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Chapter V
Achieving Business Benefits
from ERP Systems
Alok Mishra
Atilim University, Turkey
ABStRAct
Enterprise resource planning (ERP) systems are becoming popular in medium and large-scale organi-
zations all over the world. As companies have to collaborate across borders, languages, cultures, and
integrate business processes, ERPs will need to take globalization into account, be based on a global
architecture, and support the features required to bring all the worldwide players and processes together.
Due to the high cost of implementation for these systems, organizations all over the world are interested
in evaluating their benefits in the short and long terms. This chapter discusses various kinds of business
benefits in a comprehensive way in order to justify the acquisition and implementation of ERP systems
in organizations in the present global context.
Copyright 2008, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
Achieving Business Benefits From ERP Systems
access to information (OLeary, 2000). All of these tions to adapt internal operations and business
features facilitate better organizational planning, processes to meet country-specific needs. As
communication, and collaboration (Olson, 2004). a result, organizations can focus on improving
Applied Robotics increased on-time deliveries productivity and serving their customers instead
40% after implementing ERP, and Delta Electron- of struggling to ensure they are in compliance
ics reduced production control labor requirements with business and legal requirements around the
by 65% (Weil, 1999). Therefore, in the last decade, world. Companies that automate and streamline
organizations around the world have made huge workflows across multiple sites (including suppli-
investments in enterprise systems. According to ers, partners, and manufacturing sites) produced
a report by Advanced Manufacturing Research, 66% more improvement in reducing total time
the ERP software market was expected to grow from order to delivery, according to Aberdeens
from $21 billion in 2002 to $31 billion in 2006, 2007 study of the role of ERP in globalization.
and the entire enterprise applications market which Those companies that coordinate and collaborate
includes customer relationships management and between multiple sites, operating as a vertically
supply chain management software will top $70 integrated organization, have achieved more than
billion (AMR Research, 2002). It was estimated a 10% gain in global market share. The majority
that in the 1990s about $300 billion was invested of companies studied (79%) view global markets
in ERP systems worldwide and that this was ex- as a growth opportunity, but of those companies,
pected to grow to $79 billion annually by 2004 half are also feeling pressures to reduce costs
(Carlino, Nelson, & Smith, 2000). (Jutras, 2007). Those companies that coordinate
Enterprise systems include enterprise resource and collaborate between multiple sites, operat-
planning, customer relationship management ing as vertically integrated organizations, have
(SCM), supply chain management (SCM), product achieved more than a 10% gain in global market
lifecycle management (PLM), and e-procure- share (Marketwire, 2007).
ment software (Shang & Seddon, 2002). ERP
software integrates management information
and processes, such as financial, manufacturing, BUSineSS BeneFitS FRoM eRP
distribution, and human resources, for the pur- SySteMS
pose of enabling enterprise-wide management of
resources (Davenport, 1998; Deloitte Consulting, With the growing proliferation of ERP systems,
1998; Klaus, Rosemann, & Gable, 2000). including midsize companies, it becomes critical
ERP helps organizations to meet the challenges to address why and under what circumstances one
of globalization with a comprehensive, integrated can realize the benefits of an ERP system (Gefen
application suite that includes next-generation & Ragowsky, 2005). ERP systems can provide the
analytics, human capital management, financials, organization with competitive advantage through
operations, and corporate services. With sup- improved business performance (Hitt, Wu, &
port for industry-specific best practices, ERP Zhou, 2002; Kalling, 2003) by, among other things,
helps organizations improve productivity, sense integrating supply chain management, receiving,
and respond to market changes, and implement inventory management, customer orders manage-
new business strategies to develop and maintain ment, production planning and managing, ship-
a competitive edge. ERP is designed to help ping, accounting, human resource management,
businesses succeed in the global marketplace and all other activities that take place in a modern
by supporting international legal and financial business (Gefen & Ridings, 2002; Hong & Kim,
compliance issues, and enabling organiza- 2002; Kalling, 2003). Thus, business benefits from
Achieving Business Benefits From ERP Systems
ERP systems use are multidimensional, ranging According to Parker and Benson (1988), in
from operational improvements through decision- order for enterprise to gain competitive advantage,
making enhancement to support for strategic goals the way in which IT is justified financially must
(Davenport, 2000; Deloitte Consulting, 1998; change. Classical quantitative techniques (e.g.,
Markus & Tanis, 2000; Ross & Vitale, 2000; cost-benefit analysis) are not adequate for the
Irani & Love, 2001; Wilderman, 1999; Cooke & evaluation of IT applications, except when dealing
Peterson, 1998; Campbell, 1998). Gartner Group with cost-avoidance issues, which generally occur
(1998) also mentions enterprise systems benefits in at the operational level. If these methodologies are
these areas, including both tangible and intangible to be enhanced, additional measuressuch as per-
benefits. While some companies claim to have ceived value to the business, increased customer
reduced their cycle time, improved their financial satisfaction, and the utility of IT in supporting
management, and obtained information faster decision makingmust be considered (Katz,
through ERP systems, in general they still have 1993). Investment in ERP systems payoff remains
a high initial implementation failure rate (Hong a controversial question (Hitt et al., 2002; Sarkis &
& Kim, 2002; Songini, 2004). Many prior studies Sundarraj, 2003; Kalling, 2003). ERP systems are
examining the relationship between investing in very complicated software packages that support
IT and the performance level of the organization the entire set of organizational activities. Hence,
(Weil, 1999) dealt with the ratio of total IT invest- it is possible that there are many unknown factors
ment (i.e., software, hardware, personnel) to the that impact the relationship between investment
entire organizations performance (the total profit in ERP and organizational productivity. This
of the organization). chapter observes the managers perception of the
Many early studies found no positive rela- benefits their organization gains from using ERP
tionship between the two variables. Strassmann systems and what impacts this benefits.
(1985) examined service-sector firms but found ERP system investments are strategic in
no significant relationship between investment in nature, with the key goal often being to help a
IT and high-performing firms. Berndt and Mor- company grow in sales, reduce production lead
rison (1992) even found a negative relationship time, and improve customer service (Steadman,
between the growth in productivity and investment 1999). In IT, evaluation costs are hard to quantify
in high-tech, although, as they point out, this may in post-implementation audits and benefits are
have been the result of measurement problems. As harder to identify and quantify (Hochstrasser
Brynjolfsson (1993) summarizes, positive returns & Griffiths, 1991; Willcocks & Lester, 1999;
from investing in IT may not have shown up in Irani, Sharif, & Love, 2001; Seddon, Graeser, &
previous research because of the inadequate way Willcocks, 2002). Management of organizations
it was measured. When measuring IT investment that adopt ERP expects many benefits from the
on a per-user basis, there is a positive correlation systems. These expectations are often difficult to
between IT investment and overall productivity meet. ERP can be seen to provide more responsive
(Brynjolfsson, 2003). Although there is a large information to management. There also is more
variance among companies in the benefit they interaction across the organization and more ef-
achieve from their IT investment (Brynjolfsson, ficient financial operation (Olson, 2004). There
2003), on average there is a $10 gain in company is weaker perceived benefit from operational per-
valuation for each dollar invested in IT (Bryn- formance, such as improved operating efficiency,
jolfsson et al., 2002). Showing such a positive inventory management, and cash management.
relationship is important because it affects MIS While more information is available at higher
funding. quality, this does not directly translate to cost
efficiencies across the board.
Achieving Business Benefits From ERP Systems
SAP-ERP delivers business benefits where improves financial management and reduces the
they matter mostto the bottom lineand risk of noncompliance. In conjunction with the
addresses the internal and external business re- Collaboration Folders (cFolders) application,
quirements of global enterprise. Organizations employees can work in seamless virtual project
can invest in mySAP ERP with confidence that teams with other departments, partners, and
expansion or change in any country or division suppliers around the world. Analytical capabili-
will be supported. The solution provides global ties help organizations improve strategic insight
businesses with concrete benefits that enable and performance through better identification
success, including the following (My SAP ERP, of global market opportunities and drivers (My
2007): SAP ERP, 2007).
Benefits perceived from adopting an ERP
Improved productivity for greater efficiency system were studied by Mabert, Soni, and Ven-
and responsiveness kataraman (2000) in Midwestern U.S. manufac-
Increased insight for more assured decision turing, and replicated in Sweden by Olhager and
making Selldin (2003). Both studies used a 1 to 5 scale,
Advanced flexibility and adaptability to cut with 1 representing not at all and 5 representing
costs and speed change to a great extent. Average ratings are given in
A partner for long-term growth Tables 1 and 2.
Here, the results are very similar. ERP systems
In addition, businesses can reduce the costs were credited with making information more
associated with compliance and administration, available, at higher quality, and with integrating
in part by creating flexible processes that balance operations (Olson, 2004). There was neutral sup-
global demands with local needs and that can be port for crediting ERP with providing benefits
adapted quickly as regulations change. Compre- in specific materials management and financial
hensive financial and reporting features ensure functions. The ratings of support for customer
that globally consolidated financial reports can be response and personnel management were quite
generated quickly. Support for internal controls low (although the Swedish rating for customer
Table 1. Expected benefits of ERP systems (Mabert et al., 2000; Olhager & Selldin, 2003)
0
Achieving Business Benefits From ERP Systems
response was very close to neutral). Interestingly, Multi-language and currency capabilities
both surveys found low support for crediting ERP Better tracking of inventory
systems with decreasing information technology Improved utilization of raw materials
costs. With an ERP, an organization can better Tighter integration of production with sales
negotiate with suppliers and reduce the cost of and distribution
raw materials by as much as 15% (Schlack, 1992). Tax advantages through improved asset
Hence, the higher the cost of raw material, the management
higher the value of raw material cost reduction Removal of a number of existing legacy
out of the cost of the product. systems
Improved development and support environ-
ment
eRP BeneFitS FRAMeWoRk Real-time functional system enhancement
capability
Shang and Seddon (2000) provided a comprehen-
sive framework of the benefits of ERP systems. In Table 3, the first three categories are based
In their survey of 233 vendor success stories and on Anthonys (1965) much cited work on planning
34 follow-up phone interviews from three major and control systems. Many IS benefit analyses
ERP vendor Web sites, they found that all orga- and frameworks have been organized around
nizations derived benefit from at least two of the Anthonys trinity of operational, managerial and
five categories, and all the vendors products had strategic levels of management. One example is
returned customer benefit in all five categories. Shang and Seddon (2000):
In the beginning of 1997 during the re-en-
gineering process, most of the multinational Weil (1990) evaluated the payoff from three
organizations perceived the following benefits types of IS investmentin transactional,
of implementing ERP system: informational, and strategic systemsin
the U.S. valve industry. He found that the
Common processes across the globe greatest benefits came from investment in
Centralized operations transactional level IT.
Achieving Business Benefits From ERP Systems
Table 3. ERP benefits framework and extent of tangibility and quantifiability (adapted from Shang &
Seddon, 2000)
Gorry and Scott Morton (1971) and oth- Mirani and Lederer (1998) adapted Antho-
ers (Silver, 1990; Demmel & Askin, 1992) nys framework to build an instrument for
reported significant benefits from using IT assessing the organizational benefits of IS
for managerial decision suport. projects.
Porter and Miller (1985) and others (Mc- Hicks (1997), Reynolds (1992), and Schul-
Farlan, 1984; Rackoff, Wiseman, & Ullrich, theis and Sumner (1989) also used Anthonys
1985; Clemons, 1991; Venkataraman, Hen- categories in classifying IT benefits as opera-
derson, & Oldach 1993) noted significant tional, tactical, and strategic. The categories
benefits from the use of IT in pursuing were also used as frameworks for analyzing
strategic goals. the benefits of general and enterprise-wide
Achieving Business Benefits From ERP Systems
information systems (Wysocki & DeMichi- accurately the payoff of IT projects and suggested
ell, 1997; Irani & Love, 2001). that one means of determining value is through
Willcocks (1994) and Graeser, Willcocks, the perception of executives. They focused on the
and Pisanias (1998) adapted Kaplan and Nor- strategic fit and the contributions of IT projects,
tons (1996) balanced scorecard approach in but indicated that researchers need somehow to
assessing IS investment in financial, project, capture or represent better the intangible benefits
process, customer, learning, and technical of IT. In the technology arena, as in the busi-
aspects, and measured organizational per- ness areas, many projects deliver benefits that
formance along Anthonys three levels of cannot be easily quantified (Murphy & Simon,
business practice. 2002). Many benefits related to the information
technology projects cannot be easily quantified,
Therefore, there are very strong precedents for example better information access, improved
in the IS literature for attempting to classify the workflow, interdepartmental coordination, and
benefits of enterprise systems in terms of organi- increased customer satisfaction (Emigh, 1999).
zational performance along Anthonys three levels These are also the features that are listed as key
of business practice.(Shang & Seddon, 2000). attributes of ERP systems (Mullin, 1999; Dav-
enport, 2000). ERP systems are implemented to
integrate transactions along and between business
intAnGiBLe BeneFitS in it AnD processes. Common business processes include
eRP PRoJectS order fulfillment, materials management, produc-
tion planning and execution, procurement, and
Webster (1994) defines a tangible item as some- human resources (Murphy & Simon, 2002). ERP
thing that is capable of being appraised at an systems enable efficient and error-free workflow
actual or approximate value. But the value management and accounting processes including
is monetary worth, or some other measure like in-depth auditing. These systems feature a single
customer satisfaction is not certain. According to database to eliminate redundancy and multiple
Hares and Royle (1994), an intangible is anything entry errors, and they provide in-depth reporting
that is difficult to measure, and the boundary functionality. ERP systems provide information
between tangible and intangible is fuzzy at best. for effective decision making on all organizational
Determining the intangible benefits derived from levels (Murphy & Simon, 2002). According to
information systems implementation has been Hares and Royle (1994), there are four main
an elusive goal of academics and practitioners intangible benefits in IT investment:
alike (Davern & Kauffman, 2000). Remenyi and
Sherwood-Smith (1999) pointed out that there are 1. Internal improvement: This includes pro-
seven key ways in which information systems cesses, workflow, and information access.
may deliver direct benefits to organizations. They 2. Customer service: This ensures quality,
also indicated that information systems deliver delivery, and support.
intangible benefits that are not easily assessed. 3. Foresight: This is vision regarding markets,
Nandish and Irani (1999) discussed the difficulty products, and acquisitions in the future.
of evaluating IT projects in the dynamic environ- 4. Adaptability: This is the ability to adapt
ment, especially when intangibles are involved in change in rapidly changing industry.
the evaluation. Tallon, Kraemer, and Gurbaxni
(2000) cited a number of studies indicating that The third and fourth sets of intangibles are
economic and financial measures fail to assess future oriented and include spotting market trends
and the ability to adapt to change.
Achieving Business Benefits From ERP Systems
Hares and Royle (1994) stated that the first set The literature suggests that intangibles can be
of ongoing intangible benefits are those concerned converted into monetary terms through the ability
with internal improvement of company operations to take care of the following observations:
or performance. These include changes in produc-
tion processes, methods of operations manage- 1. Maintain and increase sales
ment, and changes to production value and process 2. Increase prices
chains with resulting benefits in increased output 3. Reduce costs
or lower production costs. The second group of 4. Create new business
ongoing benefits, customer-oriented intangibles, is
more difficult to measure because their effective- Hares and Royle (1994) give a procedure to
ness is determined by external forces. The benefits quantify intangible benefits. The major steps
of improving customer service are greater reten- are:
tion of customers and customer satisfaction. The
third group of intangibles embodies the spotting 1. Identify benefits to be quantified
of new market trends. If new trends can be antici- 2. Make intangible benefits measurable
pated, then technology may be able to transform 3. Predict the benefits in physical terms
or create products, processes, or services to gain 4. Evaluate cash flow terms
new sales and market position. The final group of
intangible benefits is the ability to adapt to change.
As with the identification of market trends, the enteRPRiSe SySteM BeneFit
benefits derived include adapting products and FRAMeWoRk
services to market trends and the modification of
production processesa critical ability for firms According to Shang and Seddon (2002), the fol-
in rapidly changing industries. lowing five-dimensional framework, which is
ERP system investments are strategic in built on a large body of previous research into IT
nature, with the key goal often being to help a benefits, has been organized around operational
company grow in sales, reduce production lead efficiency and managerial and strategic effective-
time, and improve customer service (Steadman, ness, as the outlook of strategic managers are too
1999). Organizations turned up an average value broad to identify casual links between enterprise
of -$1.5 million when quantifiable cost savings system investment and benefit realization, and
and revenue gains were calculated against system those of operational managers are too narrow to
implementation and maintenance costs. Improved consider all relevant organizational goals. The
customer service and related intangible benefits most appropriate management level is business
such as updated and streamlined technical infra- managers (middle-level management control), as
structure are important intangible benefits that they have a comprehensive understanding of both
organizations are often seeking when making the capabilities of ES and the business plans for
these investments. The development and imple- system use. It is not expected that all organizations
mentation of ERP systems is longer in duration will achieve benefits in all 25 sub-dimensions, or
and cost intensive. It is difficult to quantify in even in all five main dimensions, but it provides
monetary terms because of the intangible nature an excellent checklist of benefits that have been
of many of the derived benefits, for example, accomplished in organizations using enterprise
improved customer service (Murphy & Simon, systems.
2002).
Achieving Business Benefits From ERP Systems
Achieving Business Benefits From ERP Systems
Achieving Business Benefits From ERP Systems
Achieving Business Benefits From ERP Systems
5.6 Increased employee morale and satisfaction: Operational benefits may come with increased
Satisfied users with better decision-mak- managerial effectiveness, strategic benefits rely
ing tools. on operational efficiency, and organizational ben-
Satisfied users with increased work efits can be realized in parallel with managerial
efficiency. benefits (Shang & Seddon, 2002).
Satisfied users in solving problems Regardless of tangible or intangible benefits,
efficiently. it is progressively more difficult to measure
Satisfied users in increased system managerial, organizational, and strategic benefits
skills and business knowledge. than infrastructure or operational benefits; this
Increased morale with better business has been an issue of debate since information
performance. systems advanced beyond transaction processing
Satisfied employees for better em- systems (Murphy & Simon, 2002). With ERP
ployee service. systems, success has been determined based
on the organizations acceptance of the changes
that the system introduces. Further, Murphy and
DiScUSSion Simon (2002) observed that organizational and
managerial classification benefits are not only the
The above benefits were reported by all selected most difficult to obtain, but also are the hardest
cases as mentioned by Shang and Seddon (2002); to quantify.
also, examples of each benefit dimension were
found in cases from each ES vendor. Every busi-
ness achieved benefits in at least two dimensions. FUtURe ReSeARch DiRectionS
Operational and infrastructure benefits were the
most quoted benefits: 170 cases (73% of 233) Empirical studies of ERP benefits assessments
claimed to have achieved operational benefits, in different organizations and their comparisons
and 194 cases (83%) claimed IT infrastructure might be an interesting area for further work in
benefits (Shang & Seddon, 2002). Operational this direction. Furthermore, assessment of ERP
benefits such as cost, speed, and error rates are benefits can be performed at two levels: first at an
measurable in many cases. Managerial benefits, enterprise level, where the entire ERP system can
although less tangible, are linked directly with be assessed regarding different types of benefits
information used at different decision-making derived from the ERP; and second at a specific
levels and with different resources. The most module (application) level, which offers interesting
useful information on both these dimensions areas for future research. Future research efforts
was provided by business managers or process should focus on managerial, organizational, and
owners, who had a clearer picture of the impact strategic benefits, which are still unexplored
of the adoption of ES on the overall organization, in terms of intangible benefits measurement to
including their own and their colleagues decision quantify.
making. Strategic benefits appear to flow from a
broad range of activities in internal and external
areas, and are described in terms of general concLUSion
competitiveness, product strategies, and other
strategic capabilities. Organizational benefits Assessing whether investment in enterprise sys-
are mainly reflected in individual attitudes (e.g., tems pays off is an important issue. Organizations
employee morale) and interpersonal interactions. can achieve a number of tangible and intangible
Achieving Business Benefits From ERP Systems
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