Assessing ERP Risks and Rewards

Assessing ERP Risks and Rewards

Joseph Bradley (University of Idaho, USA)
DOI: 10.4018/978-1-60566-026-4.ch044
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Abstract

Enterprise resource planning (ERP) systems claim to meet the information needs of organizations. These off-the-shelf software packages 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 from material requirements planning (MRP) systems and manufacturing resources planning (MRP II) systems. ERP serves 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. 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).
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Background

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).

  • The packages may require changes in business processes and procedure, 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 annually spent $10 billion on ERP software and another $10 billion on consultants to implement the systems in the late 1990s (Davenport, 1998). An AMR study estimated 2001 firm spending on ERP systems at $47 billion (Cotteleer, 2002). CIOs identified ERP as a leading application and technology development in a 2005 survey (Luftman, Kempaiah, & Nash, 2006).

This article will discuss 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.

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Why Do Firms Adopt Erp?

Firms adopt ERP for technical and business reasons. The 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).

The rapid growth of the commercial market for ERP is attributed to the following factors (Watson & Schneider, 1999):

Key Terms in this Chapter

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 ).

Material Requirements Planning (MRP) Systems: 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.

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.

ERP II: ERP systems that extend beyond the enterprise level to exchange information with supply chain partners. Examples are CRM, SCM, and e-business.

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 , p. 213).

Legacy Systems: Transaction processing systems designed to perform specific tasks. Systems that have become outdated as business needs change and the hardware and software available in the market place improve.

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.

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 , p. 5).

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