Over the last decade, many organizations have experienced significant changes in their core business applications. These applications have moved from a centralized mainframe platform toward a distributed client-server architecture, changed from monolithic customized software systems to commercial off-the-shelf (COTS) software modules with graphical development tools and expanded from a local area network environment to one with the broad reach of the World Wide Web. Business applications also have changed to support the globalization of their organization with the addition of multisite and multicurrency functionalities.
Along with these changes, many managers have wanted integration among functional applications that support data flow among the business units and have a common look and feel among the modules. Business managers have long been aware of the limitations evident in an environment of stove-piped systems and databases. When data need to flow from department to department, data must flow slowly in batches and often need to be repackaged and even manually reentered because of the differences in format, platform and data meaning among the functional departments. Managers have recognized the benefits of integrated systems where there is a centralized data source shared among the departments. The advantages of this approach include: a rapid and seamless access to data, all data represent the "single truth," and a reduction of errors associated with repackaging data.
To address these many changes, a new type of software system was developed—enterprise resource planning (ERP) systems. These systems are applications of integrated software solutions that support enterprisewide business requirements. They consist of modules that focus on specific aspects of the enterprise's business such as finance, human resources, logistics and procurement.
What Is an ERP?
An ERP integrates all departments and functions across an organization onto a single computer system that aims to serve practically everyone's particular needs. It eases the exchange of data and facilitates communication among departments. ERP systems run on client-server networks--personal computers connected to more powerful servers (including possibly mainframes) that feed them data. Each module works separately, performing specific data-processing functions.
Examples of ERP modules include the following:
- Human resource management
- Financial management
- Supply chain management
- Logistics and materials management
- Planning and budgeting
- Sales and distribution
- Student administration
Many ERPs include the capability to interface data warehouses to support managerial reporting and business intelligence requirements such as online analytical processing and data mining.
Current ERPs are structured on a client-server architecture that consists of presentation, Internet-enabling, application and database layers. These layers could either be installed in one server, e.g., an enterprise server or mainframe, or distributed among a number of servers for scalability. Also, the heart of the ERP is a relational database management system that ensures data consistency and integrity. Another feature is a workflow manager that supports the management of a dynamic work process.
The origin of ERPs goes back to the 1960s and 70s in the form of materials requirement planning (MRP) systems. This precursor to ERP systems aimed to support inventory requirements for a manufacturing systems. These systems expanded to accommodate master schedules that controlled the sequence of components for the final assembly of products. In 1972, five former IBM employees in Mannheim, Germany, created an ERP system with the vision of an end-to-end business application that would address all of the needs of an enterprise. In 1978, a mainframe-based ERP architecture was developed. It evolved to a client-server platform in 1992.
ERP systems have grown in popularity astronomically. In 1993, ERP revenue in North America was US $319 million; by1999, it grew to US $17.7 billion, representing a 55-fold increase. In 2000, estimated revenue grew to US $23 billion, a 30 percent increase in just one year. The Y2K preparation in 1998 and 1999 drove the implementation of ERP in many organizations.
A number of ERP vendors have experienced occasional slumps in sales and revenue but the overall long-term trend for ERPs has been continued growth.
ERP vendors include the following:
- SAP (Systems, Applications and Products in Data Processing) is the global market leader in ERPs; it has approximately 30 to 60 percent of the world market. The strengths of its R/3 product include support for multicountry, multicurrency environments and wide scalability. The company spends a large percentage of its revenues in research and development.
- Oracle is the second-largest software company in the world. Its ERP product, Oracle Applications, includes the popular Oracle Financials module. It has the reputation for developing a product that can be interfaced with others to create a best-of-breed ERP package. It should be pointed out that Oracle Applications should be distinguished from the Oracle relational database management system, which often is part of other ERP products such as PeopleSoft and SAP.
- PeopleSoft has its origins in human resource management software that evolved to a full feature product with the addition of other modules. However, its strength still remains its human resource management systems. PeopleSoft has a major presence in the US federal government.
- Baan has developed a number of componentized products. Recently, it has struggled financially because of questionable financial reporting practices and changes in leadership. However, it is still a relatively dominant player in the ERP market.
- JD Edwards has a product called OneWorld with origins in the AS/400 environment. Its target customers are primarily smaller organizations wiht less than 2,000 users.
Figure 1 shows the approximate market share by vendor.
There are many other ERP vendors, most of which are primarily aimed at specific markets. Microsoft recently acquired Great Plains, a company traditionally known for its financial management applications.
SAP, Oracle, PeopleSoft and other vendors have financial modules that are certified by the US government's Joint Financial Management Improvement Program. This program supports the improvement of financial management practices in the US government and is supported by the US Treasury, General Services Administration, Office of Personnel Management and Office of Management and Budget.
There are numerous other vendors, which support the companies listed previously. They include consultants, trainers, implementers and others. These vendors constitute a major expense to ERP end users in terms of implementation support and maintenance.
Benefits of ERP
Besides integrating organizations' activities, ERPs employ best practices that have been proven in the real world. At least one ERP software package incorporates more than a thousand best practices.
ERPs also enable organizational standardization. The user interface, the sequence of operations for a process and system maintenance procedures can become common standards across the organization.
ERPs improve information management by having a single database as opposed to multiple, often duplicative systems. Because of this centralized data source, ERPs provide online and real-time information and facilitate intra- and inter-organization communication and collaboration.
From a business perspective, factors that drive organizations to implement ERPs include: customer satisfaction, more efficient processes, meeting business process reengineering requirements, competitive challenges and labor shortages.
From an information technology perspective, drivers include: addressing the Y2K problem (which may no longer be applicable), the need for systems integration that is difficult to do with legacy systems, modernization of hardware and software systems built decades ago and the need for online collaboration, particularly on the Internet.
Who Is Using ERPs?
In the private sector, 70 percent of the 1,000 largest companies have implemented ERPs. Major corporations include Microsoft, IBM, General Motors, Hewlett Packard, CSX, Boeing and Mercedes-Benz.
ERPs only recently have been implemented within the US federal government. In the US Department of Defense, agencies either planning to implement or who have implemented ERP modules include:
- Defense Logistics Agency—Business systems modernization
- National Security Agency/Defense Intelligence Agency/National Imagery and Mapping Agency--Integrated human resources and payroll solution across all three agencies
- Defense Finance and Accounting System (DFAS)—Defense procurement pay system--Contract and vendor pay entitlements; DFAS corporate database (DCD)—Standard general ledger for the Air Force
- Navy--Interim modernization for the Navy—Accounting, payroll, human resources, acquisitions, procurement, operations
- Army--Wholesale logistics modernization program
Non-defense agencies implementing or that have implemented ERPs include:
- Interior, Health and Human Services, General Services Administration, Labor, Veteran Affairs—Human resources
- Treasury's US Mint—Consolidated information system (COINS) and human resources
- NASA Jet Propulsion Lab—Financial and human resources including payroll
- Energy--Administration and resource management
- Transportation, Commerce—Financials
Key ERP Issues
Process issues concern whether an organization follows the practices dictated by the software or the organization customizes the software to match the current process. In the first case, such an action will mean considerable business process changes for the organization. This will generate considerable turmoil particularly in terms of people issues. In the second case, implications include high cost, additional maintenance requirements associated with upgrades and compatibility issues.
People issues include employee resistance that requires retraining and reorientation on the part of employees and management. ERPs often require more data collection screens than legacy systems, thereby increasing employee workload. A key issue involves employee retention. In anticipation of an ERP implementation, some employees may leave the organization or retire early. Individuals directly involved with the ERP may exit the organization due to the high demand for experienced ERP programmers and implementers. Also, security is an issue because employees are exposed to enterprisewide business data instead of limited departmental or legacy system data.
Technology issues include the difficult data migration from legacy systems to the ERP database; the lack of interoperability among different vendor products, particularly when applying the best-of-breed approach; and the continual maintenance of the ERP.
A critical financial issue is the high cost of ERP software. The typical range of cost is between US $400,000 - $300 million. It has been estimated that the total cost of ownership is US $53,320 per user. There are significant hidden costs with ERP implementation including training, integration and testing, data conversion, data analysis, consulting fees and turnover.
ERP Horror Stories
As with most emerging technologies, ERP efforts have had their share of drawbacks. The following are descriptions of recent catastrophic ERP failures in the private sector:
- Hershey Foods—A 19 percent drop in earnings was caused by an incompetent ERP implementation that wreaked distribution havoc during one of its most profitable seasons in the US: Halloween.
- FoxMeyer Drugs—This pharmaceutical distribution company was forced to declare bankruptcy after an unsuccessful ERP implementation.
- Whirlpool—ERP implementation crippled its shipping system, leaving appliances stacked on loading docks and not delivered to paying customers for a full eight weeks.
- Volkswagen—Significant delays in parts shipments caused product inventories to build up to costly levels.
It has been estimated that half of the issues in ERP disasters are not technical but are people- and culture-related. Many of the failures can be attributed to poor change management in the form of inadequate training. Trainers need to understand the legacy system processes and know how to translate these process into the new processes called for in the ERP.
In the US government, the General Accounting Office has identified the following problem with ERP implementations:
- Department of Defense—Defense civilian personnel data system: Costs rose US $248 million to about US $1.3 billion, and deployment was pushed from September 1999 to March 2001.
- Labor Department: Costs jumped from US $26.5 million to US $71 million, due to underestimating implementation and operating costs.
- Department of Veteran's Affairs: Costs jumped from US $170 million to US $417 million, and the project is currently two years behind schedule.
- NASA: Its ERP failed to produce accurate financial reports. The system was unable to close year-end books on a Cal Tech contract.
These horror stories point out a number of key considerations. First, there is a need to carefully plan and execute an ERP implementation, because the failures can be catastrophic. This undertaking is definitely not for risk-averse organizations unless there is a crisis driving the organization toward an ERP. Second, ERP vendors rarely discuss these failures (unless they involved a competitor); therefore, you must be able to see through the hype and understand possible consequences of ERP implementation. Finally, these horror stories serve as valuable experiences, keeping other implementers from falling into the same trap. (Note: These stories were considered in the development of the list of lessons learned discussed later in this article.)
Implementation steps are summarized below, using, as a guideline, the accelerated implementation techniques used by SAP consultants. They include:
- Project preparation—Determine the implementation strategy, organize the project team, define the system landscape, identify technical demands, select the hardware and database vendors and gain consensus among stakeholders.
- Business blueprint and realization—Create the technical design and, based on this design, configure the ERP software. Based on the requirements, test the software, install the production system and start planning the data migration strategy from the legacy systems.
- Final preparation—Check the system settings, test the system throughput for key business processes and establish a help desk.
- Go live and support—Start the production system, ensure its availability, monitor key business processes, manage the help desk and define the long-term release strategy.
Key Planning and Implementation Decisions
This discussion looks at a number of the key decisions that need to be made when considering an enterprise integration effort.
ERP or Not to ERP?
The decision to implement an ERP should be based on a business case rationale. Possible business cases involve technology, process improvements, productivity improvements and strategic considerations.
Technology justifications include the need to address the Y2K problem (in most cases, this is no longer applicable), integrate the functions of disparate systems, replace poor-quality existing systems and merge acquisitions with new capabilities such as web accessibility into the business environment. Process improvements address actions that result in personnel and IT cost reductions. Productivity improvements include the need to close the financial cycle and increase overall production from an enterprise standpoint. Strategic considerations address the ability to implement new strategies not supported by the current software, improve customer service and satisfaction, respond to competitive pressures and enhance customer responsiveness.
Follow Software's Processes or Customize?
This key decision may determine the success or failure of the ERP effort. If the organization decides to follow the processes of the software, this will result in the organization following best practices within its sector, thereby giving it a chance to improve and standardize their processes. This approach will also facilitate future changes to the ERP software. However, this approach can create significant turmoil by requiring employees to change their ways of doing business.
If the organization decides to stick with its current processes and customize the software to fit these processes, the organization obviously will not have to experience the pain and stress associated with changing its processes. However, it will be very costly to customize and maintain the software over time. Interfaces and modular compatibility need to be sustained.
Inhouse or Outsource?
Outsourcing has the advantage of allowing the organization to continue to focus on its core mission, avoid a relatively substantial financial commitment (in some cases) and minimize the impact on the MIS department. On the downside, providing opportunities to those external to the organization may poorly impact employee morale and may give rise to security issues.
The upsides to an inhouse implementation include: a better match between the software and the business, applications optimized for the organization and better maintained security. However, an inhouse approach cannot be accomplished if there is a lack of internal expertise and personnel to support such an effort.
"Big Bang" or Phased Implementation?
A "big bang" implementation involves having all modules at all locations implemented at the same time. Characteristics of this approach include no need for temporary interfaces, limited requirement to maintain legacy software, cross-module functionality and lower overall cost if no contingencies arise.
Phased implementation is when modules are implemented one or a group at a time, often a single location at a time. Benefits of this approach include: a smoothing of resource requirements, an ability to focus on a particular module, availability of existing legacy systems as a fall-back, reduced risk, the knowledge gained with each phase and the usefulness of demonstrable working system.
Other implementation approaches include:
- The wave approach—This approach involves the application of different waves of change to different business units or regions.
- Parallel implementations—This approach involves both ERP and an existing system running together for a period of time. Its attributes include: having a basis of comparison; existing system serves as backup; requires more computing and human resources--more costly; existing system may not be properly maintained during the period; and reengineering not supported by existing systems.
- Instant cutovers (flip-the-switch)—This approach is lower in cost, motivates users to seriously convert to the new system and reduces the need for redundant systems. However, it tends to be risky, stressful to users and requires a high level of contingency planning.
Single Package or Best-of-Breed?
Single package implementation involves the installation of the full suite of a vendor's ERP software. Advantages under this approach include high interoperability among modules, common look and feel, and standardization.
A best-of-breed approach involves selection of the most appropriate modules coming from different vendors. Characteristics of this approach include: the required functionality is met, higher cost and an incompatibility among modules and among systems thereby requiring customized interfaces.
Which ERP Package?
In general, the ERP package an organization selects should be based on four factors: functional capabilities, technical attributes, partnership and cost. Detailed considerations include the following:
- Functional fit with the organization's business practices
- Degree of integration among components of the ERP system
- Flexibility and scalability
- User friendliness
- Quick implementation
- Ability to support multisite planning and control
- Technology--Client-server capabilities, database independence, security
- Availability of regular upgrades
- Amount of customization required
- Local support infrastructure
- Costs--License, training, implementation, maintenance, customization, hardware requirements
Based on experiences from recent ERP implementations both in the public sector and in industry, the following lessons were identified:
- Define the business value--Identify what benefits the organization needs to get out of an ERP, and focus on these benefits throughout the implementation to ensure that they are achieved.
- Set up regular review measures--Establish metrics to measure how well the objectives of the ERP effort are being met.
- Don't underestimate the art of change management--Keep management and users well informed of changes, provide the necessary training and support throughout the transition and involve all stakeholders.
- Make sure that every vendor involved in the project has "skin in the game"--Every vendor should share in the risk of the venture; consider using the "fix time, fix price" type of contract to ensure the effort is completed on time and within budget.
- Do not lose sight of the impact on the customer--The implementation should be transparent to the customer.
- Assign a high-level business manager to the project, adding credibility to the effort and forcing upper management to take ownership of the project.
- Engage the users throughout the process--Make sure they are aware of the progress of the implementation and upcoming changes.
- Avoid customization--This can be very costly both as a one-time expense and whenever there are upgrades to the vendor software. However, there are times when customization is required because the software does not address some aspect of the user requirements.
- Ensure that the infrastructure can support the ERP, for example, the network should be built to support the web-access capabilities of ERPs.
- Outsource--This will target situations when the organization does not have a sufficient skill pool to support an ERP implementation.
Stick with a mainstream vendor--Using a vendor that may not be around in a few years is risky. For example, in the US government, agencies should select financial modules that comply with Joint Financial Management Improvement Program (JFMIP) Certified Software (www.jfmip.gov
) standards. This is an indication that the vendor's financial module meets governmental financial system requirements.
- Perform pilot implementations--This helps minimize risks associated with large implementations.
- Be prepared for turmoil during the transition phase--The transition period can produce a stressful environment for managers and employees.
- Provide staff training and orientation--This training should not be the one-size-fits-all type; it must be customized for the particular environment. Trainers need to be familiar with the processes associated with the legacy system and understand how these processes map against the processes associated with the new ERP system.
Maintenance of an ERP
ERP projects do not end with its implementation. It is a continuing effort that must address new and/or changing requirements associated with the following:
- System bugs
- User assistance
- Changes to system
- Managment of different input and output requirements
- Maintenance and update of software
Future of ERPs
ERPs will enhance web interfaces to better support e-commerce, enterprise portals and extensible markup language (XML), which facilitates data interchange over the Internet. Also, application service providers (ASPs) will have a growing role in the outsourcing of the often expensive ERPs.
Improvements in enterprise application integration (EAI) middleware for linking ERP with legacy systems are expected probably in terms of CORBA and COM technologies.
"ERP II" is the term, recently coined by the Gartner Group, for the next generation of ERP tools that "better support" internal and external collaboration, have more industry-specific requirements and human capital management.
The implementation of an ERP and its associated business practices is a major business and IT strategy for meeting an organization's vision and goals. It has the potential of high reward, but at a price--high cost and high risk of failure. To address the risk, carefully planned change management is a critical success factor involving the smooth transitioning of people, process and systems to the new ERP environment. One way to accomplish this is to follow ISACA's Control Objectives for Information and related Technology (COBIT) guidelines, which provides a framework for management to understand and manage technical risks in an uncertain environment. COBIT® 3rd Edition© is available as a complimentary download from www.isaca.org//templateredirect.cfm?section=cobit6.
Note: This article has an accompanying web site at: www.members.aol.com/lpang10473/erp.htm
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The views expressed in this article are those of the author and do not reflect the official policy or position of the National Defense University, the Department of Defense or the US government.
Les Pang, Ph.D.
is a professor of Systems Management at the Information Resources Management College, which is part of the National Defense University in Washington, DC, USA. He teaches courses to military and civilian leaders on enterprise applications, data management technologies, modeling and simulation, the Internet, software technologies and multimedia technologies. He received a Ph.D. in engineering from the University of Utah in 1983 and a Masters in Business Administration from the University of Maryland College Park in 1988.