ERP Rationale

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INFORMATION SYSTEMS @ X

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ERP Selection


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Basic question: How does a firm justify implementing anERP system?

Why are we doing this? How do we know that the benefitsoutweigh 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

ERP projects

Are among the largest IT projects there are for mostorganizations

Cost range $5 million to over $100 million (+)


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Expected Installation TimeMabert et al. (2000); Olhager & Selldin (2003)

Time to Install ERP US Sweden

12 months 34% 38%

13 to 24 months 45% 49%

25 to 36 months 11% 8%

37 to 48 months 6% 4%

> 48 months 2% 1%


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Estimated Installation CostMabert et al. (2000); Olhager & Selldin (2003)

Installation Cost US Sweden

< $5 million 42% 40%

$5 million to $25 million 33% 35%



> $100 million 7% In prior


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ERP Life Cycle

The ERP Life Cycle is composed of 5 major Phases Grouping of related activities

Three major 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

Two additional phases Project planning

Support


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Cost / Benefit Analysis

Assess if project is worth doing, from a financialperspective

Quantify costs

Quantify benefits Perform financial calculations to assess economic

feasibility are financial benefits significantly greaterthan financial costs?

Types of analysis: Net present value, Payback period,ROI over specified time period


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

Where money spent US Sweden

Software 30% 24%

Consulting 24% 30%

Hardware 18% 19%

Implementation team 14% 12%

Training 11% 14%

Other 3% 1%


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Intangibles in Cost / Benefit

Intangible costs and benefits cannot always bemeasured, 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

Intangible Costs Reduced employee moral

Lost productivity

Lost customers or sales


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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?

O O S S S @


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Categories

Technology: Replace outdated hardware and software with

more scalable, flexible and maintainable technology

Business Process: Replace inefficient legacy processes with newprocesses 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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Year 2000

The Y2K bug

Quoted Y2K costs: $1 + per line of code (typical large organization:

10s of millions of lines)

Multiple distinct, disparate systems

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



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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

Need to integrate corporate acquisitions

Different coding schemes, disparate platforms cross

company integration very difficult

Common integration platform



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Often made on yes-no basis

Solve Y2K?

Facilitate integration of processes? Acquired companies? Scalable?

More easily maintained and supported?

Strong non-monetary motivation (although)

Cost avoidance is often sited as rationale

Technology an enabler of direct monetary impacts



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Improve business processes with an eye to efficiency, newcapabilites.

Personnel and IT cost reduction

especially accounting, clerical and IT personnel

Productivity improvements

affecting any number of process areas

Less paper, handoffs

Financial Cycle Close timely official financial information for decision-making

Real time availability of data



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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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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

Measured in non-monetary terms

Employee retention and attraction

Project a professional, modern image

New revenue generating opportunities



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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?

Measured in non-monetary terms

cost and impact on business is not certain

E.g. - Availability to promise 110% Guarantee

Superior customer response



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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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How does a firm finally decide whether or not to goERP?

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

ERP Rationale

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