According to AMR Research (2002), the overall ERP penetration has reached 67 percent. This means that two-thirds of the companies are using or implementing ERP systems. While most of ERP literature have focused on factors influencing implementation success (see Chapter 4) and benefits from ERP implementation (see Chapter 3), the question is whether organisations are really benefited from the use of ERP systems. Smith (1999) states that “there now seems to be an emerging consensus that companies have failed to reap the significant benefits that the massive investment in ERP warranted”. He identifies five reasons that form the under-delivery of ERP benefits:
Y2K concerns have forced organizations to implement quickly and minimize risk by simply implementing ERP for existing processes. Survival was seen as adequate business benefit.
Organizations underestimated the scale and degree of difficulty of implementing ERP. When problems arise, the simple route was taken and benefits are sacrificed.
Projects were pushed through with flimsy business cases. Sometimes, the reason for implementing ERP is simply to match competitors’ move.
To reduce the high costs of implementing ERP there was a real incentive to minimize the cost by reducing the amount of business change involved. Again, benefits are sacrificed.
Organizations were not actively involved in business change, as implementation partners (i.e. consulting firms) were the main forces behind the implementation.
Holland and Skarke (2001) call this as unrealized business value (UNBV) – a huge shortfall in massive IT investments and corporate bottom lines. Now Y2K issue is well behind us. As organizations progress through the learning curve, they are beginning to focus on achieving and measuring the benefits from using ERP systems (O’Grady, 2002). Several consulting firms introduced “Benefit Realization” approach in the effort to help clients realizing benefits from the investment they have already made . However, their main focus is on post-implementation (i.e. Add-on works) or providing supplement to their existing implementation methodologies. This chapter will review the literature in the context of benefit realization during ERP implementation.
Benefit Realisation: The Definition
In literature, benefit is also referred as value or system value. In their ERP fit model, Somers and Nelson (2003) conclude “ERP fit provides increased capabilities for realization of perceived system value (benefit)”. They define “perceived system value” as the benefit of ERP has failed to meet, is below, has met or has exceeded expectations. Management’s perception of system value can be reliably predicted from knowledge of organisational strategies and integration mechanisms (business driven implementation, project organisation, organisational adaptation and package adaptation).
Al-Mashari et al. (2003) discuss the linkage between ERP critical success factors, ERP success and ERP benefits. They define benefit realization process is a process where “critical factors bridge the link between ERP implementation and improvement in business performance across strategy, business process, IT, structure, culture and management systems”. Although they identifies 12 critical success factors (see section 4.3 – 4.6 for complete list), little attention is given to the relationship between ERP benefits and CSFs identified.
On other hand, Legare (2002) focuses on change management activities in ERP implementation. He believe the key for realising ERP benefits is organizational creativity, which can be improved by incorporating the use of change management techniques that focus on organizational, group and individual characteristics.
Clearly, researchers are looking for the key elements in benefit realisation process. ERP literature provides a comprehensive list of critical success factors to realise ERP benefits (see Chapter 4). However, a systematic approach in managing CSFs is needed in order to achieve optimised results.
Focusing on Benefit
Why do we need to focus on benefit? In order to answer this question, we first need to address the fundamental question: what does it mean ERP success? Markus and Tanis (2000) cited KPMG Management Consulting’s report Profit-Focused Software Package Implementation suggest success can be defined:
In terms of the implementation project: did the company succeed in getting the system running within some reasonable budget and schedule?
In terms of business results: did the company succeed in realising its business goals for the project?
In other words, success means different things depending on who defines it. Thus project managers and implementation partners “often define success in terms of completing the project on time and within budget. But people whose job is to adopt ERP systems and use them to achieve business results tend to emphasis having a smooth transition to stable operations with the new system, achieving intended business improvement like inventory reductions, and gaining improved decision support capabilities” (Markus and Tanis, 2000). Therefore, it is critical for organisation to share a common definition of success.
To reach the common definition of success, organisation need to understand what ERP implementation really is – an IT initiative or a business improvement program. Considering an ERP system’s far-reaching strategic and organizational implications, Davenport (1998) suggests that the companies deriving the greatest benefits from their systems are those that, from the start, viewed them primarily in strategic and organizational terms. Therefore, ERP implementation should demonstrate a clear link to organisation strategy and be business rather than technology driven to ensure they achieve their desired impact (Somers and Nelson, 2003). To realise the full potential of an ERP system, organisation should view ERP system as an enterprise-wide venture. The technological aspects of the implementation must be managed as part of a broad program of business transformation (Umble and Umble, 2002). Clearly, ERP implementation is successful when it achieves expected strategic, organisational, managerial and operational benefits.
Nevertheless, it does not mean ERP implementation can be carried out without considering the implementation costs and associated risks. Several researchers suggested a strong business cases should be developed to control the project’s scope, schedule and resource requirements. Business case defines the expected business benefits to be achieved from the ERP implementation and associated business changes (Davenport, 2000). Normally business case is developed to justify the project to senior management and secure funding for the project. But more importantly, it can be an effective tool to help manage the project through its life cycle – to keep people focused and oriented in the same direction and to remind everyone as they go through the project why it is being done and what the organization agrees to achieve (Wee, 2000).
In a sense, business case is a mutual agreement between all functions in the organisation. Therefore, the development of business case should not be the responsibility of project management and implementation partners. Business who will be benefited from the system should take the primary role in developing business case.
Evaluation of Performance
Traditionally information system experts have evaluated the impact of information systems in terms of speed of data processing, accessibility of information, user satisfaction, etc. As organisations are looking for ways of achieving competitive advantage through information systems, IT spending become a significant components of a firm’s annual expenditure (Seddon et al., 2002). As the result, organisations require evaluation frameworks that will allow them to establish whether their investment have delivered the predicted strategic benefits (Kennerly and Neely, 2001).
However, most of IS evaluation frameworks concentrate primarily on evaluating the system and its immediate impact, rather than focusing on its strategic potential. Even those evaluation frameworks that purport to explore the strategic impact of IS investments tend to provide financial evaluations only, such as return on investment and cost benefit analysis (Kennerly and Neely, 2001).
The DeLone and McLean framework (see Figure 6) is widely accepted as one of the more complete IS evaluation frameworks and has been used extensively in empirical research (Ballantine et al., 1996). Although the model points out the optimal goal of IS success is on organisational performance, it makes no detailed attempt to explain what should be measured when the organisational impact of the information systems is being considered (Kennerly and Neely, 2001).
In the effort of developing non-financial and non-IT measures of performance, several authors such as McKinnon and Bruns (1992) suggest that the management accountants must pass responsibility for performance measurement to those responsible for achieving the performance (i.e. process owners). This leads the development of balanced evaluation frameworks between financial, operational as well as strategic measures. Kaplan and Norton (1992) propose a “Balanced Scorecard” of measures along four perspectives, namely financial, customer, internal business, and innovation and learning, that support company’s strategy. This approach appears to become more popular as its applicability continues to spread across different fields such as IT investment including ERP systems (Al-Mashari et al., 2003).
However, the reality is, in the area of ERP implementation, most of companies do not adopt any type of evaluation systems. In a survey among IT directors in a wide range of industries, from service to manufacturing and retails to healthcare, only 42% of companies reported that they actually measure the value achieved from their ERP systems. Seventy-five percent of the companies measured any type of values used the traditional return-on-investment (ROI) metrics (Bradford and Roberts, 2001). According to their study, the top three reasons for not adopting an evaluation system are:
The ERP was replacing non-Y2K compliant systems, so the initiative was more of a technical necessity.
The ERP was adopted to stay competitive.
The measurement process was considered arbitrary and specific metrics too difficult to quantify.
Particularly companies found difficulty to measure intangible benefits such as improved workflow design, integration of disparate systems, reengineered processes, and improved visibility of information (Bradford and Roberts, 2001). Another issue in measuring ERP benefits is that companies cannot make connection between improved business performance and ERP systems. They see operational improvements such as reduced stocks, better ability to plan and control, global negotiation power, better customer service, etc., but unable realise improved financial performance (Kennerly and Neely, 2001).
In fact, the issue is not about evaluation system. It is about how a company views its largest IT investment. Thorp (1999) suggests organisations should move beyond stand-alone IT project management to business program management, where technology initiatives contribute to business results in concert with other elements of the business system, including organisational, process, and people initiatives. Therefore, the evaluation of ERP implementation should take place in a balanced perspective that measures the value-added contribution from ERP systems in the form of the tangible and intangible benefits, covering the strategic and operational aspects of business organisations (Al-Mashari et al., 2003).
Thorp (1999) identifies the criteria of an effective measurement system are:
Make sure measures exist
Measure the right thing
Measure things the right way
Make sure measurement systems guide decision and action.
Make sure measures exist. It seems that this criterion is very straightforward. In fact, it is biggest problem for ERP implementation. Most of companies do not measure benefits from ERP systems (Bradford and Roberts, 2001). Companies claim that it is difficult to measure end results such as revenues and market share, and intangible benefits such as reengineered processes and visibility of information.
Thorp (1999) proposes Result Chain (See Figure 7) approach that measures a set of intermediate outcomes that are aligned with, and contribute to, the final outcomes. For example, reduced stock out is one of measures that contribute to improved customer service level.
As for intangible benefits, Bradford and Roberts (2001) suggest benchmarking technique. Benchmarking can be applied within the organisation (i.e. pre-implementation versus post-implementation), or against industry averages and direct competitors. In fact, many ERP vendors are offering value measurement tools (i.e. SAP’s ValueSAP) to help customers gather information during the evaluation stage to determine what benefits they are trying to achieve. These tools help customers identify business opportunities through measuring and comparing key performance indicators, total cost of ownership, and benchmarks against industry averages and leaders.
Measure the right thing. ERP implementation must be delivering benefits that are aligned with the strategic direction of the enterprise. This means that measurements have to be aligned what are variously called strategic drivers, critical success factors, or performance drivers (Thorp, 1999). Copacino (2002) suggests that companies should use measurement to encourage the right behaviour. For example, a major pharmaceutical company implemented lean manufacturing process in their production plants. But one of key performance measures is asset utilisation that is conflicting to lean principle (production is triggered by customer demand that requires high flexibility of supply chain). As the result, plants used their own tools outside of ERP system to plan production in order to achieve asset utilisation target. Copacino (2002) recommends the use of process-oriented metrics instead of functional metrics as primary performance measures. He argues that process-oriented metric not only encourages individual function to work in teams, but it also encourages the optimisation of key processes. Functional measures still have a role of play, but they are secondary and are most useful for supporting primary measures (i.e. end results).
Measure things the right way. Thorp (1999) states that measurement is not simple and many organisations have not met the measurement challenge because they fall back on available, but ineffective, measures. For example, companies often measure product quality using easy-to-measure indicator of outgoing product quality (e.g. no. of defects) rather than hard-to-measure indicator of customer perceptions of quality (e.g. no. of complaints, no. of returns). Conversely, organisations are often prepared to live with unqualified and vague objectives, where a more tough-minded approach would force accountability for results (Thorp, 1999). For example, the same pharmaceutical company targeted to achieve supply chain efficiency through lean manufacturing, but failed to measure inventory across the whole supply chain.
In order to measure things the right way, performance measures must be clearly communicated and consistently applied (Quinn, 2003). People need to understand how their performance will be judged. The measures must be fully explained. And any misconceptions or point of confusion should be address before the measures are put in place. Nothing undermines a measurement system more severely than the perception that the measures are not being applied uniformly across departments or business units.
Although they are costly and time-consuming, several authors (Bradford and Roberts, 2001; Thorp, 1999) suggest benchmarking and customer survey should be conducted periodically to validate the measurement system meets industry standards and customer demands.
Measurement must guide actions. The measurement provides a way to identify problems in business processes and inform responsible party to correct the problems. However, measurement will only guide corrective action if there is clear and appropriate accountability (Thorp, 1999). When designing measurement system, organisations need to align benefits with what people can control. For example, a production planner will only be able to influence “Days of Supply” metric if he/she is given the responsibility of whole supply chain (purchasing, manufacturing and distribution).
During the ERP implementation, key stakeholders must conduct a systematic review (through formal evaluation) of benefits delivery status versus benefits expected., identify problems and opportunities, and take appropriate actions (e.g. changing implementation plan).
Many authors and researchers have identified that change management is a critical success factor in ERP implementation (Aladwani, 2001; Umble and Umble, 2002; Legare, 2002; Abdinnour-Helm et al., 2003; Al-Mashari et al., 2003). Aladwani (2001) argues that successful ERP implementation requires matching change management strategies at different stages to overcome resistance sources (habits and perceived risks) effectively. Umble and Umble (2002) suggest that change management is not just the task of implementation team. Top management, mid-level managers and supervisors should all be involved to identify and target resistance to change. Legare (2002) discusses how organisational, group and individual creativity be improved by change management techniques towards significant organisational change and successful ERP implementation. Abdinnour-Helm et al. (2003) recommend a pre-implementation assessment on employee attitude that can help identify organisational readiness for massive change. Once identified, organisations can tailor their implementation efforts to ensure a critical mass of positive effort and enhance the probability of success. Al-Mashari et al. (2003) suggest that ERP implementation requires massive change in an organisation’s structure and affects the way people used to work and interact. Therefore, it is important that an organisation goes through a careful planned transformation involving culture and structural changes.
Although they deal with different aspects of change management issues, the common understanding is that changes to organisation’s structure, culture as well as business processes are not avoidable in ERP implementation. Thorp (1999) suggests that organisation should “proactively managing change as an integral part of business programs, rather than an afterthought in reaction to ‘implementation problems'”. Many organisations understand the need of change management to ensure a smooth implementation. But they do not proactively seek opportunities to achieve greater benefits through organisational transformation. Many implementation projects have change management team in place to support the process teams. But changes are not managed as an integral part of ERP implementation.
ERP implementation is a process that constantly aligns organisation with new structure, new culture and new processes introduced by ERP system. Legare (2002) identifies the key elements of this organisational alignment effort in ERP implementation.
Vision. Develop an ERP change vision to set and manage expectations.
Leadership. Create leadership resolve by framing the ERP project as a business change.
Organisation Design. Identify organisational process improvement options around ERP. Align organisational structure, job profiles and resource levels. Restructure around ERP capabilities and business strategy.
Culture. Identify ERP-related behaviours and embed them in processes, operational procedures, and target competencies.
Commitment. Plan and deliver stakeholder management, user communication, user training and user migration.
erformance processes. Recognise new ways of working. Choose and implement new performance measures.
Business Benefits. Build ERP business change case. Identify process improvement opportunities and cost savings. Build clear ERP links to business objectives and track benefits throughout the transition process.
Talbert (2002) suggests that the greatest benefits come from a tight fit between organisational processes and the ERP system. She cites Shang and Seddon’s study (See Section 3.4) and suggests “system exploration” works best when an experienced business manager leads system implementation because he/she has both deep business knowledge and the authority to implement process changes. This leads to a question: what is the appropriate team composition?
ERP literature suggests that implementation team should consist of the best people in the organisation (Nah et al., 2001). They should be entrusted with critical decision making responsibility and charged with responsibility to identify, examine and rethinking existing business processes. Fully supported by top management, the implementation team should also have the authority to reengineer existing business processes or develop new business processes to support the organisation’s goal (Umble and Umble, 2002). Building cross-functional team is critical as both business and technical knowledge are essential for success (Nah et al., 2001).
Regarding the role of mid-level managers, Umble and Umble (2002) suggest that they should have hand-on responsibility and authority for the detailed aspects of the implementation. In other words, mid-level managers should be actively involved in the implementation as they can facilitate the constant communication between implementation teams and end users. Moreover, they will eventually be the benefit owners of the system.
Most of ERP implementations follow traditional IT project life cycle that consists of 5 phases: setting up, blueprint (requirement and design), realisation (construct), final preparation (cut-over and go-live) and post-implementation support. The benefit realisation approach is a process of managing benefit delivery throughout ERP implementation process. It is imperative for implementation team to make sure that every project-related action is directed toward the benefits (Bradford and Roberts, 2001).
The key components in setting up phase are development of benefit-focused business case and implementation plan. Developing plans that respond to the benefit opportunities available will demand the involvement of the business in identifying the potential changes that could be made and developing business requirements that will underpin those changes. The plan will be more focused on activities that ensure that the business stays involved and to ensure that the changes are made (Smith, 1999).
In blueprint phase, implement team need to ensure that benefit measures are tied into business model blueprint for what the new organisation should look like after go-live (Bradford and Roberts, 2001). The reengineered business processes or new business processes will contribute to the delivery of expected benefits.
While constructing the system that supports business process model, implementation team and benefit owners need to prepare the organisation ready through various change management activities.
Around the build-up to going live it is easy to lose sight of the original purpose of the project, i.e. the benefit. Providing support mechanisms around and after going live are therefore critical to retain focus on overcoming the inevitable dip in performance after going live (Smith, 1999).
ERP implementation does not end when system is going live. The implementation should be viewed as an ongoing process (Umble and Umble, 2002). Benefit sustaining mechanisms need to be developed, e.g. inclusion of the expected results in budgets or performance measures, having the results included in a manager’s remuneration arrangements (Smith, 1999). Installing the sustaining performance monitoring mechanisms to encourage continuous improvement also contributes to building a culture of benefit delivery.
Although technology plays an important role in the induction of ERP system, the driving force behind each stage of ERP evolution is the changing business environment. Therefore company leadership must realise that ERP implementation is not merely a technological challenge and should be managed as a business program. Benefit realisation requires that everyone from the top of the organisation to the bottom share a common goal – to achieve greatest benefit from ERP implementation that supports organisation’s strategy. A business case that clearly states expected benefits, required resources as well as associated business changes then becomes the mutual agreement between all functions within the organisation.
Benefit realisation also requires a formal evaluation system that establishes standards for baseline data and benefit measures. The ERP benefits are mainly strategic and “intangible”. However, this should not be the reason for not measuring ERP benefits. The key of benefit realisation is the design of effective measurement system that makes sure measures exist; measure the right things; measure things the right way; measurement system must guide action.
ERP systems are essentially developed as an enabling tool for improving business processes, ERP implementation and BPR activities should be closely connected (Al-Mashari et al., 2003). To ensure that ERP implementation delivers better practices, benefit owners (i.e. business not IT department) should take the responsibility of designing new business processes. The benefit-oriented approach uses benefit to drive every implementation decision such as time, budget, resources, and design issues. Organisations should focus on benefits to be delivered by new business processes rather than individual “requirements”.
As ERP implementation requires massive change in an organisation’s structure, culture and processes, organisations should manage changes as an integral part of ERP implementation. This means that implementation team should proactively identify ERP-related behaviours and embed them into business processes; design and implement jobs, structure and reinforce metrics and incentives that are aligned with new business processes. A careful planned transformation ensures not only the delivery of ERP benefits, but also the competitive advantages required in today’s ever challenging marketplace.