"SELLING" REORGANIZATION TO SME’S FINANCIAL

MANAGEMENT THROUGH ERP IMPLEMENTATION

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.

1 INTRODUCTION

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.

2 ERP

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).

332

Fertalj K. and Nazor I. (2008).

"SELLING" REORGANIZATION TO SME’S FINANCIAL MANAGEMENT THROUGH ERP IMPLEMENTATION.

In Proceedings of the Third International Conference on Software and Data Technologies, pages 332-338

DOI: 10.5220/0001880903320338

 SciTePress

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

user.

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).

3 SME

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

environment.

• 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.

4 WHY ERP

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

"SELLING" REORGANIZATION TO SME'S FINANCIAL MANAGEMENT THROUGH ERP IMPLEMENTATION

333

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).

5 BUILD VERSUS BUY

DILEMMA

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.

6 SOFTWARE ACQUISITION

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

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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.

7 IMPLEMENTING OF

SOFTWARE

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).

8 CONFLICTING INTERESTS

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.

9 NEED FOR AN

INTERMEDIARY

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

procedures.

• 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"

"SELLING" REORGANIZATION TO SME'S FINANCIAL MANAGEMENT THROUGH ERP IMPLEMENTATION

335

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.

10 RISKS REGARDING

CONSULTANTS

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.

11 CASE STUDY

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

hand.

• 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

336

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.

12 CONCLUSIONS

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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