead to intra-company rivalry, since they give instant comparative data on different sister organisations engaged in similar tasks.

Customer surveys
Because the ERP market has expanded so quickly, a vacuum has been created in the skill pool needed, especially at times of implementation. Finding competent people and retaining them throughout implementation becomes a major cause of concern.

Customers also feel the pinch in acquiring timely ongoing support, from both consulting firms and software vendors, across the various stages of the ERP life cycle.

Finally, the partnership between the consulting firm, the software vendor and the client is earmarked as an area of improvement on the part of the service providers. Research has shown that a better relationship between the implementation partner and the user positively affects implementation success.

In particular, research highlights the unstated need of paying attention to the concerns of all the stakeholders, the nature of information systems (IS) issues, clarification of the roots of these issues and the use of suitable research methods.

*The author is a freelance columnist and a practicing ERP implementation engineer at a multinational investment firm. He can be contacted at alagappan.m@gmail.com

also see : Part III: The information business
Part II: Resistance to change

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Part I : Oracles or Saps?