REASONS FOR ERP ACQUISITION

Petri Hallikainen, Sanna Laukkanen, Sami Sarpola

Information Systems Science, Helsinki School of Economics, Runeberginkatu 14-16, Helsinki, Finland

Keywords: ERP, IS acquisition

Abstract: Numerous reasons for Enterprise Resource Planning (ERP) system acquisitions in organizations have been

proposed in the prior resear

ch. In this paper these different reasons for ERP system acquisitions are

synthesized and categorized into technological and business reasons. Further, the prevalence of the different

reasons is explored with an empirical data concerning the ERP acquisition in 41 Finnish companies.

1 INTRODUCTION

Enterprise Resource Planning (ERP) systems are

configurable information system packages that

integrate information and information-based

processes within and across functional areas in an

organization. Configuring these large generic

software packages to the needs of specific

organizations, industry sectors, and countries is

necessary (Klaus et al., 2000) and requires large

investments of money, time, and expertise

(Davenport, 1998). Most of the large organizations

worldwide have already adopted ERP and the small-

and medium-sized enterprises are increasingly

following the suit (Klaus et al., 2000; Kumar and

Hillegersberg, 2000; Bernroider and Koch, 2001;

Everdingen et al., 2000).

Almost all ERP software packages can be

custom

ized to the specific needs of a particular

organi

zation. This, however, is very expensive and

may lead to problems such as the incompatibility of

product patches and new versions with the

customized ERP software (Butler, 1999; Kremers

and Dissel, 2000; Sumner, 2000; Light, 2001).

Consequently, some organizations choose to adapt

themselves to suit the ERP software being acquired

instead of customizing the software to suit the

organization (Davenport, 1998). However, as some

organizations do not want to modify themselves or

furthermore, have critical needs that can not be met

by standard functionality provided by the packaged

ERP systems (Davison, 2002; Light, 2001; Soh et

al., 2000; Everdingen et al., 2000), it is in these

organizations’ best interest to select the ERP

software that best fits their needs with the least

amount of customization so that both later

maintenance problems and organizational misfit are

avoided.

Previously the ERP systems selection has been

udied f

rom the point of view of criteria and process

employed in the selection by a number of studies

(see for example Everdingen et al., 2000; Stefanou

2000; Bernroider and Koch, 2001). On the other

hand, the reasons for why organizations acquire ERP

systems have not received as much attention in prior

research and, thus, have been investigated in only

few studies (see Brown et al., 2000; Knapp and

Shin, 2001; Kremers and Dissel, 2000; Ross and

Vitale, 2000).

In this study we aim to begin to fill this gap in

he previ

ous research by synthesizing the different

reasons for ERP acquisitions proposed in the prior

research and by exploring their prevalence with

empirical data concerning the acquisition of ERP

systems in 41 Finnish companies. Based on our

literature review, we ended up with two categories

of reasons for ERP acquisitions: technological and

business reasons.

Technological reasons: In th

is category, th

acquisition of ERP system is motivated by the need

for new information technology (Hecht, 1997), and

mainly aims to support current way of doing

business. This category includes also the information

technology (IT) investments mainly aimed for

efficiency improvements, that is, cost reductions

(Fitzgerald, 1998). The specific technological

drivers might be, for example, the following:

Desire to outsource software ma

intenance and

development (Scheer and Habermann, 2000; Butler,

1999; Brown et al., 2000; Klaus et al., 2000).

518

Hallikainen P., Laukkanen S. and Sarpola S. (2004).

REASONS FOR ERP ACQUISITION.

In Proceedings of the Sixth International Conference on Enterprise Information Systems, pages 518-521

DOI: 10.5220/0002602605180521

 SciTePress

y Vendor support has ended for the existing

software (Kremers and Dissel, 2000; Holland and

Light, 1999).

y Need for adopting clean slate approach in

order to achieve improved software system to deal

with, for example, structural fragmentation or lack

of documentation (Holland and Light, 1999; Sprott,

2000; Davenport, 1998; Light, 2001).

y Need for common technology platform and

increased standardization in technologies used

across the organization (Sumner, 2000; Ross and

Vitale, 2000; Parr and Shanks, 2000).

y Resolution of year 2000 problem (Sprott,

2000; Brown et al., 2000; Klaus et al., 2000; Ross

and Vitale, 2000; Holland and Light, 1999; Parr and

Shanks, 2000) or euro conversion problems.

y IT cost reduction (Sumner, 2000; Brown et al.,

2000; Ross and Vitale, 2000; Holland and Light,

1999; Klaus et al., 2000).

y Desire to replace the aging IT architecture or

technology with more modern one (Brown et al.,

2000; Kremers and Dissel, 2000).

Business reasons: Sometimes the existing

information technology may be an obstacle

prohibiting necessary (Hecht, 1997), strategically

important change in the enterprise. In these cases,

new IT is acquired not simply to reduce costs but to

facilitate change in the ways of doing business, and

thus, to improve effectiveness or to gain strategic

advantage (Fitzgerald, 1998; Silk, 1990). Specific

drivers to adopt ERP software based on business

reasons can be, for example, the following:

y Globalization or desire to move to a

standardized IT and organizational blueprint to deal

with merger/acquisition or globalization (Klaus et

al., 2000; Holland and Light, 1999; Sumner, 2000;

Brown et al., 2000; Ross and Vitale, 2000;

Davenport, 1998).

y Desire to adopt best practice business models

and new ways of doing business, and to conduct

business process reengineering (Holland and Light,

1999; Davenport, 1998; Brown et al., 2000; Klaus et

al., 2000; Ross and Vitale, 2000; Sumner, 2000; Parr

and Shanks, 2000).

y Need for increased flexibility and agility in

doing business (Brown et al., 2000; Klaus et al.,

2000; Ross and Vitale, 2000; Davenport, 1998;

Holland and Light, 1999; Parr and Shanks, 2000).

y Data visibility and integration aiding

managerial decision making and operations

(Sumner, 2000; Brown et al., 2000; Klaus et al.,

2000; Kremers and Dissel, 2000; Ross and Vitale,

2000; Davenport, 1998; Parr and Shanks, 2000).

y Pressure from the value chain and need for

electronic networking and collaboration with

customers, suppliers and other business partners

(Hayman, 2000; Kumar and Hillegersberg, 2000;

Kremers and Dissel, 2000; Klaus et al., 2000; Brown

et al., 2000; Holland and Light, 1999).

It should be noted that the different reasons and

drivers for acquiring ERP systems partly overlap and

are interdependent with each other both inside, as

well as between, the two categories presented above

(Ross and Vitale, 2000).

2 METHODOLOGY

The data used in this study was obtained in a survey

investigating the ERP software selection and use in

Finnish companies. The survey was conducted

during the autumn 2002 and spring 2003. For the

purposes of this study, the data acquired through

open-ended questions inquiring three most important

reasons for ERP system acquisition is used. Of the

44 companies that responded to the survey 41

provided adequate answers to this question. Further,

of these 41 companies roughly ¼ were large

companies while ¾ were small and medium sized

enterprises (<250 employees). Meanwhile, a bit over

½ of the companies operated in wholesale industry

but the sample included also companies operating in

retail, logistics, and manufacturing industries. Some

of the companies that answered to the survey were

currently acquiring ERP system while majority had

already acquired and implemented their ERP

systems. Majority of the companies had acquired

their current ERP system in late 1990’s or early

2000’s. The reasons that the companies reported as

the most important reasons for ERP acquisition were

grouped based on the above presented

categorization. The purpose of this categorization

was to validate whether support can be found for the

existence of the different reasons from empirical

data. The different reasons reported by the

companies and their categorization are presented in

table 1. Identical and clearly overlapping reasons

have been merged.

3 FINDINGS

The reasons that the companies reported as the most

important reasons for the ERP acquisition are

presented in Table 1 under the respective

subcategories. For each subcategory, also the

number of instances (answers provided by the

companies) in that particular subcategory is

displayed in the table. Admittedly, some of the

reasons provided by the companies could, based on

the interpretation, be seen to fit into several

subcategories. Although the best possible fit was

REASONS FOR ERP ACQUISITION

519

Table 1: Technological and business reasons reported for the acquisition of ERP

used as a criterion for categorizing the reasons, there

is a possibility for interpretation bias, and thus, the

results should be considered as tentative. Further, it

should be noted that the reasons exhibited in table 1

are the top three reasons mentioned by the

companies. Thus, a low number of instances in a

category should not be interpreted as a sign of

unimportance.

Of the different technological reasons for ERP

acquisition, particularly the desire to replace the

aging IT architecture or technology with more

modern one was often reported as a reason for ERP

acquisition. Further, the desire for IT cost reduction,

as well as the need for a common technology

platform and increased standardization in

technologies used across the organization, were

rather common reasons for ERP acquisitions. The

year 2000 problems and euro conversion problems,

on the other hand, generated surprisingly few

instances considering that the influence of year 2000

problems for the ERP system acquisition has been

reported in prior research (Sprott, 2000; Brown et

al., 2000; Klaus et al., 2000; Ross and Vitale, 2000)

and that many of the companies participating in our

survey had acquired their ERP systems in the late

1990’s or early 2000’s. Also the need for adopting a

clean slate approach in order to achieve an improved

TECHNOLOGICAL REASONS BUSINESS REASONS

Desire to outsource software maintenance and development

Globalization and desire to move to a standardized IT and

(6 instances)

organizational blueprint to deal with merger/acquisition or

- Support for old ERP software ended

globalization

(9 instances)

- Acquisition of ERP software that is actively developed by the - Globalization of the company’s business

vendor - Current ERP system does not adequately support global

- New ERP software allows further development operations

- Maintenance services - Current information systems are not transferrable to abroad

- Standardization of company’s policies and practices

Need for adopting clean slate approach in order to achieve

- Acquisition of unified global system for the whole company

improved software system

(3 instances) - Development objectives set by the group

- Need to acquire uncustomized standard ERP package - Demands of the group

- Problems with the maintenance of the old system

- Old system not amenable to further development

Desire to adopt best practice business models and new ways of

doing business, and to conduct BPR

(10 instances)

Need for common technology platform and increased

- Support for new processes

standardization in technologies used

(7 instances) - Improvement of the efficiency of existing processes

- Acquisition of a common information system to the group - Changes in the company’s business

- Need to integrate the ERP system with other systems - Future development outlooks

- Need to link all the group's companies into same network

- Holistic renewal of company’s information systems

Need for increased flexibility and agility in doing business

- Old system did not operate in the required way

(2 instances)

- Speeding up the availability of timely information

Resolution of year 2000 problems or euro conversion problems

- Improving the efficiency of reporting

(4 instances)

- Year 2000 problems

Data visibility and integration aiding managerial decision

- Euro conversion problems

making and operations

(18 instances)

- New requirements e.g. integrated CRM

IT cost reduction

(7 instances) - Possibilities for integration

- Need to improve efficiency - Support for the improvement of operations

- Need for more capacity and efficiency - Support for the sales and marketing

- Need to lower costs - Improvement of customer service

- Need to lower support and maintenance costs - Improvement of process control

- Improvement of project control

Desire to replace the aging IT architecture or technology

- Improvement of managerial accounting and reporting

(14 instances) - Unified reporting

- Need to adopt a modern ERP system - Enhancement of information flow within the company

- Abandonment of old mainframe computer - Improvement of data visibility

- Old system used obsolete technologies - Increasing the reliability of information

- Need to meet increased requirements - Increasing the amount of information

- Need to renew an old system

- Replacement investment

Pressure from the value chain and need for electronic

- Old system had reached the end of its development lifecycle

networking and collaboration

(4 instances)

- Enablement of multicompany environment

- Electronic commerce

- Expansion of the existing electronic commerce solutions

- Growing demands of customers and other interest groups

ICEIS 2004 - DATABASES AND INFORMATION SYSTEMS INTEGRATION

520

software system accumulated a surprisingly low

number of instances.

Of the different business reasons, particularly

data visibility and integration in order to aid

managerial decision making and operations was

often reported as a reason for ERP acquisition.

Reasons related to business process re-engineering

and adoption of best practice business models, as

well as to globalization, and mergers and

acquisitions, were also reported to have triggered

ERP initiatives in rather many companies.

Surprisingly, the need for improved flexibility and

agility in terms of, for example, more efficient

reporting, was not often mentioned. Perhaps even

more surprisingly, value chain integration or e-

commerce were not among the most reported

reasons for ERP initiatives.

In about one third of the companies (16

companies) the three most important reasons for the

ERP acquisition were technological reasons.

Similarly, about one third of the companies (13

companies) reported business reasons to be the three

most important reasons for ERP acquisition. The

companies in the remaining third (12 companies)

reported a mixture of both technological and

business reasons among the three most important

reasons. The results indicate that rather many

companies view ERP acquisitions as technological

initiatives. Knowing the risks involved in ERP

implementation and wide effects of ERP systems in

organizations, this can be considered alarming. More

specifically, perceiving ERP as a technological

initiative does not allow harnessing the full potential

of ERP, which takes effect through re-engineering

and improving the business processes in

organizations.

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