Benefit Realisation – ERP and Business

3.1 Introduction Henley (1999) identifies two general relationships between strategy (or competitive advantage) and information systems: • The general strategic direction of an organisation drives the strategic direction needed for its information resource. This is what is called “aligning IT with the business”. • The capabilities of information systems and technology can give rise to new opportunities that can be incorporated in the overall direction of the business. This is what is called “IT as a business enabler”. This means the alignment between business and ERP is not a one-way street defined by the business or ERP system alone. Therefore, ERP implementation should a process that explodes options in both directions. 3.2 Aligning ERP with the Business What does it mean to align ERP with the Business? Somers and Nelson (2003) suggest that ERP implementation should demonstrate a clear link to organization’s business and operational strategies and be business rather than technology driven to ensure that ERP implementation achieves desired impact on business. The decision makers must be sure that forethought and analysis precede the ERP implementation, and when considering an ERP system, should evaluate it within the context of a strategic plan. The next level of alignment is between ERP and company’s current business processes. In Everdingen and Hillegersberg’s research (2000) among European midsize companies, the most important criterion for selecting an ERP system is the best fit with current business processes. Unlike the design and development of proprietary system, however, implementation of packaged ERP system generally requires that an organization adapt some of its processes to fit with pre-specified functionality (Volkoff, 1999). At the same time, most ERP packages are tailorable and can be configured in different ways. Therefore ERP implementation is an iterative process of adaptation of organizational processes and software to each other. Such adaptation process brings the organisation’s existing processes and the ERP system’s embedded functionality into alignment through a combination of software configuration (or development) and organisational change (Volkoff, 1999). The key question is which type adaptation, package adaptation or organisational adaptation, is more desirable in the different contexts (Hong and Kim, 2002). 3.3 ERP as a Business Enabler Before we can answer the question above, we need to understand what ERP as a business enabler has to offer to improve company’s performance and gain competitive advantages: • Improved management decision-making within and across business due to greater clarity and timing of information. An ERP system enables a company to integrate the information used throughout its entire organisation. The integrated information, then supports virtually all of a company’s business activities – across functions, across business units, across the world. As the results of smooth information flow, management as well as empowered employees are able to get the information they needed to make sound and timely business decisions (Davenport, 1998). • Improved global and regional supply-chain planning abilities. The supply-chain capabilities of ERP increase efficiency and productivity. In turn, it leads to reduced cycle time and inventory. Financially, it means improved cash flow and working capital requirement (Gupta, 2000). • Profitable relationship with suppliers and customers. Not only can a company integrate the internal systems but also reach beyond the corporate walls to better connect with suppliers, distributors and end customers. This established new standard of performance in the industry (Somers and Nelson, 2003). • Improved organisational flexibility through shared services and regional/global management structure (Davenport, 1998). • Improved customer service. ERP system increased a company’s ability to deliver consolidated information and efficient query resolution to customers resulting in improved vendor/customer relationship (Somers and Nelson, 2003). Shang and Seddon (2000) compiled a list of ERP benefits from a review of 233 ERP-vendor success stories published on the web with 34 follow-up interviews to confirm the content of their analysis. The benefits are classified into five categories: • IT Infrastructure benefits, involving building business flexibility, IT cost reduction, and increase IT infrastructure capability. • Operational benefits, relating to cost reduction, cycle time reduction, productivity improvement, quality improvement, and customer services improvement. • Managerial benefits, relating to better resource management, improved decision making and planning, and performance improvement. • Strategic benefits, concerning supporting business growth, supporting business alliance, building business innovations, building cost leadership, generating product differentiation, and building external linkages. • Organisational benefits, relating to supporting organisational changes, facilitating business learning, empowering, and building common visions. Although the data used in the study is likely to be biased, the classification provides a starting point for understanding the role of ERP as business enabler. 3.4 ERP Fit In order to achieve greatest benefits from ERP implementation, alignment between ERP and the business requires planned and purposeful management actions during implementation process. Whether organisational adaptation or package adaptation is more desirable, it depends on individual unique situation as well various implementation variables . To help organisation to be better aligned, several researchers introduced the concept of “ERP Fit”. Hong and Kim (2002) suggest that organisational fit (including Data, Process and User) determines the required level of organisational adaptation and package adaptation in ERP implementation. The adaptation is only effective when organisational fit is relative low. Therefore, a successful ERP implementation should measure and manage the impact of the organisational and package adaptations from a risk assessment approach to minimise the potential business disruptions and user resistance. Figure 1: Organisational Fit Model (Hong and Kim, 2002) In their ERP Fit model, Somers and Nelson (2003) suggest a variety of integration mechanisms (Figure 2) that are appropriate for bringing about internal consistencies between the organisation’s strategies and the new technology, and, ultimately their impact on the value of the system. Although the configuration of integration mechanisms will vary from company to company, an organisation is more likely to realise higher system value (or benefit) when there is a fit between its strategy and integration mechanisms. Figure 2: ERP Fit Model (Somers and Nelson, 2003) In the May 2002 working paper “Maximizing the Benefits of an Enterprise System”, co-authors Shari Shang and Peter Seddon report the results of a three-year study. They identified four strategies for achieving fit that reflects an organisation’s preparedness on organisational adaptation and package adaptation (Talbert, 2002): • Process replication uses software to duplicate or automate existing business processes. The company benefits from automation, but old process problems persist. • Process modification and enhancement changes organisational processes to adapt to the software. The company gets new business processes, but typically at the cost of more operational and change-management problems. • Software modification and enhancement configures and customises the ERP to fit existing organisational processes. However, subsequent software maintenance and upgrade costs will be much higher. • System exploration reviews all opportunities for better process performance. Companies may tailor some parts of the software to fit important business requirements, but they also change some organisational processes to exploit attractive software features. Of the four strategies, system exploration offers the most benefits with the fewest problems because it optimally balances the organisation’s need and the best practices the software supports. This research result is, in fact, consistent with the findings from other researcher.

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