Benefit Gigs: Companies Have Spent Billions on Implementing ERP Systems over the Past Five Years. Mike Baker Questions Whether Most of These Firms Gained the Maximum Advantage from Their Investment and Considers Case-Study Evidence about One Particular Example. (Enterprise Resource Planning)
Baker, Mike, Financial Management (UK)
The first wave of enterprise resource planning (ERP) implementations happened in the mid to late 1990s, prompted by the need to update systems for Y2K compliance. Attempts to measure their anticipated benefits were hampered by the pace at which the implementations were completed and the high cost of consultancy advice, which was in short supply. This wave lost its momentum when the economy slowed. Now potential investors are taking time to assure themselves that the benefits they seek have been experienced by other users.
Businesses invest in company-wide ERP systems in the hope that they will integrate and optimise business processes--eg, order entry and production planning--across the organisation. They see them as a way of meeting the challenges created by expanded global markets, in which they face competition from an increasing number and variety of products.
Their spending on ERP has been huge. One estimated total for 1998 was around $14 billion, and the projected expenditure for 2002 was $72.6 billion. The average cost of implementing one system is around $15 million, so it seems inconceivable that any business would make such a commitment without justifying it fully. But research indicates that 38 per cent of firms fail to produce a business case (1), while another study concludes that, of those businesses that do, 58 per cent don't conduct a post-implementation analysis (2). Most firms (56 per cent) found that the cost of implementing their ERP system exceeded the original estimated budget by an average of 61 per cent (3).
This article focuses on a research project started by the chief executive of the UK subsidiary of a major US manufacturing company who wanted to assess the potential for implementing ERP. It is based on a case study conducted by a focus group, which was selected on its ability to provide and analyse in-depth empirical evidence.
The company had experienced many problems managing its business with legacy systems. These were not integrated and there was a risk that the systems could be lost if key people were to leave. There was also a large amount of data duplication, since figures could be taken from one subsystem, manipulated in spreadsheets or on another database and then reappear elsewhere in the system.
The nature of the risks of using the legacy or ERP options was considered (table 1). As part of the business case, the focus group investigated setting up an implementation team drawn from members of staff. The group bore in mind the following warning (1): "If you don't have enough organisational slack to focus on the implementation, don't undertake one or kid yourself that you'll put in the system now and plan for business change later."
The total costs of implementation were estimated by the software vendor. Table 2 summarises its forecast total seven-year cost profile. The major cost was consultancy, which represented 1,888 man-days of effort. The backfill staff costs would be paid for temporary employees to cover for people who moved from their normal jobs to work on the implementation. The additional support costs would be incurred on using extra staff to support the new systems. Maintenance costs covered the contracts to maintain software licences with upgrades and provide helpdesk support for hardware and software.
It was clear that the firm needed a systematic procedure for exploring the benefits. Whenever a potential benefit was uncovered, an executive was given responsibility for delivering this benefit after implementation. The group began by assessing the tangible benefits that were likely to accrue (table 3).
The opportunity cost saving of not investing in business as usual (BAU) was assumed to be a benefit of installing ERP. In total, the group found that the firm could expect to cut back on 15 roles, but would also need two new roles: a benefits manager and an extra internal IT support person. It could also expect to reduce indirect overtime by half, as well as making savings on paperwork and related facilities. …