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ERP Selection

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Overview

Basic question: How does a firm justify implementing an ERP system?

Why are we doing this? How do we know that the benefits outweigh the costs? What is the business case for ERP?

What are the categories of benefits? What are the costs? What are the hidden costs?

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IS/IT Projects
Typically

Late Over budget Fail to satisfy design specifications

Are among the largest IT projects there are for most organizations Cost range $5 million to over $100 million (+)

ERP projects

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Expected Installation Time

Mabert et al. (2000); Olhager & Selldin (2003)

Time to Install ERP

12 months

US
34%

Sweden
38%

13 to 24 months
25 to 36 months

45%
11%

49%
8%

37 to 48 months
> 48 months
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6%
2%

4%
1%

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Estimated Installation Cost

Mabert et al. (2000); Olhager & Selldin (2003)

Installation Cost
< $5 million

US
42%

Sweden
40%

$5 million to $25 million

$26 million to $50 million

33%
10%

35%
18%

$51 million to $100 million

> $100 million
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7%
7%

7%
In prior

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ERP Life Cycle

The ERP Life Cycle is composed of 5 major Phases

Grouping of related activities Analysis: understanding business needs how do we want configure the software (choose from software options) Design: prototyping, pilots, etc. Implementation: final configuration, testing (lots), and rollout Project planning Support

Three major activities

Two additional phases

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Cost / Benefit Analysis

Assess if project is worth doing, from a financial perspective Quantify costs Quantify benefits Perform financial calculations to assess economic feasibility are financial benefits significantly greater than financial costs? Types of analysis: Net present value, Payback period, ROI over specified time period

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Cost Proportions
Mabert et al. (2000); Olhager & Selldin (2003)

Where money spent

Software Consulting Hardware Implementation team Training Other
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US
30% 24% 18% 14% 11% 3%

Sweden
24% 30% 19% 12% 14% 1%

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Intangibles in Cost / Benefit

Intangible costs and benefits cannot always be measured, but must be considered. Sometimes, intangibles determine if project proceeds or not. Intangible Benefits

Increased levels of service Customer satisfaction Survival Need to develop in-house expertise Reduced employee moral Lost productivity Lost customers or sales

Intangible Costs

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Defining Business Rationale: tangible and intangible benefits

Need to define business rationale/anticipated benefits for imple ERP:

Helps set clear, unambiguous objectives

> Why?

Makes the firm commit necessary resources Provides direction for ERP design focus
> For example, business process improvement

Determine how success will be measured

> This is sometimes critical to whether or not the project is approved > Metrics: examples?

Ensure senior management on board

> Why?

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Business Rationales

Categories

Technology: Replace outdated hardware and software with more scalable, flexible and maintainable technology Business Process: Replace inefficient legacy processes with new processes that are grounded in best practices Strategic: Implement a technology platform that gives the organization abilities it did not have before Competitive: Provide the organization a better ability to compete in their industry

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Technology Rationales Year 2000

The Y2K bug Quoted Y2K costs: $1 + per line of code (typical large organization: 10s of millions of lines) Multiple vendors and platforms Inability to access and share critical information Expensive to maintain (muliple DBs, OS, programming environments) Staff acquisition and training a big issue

Multiple distinct, disparate systems

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Technology Rationales
Poor quality of existing systems

Often the result of a band aid approach the 10 room shack difficult to fix, impossible to improve Different coding schemes, disparate platforms cross company integration very difficult Common integration platform

Need to integrate corporate acquisitions

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Technology Rationales Measurement

Often made on yes-no basis

Solve Y2K? Facilitate integration of processes? Acquired companies? Scalable? More easily maintained and supported? Cost avoidance is often sited as rationale Technology an enabler of direct monetary impacts

Strong non-monetary motivation (although)

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Business Process Rationales

Improve business processes with an eye to efficiency, new capabilites. Personnel and IT cost reduction

especially accounting, clerical and IT personnel affecting any number of process areas Less paper, handoffs

Productivity improvements

Financial Cycle Close

timely official financial information for decision-making Real time availability of data

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Business Process Rationales Measurement There may be specific, quantifiable monetary goals

Some goals e.g., quality are difficult to quantify in monetary terms

Predictability / accuracy of measurement depends on reengineering method Common monetary goals:

productivity gains do more with less people and associated reduction in costs Increased reliability due to better maintenance: no unscheduled downtime, Reduction in raw material purchases/less inventory fewer warehouses lower freight costs Reduced costs associated with accounting function

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Strategic Rationales

Facilitate new strategies for the organization Reasons beyond process / transaction efficiency

better customer satisfaction, quality corporate image allow base for emerging technology : e-commerce Allow the organization to do things it could not do before Allow company to enter new markets Employee retention and attraction Project a professional, modern image New revenue generating opportunities

Measured in non-monetary terms

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Competitive Rationale Our competitor has it, so we need it to stay in business

Why does our competitor have it? Do we need it too? What happens if we dont? cost and impact on business is not certain E.g. - Availability to promise 110% Guarantee Superior customer response

Measured in non-monetary terms

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Levi Case
What rationale(s) did Levi used to justify ERP decision? Categories

Technology Business Process Strategic Competitive

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The REALLY important criteria

How does a firm finally decide whether or not to go ERP?

By addressing the question..What keeps executives awake at night? Is there some crisis (technical, competitive, or other) that necessitates a change? Organizations often need to be galvanized into action

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