The role of governance in ERP system implementation

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The role of governance in ERP system

implementation

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Available from: Jennie Carroll Retrieved on: 24 September 2015

The Role of Governance in ERP System Implementation

Department of Information Systems University of Melbourne

Melbourne, Victoria Email: lois.fitz-gerald@rmit.edu.au

Jennie Carroll

Department of Information Systems University of Melbourne

Melbourne, Victoria

Email: jcarroll@dis.staff.unimelb.edu.au

Abstract

The implementation of ERP systems is a complex undertaking, which has a wide-reaching impact on key stakeholders including staff and customers. This research-in-progress paper summarises the first stage of a research project which investigates the role of governance in ERP systems implementations. It presents a matrix which maps well-documented ERP risks and influences on success against their locus of control: project governance, IT governance or organisational governance. The matrix will be applied to an in-depth case study of ERP implementation in a large service organization.

Keywords

ERP, Enterprise Resource Planning systems, ERP success and ERP failure, governance

INTRODUCTION

Enterprise Resource Planning (ERP) systems are packaged (but customisable) software applications, which manage data from various organisational activities and provide a fully integrated solution to major organisational data management problems. They provide for both the core administrative functions, such as human resource management and accounting, as well as integrated modules which can be selected to support key business processes, such as warehousing, production, client management (Rosemann, 1999).

Investment in ERPs is an important issue for both IS practitioners and researchers because their implementation is a major financial and human investment for any organisation (Davenport, 2000, Hillman 2001, Parr et al. 1999, Willis 2001, Zrimsek 2001). A recent US survey of 63 companies indicated that the average implementation cost approximately $11 million and took 23 months to complete: a second survey of executives showed that 65% of them believed that their ERP implementation had a moderate chance of damaging their businesses (Umble 2002, Willis et al 2001). Research to improve our ability to implement sound functioning ERP systems is vital because the impacts of poor implementation in any organisation are far reaching. These may include a huge, unplanned financial commitment to system remediation; inability to carry out core business and reporting activities and consequent threat to business continuity; loss of reputation in the marketplace and impacts on staff workload, morale and consequent turnover and loss of expertise (Glover 1999, Keil 2000, Umble 2002).

However, organisations are still prepared to invest heavily in ERP systems. Anticipated sales of ERP systems were variously expected to be greater than US$20 billion by 2002 (GartnerGroup 1999), to exceeding US$84 billion world wide by 2003 (AMR 2002, Davenport 1998, Shang et al 2002). In addition to the known software licensing fees, there are a range of hidden implementation costs including customizing expenses (often many times of cost of the software itself), hardware costs and training expenses (Mabert 2002). The literature also identifies extensive costs at the organisational level through business process re-engineering and change management (Kirkpatrick 1998).

There are several drivers which lead executives and boards of directors to decide to replace existing business support systems with a resource-intensive ERP system. The claimed benefits from investing substantial financial and human resources in ERP implementation are the achieving strategic competitive advantage in three major areas of business activity: accurate and timely information for strategic decision making, business process improvement and a strong client focus.

Large legacy Information Systems traditionally have been designed to perform routine paperwork processing, and reporting around specific business activities. Information for executive use in decision-making was a by-product of transaction processing systems (Rockart 1979). The fragmented nature of the management information, which flows from these discrete systems, does not make it immediately useful for strategic

decision-making in a competitive environment. In addition, even where these legacy systems have been partially integrated by middle ware to communicate data, they are expensive and complex to maintain and upgrade (Vickers 2000). ERP systems, underpinned by integrated databases, make information available across the organisation and support ad hoc and exception reports such as are required by executives to allow them to make strategic decisions to provide competitive advantage.

Achieving business process improvement and control is also a key investment incentive. These include operational or tangible benefits (cost reduction, improvements in cycle times, productivity, quality and customer services) (Willis 2002); managerial benefits (improved resource management, decision making, planning and performance); and organisational benefits (support to organisational changes, facilitation of business learning, empowerment and building common visions) (Shang and Seddon 2000).

ERP systems also may offer competitive advantage through providing better service to customers as well as internal stakeholders by making organisational data available for client use. A system which allows clients to place orders, view previous orders, change their organisational details, view the delivery or shipment status of their order and pay online, is meeting client information needs in addition to improving improved organisational data management capability. A successful ERP system allows an organisation to present a single face (one-stop-shop) to the client, to strengthen supplier partnerships and gain competitive advantage by doing so (Willis 2001).

Other suggested benefits of ERP systems include: the embedding of tacit organisational knowledge explicitly, in well-documented information structures and decision rules, for use by both management and employees of the organization (Davenport 2000); providing a way to increase management control through centralised information and management-sanctioned rather than ad hoc business processes (Beeson and Rowe 2001); and increased IT infrastructure capability and business flexibility and reduced IT costs (Shang and Seddon 2000). ERP system implementation is a major financial and organisational investment that may offer a range of benefits to the organization. This paper discusses some of the identified influences on ERP success and failure. The role of three main levels of governance in ERP system implementation is discussed and the paper categorises well- documented project-related issues, risks and influences on success against their locus of control – project governance, IT governance and organisational governance.

ERP SYSTEM IMPLEMENTATION OUTCOMES

Although they are a fairly recent development, ERP systems are already well documented in the Information Systems literature as being difficulty to implement within budget, within anticipated time frames and with functionality which is satisfactory to end users (Glover 1999, Mabert 2000, Rosemann 2000, Scott 2000). Current research, based on feedback from 117 companies involved in ERP system implementation, provides the following indicators of the difficulties experienced by organizations as they implement their ERP systems: one in four ERP projects is over budget; approximately 20% of systems are terminated before implementation is completed; 40% of respondents confirm that their ERP project failed to achieve business objectives and ROI is often 6 months to years longer than expected (Computer World 2001).

In seeking to understand and define ERP success or failure, research in a number of allied fields including information systems, project management, strategic management and software engineering has been examined. The terminology relating to success or failure of ERP implementations is often used very generally, with little explanation or evaluation of what the terms actually mean for an organization or a researcher. A common definition of a successful ERP system implementation is one within budget, on time and delivers anticipated functionality (Standish, 1999). Implementation failures may be cancelled before completion, or never successfully integrated into the business on implementation (Standish 1999). Software development project literature contributes to the categorisations with the following definitions: failed (product does not meet customer or quality expectations); low success (above average cost, effort and schedule performance but meeting quality expectations); successful (average cost, effort quality and time); high success (less than average cost, effort and time); exceptional success (meeting all quality, cost effort and schedule expectations) (Linberg 1999). The definition of implementation failure is also further explored in the project abandonment and project escalation literature: total abandonment (complete termination of all aspects of the project prior to implementation); substantial abandonment (major reduction or simplification of project specifications prior to implementation; and partial abandonment (original project scope reduced but overall project specifications remain the same prior to implementation) (Ewusi-Mensah et al 1991).

The literature on IS effectiveness however, highlights that success and measurements of benefits from successful implementation are two different things (Alter, 1999) and that benefits are highly complex to evaluate. Different stakeholders in the same organization will come to different conclusions about the success of the same system and “IS Success is thus conceptualised as a value judgement made by an individual, from the point of some stakeholder” (Seddon, 1997 p248). Evaluating information systems (especially ERP systems) is much more

complex today when the trend towards interactive computing has expanded the overlap between the work system and the information system which supports it (Alter, 1999). In discussions about the effectiveness or success of a particular system (which is a combination of a work system and information system) the work system specialists (business focused) and information system specialists (IT focused) may evaluate system effectiveness completely differently (Alter, 1999).

One of the largely neglected areas in the literature on ERP system success and failure is that of partial success or challenged implementations: implementations which may have run over budget, are operational but still not delivering full functionality (Standish 1999). A challenged ERP system implementation could be supporting business processes and ensuring business continuity, therefore from an organisational perspective, as a replacement system it has not failed totally. However, it may have been slower and more expensive to implement than expected and may not be delivering the strategic advantage and full business process improvement. Commercial organisations with ERP systems in this category would prefer that their clients and competitors were unaware of these challenged implementations and they are not widely publicised in the literature. The financial costs associated with challenged implementations accrue from provision of additional resources for remediation, data validation and data cleansing, re-programming and re-training. The human costs in time wasted and confidence lost is incalculable.

In this research, successful ERP implementations are defined as those that deliver full functionality on time and within budget; failed implementations are abandoned prior to, or during, implementation and so are never implemented. Challenged implementations may have gone over time or over budget or are operational but not delivering full functionality.

HOW CAN IMPLEMENTATION BE IMPROVED?

Given the high number of ERP systems that are described as unsuccessful, it is important to examine the reasons for this lack of success. Explanations for ERP projects which have less successful outcomes than expected have been drawn from a number of disciplines including project management, information systems, software development and risk management. In particular, widely documented techniques for improving ERP implementation include the use of critical success factors, risk factors and project management issues. There is much overlap in the discussions in these three areas, with critical success factors being documented as positive influences on success whereas risk factors are seen as the negative influences on success or as influences on failure. Overcoming risks at each stage of the project is a key focus of project management.

Critical success factors (CSFs) were initially devised as a tool for identifying what organizations must do well in order to succeed and determining the information needs of top executives (Rockart 1979). In the 1970s and 80s, CSFs were defined as those key business activities which, if achieved, would ensure competitive marketplace performance for an organization (Bullen et al 1981). Because they are simple to understand, document and monitor, CSFs have become a useful tool is information systems analysis and research.

Critical success factors have been identified and the benefits of their use have been documented in project management and software development and implementation (Parr et al 1999, Holland et al 1999). In addition, determining what distinguishes a critical factor from a non-critical factor and the type or level of criticality led Williams and Ramaprasad (1996) to develop a taxonomy of critical success factors. They identify the types of criticality (linkage by a causal mechanism, necessity and sufficiency, necessity and association) and attributes of CSFs as standing or instigating, direct or indirect acting, and enhancing or inhibiting. In relation to systems implementations, CSFs exist within a complex social organisation, with interactions between various stakeholders, and are naturally subjective (Parr et al 1999, Williams and Ramaprasad 1996).

Many authors use CSFs so generally that they could be viewed as possible influences on success rather than causal factors. Parr and Shanks (2000) argue that CSFs in ERP implementations are defined factors which, while not sufficient to ensure a successful outcome, are necessary to achieve success. They suggest that “…both the concepts of causality, and necessary and sufficient conditions, are concepts so rigorous that they were regarded by the authors as unachievable in the analysis of complex social, organisational and technical interactions such as ERP implementation” (Parr & Shanks 2000 p6).

Risk factors refer to the negative indicators which will presage ERP system implementation failure. Often the negative re-statement of a critical success factor (for example a well documented CSF is top management support, and a well-recognised risk is viewed as lack of top management support), a risk is a potential problem which could threaten the success of a project (Wiegers, 1998) or “a negative outcome that has a known or estimated probability of occurrence, based on experience or some theory” (Willcocks et al 1994).

Project Management: A key issue for IS project management is tightening up project level control including an emphasis on clear project objectives and milestones, proper project planning, firm project requirements, well

documented processes, clear project roles and responsibilities, use of sound methodologies and tools (Ewusi-Mensah 1997, Jurison 1999, Lyytinen and Hirschheim 1987, Standish 1999, Wiegers 1998).

In summary, critical success factors, risk factors and project management issues, restated in terms of the CSFs, are detailed below:

• Top management support and project champion. Top management refers to executive level support (Ewusi-Mensah 1997, Jurison 1999, Parr and Shanks 1999, Sauer 1999, Standish 1999). This may be indicated by “the level of commitment by senior management to the project in terms of their own involvement and willingness to allocate valuable organisational resources” (Holland and Light 1999 p4) and to a willingness and ability to undertake the cultural, political and structural change which may be necessary for successful ERP system implementation (Sumner 1999). The role of a project champion or executive sponsor is to provide strategic input for the project team and to market the benefits of the project back to the business (Parr and Shanks, 1999), to provide an point of overt authority for the project within the organization (Pinto 1998) and lobby management for all required resources (Standish 1999).

• Balanced team and best people full time. This includes an experienced project manager (Standish, 1999), a competent, full time team including sufficient business analysts (Sumner 1999), who are seconded from their normal duties for the period of the project (Parr and Shanks 1999, Shattock 2001, Standish 1999) and who have the correct skill mix to support the implementation (Lyytinen and Hirschheim 1987, Parker 1998, Standish 1999, Willcocks and Griffiths 1994).

• Empowered decision makers (Parr and Shanks 1999) refers to the ability of project team members to make quick decisions which will be supported by the organization.

• Minimal customisation or vanilla implementation refers to severely limiting the amount of customisation to the vendor’s ‘off the shelf” ERP product. Limiting customisation ensures that vendor upgrades can be implemented with reduced organisational resource allocation and that the benefits of tried and tested ‘best practice’ vendor programmed modules can be gained (Parr and Shanks 1999).

• Sound project management principles including an approved project plan, known specifications and level of complexity (Ewusi-Mensah 1997, Jurison 1999, Lyytinen and Hirschheim 1987, Parker 1998, Standish 1999, Sumner 1999, Wiegers 1998, Willcocks and Griffiths 1994), clearly defined and understood goals (Parr and Shanks 1999) and Definition of smaller scope (Parr and Shanks 1999),

• User involvement and change management. In an ERP system implementation the focus is very much on people, and in particular users, as well as on processes and technologies (Zrimsek 2000). Training with a focus on the new business processes, technical aspects of the system and end user needs is a key part of successful ERP system implementation (Parr and Shanks 1999). Establishing a sound change management strategy, seeking input from potential system users and regular, comprehensive communication to provide information, assist in the change management process and manage expectations are key activities of both the organisation and the project team (Jurison 1999, Parr and Shanks 1999, Willcocks and Griffiths 1994, Standish 1999, Sumner 1999).

• Good fit of system to organisational environment. This refers to an organization’s structural (centralised, decentralised, federal), cultural and political environment and its compatibility with the basic premises on which an ERP system is built (centralised data, consistent practice, shared procedures, established software user roles and authorities) (Lyytinen and Hirschheim 1987, Sumner 1999, Willcocks and Griffiths 1994). These factors and risks are important at different phases of project development, from planning through to implementation stabilisation and improvement (Parr and Shanks 1999) and will vary in importance depending on the scope of the ERP system implementation including the number and complexity of the business modules to be implemented (Phelan and Frey, 2002).

THE ROLE GOVERNANCE IN ERP SYSTEM IMPLEMENTATION ?

implementation is the increasing emphasis over the last few years (especially during the same period when ERP systems implementations became more widespread) on top management support and the existence of a project champion (Ewusi-Mensah 1997, Jurison 1999, Parr and Shanks 1999, Sauer 1999, Schmidt et al 2001, Standish 1999, Sumner 1999). Indeed some of the earlier seminal project management literature did not even mention risks associated with the absence of either of these business-focused influences on success (for example Boehm 1991). However, in more recent studies, lack of top management support or commitment is the risk which has the greatest impact on project implementation success and overshadowed all other documented risks (Keil 1998, Schmidt 2001). A lack of leadership and commitment from top management was cited as a major reason for failure by 73% of respondents in a recent survey (Umble 2001).

The importance given to both top management support and executive/project champion is a clear indication that implementation of enterprise wide systems are very different from normal software development projects – even large ones. ERP projects are actually business transformation projects, rather than straightforward large

software development projects (Glover et al 1999, Holland and Light 1999) and their implementation will significantly change work processes and organisational structures, together with the daily activities of the majority of staff. Because the business transformational nature of ERP systems, their failure is more likely to be due organisational, social or even political reasons that than to technical or software based causes (Willcocks and Margetts 1994). Top management support is also important in each phase of development, from planning through project implementation and enhancement (Parr and Shanks 2000).

A clear explanation of exactly what would constitute top management support is absent in the literature. Even the constituents of top management and their roles, with respect to a system implementation, are not well defined. We suggest that governance is a crucial issue here. Governance is about providing strategic direction, planning and controlling projects and people, and is delegated to project leaders (project governance), those responsible for IT (IT governance) and senior executives (organisational governance) by the Board of Directors. The role of governance in ERP system implementation is examined and evaluated in the rest of this paper. Organisational Governance: There are two key groups who constitute “top management” in organizations: the Board of Directors and Executive Management.

• The Board of Directors of an organisation has a governance role which is described in various ways in the

literature: from the very narrow perspective as “the way to ensure that managers follow the interests of

shareholders” (Vives 2000 ) to more general descriptions such as “the way in which companies are directed and controlled, and encompasses issues such as the responsibilities of directors, and the relationship between shareholder, directors and auditors” (IT Governance Institute 2002) and as “the relationship among various participants in determining the direction and performance of corporations” (Monks & Minow 1998 p1). The definition of governance has moved over the last century as corporations have matured: from the earliest documented thinking of Adam Smith (Tricker 1990); through to a focus on the principal-agency relationship (Berle and Means 1965); to the corporate stakeholder focused model (Freeman, 1984); and in the last decade, to a focus on a key stakeholder – the employee or knowledge worker (Carroll, 1993, Schilling 2000, Ticker 1990, Vives 2000). In tracing these ways of thinking about governance, the focus has changed from one of protecting shareholders against management exploitation, to protecting and serving the interests of stakeholders, to ensuring business continuity, protecting corporate information and knowledge and developing the organisation’s human capital. In large service-focused, knowledge-based organizations, the objectives of corporate governance are to protect the integrity of the enterprise, motivate employees and ensure business continuity (Vives, 2000). In summary, governance for the Board today includes responsibility for business continuity, developing a shared sense of values within the organization, safeguarding corporate knowledge and management of human capital (Aoki, 1999, Farrar 2001). The role of corporate governance in ERP system implementation can be more easily understood given the business transformational nature of ERP systems and the consequent effects on everyday working practices as well as the accuracy and availability of corporate information.

• Executive Management is employed by the Board to carry out the business of the organization. The Board

delegates responsibility for organistional administration to the management team (Chief Executive Officer (CEO) and executives) who are responsible for achieving organisational targets, managing business activity and responding to various stakeholder needs (Sternberg 1996) but retains ultimate responsibility for administration of the organization and management of its resources (Shattock, 2001).

From the brief outline above it is clear that the responsibility for ERP project advocacy, provision of adequate resources (Parr and Shanks 1999), control through project compliance and regulation (Ewusi-Mensah 1997) and ensuring oversight of human capital through appropriate change management are joint responsibilities of both the Board of Directors and the executive team. The clear delineation of responsibilities of each group, together with management of the grey area which can sometimes occur between corporate governance and executive management (Shattock 2001), will ensure a cohesive “top management” team to provide fully integrated support to the ERP system implementation project.

IT Governance: IT governance describes how those in authority in an organization will consider and employ Information Technology (particularly in relation to its use in monitoring, control and direction) in the furthering of the goals of the organisation (Broadbent 2002). IT governance is the responsibility of the Board and executive management and “is an integral part of enterprise governance: it consists of the leadership and organisational structures and processes that ensure that the organisation’s IT sustains and extends the organisation’s strategies and objectives” (IT Governance Institute 2003 p9). IT governance is not an isolated activity but is an integral part of organisational governance because it provides direction, through the implementation of an IT strategy, “for the purpose of achieving competitive advantage for the organization” (Patel 2002). In addition the purpose of IT governance is to ensure IT alignment with organisational goals; that IT ensures competitive advantage; that resources are used responsibly and that IT-related risks are properly managed.

Individuals and committees who take responsibility for IT governance will also have an important role in any ERP system implementation through the following activities: assessing IS infrastructure risk (Parker, 1988) and ensuring adequate infrastructure (Ewusi-Mensah 1997), providing the project with adequate visibility (Wiegers 1998), building in transparency, overseeing IT infrastructure partner relationship management (Weill and Broadbent 1998), providing a forum to which to escalate changes to project costs, timelines etc (Ewusi-Mensah 1997); establishing a clear process for exception handling (Weill and Vitale 2002), providing or ensuring the existence of a project champion to share a global view of the project with the project team and project benefits with the business stakeholders (Ewusi-Mensah 1997, Jurison 1999, Parr and Shanks, Standish 1999).

Project Governance: Project risks and critical success factors for implementation of large-scale software projects have been well documented and are also very relevant to of implementation of ERP systems. These include: definition of scope and goals (Parr and Shanks), sound project management (Willcocks and Griffiths 1994), project methodology (Lyytinen and Hirschheim 1987), experienced project manager, small milestones (Standish, 1999), project control (Ewusi-Mensah, 1997), realistic schedule and well defined project objectives (Jurison 1999), attention to the stages of project management (Keil 1998), clear roles and responsibilities, integration and testing (Sumner 1999), application domain experience (Wiegers 1998). Project governance will ensure that these factors, together with other factors identified in the Governance Matrix at the project

governance, are planned for, implemented, controlled and monitored.

MATRIX OF GOVERNANCE AND ERP SUCCESS

Using the lens of governance, existing critical success factors, risks and project management issues have been allocated to the three levels of governance (organisational, IT and project), in order to provide a framework for examining the role of governance in ERP system implementations.

Responsible Level of

Governance Influences on ERP success (CSFs, risks and PM issues)

Top Management Support (Ewusi-Mensah 1997, Jurison 1999, Parr and Shanks 1999, Standish 1999, Sumner 1999)

Commitment to change & organization-wide change management strategy (including user participation) (Parr and Shanks 1999, Willcocks and Griffiths)

Ensuring good organisational fit with ERP (Lyytinen and Hirschheim 1987, Sumner 1999, Willcocks and Griffiths 1994)

Project Champion (Parr and Shanks 1999, Pinto 1998, Standish 1999, Sumner 1999) Development of management control structure (Sumner 1999)

Set in place focused project reporting to CEO (Keil 1998)

Re-design of business processes for enterprise wide design and vanilla implementation (Sumner 1999)

Assign clear project ownership and lines of authority for decision making (Wiegers 1998) Making reasonable organisational commitments (Wiegers 1998)

Organisational Governance

Empowered decision makers (Parr and Shanks 1999) Adequate Infrastructure (Ewusi-Mensah 1997)

First point of escalation for variances to project cost and timescale (Ewusi-Mensah 1997) Assign ownership and accountability for technical risks (Ewusi-Mensah 1997)

Manage partner relationships and set the standards for service and partner qualifications (Phelan and Frey 2001)

IT Governance

Ensure adequate visibility of the project (Wiegers 1998)

Employ sound project management techniques and controls (Ewusi-Mensah 1997, Phelan and Frey 2001, Wiegers 1998)

Small scope and scale (Parr and Shanks 1999) Request realistic and adequate budget (Jurison 1999) Adhere to standardised specifications (Sumner 1999) Project Governance

Balanced team and best people full time (Lyytinen and Hirschheim 1987, Parker 1998, Parr and Shanks 1999, Shattock 2001, Standish 1999, Willcocks and Griffiths 1994)

APPLICATION OF THE MATRIX

In their extensive annotated bibliography, Esteves and Pastor (2001) recommend that there is a pressing need for more in-depth case studies into ERP implementations. Given the key importance of top management support in

ERP system implementation, an in-depth investigation into the role of governance including senior executives with responsibility for IT and project leadership, will be undertaken in one challenged ERP implementation. The matrix will be applied to an indepth case study of ERP implementation in a large service organization, to refine and extend our understanding of the role of governance in ERP implementation.

CONCLUSION

The current poor global economic climate, user saturation and over-inflated expectations have all had an impact on the ERP systems market for sales in 2003 and beyond. However, the move towards vendor development of ERP systems which support customer relationship management and supply chain management will involve many large and medium sized organisations in intense human and financial investment in complex system implementations over the next few years. This paper presents a matrix which maps well-documented ERP risks and influences on success, against their locus of control: project governance, IT governance or organisational governance. The aim of future research will be to develop an understanding of where responsibility for control and risk factor mitigation should sit in the organisational hierarchy - at the level of project governance, IT governance or organisational governance or some combination of these - in order to provide insight to enable more effective ERP implementation in the future.

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ACKNOWLEDGEMENTS

The authors would like to gratefully acknowledge the contribution of Professor Graeme Shanks and Dr. Peter Seddon to the framing of this work. In addition, our thanks also go to Department of Information Systems staff and post graduate students who attended the weekly OASIS seminar series - for their comments and feedback.

COPYRIGHT

The following copyright statement with appropriate authors’ names must be included at the end of the paper [Lois Fitz-Gerald and Jennie Carroll] © 2003. The authors assign to ACIS and educational and non-profit institutions a non-exclusive licence to use this document for personal use and in courses of instruction provided that the article is used in full and this copyright statement is reproduced. The authors also grant a non-exclusive licence to ACIS to publish this document in full in the Conference Papers and Proceedings. Those documents may be published on the World Wide Web, CD-ROM, in printed form, and on mirror sites on the World Wide Web. Any other usage is prohibited without the express permission of the authors.