Krešimir Fertalj
Faculty of Electrical Engineering and Computing, University of Zagreb, Unska 3, Zagreb, Croatia
Igor Nazor
University of Split, Split, Livanjska 5, 21000, Split, Croatia
Keywords: SME, ERP implementation, IS consultant, BPR.
Abstract: Small and medium enterprises (SMEs) have been receiving less focus from the software vendors than large
enterprises (LEs). Research on the implementation of ERP in certain European countries shows that the job
of implementing an Enterprise Resource Planning package (ERP) is a riskier business for SMEs than for
LEs. This paper presents a methodology for efficient implementation of ERP solutions by delegating the
main project leadership roles to an experienced consultant. Finally, a case study is presented with proposed
implementation steps. The steps taken in this project, if proven on some additional projects with SMEs
could become basis for a more formalized set of activities, or even a methodology.
This paper describes a suggestion of how to "sell"
the idea of restructuring the organization for a small
to medium company that needs to implement a new
ERP. The paper also argues for an independent
person in charge of the entire process of selecting,
acquiring and implementing new enterprise
information system in a SME. The arguments for
that are given by showing typical characteristics and
behaviour of SMEs in the process of acquiring a new
software solution, and by analyzing the typical
problems encountered in real life projects.
Additionally, typical business interests of all parties
involved are analyzed. The most obvious
shortcoming of SMEs compared to large companies
is the lack of in-house resources. Therefore, the
knowledge the software project management should
be outsourced.
The process of restructuring SME often appears
to be natural, because of dynamic environment in
which they operate. It is often not recognized as
such, and not controlled adequately. The decision to
purchase an ERP package to support the business
processes can be a good opportunity to formalize the
process of reorganization.
An overview of research in the area of ERP
implementation in the SME sector is given, and a
successful practice described, that could evolve into
a methodology, after being proven successful and
tuned on few additional real-life cases.
An Enterprise Resource Planning (ERP) system is a
software platform, providing best ways to do the
business based on common business practices or
academic theory. The aim of an ERP is to improve
the co-operation and interaction between all
departments in organisations (such as product
planning, manufacturing, purchasing, marketing and
customer service department). As an enabling key
technology, as well as being an effective managerial
tool, ERP allow companies to integrate at all levels
and to utilise important ERP applications such as
accounting and financial management, supply-chain
management (SCM), human resources management
(HRM) and customer relationship management
(CRM). Such applications represent large, complex,
computerised and integrated information systems
which can strongly influence long-term business
success (Bernroider, 2003).
Fertalj K. and Nazor I. (2008).
In Proceedings of the Third International Conference on Software and Data Technologies, pages 332-338
DOI: 10.5220/0001880903320338
A precedent of today's ERP systems are the
Materials Requirement Planning Systems, (MRP)
from the 70's which automated production planning
and management process, by scheduling operations
and material purchasing based on the forecasted and
current requirements of finished goods, and the
constraints of the production facility. Manufacturing
Resources Planning (MRP-II) systems in the 80's
coordinated the entire process, from planning the
purchase of materials and parts, requirements-based
production capacity planning, to distribution. The
term ERP was first used by Gartner Group in the
early 90's, and included multiple applications that
automated parts of business (MRP-II, CAD, CAM,
CAE, financial modules). The aim of ERP is to
manage business processes within the organization.
The market for ERP solutions is constantly
growing, and the license and maintenance revenue
from the ERP market was 17,2 billion USD in 1998
and was expected to rise to 24,3 billion USD by the
year 2000 (Fertalj, 2003) with its today's value in
tens of billions of USD. In addition to a few global
market players, that offer complex solutions
configurable for specific needs, there are many local
vendors with less sophisticated applications that are
usually programmatically modified for a particular
In recent years, most ERP system suppliers have
increased their focus on small and medium
enterprises. There are some reasons for this trend
including a saturation of the market as most large
organizations have already implemented an ERP
solution, increasing possibilities and need for the
integration of systems between organizations and the
availability of relatively inexpensive hardware.
(Sarpola, 2003)
Their offer for SMEs is either their original
application with reduced functionality, or a
completely new package branded for SMEs
(mySAP, Oracle Small Business Suite, Navision).
There are different definitions of medium-sized
enterprises, depending which of their aspects is
being considered. The European commission defines
SMEs as the companies that have fewer than 250
employees, and either, an annual turnover of less
than 40 M€ or an annual balance-sheet total of less
than 27 M€ (Commission, 2003), and are
conforming to certain criterions of independence.
This definition is not precise enough for our
needs, as we are looking for organizational size and
complexity of processes. For instance, an insurance
company of 250 employees might be too complex
for the scope of this work, while a mid-sized
services company that employs 200 workers, with an
administration of 10 people may be too simple to
gain any benefits from ERP introduction. Also, local
government organizations, which have "non-typical"
activities that are not related to profit, usually have a
different approach when automating their work.
Reorganization in such companies often has
political, rather than profit-oriented objectives, so a
different logic might apply.
An "ideal" SME that is considered in this paper
is the one that:
Evolved to its present size in a competitive
Has a sufficiently complex organizational
structure, with at least main processes defined. There
must be processes to improve, or information to
integrate. If the organization is small enough that
one person is capable of controlling most
information that enters the company, implementing
of an ERP may not be worth the effort. Companies
with extremely simple processes where a few people
create information, may only need a simple solution
and a basic training from the software vendor to use
it. The system compulsorily encompasses a financial
package, maybe a stock management package and
similar primarily financial functionalities.
Preferably not in a market position where it is
not forced to change, i.e. not an unchallenged
absolute market leader. Preferably there is relatively
strong competitive pressure from other players on
the market. Such companies usually have a "healthy"
motivation to improve and create a competitive
advantage. However, there can be other strong and
valid motivators, like being taken over, losing
market share, downsizing, etc.
The need for an ERP is usually recognized when
companies encounter business problems that are
related to the flow of information. Often too much
effort and time is needed to collect and compile
relevant information, resulting in inadequate
management decisions based on that information.
At this point company’s management usually
approaches some known software vendors, asking
for a presentation of their product. Those
presentations often emphasize product features, and
tend to ignore the issue of the implementation
process which is heavily dependent on various
factors (organizational, business culture, etc.),
specific for each particular company. The
company’s management is left to make a decision
based on too few parameters learned from the
presentations. In this course of events they are often
unaware of the issues that will arise later.
In the case of SMEs, most often a decision to
purchase Commercial Off the Shelf (COTS) product
is made to reduce cost and finish the implementation
as quickly as possible.
A Study on Austrian SMEs in 2005 shows that
the penetration of ERP in SMEs compared to LEs is
still rather low, (22,5% of SMEs have ERP, as
opposed to 71,1% of LEs )(Bernroider, 2005).
Today there exist many open-source and COTS
solutions covering almost any area of business. Due
to the economies of scale, these solutions cost less
than developing a custom solution from scratch. The
obvious benefit is the possibility to cover most
functionality required in a short time, with a tested
solution. There are disadvantages, such as less
control over the code, less certainty of how a
component will behave in an integrated environment
or dependence on different vendors. Furthermore, it
is usually not recommended to make changes in the
COTS source code, or even to force the vendor to
make them, because there may be issues of
compatibility with the future versions. New
versions of a COTS component of purchased
application should be carefully tested before being
implemented. Also, all of the required functionalities
may not be available in any of the COTS or open-
source product on the market, so there should be a
degree of flexibility, and an iterative approach while
matching system requirements with COTS
components that can be put to work together.
Although a list of disadvantages seems longer than a
list of advantages, most of them can be dealt with by
having an efficient selection and implementation
process in place.
Methodologies for selection of software vendors
exist, but are mostly aimed at large organizations,
and usually rather complex and time-consuming to
implement. In most cases they are inappropriate for
a small organization to follow.
The software selection process has been
formalized on different levels, depending on the
exact objectives, and the complexity and "life
expectancy" of the application selected. Most
methods have been developed for large
organizations, and the ones with high risks involved,
namely military or government. One of the ideas is
to evaluate not the existing software package itself,
but the capability of the manufacturer to produce
demanded software, implemented in the CMM-
based SCE methodology, used for the selection of
software suppliers (Barbour, 2005). However, SCE
is used for projects of $10M+, the ones lasting more
than 2 years.
Behaviour of companies when buying software
has been researched, and SMEs were compared to
LEs. One research comparing behaviour of Austrian
SMEs and large companies when purchasing
software (Bernroider, 2000) showed that SMEs by
far most value Adaptability and Flexibility, followed
by Good Support and Short Implementation Time.
These characteristics are also positioned high in the
priorities of large companies, but there are also
Process Improvement, Increased Organizational
Flexibility, and Increased Customer Satisfaction.
The research also shows that large companies have a
more structured approach to purchasing software,
rely more on external consultants etc, and spend
more time specifying their needs.
Usually, the need for new software is recognized
when the company has grown quickly, and the old
manual business procedures are not efficient enough.
The transition from a "small" to a "medium"
organization is a known process with some common
trends, mostly organizational. This is risky enough
itself, and many companies don't deal with it well.
A characteristic of medium-sized companies
which has not been investigated thoroughly enough
is the personal connections between most
employees, which have remained from the period of
being small, and which can be a disturbance while
making unpopular decisions. Large companies are
usually more divided both horizontally and
vertically, so the people making decisions usually
have less personal connections with those affected.
LEs plan the software implementation with long-
term goals in mind. SMEs, on the other hand decide
to buy software to solve a particular problem on
hand. The strong request on "Adaptability and
Flexibility" (Bernroider, 2003) merely means that
they want the ERP they buy today to be useful in the
future, as they expect more organizational changes
ICSOFT 2008 - International Conference on Software and Data Technologies
to come. The expectation of flexibility is difficult to
satisfy as they often do not know what they will
need in future.
Because of a more systematic approach to software
purchasing, more sophisticated expectations, and
willingness to spend more money and time on
preparation, one could expect that large companies
will be less disappointed in the end result.
Implementation of any complex software solution is
associated with various risks. Research (Bernroider,
2003) shows that on average, only 80% of planned
functionality is obtained after ERP implementation,
90% ERP implementation projects are late or over
budget (Sarpola, 2003), 40% end up with only a
partial implementation, and 20% of all projects in
1999 were discarded as total failures.
A comparison between SMEs and LEs showing
differences in approach, commitment, and results of
ERP implementation says that SMEs prefer slow-
phased implementation, as opposed to LE's that
prefer implementations consisting of a pilot project
and the rest in a single step. SME's experience more
business trouble while implementing ERP (ERP
does not work as expected in 65% of cases, 70%
experience a short decline in performance).
(Bernroider, 2005) SMEs more often implement
SCM and CRM along with ERP. In general, one
could say that SMEs have a more opportunistic
approach to ERP implementation and poorer project
management, which results in more unsatisfying
outcomes. On a positive side, SMEs are simpler and
more flexible, so even a really poor ERP
implementation does not inflict permanent damage.
LEs are generally more satisfied with the
outcome of ERP implementation, have more defined
goals and manage projects better. Relying more on
consultant knowledge makes them more vulnerable
when these leave the company. On the other hand,
risks for LEs in case of failure are greater, so 2,2%
of them never recover from a poor ERP
implementation. branded for SMEs (mySAP, Oracle
Small Business Suite, Navision).
From the authors' experience, the actions to follow
often miss the opportunity to efficiently reorganize
the company. This is due to discrepancy of interests
of the parties involved. The agreed price of a
complete ERP usually includes licenses, installation,
implementation and start of exploitation. The
conditions of software maintenance usually define
an "assumed" monthly level of service that includes
minor modifications, solving technical difficulties,
managing data consistence and security, periodical
(annual) interventions, and often, supporting
changing requirements due to changes in legislation.
Major changes are defined as separate projects
which are agreed and charged separately.
Consequently, the interest of the software
implementer is to install the basic functionalities as
quickly and with as few problems as possible,
leaving enough room for future major
improvements. The skill of the vendor here is to
balance with the customer satisfaction, and need for
improvements to maximize profit over time. An
ideal customer would be the one that constantly
undertakes major changes in the software.
One could argue that a solution that would
quickly and drastically improve the customer's way
of functioning, without a need for constant software
improvements, would not be in the software
company's best interest.
Furthermore, if there is a solution on the market
that could be easily integrated with the ERP and
improve functionality (which is often the case today
with collaboration and document management
applications), the software vendor might not suggest
it, but rather try to develop the required
functionality, at a much higher cost in terms of both
time and money.
SMEs on the other hand often do not know what is
best for them. Because of lack in internal resources
and a quickly changing environment, SMEs need a
third party leading the project of implementation.
Project leader in this case must perform some major
activities, as follows.
Drawing-up the current state of organization,
defining business processes and workflow
Motivating management to define company's
strategy that can be put into action through
reorganization and ERP implementation.
Define the new organization, using the right
amount of formalism. Because of the "ad-hoc"
nature of SMEs compared to large companies, a
complex procedure of reorganization that
involves lots of administration defining,
measuring, and executing changes may
discourage the management, who might see these
activities as wasting of time.
Defining hardware requirements, overseeing
purchase and taking care of time constraints.
Staying in constant contact with the sponsor
(management) defining problems and seeking
support for their resolution. Being an outsider to
the company, there is a big "political" task to
perform, to gain credibility with both the
employees and the management.
Acting as the project leader towards the software
manufacturer, specifying needs and overseeing
execution of agreed work. Being directly
involved in follow-up of all planned activities, as
there is usually no one else to take care of it. This
involves breaking down a big plan to
individualized tasks, organizing training for
employees, tracking their progress.
Organizing the follow-up meetings between
management, software producer and key users in
the company.
There are usually people within the company who
are able to perform some of even all of these tasks,
but it is a full-time job to coordinate them and
impartially suggest even unpopular decisions.
The typical risks of hiring a consultant are that he or
she may not be acquainted with the specifics of a
particular company. There may not be enough
experience in one or more of the fields that need to
be covered by only one person. The assumption that
the processes in SMEs are lots simpler than the ones
at LEs, and that one experienced person should be
able to keep everything under control, may not
always be valid.
There is also a problem of non-aligned interests
of the external consultant, with the ones of the SME.
Great care should be taken when defining external
consultant's objectives, in making them dependent of
the company's overall success, as well as the success
of the ERP project. There are many examples,
although mostly with LEs, of failures that can be
attributed to external consultants. (Scott, 1999).
The advice would be to tie consultant's
compensation to the attained goals (percentage of
growth in a period, timeliness of the ERP project
execution, reduction of order processing time) or
even define penalties if such goals are not met. Also,
there should be a careful screening for the
consultant's previous experiences, where one should
seek for those who were successful in similar
projects, and who have a necessary broadness. For
example, a consultant who managed a very big
project with many people involved might not be
adequate for a small company's project where there
are lots of operative work to be done, and less
delegation of duties. There exist professional
associations that can be contacted for this purpose.
The authors recently conducted an ERP
implementation in a Croatian medium-sized
construction company. In order to improve its
financial management, a better control over labour
and materials cost and scheduling of construction
projects were required. A need for reorganization
was apparent to an outsider, as the company dropped
in size from 1.500 to 150 employees, still keeping a
similar organizational structure. As the project
progressed and the information from the ERP
became available, it triggered other changes, some
voluntary and some imposed by the management. In
order to take this approach, a flexible ERP was
needed that could automate "the old way" in the
beginning, but could be configurable to follow the
changes in business processes.
Following is the sequence of activities that were
proposed to the management by the authors, and
were generally accepted.
Purchase the software to solve the problem on
Automate the support functions. Start with the
ones that are already most automated, such as
Finances, Purchasing, Warehouse, HR. The idea was
to first do the job that will require least effort, with
the most visible effects. The idea is to rely heavily
on support of the software vendor's team, while not
allowing them to dictate dynamics of
implementation. A successful first phase will give
the project manager credibility needed to address the
main issue, automating the core business.
Expose the people from core business activities
to the new system. It is important to bear in mind
that implementing an ERP will definitely lead to
changes in the way people work. People from the
core activity have an enormous power to stop or
ICSOFT 2008 - International Conference on Software and Data Technologies
sabotage the efforts, with an argument that the new
system, would temporarily slow down the
production. The success of implementing a software
in the core activity lies in slowly dosing the good
and the bad things, good things being less work
needed, more accurate and timely information
available, better communication in the value chain.
Bad things are getting used to the new software,
dealing with the software instability, changing the
way of working, and most importantly, shifting of
positions of power within the department. With the
new software in place, the ones who get used to it
more quickly are in better position. Usually it is the
younger and the more technically oriented
employees. However, one must understand the
difference between software skills and real skills that
add value to the process, because sometimes older
and more experienced people are unfairly
disregarded in this process, which turns into a loss
for the company. An extreme example from the real
life is employing a young person to do the typing for
an older key technical engineer who resists
accepting to use the computer. There are also
opposite examples – employing of a young
inexperienced person to perform consulting in
complex environment.
With the help of the sponsor, set goals for core
activities. Before this is done, one must make sure
that there is enough knowledge of the new system in
the core business activity. If possible, the suggestion
is not to have sudden changes, but to let the new
way of working take over the old way. This way
there is always an alternative in case of problems
with the new system, which gives additional security
to those involved in the transition. This could for
example mean following one or more construction
sites through software, while others are followed the
old way, or automating production of one line of
products. The idea is not to break the existing
process with the new way of working if not
necessary. After the first cycle is completed, or nears
the end (one building, or one yacht assembled and
delivered) there will be enough data to analyze and
to convince the management to start reorganization.
Small and medium sized enterprises represent a very
large potential market for ERP solutions. Specific
approaches should be developed to use the benefits
of a comprehensive solution such as an ERP, and to
minimize the negative impacts, mostly arising from
their complexity and high expectations on security.
Due to lack of proprietary resources, and a faster
pace of changes that SMEs undergo, one must find a
way to implement software as simply, and with as
few additional resources, as possible.
Emphasis should be given to the "natural flow"
of things, at first maybe even "automating the old
way", and as the organization matures, changing the
business processes accordingly. The ERP systems
used by SMEs should be flexible, even able to
purposefully reduce the information security for the
benefit of ease of implementation. Once the situation
is stabilized, the security of information can be
raised again. Use of COTS solutions should
minimize the cost of development, at the expense of
the cost of systems integration.
Another high demand is for the project manager,
who should be skilled in many areas, such as
business, change management, training, information
security and IT systems integration. Of course, one
cannot be expert in all of these areas, but must be
able to manage them, engaging specialists for
specific tasks if needed.
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