nupur erp
Content
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BPMJ 16,2
Managing enterprise resource planning projects
Prasanta Kumar Dey, Benjamin Thomas Clegg and David J. Bennett
Aston Business School, Aston University, Birmingham, UK
Abstract
Purpose – The purpose of this paper is to help managers to successfully plan, implement, and operate enterprise resource planning (ERP) projects using a risk management framework. Design/methodology/approach – This paper adopted a combined literature review and case study method. Using literature review, the paper first identified major issues of managing ERP projects and develops a risk management framework for managing those issues. The proposed risk management framework was then applied to a ERP implementation project of a UK-based energy services group and its effectiveness for managing ERP projects implementation had been demonstrated. Additionally, the risk factors as identified from the case application are compared with the risk factors from the previous researches so as to suggest mitigating measures. Findings – All the risk factors are categorized into planning, implementation and operations phases along with project processes, organizational transformation and information technology (IT) perspectives. Project implementation phase is the most vulnerable to failure. The case study results reveal that the effect of other projects on on-going ERP project, management of overall IT architecture and non-availability of resources for organizational transformation are most critical from likelihood and impact perspectives. Managing risk across various phases of project and equal emphasize to effective project management, organizational transformation and IT adoption are the key to success in ERP implementation. Practical implications – The risk factors, which were identified using literature review and the case study, have great significance as mitigating measures of those risks may result successful implementation of ERP projects in the industry. Additionally, proposed risk management framework could be customized to implement ERP projects elsewhere. Originality/value – ERP projects are risky as they are capital intensive, technically complex, and call for organizational transformation. There are both success and failure stories. However, both researchers and practitioners agree, that if it can be implemented and operated successfully and benefits should be achievable. Although there are many studies on ERP implementation, little has been discussed on managing risks of ERP projects. Therefore, this paper bridges the gap. Keywords Manufacturing resource planning, Critical success factors, Risk management Paper type Research paper
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Business Process Management Journal Vol. 16 No. 2, 2010 pp. 282-296 q Emerald Group Publishing Limited 1463-7154 DOI 10.1108/14637151011035606
Introduction Globalization has made today’s business more challenging with increasing competition, rising customer expectations, and expanding markets. This places pressure on companies to reduce cost across the supply chain, reduce inventory, improve logistics operations, expand product variety, improve delivery schedules, improve quality, and reduce material flow time. Companies have realized that these challenges can only be met and the necessary changes made when they share information among their suppliers, distributors, and customers. In order to remain competitive, organizations are increasingly developing collaboration and/or strategic partnerships with their suppliers to share common goal in the business. To accomplish these objectives, companies are increasingly adopting enterprise resource planning (ERP) systems.
ERP systems are designed to provide seamless integration of processes across functional areas with improved workflow, standardisation of business practice, and access to real-time, up-to-date data. ERP systems are complex and implementing them can be a challenging, time consuming, and expensive project for any company (Davenport, 1998). The term “ERP” was conceived and coined in the 1970s but its true benefits to the business world were only realized in the early 1990s. Nah et al. (2001) describe ERP as a packaged business software system that enables a company to manage the efficient and effective use of resources (materials, human resource (HR), finance, etc.) by providing a total integrated solution for the organization’s information processing needs. According to Arif et al. (2005), ERP can integrate the planning and management all major business processes with a single client/server architecture in real time, including contacts with business partners and with customers. The potential benefits of ERP include dramatic declines in inventory, breakthrough reductions in working capital, abundant information about customer wants and needs, along with the ability to view and manage the extended enterprise of suppliers, alliances, and customers as an integrated whole (Chen, 2001; Binder and Clegg, 2007; Clegg, 2008). Most important attributes of ERP are its abilities to automate and integrate business processes across organizational functions and locations, enable implementation of all variations of best business practices with a view towards enhancing productivity, share common data and practices across the entire enterprise in order to reduce errors, produce and access information in a real-time environment to facilitate rapid and better decisions and cost reductions (Nah et al., 2001; Soh et al., 2000). ERP systems provide firms with a transaction processing function, allowing for the integrated management of data throughout the entire company, and a workflow management function controlling the numerous process flows. ERP facilitates the flow of information between all the processes in an organization. ERP systems can also be an instrument for transforming functional organizations into process-oriented ones. When properly integrated, ERP supports process-oriented businesses effectively (Al-Mashari and Zairi, 2000). An important feature of ERP is that it is the first approach that integrally combines business management and information technology (IT) concepts (Slooten and Yap, 1999). ERP’s strength stems from its ability to provide comprehensive business functionality in an integrated way using a state-of-the-art IT infrastructure (Waston et al., 1999). Another significant feature of ERP software is that core corporate activities, such as manufacturing, HRs, finance, and supply chain management have been automated and improved considerably by incorporating best practices, so as to facilitate greater managerial control, speedy decision making, and huge reduction of business operational cost (Bancroft et al., 1998; Holland and Light, 1999). ERP systems help to solve the problem of fragmentation of information in large corporate organizations and to integrate all the information flows within the organization. The standardisation of business processes, ensuring integrity of data, and removing the number, complexity, and expense surrounding the independent legacy systems are all major benefits to be achieved by implementing ERP systems. Researchers pointed out that although ERP systems can bring competitive advantage to organizations, the high failure rate in implementing such systems is a major concern (Kim et al., 2005). There have been a number of prominently publicized
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failures and they have underscored the frustrations and even total meltdowns that enterprises go through in implementing ERP systems. For instance, Allied Waste Industries, Inc. decided to pull the plug on a $130 million system built around SAP R/3, while another trash hauler, Waste Management, Inc., called off an SAP installation after spending about $45 million of an expected $250 million on the project. Hershey Food Corporation has also held SAP accountable for order processing problems that hampered its ability to ship candy and other products to retailers around the peak Halloween season (Boudette, 1999). Despite the large installed base of ERP systems, academic research in this area is relatively new (Mabert et al., 2003). The initial literature in ERP consists of case studies of successful and unsuccessful implementation (Deutsch, 1998; Diederich, 1998; Nelson and Ramstad, 1999), which were mostly published in the trade and professional journals and magazines. Several authors (Piturro, 1999; Trunk, 1999; Zuckerman, 1999) report on application of ERP as a business change enabler in order to achieve competitive advantage. Davenport (1998) demonstrated the challenges of ERP implementation, while McAfee (1998) looked into its operations; they argued that a firm’s ERP competence must be used effectively in order to truly harness the capabilities of an ERP system for competitive advantage. Van Everdingen et al. (2000) and Mabert et al. (2000, 2001) surveyed European and US manufacturing sectors, respectively, to study motivation for ERP implementation, implementation strategies, modules and functions, and operational benefits. Mabert et al. (2003) empirically investigated whether there are key differences in the approaches by companies that managed their implementations within schedule and budget. While there are studies on various aspects of ERP implementations in industry, little has been reported on managing risks and uncertainties of ERP projects. The purpose of this paper is to demonstrate the effectiveness of risk management using the previous works discussed above and a new case study which is discussed below. The remainder of the paper is classified into methodology, literature review, generic risk factors, proposed risk management framework, case application, discussion, and conclusion. Methodology Using literature review of critical success factors and issues of ERP implementation, this paper first identifies risk factors that do not allow ERP projects to achieve time, cost, and quality, and subsequently develop a framework for risk management. The proposed framework was then applied to a UK-based energy utility company to demonstrate its effectiveness. A case study approach was adopted for the application of the proposed risk management and a focus group was conducted to identify the risk factors. The identified risk factors were then compared with the generic risk factors that were identified from the previous researches and mitigating measures were suggested. Literature review on issues of ERP implementation As with any form of technology, there are certain pitfalls associated with the ERP systems. ERP systems have huge storage needs, massive networking requirements, and potential training overheads and are costly and difficult to implement (Adel, 2001). Many of small- and medium-sized enterprises refrain from implementing ERP
solutions because of the cost involved. If an ERP system needs to be customized for an individual organization, it can turn out to be a very costly and time-consuming process. Moreover, organizations can spend three to seven times more money on implementation than the original estimate of the software. Training costs also can run into millions after the system has been installed. There is also a large amount of organizational change required to conform to the vendor’s best practices. There also might be different types of “misfits” associated with ERP. These ERP misfits have been presented by Soh et al. (2000) and are classified into three broad categories – data, process, and output. FoxMeyer, a bankrupt drug company, argued that major problems were generated by a failed ERP system, which created excess shipments resulting from incorrect orders and costing FoxMeyer millions of dollars (Bicknell, 1998; Boudette, 1999). Dell Computer spent tens of millions of dollars on an ERP system only to scrap it because the system was too rigid for their expanding global operations. Recent ERP failures also include Boeing, Dow Chemical, Mobil Europe, Applied Materials, Hershey, and Kellogg’s. One study indicates that 40 percent of all ERP installations only achieve partial implementation and 20 percent of attempted ERP adoptions are scrapped as total failures (Trunick, 1999). Ptak and Schragenbeim (1999) also report that between 60 and 90 percent of ERP implementations do not achieve the return on investment identified in the project approval phase. There is a growing consensus that planning issues are a major barrier to employing these systems effectively. The technical capabilities of ERP systems are relatively well proven. However, looking at the failure rate of ERP projects, some companies have found that by forgoing an ERP system they can actually gain a cost advantage over competitors that are embracing the system. Justification of ERP systems, therefore, needs to encompass not only economic but also strategic benefits. While ERP systems may have the “magic touch” to dramatically enhance the performance of many companies’ business operations, they are also expensive, profoundly complex, and notoriously difficult to implement. The chance of failure has always been high and in order to reap the potential benefits and avoid serious pitfalls, firms must truly understand and address the planning issues. For instance, Davenport (1998) describes the complex upgrading process of an ERP system from SAP R/2 to R/3 as a costly, time-consuming process. The complexity of ERP implementation is forcing many organizations to rethink their plans for acquiring and implementing them (Kumar and Hillegersberg, 2000). Despite the significant benefits that ERP software packages provide in managing and integrating cross-functional business processes, they often cost millions of dollars to buy, several time as much to install, and, more importantly, they result in disruptive organizational changes (Volkoff, 1999; Soh et al., 2000). In fact, 65 percent of executives believe that ERP systems have at least a moderate chance of hurting their businesses because of the potential for implementation problems. From a financial perspective the Standish group’s research shows that 90 percent of ERP implementations end up late or over budget. Although it has been estimated that the payback period for an ERP system typically ranges from one to three years, the evidence is mixed. Meta group recently surveyed 63 companies (ranging in size from $12 million to $43 billion in corporate revenue) to quantify the payback firms got from their ERP investments; their findings showed that the average implementation cost $10.6 million and took 23 months to complete. In addition, an average of $2.1 million
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was spent on maintenance over a two-year period. Ultimately, their research indicated that companies showed an average loss on their investment of $1.5 million over a six-year period. Abdinnour-Helm et al. (2003) and Kirkpatrick (1998) also report that implementing an ERP system is very expensive and time consuming. It costs the average Fortune 500 company $30 million in license fees and $200 million in consulting fees (not to mention additional millions in computers and networks) and can take three years or more before the system yields its maximum benefit. According to Deloitte Consulting’s global director for aerospace and defence, some aerospace companies are spending much more than the projected $30 million. The cost of software licenses and installation can range between $300 and 400 million with installation typically running 2.5 times the value of the licenses. This can put a financial drain on companies for at least two years before they realize a return on their investment (Hughes, 1999). Problems in implementing ERP systems have led to some spectacular failures (Bailey, 1999; Boudette, 1999). Whirlpool experienced delays in shipments of appliances to many distributors and retailers. Allied Waste Industries, Incorporated found SAP too expensive and too complicated to operate. Waste Management Incorporated aborted its SAP implementation after it had spent $45 million of the estimated $250 million needed. Unfortunately, many chief executives view ERP as purely a software system and the implementation of it as a technological challenge. They do not understand that ERP may fundamentally change the way in which the organization operates. This is one of the problematic issues facing current ERP systems. The ultimate goal should be to improve the business and not the implementation of the software per se. The implementation should be business driven and directed by business requirements and not the IT department. Marina and Neil (2001) quote a Standish Group report about the statistics in terms of cost and proposed benefits of ERP projects which reported on ERP implementation projects being on average, 178 percent over budget, taking 2.5 times as long as intended and delivered only 30 percent of promised benefit. It has been estimated that 50-75 percent of US firms experience some degree of failure in implementing advanced manufacturing technology (Umble et al., 2003). There are many further horror stories about implementations that have gone wrong (Laughlin, 1999; Bancroft et al., 1998). Many researchers suggested critical success factors for ERP implementation. Umble et al. (2003) identify clear understanding of strategic goals, commitment by top management, excellent project management, organizational change management, need for a great implementation team, data accuracy, extensive education and training, focused performance measures, and multi-site issues as critical success factors for ERP implementation. Al-Mashari et al. (2003) develop a taxonomy for ERP critical factors. They identify management and leadership, and visioning and planning as the major critical factors in the ERP setting up stage; ERP package selection, training and education, system integration, communication, project management, system testing, process management, legacy systems management, cultural, and structural changes as the critical factors in the implementation stage; and performance evaluation and management as the critical factors in the evaluation phase. Mandal and Gunasekaran (2003) emphasize effective change management for successful ERP implementation: which comprises of change strategy, ERP implementation competency,
project management competency, and IT-based business process reengineering (BPR) competency. However, Kuruppuarachchi et al. (2002) emphasize the need for organizational requirements, project organization structure, a supporting team, training, and project information systems for effective change management. Mabert et al. (2003) identify planning and implementation variables that affect ERP implementation as: clearly defined outcomes, performance matrices, strong executive sponsorship, strong executive involvement, an empowered ERP steering committee, and an implementation team with a clear organizational change strategy, a clear education and training strategy, and an ERP plan that addresses data conversion and integrity. Generic risk factors for ERP implementation The above literature review reveals a list of risk factors that are expected to occur in ERP implementations. The risk factors are categorized both project phase wise and as per their characteristics (i.e. whether they are related to project management processes, organizational transformation and IT). Table I shows the risk factors in accordance to project phases and risk categories.
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Project phases Planning
Project management processes Inaccurate business case Unclear objectives Weak implementation team
Risk categories Organizational transformation Lack of management/ executive commitments and leadership Lack of synergy between IT strategy and organizational competitive strategy Unclear change strategy Inappropriate change management Inappropriate management of culture and structure
IT Lack of communication with the end-users Inadequate training plan for the users
Implementation
Inappropriate management of scope Lack of communication among ERP implementation team, ERP provider and ERP users Poor contract management Inappropriate contract closeout
Hand-over, evaluation and operations
Inadequate organizational readiness Resistance to change Lack of user training
BPR incompetence ERP installation incompetence Inappropriate selection of ERP software Inappropriate system integration Lack of data accuracy Inappropriate training and education of operating people Inappropriate system testing and commissioning Multi-site issues Lack of clarity on inspection and maintenance Inaccurate performance measurement and management framework
Table I. Project phase wise risk factors
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Proposed risk management framework Figure 1 shows an overview of the proposed risk management framework. The risk management framework has five steps – identifying risk, logging risk, reviewing risk, managing risk, and closing risk. The following sections describe each step. Identifying risk The stakeholders “risk” can be defined as a problem that may occur in the future, that has a scale of impact and a probability of occurrence, that needs to be managed by a mitigation strategy or a contingency action, and its occurrence has a potentially adverse effect on the programme or the quality of its deliverables. There are many qualitative and quantitative tools that can be used for identifying risk (Dey, 2002). Involvement of the concerned stakeholders and coming to consensus are the key to appropriate identification of risk in projects. Logging risk Each identified risk needs to be logged into a register in order to capture data against each, which needs to be updated and reported to various levels as per project team’s plan. Reviewing risk The report needs to be reviewed by various concerned stakeholders before acceptance for detailed analysis (likelihood and impact). Managing risk With the involvement of the concerned stakeholders, the likelihood and impact of each risk are determined along with development of mitigating strategies. These may call for additional resources for which management commitment from various levels is required.
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• Project reports • Project plans • Minutes of project • Review meetings
1. Identifying risk • Brainstorm • Come to consensus
Risks
2. Logging risk • Capture data • Update log
• Risk log entries • Risk reports Input to other project reports
3. Reviewing risk • Analyse • Discuss 4. Managing risk • Analyse likelihood and impact of risks • Suggest mitigating measures
Figure 1. Risk management framework for the group’s ERP implementation projects
5. Closing risk • Confirm • Notify
• Mitigating strategies • Containment actions
• Acceptable risk report
Closing risk All the risks need to be followed up closely in a very regular basis and should be integrated with project monitoring and control reporting. The occurrences and impact of these risks need to be reported not only to follow up but also archiving it for learning for forthcoming project management. All the risks needs to be closed at the appropriate time and reported back to all the concerned stakeholders. Case application The proposed risk management framework was applied to a UK-based energy services group. The group was formed following the privatisation of the gas energy market in the UK and a subsequent de-merger of part of the business in 1997. It has since developed into an international business with a total group turnover of £13.4 billion. The group employs over 30,000 people and has expanded globally through a strategy of acquisitions and partnerships in both Canada and the USA. More recently, the company has focused on entrance into the deregulating European markets. As the group had grown by acquisition and mergers, it now possesses an IT landscape consisting of disparate IT systems and disconnected processes. Accordingly, it has embarked on an ERP implementation and re-implementation strategy with SAP as the chosen ERP solution. The group already had a sub-optimal SAP implementation in parts of the business. The group adopted a phased approach focusing on the highest priority process areas first and gradually increasing the ERP modular footprint over a timescale of several years. The first two immediate priorities on its roadmap were on different process areas and these had different strategic drivers and business case models. However, there were several areas of commonality such as a common ERP platform (i.e. SAP), a common implementation methodology and approach, and a common approach to the project management team structure and management processes. The project that is the subject of this case study was a ten-month business transformation initiative consisting of the implementation of a SAP ERP platform for finance, procurement and HR processes with 1,500 system users and 35,000 payroll records involved. To support its vision, The group undertook this business transformation project to radically overhaul its back office systems and to reduce cost. The objectives were to achieve simplification, automation, standardisation, and integration across the three functions. To have the three back office functions working in a fully integrated and largely automated way would provide an invaluable platform upon which the group could begin to develop much wider improvements based on a common and flexible backbone. The project involved implementing SAP’s “mySAP” ERP application suite (to support the HR and finance), e-procurement and business warehouse (BW). Additionally, the new solution provided the platform from which the functions would transform their partnership with the rest of the group’s businesses. The overall solution was based on the SAP “Netweaver” open platform, allowing legacy SAP and non-SAP applications to be fully integrated. The project resulted in the migration of significant volumes of complex legacy data (250-metre transactions with a £1.53 trillion value); the solution was successfully implemented and achieved its objectives to provide simplified and standardised
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processes across the back-office. The SAP ERP suite provided automated and integrated support for these processes. The proposed risk management framework was applied to the above ERP implementation case. The following paragraphs demonstrate the application of each step of the framework. The project organization structure has been shown in Figure 2. The UK-based energy services group (the client) employed a multinational consultant to facilitate ERP implementation and SAP was ERP vendor. The client formed its project team in matrix structure with representative from both functional and IT group. The consultant and the vendor deployed their project teams to implement ERP successfully in client’s premises. Therefore, ERP core project team consisted of client’s project team, consultant’s project team and ERP vendor’s project team. They had applied the proposed risk management framework in order to manage risk in implementing ERP for improving energy service group’s performance. The following paragraphs demonstrate the application of the proposed risk management framework. Identifying risk A formal workshop was held in project planning phase to review risks that are likely to occur. This involved representatives of ERP core project team, client’s functional group and IT group along with management representatives. Project plans, various reports and minutes of the meetings were reviewed by the members prior to the workshop. Additionally, the participants used their experience to identify risks. Logging risk All risks were then updated on the risk log and communicated to the concerned stakeholders. Management and the client’s project team identified the more general project wide risks and check specifics for each function with the various functional teams. The functional teams were responsible for the identification of risks specific to their operations.
ERP vendor ERP consultant ERP core project team Management (CEO and board of directors)
Client
Consultant’s project team
Figure 2. ERP project governance structure
Information technology group Functional group
Client’s project team
ERP vendor’s project team
Reviewing risk Following this, on an ongoing basis, risks were monitored on a weekly basis, with the risk log being updated and key risks being documented in weekly functional reports. This was the responsibility of each functional team. The client project team played an active role in policing this process by attending weekly meetings with functional team to check status, action dates, and to review if new risks were being missed. Managing risk The likelihood and impact of each risk on project outcome were then determined with the involvement of the representatives of client project team, management and functional teams. They derived consensus-mitigating strategies through brainstorming sessions using their experience. This was formalized by a weekly review between work package leaders, management, and the client project team. The client project team had overall responsibility for managing all risks, which include for discussing closing actions, due dates, priorities, and risk impacts with the leaders to ensure that risks were being actively managed. High probability and high impact risks were given escalated up the governance structure to be analysed and discussed within the weekly management meetings and they would also be detailed on the weekly management reports. Should a risk be out of the control of the project management team it would be escalated further up the governance structure to the Executive Steering Committee (chief executive officer and the board of directors) that provided the executive sponsorship for the projects. Closing risk Each risk was updated with respect to its likelihood and impact along with the mitigating strategy. Every risk was closed out with completion of related project activities and lesson learned was transferred to the project evaluation report. Tables II-IV show risk analysis results of the case study project just before implementation. Discussion The case study organization had adopted a risk-based project management framework to implement ERP projects. All the possible risks were identified in the planning phase with the involvement of the concerned stakeholders and categorized to implementation, handing over and operations as per the time of their occurrence. Further the risks were classified into IT, organizational transformation, and project management processes related risks. It had been observed that the most of the risks were likely to occur during the implementation phase of the project. In the implementation phase of the project “non-availability of business resources,” “delay in making changes in legacy system,” “effect of other projects on ERP implementation,” “mismanagement of overall IT architecture” risks had high probability and high impact. Only “delay in handing over sign-off” had high probability and high impact in the handing over phase. In implementing ERP projects issues related to organizational transformation, IT, and project management processes are equally important. In the organizational transformation, category risks of “non-availability of business resources” and “delay in making changes in legacy system” had high probability and high impact. In the
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Risk Project resources required not available, e.g. for training The project execution deviates from design/principles “Quality” at risk due to time/cost drivers Risk that sponsor cancels the project Other projects that are happening in parallel within the business impact the ERP project Project team “burns out” Lack of resources available from within the business to fill specific roles Scope creep Hardware procurement process too long Project team turn-over Plans is not achievable because of insufficient capacity and parallelism Communication risk between the project and the business Testing team under-resourced Business resources required not available – business resource may “overlap” Legacy system change impact interfaces Legacy systems require changes which would be likely to delay the project Business inadequately prepared to take on new solution Fail to transfer knowledge (consultant to the business project resources) The business suffers “change fatigue” IT quality gates (project review checkpoints) prevent the projects making progress Mismanagement of overall IT architecture’ Lack of resources in new technology areas being implemented due to their specialist nature Insufficient servers “horse power” Insufficient data base capacity within SAP for the volume of transactions being migrated across from the legacy systems Data cleansing is not as per requirement Risk that telecommunication links with outsourcing partners fails, resulting in a lack of access to SAP by the offshore team Individual role profiles (SAP) fail to match “real” organization roles Fail to develop a reliable solutions using IT to all the functional issues Decisions with respect to the system architecture configuration are not taken on time The project end-user infrastructure fails to support deployment Insufficient training facilities available Failure to move towards Sarbanes-Oxley Act1 compliance
Impact Likelihood Category H M M H H M M H H M H M L H H H M H L H H H H H M H H H M L M H M L H L H M H L M M L L L H M H L M H L H L L M H L L M L M M L IT Organizational transformation Project management process
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Table II. Risks in the implementation phase
Notes: H, high; M, medium; and L, low
IT category, “mismanagement of overall IT architecture” had high probability and high impact. In the project management processes category, “effect of other projects on ERP implementation” and “delay in handing over sign-off” had high probability and high impact. Proactive actions and contingency plans helped the ERP projects achieving their desired time, cost, and quality. The risks as identified in this case studies in the organizational transformation and project management process categories have strong synergy with the risks that were identified from the literature reviews. However, IT-related risks were unique for the project under study. ERP systems have received much attention lately for their potential to enable more effective decision-making. Many companies are implementing ERP packages as a means of reducing operating costs, increasing productivity and improving customer services, ERP systems help to solve the problem of fragmentation of information in large corporate organizations and to integrate all the information flows within the organization. The standardisation of business processes, ensuring integrity of data, and removing the number, complexity, and expense surrounding the independent legacy systems are all major benefits to be achieved by implementing ERP systems. Many organizations realize that they need to form alliances with their customers, partners, and suppliers over the internet, e-business integration with ERP systems becomes a critical issue. ERP has diminished the internal and external boundaries of the organization and provided a more open environment. Many small- and medium-sized organizations are also beginning to realize the importance of ERP. This study could be extended by empirically studying risk management practices of other organizations and understanding the pros and cons of each framework. Additionally, risk factors in every phase of projects could be identified and their
Risk Decisions/sign-off does not occur in a timely manner Business fails to adopt change Fail to properly reconcile business information into the new system Notes: H, high; M, medium; and L, low Impact Likelihood Risk category H L H H L L Project management processes Organizational transformation IT
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Table III. Risks in the handing-over phase
Risk Fail to deliver benefits as outlined in the business case Insufficient training Solution fails to be scalable Lack of disaster recovery arrangements Solution fails to provide financial control Solution fails to comply with Data Protection Act Issues arise post-go-live with a lack of time to fix them
Impact M H M M H H L
Likelihood L M L M M L L
Risk category Organizational transformation IT Table IV. Risks in the operations phase
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characteristics could be studied so as to develop effective project management framework for successful ERP implementation. Conclusions The main objective of this paper was to help managers to successfully plan, implement and operate ERP systems using risk management framework. Since the early 1990s ERP has been deployed by many organizations to transform entire business process in order to improve performance. On one hand, ERP has brought success to many organizations, whereas, on the other hand, it has sometimes resulted in significant failures. The main problems associated with an ERP system are its cost, the burden of implementation, and delay in accruing benefits. However, it is general agreed, that if it can be implemented and operated successfully and benefits should be achievable. A literature review helped identify generic risks of ERP projects. Some of the success factors are commitment from top management, reengineering of the existing processes, selecting the right system, integrating ERP with other business information systems. These items were illustrated with a new case study based in a world leading energy supplier. The case study shows that nature and characteristics of risks depends on the sizes and complexities. Effective management of those risks helps achieve project success but the appropriate identification of risks is a major challenge. Thus, project risk management comprises of the identification, analysis, response development, and controlling of risk-mitigating measures and contingency plan with the involvement of the concerned stakeholders. In other words, effective project management of ERP projects requires integration of risk management with scope, time and cost management. Therefore, appropriate identification of risks during early project planning phase, and monitoring and controlling them throughout the subsequent phases with the involvement of the concerned stakeholders helps achieve desired time, cost, and quality of ERP projects.
References Abdinnour-Helm, S., Lengnick-Hall, M.L. and Lengnick-Hall, C.A. (2003), “Pre-implementation attitudes and organizational readiness for implementing an enterprise resource planning system”, European Journal of Operational Research, Vol. 146, pp. 258-73. Aladwani, A.M. (2001), “Change management strategies for successful ERP implementation”, Business Process Management Journal, Vol. 7 No. 3, pp. 266-75. Al-Mashari, M. and Zairi, M. (2000), “Supply chain reengineering ERP systems: an analysis of a SAP R/3 implementation case”, International Journal of Physical Distribution & Logistics, Vol. 30 Nos 3/4, pp. 296-313. Al-Mashari, M., Al-Mudimigh, A. and Zairi, M. (2003), “Enterprise resource planning: a taxonomy of critical factors”, European Journal of Operational Research, Vol. 146, pp. 352-64. Arif, M., Kulonda, D., Jones, J. and Proctor, M. (2005), “Enterprise information systems: technology first or process first”, Business Process Management Journal, Vol. 11 No. 1, pp. 5-21. Bailey, J. (1999), “Trash haulers are taking fancy software to the dump”, The Wall Street Journal, June 9, p. B4. Bancroft, N., Seip, H. and Sprengel, A. (1998), Implementing SAP R/3: How to Introduce a Large System into A Large Organization, Manning, Greenwich, CT.
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Bicknell, D. (1998), “SAP to fight drug firm’s $500M suit over R/3 collapse”, The Computer Weekly, September 3. Binder, M. and Clegg, B.T. (2007), “Enterprise management: a new frontier for organisations”, International Journal of Production Economics, Vol. 106 No. 2, pp. 409-30 (special issue on Organisation, Structure and Culture on Operations Management). Boudette, N.E. (1999), “Europe’s SAP scrambles to stem big glitches”, The Wall Street Journal, November 4, p. A25. Chen, I.J. (2001), “Planning for ERP systems: analysis and future trend”, Business Process Management Journal, Vol. 7 No. 5, pp. 374-86. Clegg, B.T. (2008), “The growing importance of inter-company collaboration”, Journal of Manufacturing Technology Management, Vol. 19 No. 3 (Editorial). Davenport, T.H. (1998), “Putting the enterprise into the enterprise system”, Harvard Business Review, Vol. 16 No. 4, pp. 121-31. Deutsch, C. (1998), “Software that can make a grown company cry”, The New York Times, Vol. CXLVIII No. 51, pp. 1-13. Dey, P.K. (2002), “Project risk management: a combined analytic hierarchy process and decision tree approach”, Cost Engineering, Vol. 44 No. 3, pp. 13-26. Diederich, T. (1998), “Bankrupt firm blames SAP for failure”, Computer World, available at: www.computerworld.com/cwi/Printer_Friendly_Version/0,1212,NAV47_STO26181-,00.html (accessed August 28, 1998). Holland, C. and Light, B. (1999), “A critical success factors model for ERP implementation”, IEEE Software, May/June, pp. 30-5. Hughes, D. (1999), “Aerospace invests billions in ERP software, processes”, Aviation Week & Space Technology, Vol. 150 No. 4, pp. 68-70. Kim, Y., Lee, Z. and Gosain, S. (2005), “Impediments to successful ERP implementation process”, Business Process Management Journal, Vol. 11 No. 2, pp. 158-70. Kirkpatrick, D. (1998), “The e-ware war: competition comes to enterprise software”, Fortune, Vol. 7, pp. 102-12. Kumar, K. and Hillegersberg, V. (2000), “ERP experiences and evolution”, Communications of the ACM, Vol. 43 No. 4, pp. 22-6. Kuruppuarachchi, P., Mandal, P. and Smith, R. (2002), “IT project implementation strategies for effective changes: a critical review”, Logistics Information Management, Vol. 15 No. 2, pp. 126-37. Laughlin, S.P. (1999), “An ERP game plan”, Journal of Business Strategy, Vol. 20 No. 1, pp. 32-7. McAfee, A.P. (1998), “The impact of information technology on operational effectiveness: an empirical investigation”, working paper, Harvard Business School, Cambridge, MA. Mabert, V.M., Soni, A.K. and Venkataramanan, M.A. (2000), “Enterprise resource planning survey of US manufacturing firms”, Production & Inventory Management Journal, Vol. 41 No. 20, pp. 52-8. Mabert, V.M., Soni, A.K. and Venkataramanan, M.A. (2001), “Enterprise resource planning: common myths versus evolving reality”, Business Horizons, Vol. 44 No. 3, pp. 67-76. Mabert, V.A., Soni, A.K. and Venkataraman, M.A. (2003), “The impact of organisation size on ERP implementations in the US manufacturing sector”, Omega, Vol. 31 No. 3, pp. 235-46. Mandal, P. and Gunasekaran, A. (2003), “Issues in implementing ERP: a case study”, European Journal of Operational Research, Vol. 146, pp. 274-83.
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Marina, K. and Neil, M. (2001), “The implementation of enterprise resource planning packages in different organisational and national cultures”, Information Systems, Vol. 26, pp. 185-204. Nah, F., Lau, J. and Kuang, J. (2001), “Critical factors for successful implementation of enterprise systems”, Business Process Management Journal, Vol. 7 No. 3, pp. 285-96. Nelson, E. and Ramstad, E. (1999), “Hershey’s biggest Dud has turned out to be new computer system”, The Wall Street Journal, Vol. CIV No. 85, pp. A1-A6. Piturro, M. (1999), “How midsize companies are buying ERP”, Journal of Accountancy, Vol. 188 No. 3, pp. 41-8. Ptak, C.A. and Schragenbeim, E. (1999), ERP: Tools, Techniques, and Applications for Integrating the Supply Chain, St Lucie Press, Boca Raton, FL. Slooten, K. and Yap, L. (1999), “Implementing ERP information systems using SAP”, Proceedings of AMCIS, pp. 226-8. Soh, C., Kien, S.S. and Tay-Yap, J. (2000), “Cultural fits and misfits: is ERP a universal solution?”, Communications of the ACM, Vol. 43 No. 4, pp. 47-51. Trunick, P.A. (1999), “ERP: promise or pipe dream?”, Transportation & Distribution, Vol. 40 No. 1, pp. 23-6. Trunk, C. (1999), “Building bridges between WMS & ERP”, Journal of Transportation & Distribution, Vol. 40 No. 2, pp. 6-8. Umble, E.J., Haft, R.R. and Umble, M. (2003), “Enterprise resource planning: implementation procedures and critical success factors”, European Journal of Operational Research, Vol. 146 No. 2, pp. 241-57. Van Everdingen, Y., Hillegersberg, J. and Waarts, E. (2000), “ERP adoption by European midsize companies”, Communications of the ACM, Vol. 43, pp. 27-31. Volkoff, O. (1999), “Using the structurational model of technology to analyze an ERP implementation”, Proceedings of AMCIS, pp. 235-7. Waston, E., Rosemann, M. and Stewart, G. (1999), “An overview of teaching and research using SAP R/3”, Proceedings of AMCIS, Milwaukee, WI, August 13-15. Zuckerman, C. (1999), “ERP: pathway to the future or yesterday’s buzz?”, Journal of Transportation & Distribution, Vol. 40 No. 8, pp. 37-43. Further reading Davenport, T.H. (2000), Mission Critical: Realizing the Promise of Enterprise Systems, Harvard Business School Press, Boston, MA. Umble, E.J. and Umble, M.M. (2002), “Avoiding ERP implementation failure”, Industrial Management, Vol. 44 No. 1, pp. 25-33. Corresponding author Prasanta Kumar Dey can be contacted at: [email protected]
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Managing enterprise resource planning projects
Prasanta Kumar Dey, Benjamin Thomas Clegg and David J. Bennett
Aston Business School, Aston University, Birmingham, UK
Abstract
Purpose – The purpose of this paper is to help managers to successfully plan, implement, and operate enterprise resource planning (ERP) projects using a risk management framework. Design/methodology/approach – This paper adopted a combined literature review and case study method. Using literature review, the paper first identified major issues of managing ERP projects and develops a risk management framework for managing those issues. The proposed risk management framework was then applied to a ERP implementation project of a UK-based energy services group and its effectiveness for managing ERP projects implementation had been demonstrated. Additionally, the risk factors as identified from the case application are compared with the risk factors from the previous researches so as to suggest mitigating measures. Findings – All the risk factors are categorized into planning, implementation and operations phases along with project processes, organizational transformation and information technology (IT) perspectives. Project implementation phase is the most vulnerable to failure. The case study results reveal that the effect of other projects on on-going ERP project, management of overall IT architecture and non-availability of resources for organizational transformation are most critical from likelihood and impact perspectives. Managing risk across various phases of project and equal emphasize to effective project management, organizational transformation and IT adoption are the key to success in ERP implementation. Practical implications – The risk factors, which were identified using literature review and the case study, have great significance as mitigating measures of those risks may result successful implementation of ERP projects in the industry. Additionally, proposed risk management framework could be customized to implement ERP projects elsewhere. Originality/value – ERP projects are risky as they are capital intensive, technically complex, and call for organizational transformation. There are both success and failure stories. However, both researchers and practitioners agree, that if it can be implemented and operated successfully and benefits should be achievable. Although there are many studies on ERP implementation, little has been discussed on managing risks of ERP projects. Therefore, this paper bridges the gap. Keywords Manufacturing resource planning, Critical success factors, Risk management Paper type Research paper
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Business Process Management Journal Vol. 16 No. 2, 2010 pp. 282-296 q Emerald Group Publishing Limited 1463-7154 DOI 10.1108/14637151011035606
Introduction Globalization has made today’s business more challenging with increasing competition, rising customer expectations, and expanding markets. This places pressure on companies to reduce cost across the supply chain, reduce inventory, improve logistics operations, expand product variety, improve delivery schedules, improve quality, and reduce material flow time. Companies have realized that these challenges can only be met and the necessary changes made when they share information among their suppliers, distributors, and customers. In order to remain competitive, organizations are increasingly developing collaboration and/or strategic partnerships with their suppliers to share common goal in the business. To accomplish these objectives, companies are increasingly adopting enterprise resource planning (ERP) systems.
ERP systems are designed to provide seamless integration of processes across functional areas with improved workflow, standardisation of business practice, and access to real-time, up-to-date data. ERP systems are complex and implementing them can be a challenging, time consuming, and expensive project for any company (Davenport, 1998). The term “ERP” was conceived and coined in the 1970s but its true benefits to the business world were only realized in the early 1990s. Nah et al. (2001) describe ERP as a packaged business software system that enables a company to manage the efficient and effective use of resources (materials, human resource (HR), finance, etc.) by providing a total integrated solution for the organization’s information processing needs. According to Arif et al. (2005), ERP can integrate the planning and management all major business processes with a single client/server architecture in real time, including contacts with business partners and with customers. The potential benefits of ERP include dramatic declines in inventory, breakthrough reductions in working capital, abundant information about customer wants and needs, along with the ability to view and manage the extended enterprise of suppliers, alliances, and customers as an integrated whole (Chen, 2001; Binder and Clegg, 2007; Clegg, 2008). Most important attributes of ERP are its abilities to automate and integrate business processes across organizational functions and locations, enable implementation of all variations of best business practices with a view towards enhancing productivity, share common data and practices across the entire enterprise in order to reduce errors, produce and access information in a real-time environment to facilitate rapid and better decisions and cost reductions (Nah et al., 2001; Soh et al., 2000). ERP systems provide firms with a transaction processing function, allowing for the integrated management of data throughout the entire company, and a workflow management function controlling the numerous process flows. ERP facilitates the flow of information between all the processes in an organization. ERP systems can also be an instrument for transforming functional organizations into process-oriented ones. When properly integrated, ERP supports process-oriented businesses effectively (Al-Mashari and Zairi, 2000). An important feature of ERP is that it is the first approach that integrally combines business management and information technology (IT) concepts (Slooten and Yap, 1999). ERP’s strength stems from its ability to provide comprehensive business functionality in an integrated way using a state-of-the-art IT infrastructure (Waston et al., 1999). Another significant feature of ERP software is that core corporate activities, such as manufacturing, HRs, finance, and supply chain management have been automated and improved considerably by incorporating best practices, so as to facilitate greater managerial control, speedy decision making, and huge reduction of business operational cost (Bancroft et al., 1998; Holland and Light, 1999). ERP systems help to solve the problem of fragmentation of information in large corporate organizations and to integrate all the information flows within the organization. The standardisation of business processes, ensuring integrity of data, and removing the number, complexity, and expense surrounding the independent legacy systems are all major benefits to be achieved by implementing ERP systems. Researchers pointed out that although ERP systems can bring competitive advantage to organizations, the high failure rate in implementing such systems is a major concern (Kim et al., 2005). There have been a number of prominently publicized
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failures and they have underscored the frustrations and even total meltdowns that enterprises go through in implementing ERP systems. For instance, Allied Waste Industries, Inc. decided to pull the plug on a $130 million system built around SAP R/3, while another trash hauler, Waste Management, Inc., called off an SAP installation after spending about $45 million of an expected $250 million on the project. Hershey Food Corporation has also held SAP accountable for order processing problems that hampered its ability to ship candy and other products to retailers around the peak Halloween season (Boudette, 1999). Despite the large installed base of ERP systems, academic research in this area is relatively new (Mabert et al., 2003). The initial literature in ERP consists of case studies of successful and unsuccessful implementation (Deutsch, 1998; Diederich, 1998; Nelson and Ramstad, 1999), which were mostly published in the trade and professional journals and magazines. Several authors (Piturro, 1999; Trunk, 1999; Zuckerman, 1999) report on application of ERP as a business change enabler in order to achieve competitive advantage. Davenport (1998) demonstrated the challenges of ERP implementation, while McAfee (1998) looked into its operations; they argued that a firm’s ERP competence must be used effectively in order to truly harness the capabilities of an ERP system for competitive advantage. Van Everdingen et al. (2000) and Mabert et al. (2000, 2001) surveyed European and US manufacturing sectors, respectively, to study motivation for ERP implementation, implementation strategies, modules and functions, and operational benefits. Mabert et al. (2003) empirically investigated whether there are key differences in the approaches by companies that managed their implementations within schedule and budget. While there are studies on various aspects of ERP implementations in industry, little has been reported on managing risks and uncertainties of ERP projects. The purpose of this paper is to demonstrate the effectiveness of risk management using the previous works discussed above and a new case study which is discussed below. The remainder of the paper is classified into methodology, literature review, generic risk factors, proposed risk management framework, case application, discussion, and conclusion. Methodology Using literature review of critical success factors and issues of ERP implementation, this paper first identifies risk factors that do not allow ERP projects to achieve time, cost, and quality, and subsequently develop a framework for risk management. The proposed framework was then applied to a UK-based energy utility company to demonstrate its effectiveness. A case study approach was adopted for the application of the proposed risk management and a focus group was conducted to identify the risk factors. The identified risk factors were then compared with the generic risk factors that were identified from the previous researches and mitigating measures were suggested. Literature review on issues of ERP implementation As with any form of technology, there are certain pitfalls associated with the ERP systems. ERP systems have huge storage needs, massive networking requirements, and potential training overheads and are costly and difficult to implement (Adel, 2001). Many of small- and medium-sized enterprises refrain from implementing ERP
solutions because of the cost involved. If an ERP system needs to be customized for an individual organization, it can turn out to be a very costly and time-consuming process. Moreover, organizations can spend three to seven times more money on implementation than the original estimate of the software. Training costs also can run into millions after the system has been installed. There is also a large amount of organizational change required to conform to the vendor’s best practices. There also might be different types of “misfits” associated with ERP. These ERP misfits have been presented by Soh et al. (2000) and are classified into three broad categories – data, process, and output. FoxMeyer, a bankrupt drug company, argued that major problems were generated by a failed ERP system, which created excess shipments resulting from incorrect orders and costing FoxMeyer millions of dollars (Bicknell, 1998; Boudette, 1999). Dell Computer spent tens of millions of dollars on an ERP system only to scrap it because the system was too rigid for their expanding global operations. Recent ERP failures also include Boeing, Dow Chemical, Mobil Europe, Applied Materials, Hershey, and Kellogg’s. One study indicates that 40 percent of all ERP installations only achieve partial implementation and 20 percent of attempted ERP adoptions are scrapped as total failures (Trunick, 1999). Ptak and Schragenbeim (1999) also report that between 60 and 90 percent of ERP implementations do not achieve the return on investment identified in the project approval phase. There is a growing consensus that planning issues are a major barrier to employing these systems effectively. The technical capabilities of ERP systems are relatively well proven. However, looking at the failure rate of ERP projects, some companies have found that by forgoing an ERP system they can actually gain a cost advantage over competitors that are embracing the system. Justification of ERP systems, therefore, needs to encompass not only economic but also strategic benefits. While ERP systems may have the “magic touch” to dramatically enhance the performance of many companies’ business operations, they are also expensive, profoundly complex, and notoriously difficult to implement. The chance of failure has always been high and in order to reap the potential benefits and avoid serious pitfalls, firms must truly understand and address the planning issues. For instance, Davenport (1998) describes the complex upgrading process of an ERP system from SAP R/2 to R/3 as a costly, time-consuming process. The complexity of ERP implementation is forcing many organizations to rethink their plans for acquiring and implementing them (Kumar and Hillegersberg, 2000). Despite the significant benefits that ERP software packages provide in managing and integrating cross-functional business processes, they often cost millions of dollars to buy, several time as much to install, and, more importantly, they result in disruptive organizational changes (Volkoff, 1999; Soh et al., 2000). In fact, 65 percent of executives believe that ERP systems have at least a moderate chance of hurting their businesses because of the potential for implementation problems. From a financial perspective the Standish group’s research shows that 90 percent of ERP implementations end up late or over budget. Although it has been estimated that the payback period for an ERP system typically ranges from one to three years, the evidence is mixed. Meta group recently surveyed 63 companies (ranging in size from $12 million to $43 billion in corporate revenue) to quantify the payback firms got from their ERP investments; their findings showed that the average implementation cost $10.6 million and took 23 months to complete. In addition, an average of $2.1 million
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was spent on maintenance over a two-year period. Ultimately, their research indicated that companies showed an average loss on their investment of $1.5 million over a six-year period. Abdinnour-Helm et al. (2003) and Kirkpatrick (1998) also report that implementing an ERP system is very expensive and time consuming. It costs the average Fortune 500 company $30 million in license fees and $200 million in consulting fees (not to mention additional millions in computers and networks) and can take three years or more before the system yields its maximum benefit. According to Deloitte Consulting’s global director for aerospace and defence, some aerospace companies are spending much more than the projected $30 million. The cost of software licenses and installation can range between $300 and 400 million with installation typically running 2.5 times the value of the licenses. This can put a financial drain on companies for at least two years before they realize a return on their investment (Hughes, 1999). Problems in implementing ERP systems have led to some spectacular failures (Bailey, 1999; Boudette, 1999). Whirlpool experienced delays in shipments of appliances to many distributors and retailers. Allied Waste Industries, Incorporated found SAP too expensive and too complicated to operate. Waste Management Incorporated aborted its SAP implementation after it had spent $45 million of the estimated $250 million needed. Unfortunately, many chief executives view ERP as purely a software system and the implementation of it as a technological challenge. They do not understand that ERP may fundamentally change the way in which the organization operates. This is one of the problematic issues facing current ERP systems. The ultimate goal should be to improve the business and not the implementation of the software per se. The implementation should be business driven and directed by business requirements and not the IT department. Marina and Neil (2001) quote a Standish Group report about the statistics in terms of cost and proposed benefits of ERP projects which reported on ERP implementation projects being on average, 178 percent over budget, taking 2.5 times as long as intended and delivered only 30 percent of promised benefit. It has been estimated that 50-75 percent of US firms experience some degree of failure in implementing advanced manufacturing technology (Umble et al., 2003). There are many further horror stories about implementations that have gone wrong (Laughlin, 1999; Bancroft et al., 1998). Many researchers suggested critical success factors for ERP implementation. Umble et al. (2003) identify clear understanding of strategic goals, commitment by top management, excellent project management, organizational change management, need for a great implementation team, data accuracy, extensive education and training, focused performance measures, and multi-site issues as critical success factors for ERP implementation. Al-Mashari et al. (2003) develop a taxonomy for ERP critical factors. They identify management and leadership, and visioning and planning as the major critical factors in the ERP setting up stage; ERP package selection, training and education, system integration, communication, project management, system testing, process management, legacy systems management, cultural, and structural changes as the critical factors in the implementation stage; and performance evaluation and management as the critical factors in the evaluation phase. Mandal and Gunasekaran (2003) emphasize effective change management for successful ERP implementation: which comprises of change strategy, ERP implementation competency,
project management competency, and IT-based business process reengineering (BPR) competency. However, Kuruppuarachchi et al. (2002) emphasize the need for organizational requirements, project organization structure, a supporting team, training, and project information systems for effective change management. Mabert et al. (2003) identify planning and implementation variables that affect ERP implementation as: clearly defined outcomes, performance matrices, strong executive sponsorship, strong executive involvement, an empowered ERP steering committee, and an implementation team with a clear organizational change strategy, a clear education and training strategy, and an ERP plan that addresses data conversion and integrity. Generic risk factors for ERP implementation The above literature review reveals a list of risk factors that are expected to occur in ERP implementations. The risk factors are categorized both project phase wise and as per their characteristics (i.e. whether they are related to project management processes, organizational transformation and IT). Table I shows the risk factors in accordance to project phases and risk categories.
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Project phases Planning
Project management processes Inaccurate business case Unclear objectives Weak implementation team
Risk categories Organizational transformation Lack of management/ executive commitments and leadership Lack of synergy between IT strategy and organizational competitive strategy Unclear change strategy Inappropriate change management Inappropriate management of culture and structure
IT Lack of communication with the end-users Inadequate training plan for the users
Implementation
Inappropriate management of scope Lack of communication among ERP implementation team, ERP provider and ERP users Poor contract management Inappropriate contract closeout
Hand-over, evaluation and operations
Inadequate organizational readiness Resistance to change Lack of user training
BPR incompetence ERP installation incompetence Inappropriate selection of ERP software Inappropriate system integration Lack of data accuracy Inappropriate training and education of operating people Inappropriate system testing and commissioning Multi-site issues Lack of clarity on inspection and maintenance Inaccurate performance measurement and management framework
Table I. Project phase wise risk factors
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Proposed risk management framework Figure 1 shows an overview of the proposed risk management framework. The risk management framework has five steps – identifying risk, logging risk, reviewing risk, managing risk, and closing risk. The following sections describe each step. Identifying risk The stakeholders “risk” can be defined as a problem that may occur in the future, that has a scale of impact and a probability of occurrence, that needs to be managed by a mitigation strategy or a contingency action, and its occurrence has a potentially adverse effect on the programme or the quality of its deliverables. There are many qualitative and quantitative tools that can be used for identifying risk (Dey, 2002). Involvement of the concerned stakeholders and coming to consensus are the key to appropriate identification of risk in projects. Logging risk Each identified risk needs to be logged into a register in order to capture data against each, which needs to be updated and reported to various levels as per project team’s plan. Reviewing risk The report needs to be reviewed by various concerned stakeholders before acceptance for detailed analysis (likelihood and impact). Managing risk With the involvement of the concerned stakeholders, the likelihood and impact of each risk are determined along with development of mitigating strategies. These may call for additional resources for which management commitment from various levels is required.
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• Project reports • Project plans • Minutes of project • Review meetings
1. Identifying risk • Brainstorm • Come to consensus
Risks
2. Logging risk • Capture data • Update log
• Risk log entries • Risk reports Input to other project reports
3. Reviewing risk • Analyse • Discuss 4. Managing risk • Analyse likelihood and impact of risks • Suggest mitigating measures
Figure 1. Risk management framework for the group’s ERP implementation projects
5. Closing risk • Confirm • Notify
• Mitigating strategies • Containment actions
• Acceptable risk report
Closing risk All the risks need to be followed up closely in a very regular basis and should be integrated with project monitoring and control reporting. The occurrences and impact of these risks need to be reported not only to follow up but also archiving it for learning for forthcoming project management. All the risks needs to be closed at the appropriate time and reported back to all the concerned stakeholders. Case application The proposed risk management framework was applied to a UK-based energy services group. The group was formed following the privatisation of the gas energy market in the UK and a subsequent de-merger of part of the business in 1997. It has since developed into an international business with a total group turnover of £13.4 billion. The group employs over 30,000 people and has expanded globally through a strategy of acquisitions and partnerships in both Canada and the USA. More recently, the company has focused on entrance into the deregulating European markets. As the group had grown by acquisition and mergers, it now possesses an IT landscape consisting of disparate IT systems and disconnected processes. Accordingly, it has embarked on an ERP implementation and re-implementation strategy with SAP as the chosen ERP solution. The group already had a sub-optimal SAP implementation in parts of the business. The group adopted a phased approach focusing on the highest priority process areas first and gradually increasing the ERP modular footprint over a timescale of several years. The first two immediate priorities on its roadmap were on different process areas and these had different strategic drivers and business case models. However, there were several areas of commonality such as a common ERP platform (i.e. SAP), a common implementation methodology and approach, and a common approach to the project management team structure and management processes. The project that is the subject of this case study was a ten-month business transformation initiative consisting of the implementation of a SAP ERP platform for finance, procurement and HR processes with 1,500 system users and 35,000 payroll records involved. To support its vision, The group undertook this business transformation project to radically overhaul its back office systems and to reduce cost. The objectives were to achieve simplification, automation, standardisation, and integration across the three functions. To have the three back office functions working in a fully integrated and largely automated way would provide an invaluable platform upon which the group could begin to develop much wider improvements based on a common and flexible backbone. The project involved implementing SAP’s “mySAP” ERP application suite (to support the HR and finance), e-procurement and business warehouse (BW). Additionally, the new solution provided the platform from which the functions would transform their partnership with the rest of the group’s businesses. The overall solution was based on the SAP “Netweaver” open platform, allowing legacy SAP and non-SAP applications to be fully integrated. The project resulted in the migration of significant volumes of complex legacy data (250-metre transactions with a £1.53 trillion value); the solution was successfully implemented and achieved its objectives to provide simplified and standardised
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processes across the back-office. The SAP ERP suite provided automated and integrated support for these processes. The proposed risk management framework was applied to the above ERP implementation case. The following paragraphs demonstrate the application of each step of the framework. The project organization structure has been shown in Figure 2. The UK-based energy services group (the client) employed a multinational consultant to facilitate ERP implementation and SAP was ERP vendor. The client formed its project team in matrix structure with representative from both functional and IT group. The consultant and the vendor deployed their project teams to implement ERP successfully in client’s premises. Therefore, ERP core project team consisted of client’s project team, consultant’s project team and ERP vendor’s project team. They had applied the proposed risk management framework in order to manage risk in implementing ERP for improving energy service group’s performance. The following paragraphs demonstrate the application of the proposed risk management framework. Identifying risk A formal workshop was held in project planning phase to review risks that are likely to occur. This involved representatives of ERP core project team, client’s functional group and IT group along with management representatives. Project plans, various reports and minutes of the meetings were reviewed by the members prior to the workshop. Additionally, the participants used their experience to identify risks. Logging risk All risks were then updated on the risk log and communicated to the concerned stakeholders. Management and the client’s project team identified the more general project wide risks and check specifics for each function with the various functional teams. The functional teams were responsible for the identification of risks specific to their operations.
ERP vendor ERP consultant ERP core project team Management (CEO and board of directors)
Client
Consultant’s project team
Figure 2. ERP project governance structure
Information technology group Functional group
Client’s project team
ERP vendor’s project team
Reviewing risk Following this, on an ongoing basis, risks were monitored on a weekly basis, with the risk log being updated and key risks being documented in weekly functional reports. This was the responsibility of each functional team. The client project team played an active role in policing this process by attending weekly meetings with functional team to check status, action dates, and to review if new risks were being missed. Managing risk The likelihood and impact of each risk on project outcome were then determined with the involvement of the representatives of client project team, management and functional teams. They derived consensus-mitigating strategies through brainstorming sessions using their experience. This was formalized by a weekly review between work package leaders, management, and the client project team. The client project team had overall responsibility for managing all risks, which include for discussing closing actions, due dates, priorities, and risk impacts with the leaders to ensure that risks were being actively managed. High probability and high impact risks were given escalated up the governance structure to be analysed and discussed within the weekly management meetings and they would also be detailed on the weekly management reports. Should a risk be out of the control of the project management team it would be escalated further up the governance structure to the Executive Steering Committee (chief executive officer and the board of directors) that provided the executive sponsorship for the projects. Closing risk Each risk was updated with respect to its likelihood and impact along with the mitigating strategy. Every risk was closed out with completion of related project activities and lesson learned was transferred to the project evaluation report. Tables II-IV show risk analysis results of the case study project just before implementation. Discussion The case study organization had adopted a risk-based project management framework to implement ERP projects. All the possible risks were identified in the planning phase with the involvement of the concerned stakeholders and categorized to implementation, handing over and operations as per the time of their occurrence. Further the risks were classified into IT, organizational transformation, and project management processes related risks. It had been observed that the most of the risks were likely to occur during the implementation phase of the project. In the implementation phase of the project “non-availability of business resources,” “delay in making changes in legacy system,” “effect of other projects on ERP implementation,” “mismanagement of overall IT architecture” risks had high probability and high impact. Only “delay in handing over sign-off” had high probability and high impact in the handing over phase. In implementing ERP projects issues related to organizational transformation, IT, and project management processes are equally important. In the organizational transformation, category risks of “non-availability of business resources” and “delay in making changes in legacy system” had high probability and high impact. In the
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Risk Project resources required not available, e.g. for training The project execution deviates from design/principles “Quality” at risk due to time/cost drivers Risk that sponsor cancels the project Other projects that are happening in parallel within the business impact the ERP project Project team “burns out” Lack of resources available from within the business to fill specific roles Scope creep Hardware procurement process too long Project team turn-over Plans is not achievable because of insufficient capacity and parallelism Communication risk between the project and the business Testing team under-resourced Business resources required not available – business resource may “overlap” Legacy system change impact interfaces Legacy systems require changes which would be likely to delay the project Business inadequately prepared to take on new solution Fail to transfer knowledge (consultant to the business project resources) The business suffers “change fatigue” IT quality gates (project review checkpoints) prevent the projects making progress Mismanagement of overall IT architecture’ Lack of resources in new technology areas being implemented due to their specialist nature Insufficient servers “horse power” Insufficient data base capacity within SAP for the volume of transactions being migrated across from the legacy systems Data cleansing is not as per requirement Risk that telecommunication links with outsourcing partners fails, resulting in a lack of access to SAP by the offshore team Individual role profiles (SAP) fail to match “real” organization roles Fail to develop a reliable solutions using IT to all the functional issues Decisions with respect to the system architecture configuration are not taken on time The project end-user infrastructure fails to support deployment Insufficient training facilities available Failure to move towards Sarbanes-Oxley Act1 compliance
Impact Likelihood Category H M M H H M M H H M H M L H H H M H L H H H H H M H H H M L M H M L H L H M H L M M L L L H M H L M H L H L L M H L L M L M M L IT Organizational transformation Project management process
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Table II. Risks in the implementation phase
Notes: H, high; M, medium; and L, low
IT category, “mismanagement of overall IT architecture” had high probability and high impact. In the project management processes category, “effect of other projects on ERP implementation” and “delay in handing over sign-off” had high probability and high impact. Proactive actions and contingency plans helped the ERP projects achieving their desired time, cost, and quality. The risks as identified in this case studies in the organizational transformation and project management process categories have strong synergy with the risks that were identified from the literature reviews. However, IT-related risks were unique for the project under study. ERP systems have received much attention lately for their potential to enable more effective decision-making. Many companies are implementing ERP packages as a means of reducing operating costs, increasing productivity and improving customer services, ERP systems help to solve the problem of fragmentation of information in large corporate organizations and to integrate all the information flows within the organization. The standardisation of business processes, ensuring integrity of data, and removing the number, complexity, and expense surrounding the independent legacy systems are all major benefits to be achieved by implementing ERP systems. Many organizations realize that they need to form alliances with their customers, partners, and suppliers over the internet, e-business integration with ERP systems becomes a critical issue. ERP has diminished the internal and external boundaries of the organization and provided a more open environment. Many small- and medium-sized organizations are also beginning to realize the importance of ERP. This study could be extended by empirically studying risk management practices of other organizations and understanding the pros and cons of each framework. Additionally, risk factors in every phase of projects could be identified and their
Risk Decisions/sign-off does not occur in a timely manner Business fails to adopt change Fail to properly reconcile business information into the new system Notes: H, high; M, medium; and L, low Impact Likelihood Risk category H L H H L L Project management processes Organizational transformation IT
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Table III. Risks in the handing-over phase
Risk Fail to deliver benefits as outlined in the business case Insufficient training Solution fails to be scalable Lack of disaster recovery arrangements Solution fails to provide financial control Solution fails to comply with Data Protection Act Issues arise post-go-live with a lack of time to fix them
Impact M H M M H H L
Likelihood L M L M M L L
Risk category Organizational transformation IT Table IV. Risks in the operations phase
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characteristics could be studied so as to develop effective project management framework for successful ERP implementation. Conclusions The main objective of this paper was to help managers to successfully plan, implement and operate ERP systems using risk management framework. Since the early 1990s ERP has been deployed by many organizations to transform entire business process in order to improve performance. On one hand, ERP has brought success to many organizations, whereas, on the other hand, it has sometimes resulted in significant failures. The main problems associated with an ERP system are its cost, the burden of implementation, and delay in accruing benefits. However, it is general agreed, that if it can be implemented and operated successfully and benefits should be achievable. A literature review helped identify generic risks of ERP projects. Some of the success factors are commitment from top management, reengineering of the existing processes, selecting the right system, integrating ERP with other business information systems. These items were illustrated with a new case study based in a world leading energy supplier. The case study shows that nature and characteristics of risks depends on the sizes and complexities. Effective management of those risks helps achieve project success but the appropriate identification of risks is a major challenge. Thus, project risk management comprises of the identification, analysis, response development, and controlling of risk-mitigating measures and contingency plan with the involvement of the concerned stakeholders. In other words, effective project management of ERP projects requires integration of risk management with scope, time and cost management. Therefore, appropriate identification of risks during early project planning phase, and monitoring and controlling them throughout the subsequent phases with the involvement of the concerned stakeholders helps achieve desired time, cost, and quality of ERP projects.
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