Enterprise Resource Planning System Risks and Rewards

Enterprise Resource Planning System Risks and Rewards

Joseph Bradley (University of Idaho, USA)
Copyright: © 2009 |Pages: 13
DOI: 10.4018/978-1-59904-859-8.ch007
OnDemand PDF Download:


Enterprise Resource Planning systems have proven difficult and costly to implement. Organizations must consider the risks and rewards of embarking on complex and time consuming implementation projects. This chapter explores why firms adopt ERP systems, identifies the benefits firms seek, discusses the various risks firms face as they adopt these systems, and suggests ways firms can manage these risks.
Chapter Preview


As global business markets become increasingly competitive, firms look to technology to manage and improve their performance. Timely and accurate information is a key to gaining performance efficiency. Many firms have implemented Enterprise Resource Planning systems (“ERP”) to meet these objectives. ERP systems are complex, off-the-shelf software packages that claim to meet the information needs of organizations. These systems replace hard to maintain solutions created by IS departments or older off-the-shelf packages that often provided only piecemeal solutions to an organization’s information needs. ERP systems evolved in the early 1990s from material requirements planning systems (“MRP”) and manufacturing resources planning systems (“MRP II”). MRP dealt with material planning and control. MRP II dealt with scheduling and planning a firm’s manufacturing resources. ERP systems serve the entire enterprise, not just manufacturing and inventory control as with its predecessors. ERP integrates information for the entire organization in a single database. But ERP implementations are often complex and experience serious problems (Liang et al., 2007; Xue et al., 2005). Failures, abandoned projects and general dissatisfaction have been well publicized in the business press. ERP systems are “expensive and difficult to implement, often imposing their own logic on a company’s strategy and existing culture (Pozzebon, 2000, p. 1015).” Muscatello and Parente (2006) cite ERP failure rates to be as high as 50%.


Three characteristics distinguish ERP implementations from other IT projects (Somers, Ragowsky, Nelson, & Stern, 2001).

  • ERP systems are “profoundly complex pieces of software, and installing them requires large investments of money, time and expertise (Davenport, 1998, p. 122).”

  • Software packages may require changes in business processes and procedure, may induce customization, and leave the implementing firm dependent on a vendor for support and updates (Lucas, Walton, & Ginsberg, 1988).

  • The adopting firm is usually required to reengineer its business processes. As a result, the project must be managed as a broad program of organizational change rather than a software implementation (Markus & Tanis, 2000; Somers et al., 2001).

Despite these risks, global firms were spending $10 billion on ERP software and another $10 billion on consultants to implement the systems in the late 1990s (Davenport, 1998). An AMR study expected firms to spend $47 billion on ERP packages in 2001(Cotteleer, 2002). Large sums are still being spent on ERP implementation projects. A Forrester survey found that ERP and enterprise applications remained “the top IT spending priority for 2005 (Hamerman & Wang, 2006).” A summer 2005 survey of members of the Society for Information Management (SIM) showed that ERP is among the top six application concerns of its members (Luftman et al., 2006). Hunter and Lippert (2007) forecast the ERP market to reach $US 1 trillion by 2010.

This article discusses the benefits firms expect to realize by adopting ERP systems, why some firms do not adopt these systems, risks associated with ERP implementation, some well publicized ERP failures, risk management tools and future trends in ERP implementation.


Benefits; Why Do Firms Adopt Erp?

Firms adopt ERP systems for both technical and business reasons. Technical reasons include: reducing systems operating costs, solving specific problems, such as Y2K, accommodating increased system capacity, and solving maintenance problems with legacy systems. Business reasons may include: presenting a single face to the customer, quoting realistic delivery times, accommodating business growth, improvement of business processes, standardization of data, reduction of inventory carrying costs, and elimination of delays in filling orders (Markus & Tanis, 2000).

Key Terms in this Chapter

Critical Success Factors (CSFs): Bullen and Rockart (1981) define critical success factors (CSFs) as “the few key areas of activity in which favorable results are absolutely necessary for a particular manager to reach his goals.” Successful managers must focus their scarcest resource, their time, “on those things that make a difference between success and failure” (p. 389). The concept of critical success factors is consistent with a Drucker (1973) statement: “One has to control by controlling a few developments which can have significant impact on performance and results.”

Legacy Systems: Transaction processing systems that are designed to perform specific tasks. These systems usually involve only a single functional area a business and are not integrated. Many legacy systems become outdated as business needs change and the hardware and software available in the market place improved.

Risk Management: A system designed to avoid “problems during a project, which can lead to deviation from project goals, timetables, and cost estimations (Zafiropoulos et al., 2005).

Manufacturing Resources Planning (MRPII): Extends MRP by addressing all resources in addition to inventory. MRPII links material requirements planning with capacity requirements planning avoiding over and under shop loading typical with MRP.

Risks: “A risk is a future event that may or may not occur. The probability of the future event occurring must be greater than 0% and less than 100%. The consequences of the future event must be unexpected or unplanned for” (Hall & Hulett, 2002).

Material Requirements Planning Systems (MRP): Processes that use bills of materials, inventory data and a master productions schedule to time phase material requirement, releasing inventory purchases in a manner that reduces inventory investment yet meets customer requirements.

ERP II: Gartner group coined this expression to describe opening up ERP systems beyond the enterprise level to exchange information with supply chain partners. ERP II extends beyond the four-walls of the business to trading partners. ERP II includes supply chain management (SCM) applications, customer relationship management (CRM) applications, and e-commerce applications. ERP II is also referred to as extended enterprise systems.

Enterprise Resource Planning Systems (ERP): An off-the-shelf accounting-oriented information system that meets the information needs of most organizations. A complex and expensive information tool to meet the needs of an organization to procure, process and deliver customer goods or services in a timely, predictable manner.

IT-Related Risk: This risk includes “anything related to IT that could have significant negative effects on the business or its environment from the perspective of an executive investing in IT”. (Markus, 2000).

Complete Chapter List

Search this Book:
Editorial Advisory Board
Table of Contents
Jatinder N. D. Gupta, Sushil Sharma, Mohammad A. Rashid
Jatinder N. D. Gupta, Sushil Sharma, Mohammad A. Rashid
Chapter 1
Nancy Alexopoulou, Panagiotis Kanellis, Mara Nikolaidou, Drakoulis Martakos
Efficient response to change, both upon expected and unpredicted contingencies, is a critical characteristic for modern enterprises. This chapter... Sample PDF
A Holistic Approach for Enterprise Agility
Chapter 2
Hossana H. Aberra
SAP Business Blueprint is a vital part of SAP implementation exercise. A well-defined business blueprint may set the foundation for successful... Sample PDF
What is SAP Business Blueprint?
Chapter 3
Rogerio Atem de Carvalho
This chapter introduces the key aspects of Free/Open Source Enterprise Resources Planning systems (FOS-ERP). Starting by related work carried out by... Sample PDF
Free and Open Source Enterprise Resources Planning
Chapter 4
Brian H. Cameron
Business process modeling (BPM) is a topic that is generating much interest in the information technology (IT) industry today. Business analysts... Sample PDF
The Changing Nature of Business Process Modeling: Implications for Enterprise Systems Integration
Chapter 5
Alok Mishra
In the age of globalization, organizations all over the world are giving more significance to strategy and planning to get an edge in the... Sample PDF
Enterprise Resource Planning Systems: Effects and Strategic Perspectives in Organizations
Chapter 6
Gary P. Moynihan
An executive information system (EIS) is a software system designed to support the informational needs of senior management. The EIS is... Sample PDF
An Overview of Executive Information Systems
Chapter 7
Joseph Bradley
Enterprise Resource Planning systems have proven difficult and costly to implement. Organizations must consider the risks and rewards of embarking... Sample PDF
Enterprise Resource Planning System Risks and Rewards
Chapter 8
Andrea Masini
After observing that the pervasiveness of IT may soon render it strategically irrelevant, management scholars have recently questioned the value of... Sample PDF
ERP-Driven Performance Changes and Process Isomorphism
Chapter 9
Ronda R. Henning
The application software life cycle considers the functionality of a given collection of components within the context of a consumer’s requirements... Sample PDF
Application Integration within the Enterprise Context
Chapter 10
Sanjay Mathrani, Mohammad A. Rashid, Dennis Viehland
A significant investment in resources is required for implementation of integrated enterprise systems as technology solutions while the... Sample PDF
The Impact of Enterprise Systems on Business Value
Chapter 11
Charlotte H. Mason, Aleda V. Roth
Growing competitive pressures and escalating customer demands have led businesses to sophisticated information technology to manage costs and... Sample PDF
The Right Path to SCM-CRM Integration
Chapter 12
Euripidis Loukis, Ioakim Sapounas, Konstantinos Aivalis
This chapter is dealing with the alignment of enterprise systems with business strategy and its impact on the business value that enterprise systems... Sample PDF
Enterprise Systems Strategic Alignment and Business Value
Chapter 13
Sanjay Mathrani, Mohammad A. Rashid, Dennis Viehland
The market for enterprise systems (ES), continues to grow in the post millennium era as businesses become increasingly global, highly competitive... Sample PDF
Enterprise Systems in Small and Medium-Sized Enterprises
Chapter 14
Kerstin Fink, Christian Ploder
Small and medium-sized enterprises (SMEs) are a vital and growing part of any national economy. Like most large businesses, SMEs have recognized the... Sample PDF
Integration Concept for Knowledge Processes, Methods, and Software for SMEs
Chapter 15
Tobias Schoenherr, Ditmar Hilpert, Ashok K. Soni, M.A. Venkataramanan, Vincent A. Mabert
Although the research on integrated enterprise systems (ES) is proliferating, the knowledge base about ES implementations, usage and experiences... Sample PDF
Enterprise System in the German Manufacturing Mittelstand
Chapter 16
Darshana Sedera
Organizations invest substantial resources in acquiring Enterprise Systems, presumably expecting positive impacts to the organization and its... Sample PDF
Size Matters! Enterprise System Success in Medium and Large Organizations
Chapter 17
Joseph Bradley
ERP implementation projects normally involve a single vendor providing the packaged software for the entire system. Although most companies follow... Sample PDF
Implementing Best of Breed ERP Systems
Chapter 18
Ganesh Vaidyanathan
Enterprise resource planning systems are complex yet single, integrated software programs that runs off a single database so that the various... Sample PDF
Enterprise Resource Systems Software Implementation
Chapter 19
Calin Gurau
This chapter considers the importance of business modelling for implementing e-CRM systems. The introduction of e-business models requires the... Sample PDF
Restructuring the Marketing Information System for eCRM: An Application of the Eriksson-Penker Method
Chapter 20
Albert Boonstra
At the present moment, many hospitals are going through a process of change directed at the integrated delivery of health care. Enterprise Systems... Sample PDF
Analyzing an ES Implementation in a Health Care Environment
Chapter 21
S. Padmanaban
ERP systems have become key enablers of businesses today. While many organizations wish to adopt ERP for competitive advantage, they find choosing... Sample PDF
Designing to Deploying Customisable ERP Cost Effectively
Chapter 22
Mateja Podlogar, Katalin Ternai
This chapter introduces the ERP systems, their complexity, and especially their integration in higher education as a significant challenge for many... Sample PDF
ERP Systems in Higher Education from Regional Perspective
Chapter 23
Valentin Nicolescu, Holger Wittges, Helmut Krcmar
This chapter provides an overview of past and present development in technical platforms of ERP systems and its use in enterprises. Taking into... Sample PDF
From ERP to Enterprise Service-Oriented Architecture
Chapter 24
ERP and Beyond  (pages 329-345)
Suresh Subramoniam, Mohamed Tounsi, Shehzad Khalid Ghani, K. V. Krishnankutty
Enterprise-wide automation has already transformed the relations among suppliers, purchasers, producers, and customers. Conventional ERP helps only... Sample PDF
ERP and Beyond
Chapter 25
Gita A. Kumta
The chapter introduces the essence of ERP in government as a tool for integration of government functions which provides the basis for citizen... Sample PDF
E-Government and ERP: Challenges and Strategies
Chapter 26
Manish Gupta, Raj Sharman
A paradigm shift is occurring in identity management philosophy. User-focused identity management is one the emerging and most promising paradigms.... Sample PDF
Emerging Frameworks in User-Focused Identity Management
Chapter 27
Ramón Brena, Gabriel Valerio, Jose-Luis Aguirre
From the Knowledge Management perspective, Knowledge distribution is a critical process in organizations. As many of the other Knowledge-related... Sample PDF
Next-Generation IT for Knowledge Distribution in Enterprises
About the Editors
About the Contributors