IMPLEMENTATION OF ERP SYSTEMS (STUDY OBJECTIVE 6)
There are many important factors and issues to bear in mind when an organization considers implementation of an ERP system. The management of an organization must consider each of these issues either before or during the ERP implementation. These issues include the following:
- Hiring a consulting firm
- The best-fit ERP system
- Which modules to implement
- Best of breed versus ERP modules
- Business process reengineering
- Customization of the ERP system
- The costs of hardware and software
- Testing the ERP system
- Data conversion
- Training of employees
- Method of conversion, or “going live”
Many of these issues are interrelated, but the following discussion will address these issues one at a time.
HIRING A CONSULTING FIRM
Very frequently, organizations considering an ERP implementation hire a consulting firm to assist with all or part of the implementation. If a consultant is hired to assist in the entire process, the consulting firm will help with the remaining factors 2 through 11 described in the next subsections. For example, the consulting firm is likely to assist the organization in evaluating and selecting an ERP system, implementing the software, and training employees to use the new system. Alternatively, an organization might choose to use a consulting firm for only selected parts of the ERP implementation process.
THE BEST-FIT ERP SYSTEM
An organization must choose the ERP system that best suits its needs. Chapter 6 described some of the factors involved in software selection. Those concepts apply also in selecting an ERP system; however, there are additional factors unique to ERP systems that must be considered. One such factor is the system's area of specialization. While ERP systems encompass all business processes, each vendor's software has special areas of strengths. For example, SAP's ERP system evolved from manufacturing resources planning (MRP II) software and therefore has been considered particularly strong in its manufacturing related modules. Thus, a manufacturing firm might prefer SAP to Peoplesoft. Peoplesoft evolved from a human resources software system and therefore has been known for its particularly strong HR modules.
The organization must consider its business processes and how well each ERP system operates for those processes. Consulting firms are often used to assist in selecting an ERP system.
WHICH MODULES TO IMPLEMENT
ERP systems have modules available for all typical processes and functions of an organization. However, each additional module that an organization chooses to purchase and implement adds cost, implementation time, and implementation difficulties. For some processes, a company may choose to keep a legacy system rather than purchase an ERP module. For example, a company may have an existing legacy system that records and reports fixed asset processes. Rather than purchase a fixed asset module of an ERP system, the organization may choose to continue using the legacy system.
When determining whether to purchase a particular module, the organization must recognize that there tend to be problems inherent in integrating a legacy system into an ERP system. Either approach—purchasing an ERP module or keeping a legacy system—has costs and benefits that must be weighed.
BEST OF BREED VERSUS ERP MODULES
While ERP systems usually are intended to fit all business processes of an organization, some experts believe that ERP systems do not necessarily offer the best solution for all processes. It is difficult for any single software system to offer the best possible modules in all areas of business processes. This is especially true since ERP systems are designed to have a very broad appeal across many different kinds of organizations. This broad appeal is accomplished by building ERP modules around standard, generic business processes. Therefore, some experts believe that an organization is better served by using one brand of ERP system for many processes, but to select some modules from other vendors that are “best of breed.” Best of breed means the best software on the market for a particular type of business process for this size of an organization.
A best of breed approach is usually applied when an organization has some processes that may be different from the generic processes. Those processes that may be unique or a little more specialized might be better handled by a best of breed rather than the ERP module.
Similar to the factors in decision making regarding legacy systems or ERP modules are the costs and benefits of using either the ERP module or the best of breed system. The ERP module is likely to be easier to integrate into the whole system, but might not offer as much functionality as the best of breed. The organization must evaluate this trade-off and determine which approach best suits the many modules it wishes to implement.
BUSINESS PROCESS REENGINEERING
Chapter 1 introduced the concept of business process reengineering. Recall that business process reengineering (BPR) is the purposeful and organized changing of business processes to make them more efficient. BPR not only aligns business processes with the IT systems used to record processes, but it also improves the efficiency and effectiveness of these processes. Thus, the use of sophisticated IT systems usually leads to two kinds of efficiency improvements. First, the underlying processes are reengineered so as to be conducted more efficiently. Second, the IT systems improve the efficiency of the underlying processes through automation. By rethinking and redesigning processes, the organization may be able to improve, and thereby enhance, the process. Rethinking and redesign are especially aided by the use of IT. When computerized technology is introduced into processes, the processes can be radically redesigned to take advantage of the speed and efficiency of computers to improve processing efficiency. IT and BPR have a mutually enhancing relationship. IT capabilities should support the business processes, and any business process should be designed to match the capabilities that the IT system can provide. BPR should leverage the capabilities of IT to improve the efficiency of processes.
BPR is an important aspect of ERP system implementation. Since most organizations' processes do not match the processes in the ERP system for any individual module, BPR is usually undertaken to make the business processes more compatible with the ERP modules. For example, an organization's sales and delivery processes may not currently be done in the same manner as the ERP system module that was written to handle such processes. Since ERP systems have been developed through many years of working experience with many organizations, the ERP systems are usually built around effective and efficient process steps. This means that organizations are usually best served by BPR to change their processes to match those in the ERP system. As described in the preceding paragraph, BPR not only makes the individual process more efficient, but it allows the organization to improve process efficiency overall by capturing the extra efficiencies of the advanced IT processes in the ERP system.
CUSTOMIZATION OF THE ERP SYSTEM
As often as possible, organizations should attempt to undertake BPR to match their processes to the ERP system. However, there are cases in which it may be necessary to customize the ERP system rather than change the business processes. Most consultants and experts would recommend that the number of customizations be limited to the least amount necessary. The two primary reasons for limiting customization is cost and upgrading of the system. Any customizations may require changing or writing new programming code, which can be a very expensive and time-consuming task. The cost of customization can easily exceed the cost of packaged ERP software. Second, customizations cannot be automatically incorporated when the ERP vendor provides an upgraded version of the ERP system. Therefore, upgrading to the next version may mean losing any customization.
In practice, many organizations do wish to have some customization. However, customization should be limited, and the organization should fully understand the extra costs and problems inherent in customization.
THE COSTS OF HARDWARE AND SOFTWARE
Implementation of ERP systems usually requires the purchase of new computer hardware, systems software, network equipment, and security software. The cost of hardware is dependent on the size of the organization, its current hardware and software, and the scope of implementation of the ERP system. The decision whether to adopt cloud-based ERP systems will also have a tremendous impact on the computer hardware and IT infrastructure needed. A cloud-base system will require less IT structure at the company. For ERP implementation in large organizations, hardware costs often exceed 1 million dollars; while in midsized organizations, hardware typically costs about half a million dollars.
The cost of an ERP software system varies depending on the size of the organization, the number of modules to implement, and whether any best of breed modules are to be purchased. As discussed earlier, a minimum cost of tier one ERP systems is approximately 1 million dollars, and in the largest corporations, the total cost can be as much as $100 to $200 million.
TESTING OF THE ERP SYSTEM
As you consider the previous paragraphs, notice the potential complexity of an ERP system implementation. It can involve integrating ERP modules, legacy systems, and best of breed modules. The primary measure of success for ERP implementation is ERP integration. Because an ERP implementation may involve integration of legacy systems and various modules from different vendors, it is imperative that these systems undergo extensive testing prior to implementation.
DATA CONVERSION
The implementation of an ERP system will involve converting data from legacy systems. Second generation ERP systems use relational database management systems (RDBMS) to store enterprise data. Conversion from data in legacy systems to RDBMS can be error prone and time consuming. Often, the data must be cleansed and errors must be corrected prior to conversion. An ERP system is intended to bring many data sources into a single database. The various operational databases of the legacy systems might have incompatible data in several different formats. An appropriate amount of time, effort, and dollars must be devoted to the proper cleansing and conversion of data.
TRAINING OF EMPLOYEES
Since ERP system implementation usually requires BPR, many processes that employees are involved with will change. Thus, training is necessary because workers will often have to learn a new set of processes. As is true of data conversion, it is expensive and time-consuming to train employees. However, this is a step that organizations should not take lightly. Poorly trained employees may prevent the organization from fully realizing the benefits of the ERP system and can cause errors and problems in the processes. Such errors can disrupt business processes and introduce incorrect data into the system.
THE METHODS OF CONVERSION TO THE ERP SYSTEM
Near the end of the implementation process, the organization must “go live” with the new ERP system. That is, after data conversion, training, software installation, and related tasks, a shift to the new ERP system must take place. There are several methods of making this switch-over. The usual approaches are big bang, location-wise, and modular implementation. These approaches are described in the sections that follow.
Big Bang
In the big bang approach to implementation, the company implements all modules and all functional areas of the ERP system at once. There is a particular date established as the “go live” date, and the ERP system is turned on fully on that date. Therefore, the installation of ERP systems of all modules happens across the entire company (including any subsidiaries) at once. The big bang approach requires that all functional areas of the company are ready to make the change at the same time. This approach demands a tremendous amount of planning and coordination across the entire company. If well planned and executed, the big bang approach has the potential to reduce the time and cost of implementation. However, it is extremely difficult to execute a big bang conversion well. Such a tremendous effort in planning and coordination is needed that most companies are not able to pull it off.
The underlying premise of a big bang method is that the ERP implementation is simply the implementation of a big information system, which typically follows an SDLC (systems development life cycle) model. But ERP implementation requires a great deal of business process reengineering and is not like IT system changes from years ago. As processes are changed through BPR, implementation becomes more difficult and time consuming. Some have said that an ERP implementation is 60 percent about changing attitudes and only 40 percent about changing systems. Although the big bang method dominated early ERP implementations, it partially contributed the higher rate of failure in early ERP implementations. Today, not many companies dare to attempt it anymore.
THE REAL WORLD
The City of Tacoma, Washington, attempted a $50 million dollar implementation of SAP R/3 to handle all aspects of business processes within the city. The software was intended to incorporate the city's budgeting, accounting, human resources and payroll, police, fire, and city utilities. The city decided to implement the software in a big bang fashion with the assistance of a consulting firm. The communications supervisor of the city said of the implementation that “they threw the switch at one time, and a lot of failures happened.” These failures included problems with payroll checks, utility bills to city residents, and the budget module. An industry expert indicated that the city “tried to do too much at one time.” These failures in implementation caused the city to spend much more money to fix the problems. For example, the new system workflow required customer service representatives to examine five different screens of customer data to access customer data and answer inquiries. The city had to spend an extra $405,000 to have the consulting firm modify the ERP system so that important customer data were collapsed into one screen. The problems that occurred in this implementation are examples of the type of problems encountered in implementing an ERP system by a big bang approach.3
However, problems can also be encountered in even less complex projects and less aggressive ERP implementations. Marin County, California, chose SAP as the ERP system to replace its legacy accounting systems. Deloitte was chosen as the consultant. After spending several million dollars and two years in trying to implement SAP, Marin County scrapped the entire SAP project in 2010, intending to start over with another ERP vendor. The SAP ERP system was so poorly implemented that management felt it was a lower-cost alternative to replace it rather than continue the implementation. In 2011, Marin County sued two SAP subsidiaries and Deloitte for $35 million.
More than half of the ERP implementations by the big bang approach experienced significant failures or problems in the 1990s, with nearly one-third of these implementations abandoned in progress. As described in the Marin County example there continue to be failures in ERP implementations when they are not well managed. However, there have also been successful big bang implementations of ERP systems.
THE REAL WORLD
Marathon Oil Company has been a leader in worldwide energy innovations since 1887. In late 2000, the company began a big bang implementation of SAP R/3® in late 2000. Since Marathon is in a specialized industry, many of its business processes are different from most companies and have unique information needs. Despite the size and uniqueness of Marathon, it was able to fully implement the ERP system and “go live” after 13 months. The team at Marathon undertook several steps to ensure a successful implementation. First, Marathon selected a cross-functional team to manage the implementation. The company also studied the ERP market and selected the ERP software that best suited its needs. The team also studied the reasons for the failures in implementation that other companies had experienced. ERP systems often require underlying changes to business processes. Marathon had an effective plan to manage change in the organization. All of these factors contributed to the success of the implementation at Marathon.4
If a company plans a big bang approach to implementation, it must consider the many risks and potential problems. To avoid the risk inherent in a big bang approach, other approaches can be used for the implementation of an ERP system, described in the sections that follow.
Location-Wise Implementation
In a location-wise implementation of an ERP system, the organization chooses a specific location or subunit of the organization and implements the ERP system in that place only. This approach can be considered a “pilot” approach in which the ERP is first carried out in a subunit of the larger organization. This means that any resulting problems will be isolated within the pilot unit so that the entire organization is not impacted. This location-wise approach allows the implementation team to work out many of the implementation and operational issues of the ERP system while its impact is minimized within a single location. Once the pilot implementation has been completed and any related issues have been addressed, the ERP implementation can be continued across the entire organization.
Modular Implementation
In a modular implementation, the ERP system is implemented one module at a time. The implementation team will normally focus on the most critical module first and complete the implementation of modules in descending order. This allows the organization to take advantage of the new features of the module in the ERP system without affecting all processes in the organization.
A modular implementation normally limits the scope of implementation to one functional department. The implementation team can choose to implement the module in a single location, or organization-wide. A modular implementation reduces the risks associated with installation and operation of ERP systems because it reduces the scope of the implementation. A modular approach will mean that the organization cannot take advantage of all modules in the ERP system until all intended modules have been phased in. This means that the interaction of many of the ERP modules cannot be fully realized until all selected modules are implemented.