Investigation of Criteria for Selection of ERP Systems

Bálint Molnár

, Gyula Szabó

and András Benczúr

Eötvös University of Budapest, Information Systems Department, Pázmány Péter sétány 1/C, 1117 Budapest, Hungary

Dénes Gábor College, Department of Computing, 1119 Bp, Mérnök u. 39, Budapest, Hungary

Keywords: Information System, ERP, Enterprise Resource Planning, Enterprise Architecture, Selection Criteria.

Abstract: The application and introduction of ERP systems have become a central issue for management and

operation of enterprises. The competition on market enforces the improvement and optimization of business

processes at enterprises to increase their efficiency, effectiveness, and to manage better the resources

outside of the company. The primary task of ERP systems is to achieve the before-mentioned objectives.

For this reason the selection of a particular ERP system has a decisive effect on the future operation and

profitability of the enterprise, i.e. the selection phase is highly relevant step within the introduction and

implementation stage of an ERP system. The issues that are worth investigating are the criteria applied at

the decision. The qualitative correlation between the size of enterprises, market position, etc. and the applied

selection criteria for ERP systems could be analyzed as to whether which criteria are made use of at

multinational enterprises or at SMEs. Our research is grounded in a literature review and case studies of

everyday practice related to introduction, implementation and roll-out of ERP systems and it tries to provide

answers for the above raised questions.

1 INTRODUCTION

Surveys and practical experiences have shown that

all areas of enterprise operation have been affected

by cost savings including the IT related fields; the

main business objectives are modified to increase

the economic efficiency in spite of previous business

goals. The economic crisis has resulted generally in

dramatic impact on IT budgets at enterprises

(Thompson, 2010).

In spite of the enduring economic and financial

crisis, the introduction and adoption of ERP systems

continues. We have investigated the trends in a small

EU member country (Hungary) empirically and by

publications related to business management and

economics. There are clear tendencies that even the

small and medium enterprises (SME) that had data

processing systems which had been previously

developed individually or tailored to the specific

requirements started projects to buy ready-made or

commercially available Off-the-Shelf (COTS)

products on the market. The main reason is that the

previously developed, legacy systems cannot

comply with the recent requirements related to

information processing, namely cost-efficiency,

staffing level and other labor conditions.

We conclude that there are individually

developed and standard systems within the

industrial sector specific solutions.

In this paper, an ERP system (Enterprise

Resource Planning) is understood as an enterprise-

wide, comprehensive information system involving

all information processing activities that covers the

human resource, production, commercial, planning,

inventory, material planning, management control

and monitoring business processes by placing them

into a unified framework.

In next sections, we analyze the phases of

implementation process and providing some answers

for the raised issues.

2 RESEARCH METHOD

The research approach as a methodology was

twofold. We have grounded our investigation in

BSc. / MSc theses that were created on ERP at a

Hungarian College as students’ research project.

There was an empirical research on architectural

approaches of subsidiaries belonging to international

companies and operating in Hungary (ELTE, 2010).

The research was carried out by a consortium of

175

Molnár B., Szabó G. and Benczúr A..

Investigation of Criteria for Selection of ERP Systems.

DOI: 10.5220/0004151101750180

In Proceedings of the 14th International Conference on Enterprise Information Systems (ICEIS-2012), pages 175-180

ISBN: 978-989-8565-10-5

 2012 SCITEPRESS (Science and Technology Publications, Lda.)

Hungarian Universities and Colleges. Beside

companies situated in Hungary, the investigation

covered practice of ERP introduction at several

German companies either based on publications or

in-depth interviews with managers responsible for

ERP systems. There was a comprehensive literature

review related to ERP introduction and

implementation that we will discuss in detail.

3 CONCEPT OF ERP SELECTION

ERP selection is an important decision making

problem of organizations and influences directly the

performance. There are a lot of ERP alternatives in

market (Wei, 2004). The failure in selection of ERP

system firstly leads to the failure of ERP

introduction or adaptation project or secondly to

degradation of company performance (Liao, 2007).

Several research studies have been conducted to

identify relevant factors having impact on success of

implementation and introduction at ERP systems.

The major part of studies have chosen the case study

paradigm, i.e. many of them focused on single case

study of ‘‘how we implemented ERP systems in our

company’’ (Ang, 1995); (Bingi, 1999); (Mandal,

2002); (Wilson et al., 1994); (Yusuf, 2004).

Furthermore, several studies that have measured

ERP implementation success used only one or two

factors of ERP implementation success (Ang, 1995,

2002); (Malbert, 2003); (Umble, 2003).

The literature research shows that problems with

the implementation of ERP systems emerge for a

number of reasons. We can summarize briefly the

reasons as follows: (1) Generally there is a need for

business process change or re-engineering for fitting

together the business processes and information

processes of an ERP system. Leaving out the

required business process alignment could lead later

operational problems. (2) Lack of commitment from

top management, deficiency in data accuracy, and

short of user involvement can attribute to system

implementation failures appearing typically during

the operation phase. (3) Education and training to

make use of ERP system are frequently under

estimated and are given less time due to schedule

pressures. (4) The synergy demanded by cross-

functional business processes are not understood

properly.

There are competing measurement approaches

and concepts coming from research literature and

practice. Some factors that can be encountered in the

literature: (1) User satisfaction (Al-Mashari, 2003);

(Anget, 1995; 2002); (Mandal, 2002); (Yusuf,

2004). (2) Intended business performance

improvements (Al-Mashari, 2003); (Hong, 2002);

(Mandal, 2002); (Markus et al., 2000); (Yusuf,

2004). (3) On time (Al-Mashari, 2003); (Hong and

Kim, 2002); (Malbert, 2003). (4) Within budget (Al-

Mashari, 2003); (Hong 2002); (Malbert, 2003). (5)

System acceptance and usage (Ang, 1995; 2002);

(Yusuf, 2004). (6) Predetermined corporate goals

(Al-Mashari, 2003); (Umble, 2003); (Yusuf, 2004).

4 PHASES OF ERP

INTRODUCTION

The reason why a decision may have been made to

replace an operational system by an ERP solution

can be concluded from several basic causes. One of

the origins for such a decision is that the enterprise

would like to save or strengthen its market position

through acquisitions or internal growth. The IT/IS

system can be adjusted to these changes flexibly if

there is a “quantum leap” in IS service quality by

introducing an ERP system considered as a “best

practice” in the industry sector. The other important

factor is the competition on the market. Beside the

market competition there are other coercive

requirements to optimize and to increase

performance in enterprise governance and

information processing.

The samples coming out of practice demonstrate

that the introduction and application of ERP is a

longstanding process (Feuchtinger, 2008).There is a

seven phase model for ERP introduction: proposal

for changeover, analysis, conceptual plan, short

listing the potential solutions, selection process,

decision for the designated one, and project closure

(Zimmermann, 2010).

4.1 Modernization of Operational

System

The companies frequently encounter a decision

situation how they can modernize existing data

processing system. There are three different ways:

development, package procurement and renting or

leasing the ERP services.

At the beginning it is difficult to decide whether

a program package as COTS (Commercial off-the-

shelf) should be procured or a vendor should be

found to develop a customized solution and who can

adapt its basic system to the company’s requirement.

The decision is hard as the package solution cannot

cover all business processes at the enterprise. A

ICEIS2012-14thInternationalConferenceonEnterpriseInformationSystems

176

developed system may comply with requirements

and it can be tailor made for specific business

processes; however it requires more resources

(Ayağ, 2007).

Before the decision between the package solution

and development, an analysis should be carried out

on potential solutions then after the analysis a

management decision could be made.

The third opportunity is renting or paying a fee

for all or some services of an ERP system. Most

recently, the ASP (Application Service Providing)

is an appropriate, cost-effective solution for micro

and small enterprises. The software as a service can

be accessed through the Cloud Computing.

4.2 Decision Making on the

Introduction of an ERP Solution

The question emerges whether what the factors are

that lead companies to consider replacing the

operational legacy system fully or partially with a

new information system.

A Hungarian Ltd. decided to adopt an ERP

(ProFinance™) system, their justification contained

three items on the grounds of the underdeveloped,

legacy information processing system: (1) The

rapidly developing enterprise owned old, legacy

information processing system that did not cover all

business processes. For this reason, the introduction

and implementation of a more modern enterprise

management system became the must. (2) In the

region, the other, concurrent companies have

adopted and will have implemented various

management systems gaining competitive

advantage. (3) There is intention to develop and to

extend the retail branch of the enterprise. For this

reason, the new information system should have a

steady and reliable on-line connection between the

retail shops and the wholesale units.

A company from Netherland had an AS/400

based system named TOTICS and had operated for

20 years. The question “Whether does the company

need a new information system and if the answer yes

then why?” has been responded as it follows: (1)The

new system is pre-condition to realize the business

strategy plan; (2) The new IS provides higher

reliability and service level for customers; (3)

Within the business group, the objective is to

increase efficiency and to make more transparent the

business processes; (4) The system should support

the business planning and consequently the cost-

efficiency and serving the consumers; (5) The new

IS creates the opportunity for an integrated system.

(Tóth, 2008).

The subsidiary of a multinational oil company in

Hungary used to employ JDE (J.D. Edwards) ERP

system. The company has roughly 100 subsidiaries

world-wide and they had applied a wide variety of

ERP systems. The company decided to eliminate the

heterogeneity of systems. The enterprises wanted

one integrated solution. Considering the

opportunities, the top management of multinational

company made the decision for a project called

Global SAP, GSAP project (Kulcsár, 2008). The

Dutch company settled to introduce SAP R/3 as

well.

In one of our empirical research, we have met the

following approach (ELTE, 2010); (Molnár, 2011):

some business administration functions are

centralized at some regional headquarters as e.g.

invoice processing and payment. The customization

primarily meant specific parameters that reflect the

country specific legal environment. Consequently, a

business function is covered totally by a single ERP

module introduced during the changeover.

4.3 Objectives of ERP Selection and

Practical Approaches

The difficulties in selection of ERP system did not

originate from the fact that too few ERP systems is

available on market, in spite of it there are multitude

of ERP systems. There are hundred vendors beside

the major players in Germany (Grandjean, 2010).

The primary vendor selection could be based on the

market position within the specific ERP sector.

(Meyer, 2011).

The investigation of potential ERP solution

should take into account business and financial

consideration beside the information technology

viewpoints (e.g. software and programming

environment, information system function etc.). A

Hungarian Ltd. had as selection goals for ERP the

following criteria: (1) The system supplier should be

a domestic vendor, the vendor should commit itself

for satisfying the users’ request for change; (2) User

friendly system, easy handling of user interface and

ability for customization; (3) Capability for

integration and interoperation with other systems;

(4) The IT stability of IS should be high. (Csete,

2008)

4.4 Business Case

One of the major objectives during ERP selection is

to mitigate the risks inherent in the selection process.

Besides the business and technical criteria and risks

there are financial ones too. Evaluation methods

InvestigationofCriteriaforSelectionofERPSystems

177

include Net-Present-Value, Cost–Benefit Analysis,

Payback, Return on Investment, etc. To assess the

financial parameters one of the analysis models is

the ROI (Return on Investment) that can be applied.

There is an elaborated method that consists of

several hundred questions. However, the extensive

questionnaire does not solve the problem deriving

from lack of information at stakeholders. There is a

dearth of reliable information on the following

subjects (Gronau, 2010): (1) Knowledge of the

actual functions within the ERP system; (2) The

applied software and –generally – information

technology; (3) The market position, the economic

capability, viability of the potential vendor; (4) The

comprehensive view of the alternative, competing

solutions existing on market; (5) The potential

improvement of information processing; (6) The

comparative analysis of references for alternative

solutions and their implemented instances. ROI is a

good compromise for assessing the financial risks of

an ERP adaption process and other socio-technical

viewpoints. (Lindemann, 2007).

The comparison of the potential alternatives as

procuring, renting, leasing or paying per usage for

services through Cloud Computing can be carried

out by TCO approaches. At a Hungarian Ltd. the

TCO model was employed to analyze the costs for

introduction and operation (Csete, 2008).

4.5 Soft Criteria for Selection

Besides the service quality and financial criteria,

there are lots of other objectives that should be taken

into account during the selection process. The

compliance to the requirements of the company is

one of the most important criteria. To clarify and to

define accurately the compliance criteria, a business

process modeling exercise should be carried out to

discover and to map the whole business process that

will be involved in the ERP introduction. To explore

the discrepancies between the existing processes and

the processes of potential ERP systems, a gap

analysis should be performed. T

The new ERP system may fulfill the recent

requirements; however the ERP system should be

prepared for future demands (Lotto, 2006). The

stability of information systems means the

adaptability to changes of technology, business

processes and business environment.

The experiences shows that if the set of functions

to be automated is minimized for several reasons –

financial, compliance, project timing, resources etc.

– then later on, the enhancement and evolutionary

development to react to the changing environment

may cause extra costs and other operational

difficulties as against of maximization of set of

functions for automation (Grandjean, 2010).

The flexibility of ERP systems is a success

criterion within the corporate and SME world

(Feuchtinger, 2008). In this context, the flexibility is

an overarching concept that involves the

simultaneous use of various languages carrying out

even the same task, at the same time, furthermore

adaptation to the changing business and market

environment. The top management at the center of

enterprises has various opportunities to find a

satisfactory solution among the potential ERP

systems (ELTE, 2010); (Molnár, 2011). The

concrete implementation is situated in the

centralization-decentralization continuum - both

horizontally and vertically according to the

Zachmann architecture - to provide the support that

is required the top management of enterprises.

Other uncertainty factor is the structure of

business processes and organization and the

capability for adjustment to the processes provided

by an ERP system. The ERP system adaptation and

transformation of business processes has as outcome

a solid market position. The ERP system adaptation

may have as a side-effect stronger market position,

efficient internal business processes and a profound

transformation of whole activities in the enterprise.

On selecting an EPR system to support

globalized business activities, so-called country

specific features should be taken into account. Such

features include as follows: Custom and excise

handling; Tax, revenue handling; Commercial code;

Financial and cost accounting; Banking, rules for

bank accounts; Local legal environment,

jurisdiction.

The potential ERP system may or may not

contain the above listed, country specific features.

The required customization needs extra

implementation effort generally.

Some examples for the difficulties that occurred

(Contini, 2010): Country specific, compulsory Chart

of Account (Belgium); Accounting the transfer

prices (Brazil); Handling and accounting the billing

credit (Bulgaria); Country specific Payroll (Chile).

5 FUTURE RESEARCH

DIRECTIONS

The future research should deal with the changing IT

environment, especially the proliferation of Cloud

Computing, the Software as a Service (SaaS), the

application as a service, namely the ERP system

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Table 1: Factors effect on ERP implementation.

Factors effect on ERP

implementation

Occurence in case studies

weak positive

impact

average positive

impact

strong positive

impact

Neutral

average negative

impact

weak negative

impact

strong negative

impact

Top management support 8 5 6 6 2 3 3

Company-wide support 8 5 4 4 4 4 4

Business process

reengineering

1 2 6 6 6 6 6

Effective project

management

7 7 7 3 3 3 3

Organizational culture 1 2 4 4 9 6 7

Education and training 2 7 12 3 3 3 3

User involvement 1 2 6 6 6 6 6

User characteristics 2 3 7 3 3 7 8

ERP software suitability 8 8 12 2 1 1 1

Information quality 8 8 12 2 1 1 1

System quality 8 8 12 2 1 1 1

ERP vendor quality 2 8 12 7 1 2 1

Total : 56 65 100 48 40 43 44

services. in this situation, it will be worth

investigating how the notion of asp (application

service provider) changes and what the particular

features may have regarding the erp services.

6 CONCLUSIONS

The multiple case studies and financial analysis

models presented in this paper provide assistance for

the decision making processes at enterprises where

the changeover issue is reviewed.

The results of research can be summarized in a

table as a conclusion (Table 1). The assessment of

each single factor (Table 1.) is grounded in working

up the in-depth interviews, BSc. / MSc theses and

other reports, overall 40 companies were involved in

the research.

The project management during implementation

and introduction typically followed the traditional

pattern, the disciplined project controlling and

efficient team organization was a pre-condition of

success. The commitment from the top management

considered generally a crucial aspect along with a

comprehensive support from personnel of the

organization.

The result of re-engineering is evaluated by

stakeholders with mixed feelings. Nevertheless, the

education and training is regarded as having positive

influences on the final success of ERP

implementation. The user characteristics and

education are intimately related so that the technical

and business skill of staff contributes to the success

of projects. The high level of information quality at

the customer organization makes easier the

introduction of ERP system as the organization has

been already accustomed to provide accurate,

timely, reliable and consistent data.

The ERP vendor quality appears in the form of

services that are provided together with ERP system

implementation and long-term operation. These

services includes response time of help desk;

knowledgeable consultants with experiences in both

enterprise’s business processes and information

technology including vendor’s ERP system. The

participation and support of vendor’s consultant in

implementation and introduction is a significant

factor. The services provided by consultants can be

characterized by the level of knowledge in both

customer’s business processes and functions of the

particular ERP system.

ACKNOWLEDGEMENTS

The Project is supported by the European Union and

co-financed by the European Social Fund (grant

agreement no. TÁMOP-4.2.2/B-10/1-2010-0030).

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