Enterprise Resource Planning

ITO 3 Strategy and Information Technology Management ESSAY Review critically the implementation of ERP application as a form of BPR and as a form of organizational development/control. Use secondary case study material (reported in literature) to demonstrate your discussion and arguments. Library Card No. 0225037 Lancaster University February 2003 Abstract This essay discusses ERP implementation in BPR project, with an emphasis on its fit to business vision and reengineering objectives, and the impacts of ERP on organizational form and cultures. This essay argues that the tension between uniformity, in which ERP system is built, and the diversity of business processes and organizational cultures is one of the possible reasons of ERP project failures. ERP is suitable only for companies that follow its logic. These companies gain benefits from ERP system since they are able to reconcile such a tension. Moreover, ERP is capable to transform organization in a sense that it pushes the implementing companies to streamline their organizational structures and create new cultures which less hierarchical and flexible. To some extent, it facilitates the companies to empower their people. However, due to ERP capability to standardize business processes, some companies uses ERP system to exert more control and create less autonomous culture. This particular practice would end up with disempowerment amongst their employees, and it contradicts one of process reengineering objectives, which is to improve quality of work life. Keywords: ERP implementation, business vision, process reengineering objectives, organizational development. 2 Introduction Enterprise resource planning (ERP) and business process reengineering (BPR) could be seen as two management innovations that provide similar objectives since both facilitate business performance improvement. Some companies choose to implement ERP system, such as SAP R/3, as a solution for business reengineering (Cissna, 1998; Soliman and Yousef, 1998). However, not all companies gain their intended objectives after implementing ERP systems (Davenport, 1998) and this phenomenon becomes a major debate in the field of business and management. Many issues emerge when a company embarks on an ERP project. One of the issues is about how to measure its success because of various perspectives used to describe a success (Markus et al., 2000). Other issues are related to technical aspects of ERP project itself, especially at the implementation stage. There are also cultural and political as well as financial issues in such a project (Hayes et al. 2001). This essay, however, is not going to discuss one of those issues in particular, rather it aims to critically examine ERP implementation, especially which relates to its fit to business vision and reengineering objectives and its impacts on the organizational form and culture. The central argument of this essay is that ERP system is only applicable for companies that totally follow its logic. Not all process reengineering and organizational development will fit the system because of business processes diversities. In addition, due to the power of ERP to streamline organizations, some companies use it to exert managerial control to their employees, and, unfortunately, this becomes a new form of Taylorism. In the next section, the emergence of BPR and the application of ERP will be elaborated briefly to set a context in which ERP emerges and adopted in organizations as an option of business reengineering. Then some critical views on ERP implementation will be discussed in relationship to business reengineering and organizational development. The final section will draw a conclusion from the discussion and some important points concerning the political dimension of ERP project. 3 BPR and ERP To begin with, BPR is ‘the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed’ (Hammer and Champy, 1993, p. 32). Improving their performance dramatically, the authors suggest, companies should look for alternative ways of doing things to secure outcome of the process rather than improving its efficiency. Several isolated tasks should now be integrated into some main business processes and completed by teams consisting of individuals across departments in the organization. Once processes reengineered, workers will have opportunities to make decisions because they are now responsible for the outcome of those processes and pay more attention to customers. In essence, BPR should be carried out in connection with specific business strategic vision. Xerox, for instance, develop its process redesign by taking the perspective of the customer and developing systems. Westinghouse, another example, redesigns its business process to improve product quality (See Davenport and Short, 1999). The authors say that each vision implies specific objectives for process redesign. In their research, they found that the objectives are classified into cost reduction, time reduction, output quality, and quality work of life. BPR is considered as a powerful concept to improve organization’s performance since it uses the power of information technology (IT). Hammer and Champy (1993) suggest that IT is an ‘essential enabler’ of the reengineering. The authors admit that ‘a company that cannot change the way it thinks about information technology cannot reengineer’ (Hammer and Champy, 1993, p.82). IT should not be seen as merely a medium for automation, but it can also be used to challenge long held business assumptions. They cite that IBM Credit was very successful in its reengineering project because it redesigned business processes and used sophisticated software to deal with the credit process in its business reengineering project. In addition, Davenport and Short (1990, p.12) suggest that IT and BPR have a ‘recursive relationship’ because ‘each is the key for thinking about the other. Thinking about information technology should be in terms of how it supports new or redesigned business process, rather than business function or other organizational entities’. 4 With respect to the role of IT in process reengineering, ERP, as an integrated software application for organization purposes, seems to offers a possibility for companies to achieve reengineering objectives. ERP attempts to integrate all departments and functions across a company into a single system. This system is designed to solve the fragmentation of information and serve different needs in large business organization (Koch et al., 1999). One of the ERP systems that widely used in the world is SAP R/3. This application comprises of most common functions in a major corporation including manufacturing, finance, sales and distribution, and human resources. SAP is an on-line system and it uses one database for all data to avoid duplication. There is a clear definition of every data item because it is supported by a data dictionary. SAP functionality lies on customization ability to customer’s requirements. It is open systems and designed for client-server architecture (See Bancroft et al., 1999). Companies interesting to implement ERP systems, including SAP, usually believe the promises delivered by the software. Koch et al. (1999) classify three major reasons of undertaking ERP systems: to integrate financial data, to standardize manufacturing process, and to standardize human resource information. It is possible to achieve those objectives since ERP offers single version of data. ERP will enable the implementing company to work more efficient, faster, and more productive. Some Critical Views on ERP Implementation Considering the capabilities and characteristic of ERP system, it seems that its implementation in an organization is a not merely an adoption of information systems and technology. It is a big and complex project due to its impacts on the implementing companies. ERP incorporates processes and principles in business practices and when once implemented it will change organization radically. Davenport (1998, p.122) suggests that not all organizations gain the intended objectives after implementing ERP or enterprise system because they ‘fail to reconcile the technology imperatives of the enterprise system with the business needs of the enterprise itself’. Companies deciding to use ERP as an option for their business reengineering should realize that there will be tensions between the reengineering objectives and ERP capabilities. Davenport (1998, p.123) indicates that, in essence, the logic of enterprise 5 system and business are different and sometimes in conflict. If a company installing an enterprise system does not consider the business implication, it may waste money and, to some extent, the system installed ‘will weaken important sources of company’s competitive advantage’. In relationship to that decision, two important questions that companies should answer before choosing an ERP system in their reengineering project should be posed. The first question is: Why do they choose ERP in BPR project? That question will lead companies to seek the most compelling reasons for adopting ERP. The next question is: How will they implement the ERP? The answer for the second question relates to technical aspects at the implementation stage, such as the system adaptation in order to meet process reengineering requirements. Those questions would be useful in the planning stage, especially when companies follow the five steps in process redesign developed by Davenport and Short (1999): develop business vision and process objective, identify process to be engineered, understand and measure existing processes, identify IT levers, and design and build a prototype of the process. In doing so, companies should firstly consider if ERP could accommodate the intended vision and objectives. They should closely examine if ERP, as a technological option for realizing BPR, would not be in conflict with reengineering objectives. They should conduct rigorous studies about ERP-BPR fit and deliberately follow those steps in order to find the real reasons for adopting ERP system. In addition, decision about the specification of technology deployed should be based on multidimensional view of information systems (IS). The better IS fit these variables, the better IS performance. These variables among others are strategy, structure, size, environment, tasks, and individual characteristic. IT deployment should, therefore, consider a multivariate fit between business strategy, IT strategy, organizational infrastructure and processes, and IT infrastructure and processes (Henderson and Venkatraman, 1993; Weil and Olson, 1989). Companies should rethink if they find that ERP could not fit the reengineering objectives, otherwise their reengineering project might suffer in the future because of conflicts between the system and company’s objectives. Despite those considerations, Hammer (cited by Menezes, 1999) seems to pragmatically suggest that companies will succeed in implementing SAP R/3 for business reengineering if they really move from departmental-centred to a process-centred. Most of the companies implementing SAP, Hammer adds, failed because they, partially, had 6 misconception as to what SAP implementation is all about and do not really move to process-centred. Also, they failed because of ‘irrelevant’ reasons of adopting SAP, such as Year 2000 concerns, reducing software acquisition and maintenance costs, improving system reliability, moving from mainframe to client-server architecture, redeploying IT resources, and having access to software enhancements. At the implementation stage, which relates to the second question stated above, companies should also carefully determine how ERP will be adapted to business processes. In this regard, there are two approaches to implementation of packaged software: package adaptation to organizational needs and organizational adaptation to the package (Davis and Olson, cited by Hong and Kim, 2002). Company might choose one of these approaches to implement SAP. However, each has implications and consequences and some of them might be positives or negatives. Using the first approach, by adapting the software to the business processes requirement, companies may gain true benefits for the reengineering project. Although the software’s vendor would suggest that the adopting companies should not change the software due to negative impacts on its performance and difficulty in upgrading it on the future, there is a way to avoid such problems. Compaq Computer is one of the companies that might use this approach. Since it needs to maintain strategic position to its competitors, the company decides to modify its enterprise systems by writing additional modules with the computer language used by the system’s vendor and it works (See Davenport, 1998). By contrast, if a company uses the latter approach, it might be difficult to find an ERP system suitable for its specific needs. When reengineering its business, the company might come up with some particular processes and these reengineered processes are important to maintain company’s core capabilities. If the company does not want to lose them then it must not force to implement an ERP package. The reason is that ERP system provides modules which are based on some general business practices. Software vendors, for instance SAP AG, might claim that what they build in their software is ‘best practice’. For this reason, they might suggest that it is better to follow the practice facilitating by the software. Yet, this practice sometimes ignores business processes requirements because of uniformity concept embodied in an ERP system. As a consequence, some companies might find that the system is counterproductive. Following the logic given by the system is somewhat harmful, for instance, for company’s strategic 7 position. The argument lies on the fact that, to some extent, there will be no more competitive advantage, if many companies, especially those in the same industry, adopt similar business model offered by ERP. Apple Computer, for example, finds that ERP dissolves its competitive advantage when implementing the system. Having distinctive capabilities in computer industry, i.e. unique operating system and a strong brand, the company found that ERP is not suitable because the system would drive its business to have similar strategy with its competitors (See Davenport, 1998). Correspondingly, diversity is precisely the case of every business reengineering effort. Hammer and Stanton (1999) suggest that when companies embark on BPR projects, there would be strategic issues such as process standardization versus process diversity. There is, however, no single answer for this. Some companies, such as IBM, Duke Power, and Progressive Insurance have chosen standardization. In contrast, American company considers that process diversity is suitable for its organization (See Hammer and Stanton, 1999). They suggest that the reason for the option between standardization and diversity is closely related to companies’ strategy. Companies would standardize their process for whole organizations if there will not conflict their strategies. Regarding to the impacts of ERP system to organizational change, Davenport (1998, p. 127) says that ‘…[B]y providing universal, real-time access to operating and financial data, the systems allow companies to streamline their management structures, creating flatter, more flexible, and more democratic organizations.’ These changes follow the logic of ERP as a system that developed for particular objectives, such as efficiency, cost reduction, and productivity. Recognizing these kinds of changes is very important, especially when companies are deciding to develop their organizations using ERP system. Due to the particularity of changes offered by ERP system, it would help companies not to blindly adopt ERP system in their organizational development project. In that case, companies, especially those operating internationally, should also consider the notion of uniformity of ERP system because they are working in different cultures. It seems to not feasible if companies implement ERP in order to impose more uniform organizational cultures. Hewlett-Packard, Monsanto, and Nestlé are companies that have awareness about this. Although adopting ERP, they configure this system to fit their cultures, not the contrary. They do not want to scarify their practices, which is based on the notion of diversity, for uniformity (See Davenport, 1998). 8 Despite that organizational transformation, an important issue concerning with technology-human relationship emerges due to its capabilities to incorporate all business processes in organizations. Integrating parallel activities, ERP system obliterates some functions which are not efficient and redundant ones. ERP also seeks to automate and control some activities by replacing human intervention to improve process speed. Davenport (1998, p. 127) suggests that ‘…[Enterprise systems] also involve the centralization of control over information and the standardization of processes, which are qualities more consistent with hierarchical, command-and-control organizations with uniform cultures.’ Davenport (1998) exemplifies that some high-tech companies are using enterprise system, intentionally, to exert more discipline to their employees. The companies’ executives use this software to impose more-uniform processes and make the organizational culture less autonomous. For that reason, ERP is used as managerial tools for controlling the organization, especially employees as major source of uncertainty in business processes. In connection with BPR, such an intention in ERP implementation clearly contradicts with business vision and process objectives proposed by Davenport and Short (1990). They suggest that besides focusing on cost reduction, time reduction and output quality companies should also allow empowerment or improve quality of work life embarking on business reengineering. This particular vision should not be ignored if companies do not want to fail in BPR project. This vision implies that employees must be taken into account since they are the actors on the business process. As a matter of fact, Hammer (1996) provides some examples as evidence that the successful companies in reengineering would end up with employees’ satisfaction. In those examples, the impacts of BPR on employees seem to support Davenport and Short’s proposition, especially that relates to employees’ empowerment. An Aetna Life & Casualty Company’ employee says: The best thing that has happened is that now the workers feel involved and appreciated…[Our managers] have given us more and more training and they are really listening to us…[W]e can voice our opinions, and if something is going on in the team that you think you can make it better, you are allowed to voice it out and discuss it. (Cited in Hammer, 1996, p.29) 9 Conclusion In brief, the ERP-BPR relationship is unique in the way that both are intended to facilitate organizations to improve performance radically. However, there is a tension between them that seems unsolvable, i.e. standardization versus uniformity. This essay argues that this particular tension and companies’ inability to follow the logic of the system might be a plausible explanation of ERP project failures. Nevertheless, with regard to the high failure rate of ERP projects, this essay suggests that finding other causes of those failures is urgent because many companies seem to insist to implement ERP system for business reengineering or some other purposes. This essay indicates that other causes beyond the tension discussed also have contribution to such failures, and these causes seem to relate to the political dimension of ERP and BPR projects. The projects are political in a sense that people involved in such projects would usually gain more power and influence in their companies. These people would reasonably find the best sources to succeed the projects. In doing so, they might implement SAP R/3, for instance, the most popular ERP system, and try to find the best consultant for business reengineering. This effort would then result in benefits not only for those people in the projects, but also for the implementing companies, ERP vendors, and business reengineering consultants. Moreover, in a broader context, ERP and BPR projects could also be political due to some interests involved in the projects. A conference in Toronto in 1999, reported in Computing Dealer News, might be a good example for this since it brought Hammer to speak about ERP implementation in BPR project. In that event, Hammer, the proponent of BPR, was suggesting the best way to implement SAP R/3 in order to achieve the reengineering objectives (See Menezes, 1999). For that reason, such an event was somewhat political because it might represent some entities which have different interests, i.e. companies, ERP vendors, and BPR consultants. To some extent, that meeting could inevitably be a pressure for other companies to do business reengineering by adopting and implementing ERP system, such as SAP R/3. Finally, it should bear in mind that, in that sense, the interrelationship of IT industryconsultant-company might become a vicious triangle. It could lead BPR to become a management fad, especially since companies could not find more compelling reason for implementing ERP system in BPR project than ‘me-too’ reason, as consequence of such a pressure. 10 Reference Bancroft, N. H., Seip, H., and Sprengel, A. (1998) Implementing SAP R/3, Second Edition, Greenwich, Manning Publications Co. Bhatt, G. D. (2000) ‘Exploring the relationship between information technology, infrastructure and business process re-engineering’, Business Process Management, Vol. 6, No. 2, pp. 139-163. Caron, J.R. (1994) ‘Business Reengineering at CIGNA Corporation: Experiences and Lessons Learned from the First Five Year’, Management Information Systems Quarterly, http://www.misq.org/archivist/vol/no18/issue3/ sim94/sim94.html (accessed 3 December 2002). Cissna, T. (1998) ‘ERP software implementation brings pain with its gain’, Electric Light & Power, Vol. 76, Issue 11. p. 43. Davenport, T.H. (1998) ‘Putting the Enterprise into the Enterprise System’, Harvard Business Review, July-August, pp. 121-131. Davenport, T.H. and Short, J. (1990) ‘The Industrial Engineering: Information Technology and Business Process Redesign’, Sloan Management Review, Summer, pp. 11-27. Hammer, M. (1990) ‘Reengineering Work: Don’t Automate, Obliterate’, Harvard Business Review, July-August, pp. 104-112. Hammer, M. (1996) Beyond Reengineering, London, HarperCollinsBusiness. Hammer, M. and Champy, J. (1993) Re-engineering the Corporation, London, Nicholas Brealey Publishing. Hammer, M. and Stanton, S. (1995) The Reengineering Revolution, London: Book Club Associates. Hammer, M. and Stanton, S. (1999) ‘How Process Enterprise Really Work’, Harvard Business Review, November-December, pp. 108-118. 11 Hayes, D. C., Hunton, J. E., and Reck, J. L. (2001) ‘Market Reaction to ERP Implementation Announcements’, Journal of Information Systems, Vol. 15, No. 1, Spring, pp. 3-18. Henderson, J.C. and Venkatraman, N. (1999) ‘Strategic alignment: Leveraging information technology for transforming organizations’, IBM Systems Journal, Vol. 38, pp. 472-484. Hong, K. and Kim, Y (2002), ‘The critical success factors for ERP implementation: an organizational fit perspective’, Journal of Management & Information, Vol. 40, pp. 25-40. Knight, D. and Murray, F. (1994) Managers Divided: Organizational Politics and Information Technology Management, Chichester, John Wiley & Sons Ltd. Koch, C., Slater, D. and Baatz, E. (1999) ‘The ABC of ERP’, CIO Magazine, http://www.cio.com/research/erp/edit/122299_erp.html. Markus, M.L., Axline, S., Petrie, D., and Tanis, C. (2000) ‘Learning from adopters’ experiences with ERP: problems encountered and success achieved’, Journal of Information Technology, Vol. 15, pp. 245-265. McHugh, P., Merli, G. and Wheeler III, W.A. (1995) Beyond Business Process Reengineering, Chichester, John Wiley & Sons Ltd. Menezes, J. (1999) ‘Companies urged to reexamine ERP models’, Computing Dealer News, June 25, http://www.plesman.com/cdn (Accesed 5 January 2003) Parr, A. and Shanks, G. (2000) ‘A model of ERP project implementation’, Journal of Information Technology, vol. 15, pp.289-303. Peltu, M., Clegg, C. and Sell R. (1996) ‘Business Process Re-engineering: The Human Issues, Business Processes Resource Centre, Warwick Business School, University of Warwick, http://www.bprc.warwick.ac.uk/peltu.html (accessed 3 December 2002). Scarbrough, H. (1996) ‘Business Process Re-design: The knowledge dimension’, Business Processes Resource Centre, Warwick Business School, University of Warwick, http://www.bprc.warwick.ac.uk/rc-rep-8.html (accessed 3 December 2002). 12 Soliman, F. and Yousef, M. A. (1998) ‘The role of SAP software in business process re-engineering’, Journal of Operation & Production Management, Vol. 18, No. 9/10, pp. 886-895. Strassmann, P.A. (1995) ‘Reengineering’, http://www.strassmann.com/pubs/ reengineering.html (accessed 20 December 2002) Taylor, J. C. (1998) ‘Participative design: linking BPR and SAP with an STS approach’, Journal of Organizational Management, Vol. 11, No. 3, pp. 233-245. Venkatraman, N. (1994) ‘IT-Enabled Business Transformation: From Automation to Business Scope Redefinition’, Sloan Management Review, Winter, pp. 73-87. Weil, P. and Olson, M.H. (1989) ‘An Assessment of the Contingency Theory of Management Information Systems, Journal of Management Information Systems, Vol. 6 No.1, pp. 59-85. Willcocks, L.P. and Currie, W. (1997) Managing IT as a Strategic Resource, London, McGraw-Hill Companies. Zuboff, S. (1988) In the Age of Smart Machine, New York, Basic Books. 13