Impact of Enterprise Resource Planning On Usage of Balance Scorecard Implementation - Term Paper Example

Abstract The scope here is primarily to evaluate the need of ERP, followed by a thorough understanding of its impact and if its objectives are being met. We gradually move to capture the adverse effects, huge cost implications and losses that an organization may incur consequent to adoption of ERP and not measuring its effectiveness. In order to focus on the range of influences, both technical and organizational that has encouraged to monitor ERP performance, we briefly research to identify how Enterprise Systems benefits can be measured with a balance between qualitative and quantitative factors and therefore introducing Balance Scorecard as a solution to address these very challenges . While there has been detailed analysis and interpretation in the forth coming sections, a few basic definitions have also been added to facilitate the study here. Table of Contents Table of Contents 2 1. Introduction to ERP 3 2. Enterprise Resource Planning Approach 5 3. ERP System Implementation 6 4. ERP System on Performance Measurements 7 5. ERP System Benefits Realization 7 6. Need for ERP system Evaluation 9 7. Introduction to Balance Scorecard approach. 10 8. A Balanced Scorecard Approach to Enterprise Systems Performance Measurement 13 9. Research on Enterprise System success and failure 15 10. Balanced Scorecard Framework 16 11. Balanced Scorecard Effectiveness 19 12. Conclusion 20 1. Introduction to ERP It is important that companies have an absolutely clear understanding regarding what is enterprise resource planning before contemplating on its implementation as the urgency to acquire results in a limited time frame most often defeat the very purpose of investing in ERP. While we are aware ERP accelerates results and speed is one of the key drivers, the faster it is implemented the quicker and better are the advantages and delivery in terms of results, however this early process has a huge hindrance, the returns are sought at a shorter period which may blind the companies to foresee long term effects. This deviation from the conventional practice is being largely implemented as far as many companies are concerned. Business process reengineering played a vital role with respect to its implementation. One needs to know the components of Enterprise resource planning beyond the definition to further the interest of ERP . The most natural outcome of this effort lead to development of gaps between the actual results and the one derived during the process of foreseeing or at planning stage. Customizing ERP without a thought through analysis, merely at the slightest requirement of various stakeholders in the organization, molding of practices followed in the company would inevitably drag the assessment of results beyond the time limits permitted to evaluate its success. Let alone the huge monetarily impact, it also damages basic customer's trust. It is also necessary to understand that mere ERP planning does not guarantee the benefit of ERP. It has to be implemented as planned project after understanding the components of enterprise resource planning. In spite of having improved the implementation issues what remains static is the manner in which companies go ahead with ERP implementation. The objectives regarding why ERP, need to be very clear to any firm that is planning to implement it. The key ones are listed in the diagram below with enhanced customer service at the top of it as increased customer service is directly proportional to additional business and growth in revenue. Why ERP? 2. Enterprise Resource Planning Approach The section above briefly explains the key drivers an organization need to consider prior to using the ERP approach. It can be increasingly difficult to manage and measure effectiveness and success of the approach if it is implemented as a need of the times exercise, just for name sake without following systematic procedures. It is important to emphasize here that the companies most certainly need to check the desirability of going into ERP. Some issues that an organization has to address after defining enterprise resource planning are: Identify important and popular information systems How frequently there would be fluctuations in the choice of technology ? Are the leading market players engaging in efforts to stay in tune with the changes? The thoughts and theme encouraging to implement a business applications like ERP An evaluation of benefits from such business applications to stay competitive with a sharper edge than other business leaders in the respective zone of domain expertise The overall usage of those applications, its services, primary features and benefits. The necessity for innovating software applications. If an organization is able to answer these questions effortlessly, without any ambiguity, validate their results with substantial data and arguements, it will be fair to conclude that the firm has completed the ground work in their focus in taking ERP. The questions above are not only highly crucial to ensure the company is focused about the approach but will also assist in building their business model. ERP implementation is a vital in the whole process of ERP. They can take place only if one understands "What is enterprise resource Planning" and defining enterprise resource planning in their organization. Enterprise Systems is actually synonymous with Enterprise Resource Planning Systems, Enterprise Wide Systems, Integrated Vendor Solutions, Integrated Standard Software and Enterprise Application Systems and are customizable, standard software solutions like SAP, PeopleSoft, and Baan that have the potential to link and automate all aspects of the business, incorporating core processes and main administrative functions into a single information and technology architecture1. 3. ERP System Implementation The popularity of ERP as a business application remains above average, without any debate and there are no two opinions on that however, its implementation can be quite a challenge. The most crucial factor in the whole system of ERP is the implementation aspect as this phase to some extent determines the future of ERP project as successful or failure. As discussed before the success of an ERP Implementation lies in quicker processes and hence training and the speed at which the inputs of training is received decides its worth and value. Incorporating different levels of details and designing the ERP solution with elements that does not have high level business impact, and is being integrated keeping in view whims and fancies of junior and middle management, most often without even remotely considering long term company goals, can have adverse results.. Narrowing down the use of ERP for just a specific entity’s productivity rather than using it for better objectives of the company bearing in mind the overall interest of the company’s goals, and therefore seeking to change or add insignificant factors to the ERP implementation would undoubtedly drag the project time frame beyond the planned time for its execution, leading to cost implications and delay effectiveness even further. When any organizational unit proposes for a radical re-structuring process by all best possible means including ERP, this process need to be carried in all aspects of the business .Some of them definitely include strategic manouvere, operation of trade and the circumstances that call for change and adaptability. Defining enterprise resource planning in context to the concerned organization will help to decide on this issue and further its implementation with positive impact. 4. ERP System on Performance Measurements After considerable thoughts, focus, planning once ERP is seamlessly implemented by aligning company’s strategic goals, the natural inclination of any company would be to measure its result and effectiveness. Every company would want to dwell on the benefits of any enterprise system implementation and seek results at the earliest. If the salient features of ERP does not produce results anticipated out of it, ruling out, for the time being hindrances caused due to internal delays – the need to measure ERP performance emerges and a probable solution to resolve this comes to the table for further discussion and analysis. 5. ERP System Benefits Realization There have been several studies conducted to evaluate ERP System benefits. The cost and time invested in its implementation most often drives the companies to analyse its positive impact on business and the enterprise as a whole. A study conducted by Boston Consulting Group (2000) using interviews of some executives who were involved in Enterprise Systems implementations showed that less than 50% of Enterprise System projects could be classified as successful. Another study by the Standish Group established that most Enterprise System implementations today result in cost and schedule overruns. A comprehensive study of nearly 100 large companies (with revenue greater than US $ I billion) was carried out by Deloitte consulting (2000) and benchmarking partners Hammer and Co. This study is said to be one of the most successful studies ever conducted into the performance of Enterprise Systems (McCann and Lucas, 2000). Not surprisingly, this study also concluded with mixed outcomes regarding the Enterprise System pay-offs. The study identified that approximately one third (37%) of the companies studied reported significant and quantifiable benefits from their Enterprise System investments. However, some companies believed that they had received nothing out of their ERP initiative. Some organisations received modest results and they are not positive about gaining further benefits. The remaining 23% were unable to report any specific quantifiable benefits. The overall research figures show that as many as half of the companies have not realized sufficient benefit from their Enterprise System investment. These studies, research were conducted with the objective of assessing the return on investment from Enterprise Systems and has revealed the extent of dissatisfaction. This study found that more than 50% of the Enterprise System initiatives studied have reported lower Return On Investment (ROI) than expected. 6. Need for ERP system Evaluation There has been far too many researchers, organisations, practitioners and academics who have investigated the key issues related to low return on investments in Enterprise Systems (ES). These studies have identified the probable reasons behind the failure and low performance, the extent of damage done by the Enterprise System, critical success factors of Enterprise Systems and benefits realisation from Enterprise Systems. Not only have these studies indicated the importance of measuring the performance of ERP, it has also been identified that a high percentage of Enterprise System benefits are intangible and therefore harder to evaluate financially2 This has further hindered the position of Enterprise Systems; especially in the public sector, where the tangible benefits (i.e. Financial benefits) are a relatively smaller proportion of total benefits sought, particularly considering the large investments involved in the implementation. The ERP Solution do help deliver more important intangible benefits, such as better customer services. There exists a common consensus that Enterprise Systems, provided it is managed carefully, do offer substantial intangible (non financial) results as well as tangible (financial) benefits. Bartholomew (1999) claims that in a typical business environment, 80% of the organisation's value is in intangible assets. For obvious reasons, this intangibility of assets has made it difficult for organisations to illustrate whether they have received the benefits of Enterprise Systems implemented or not 3. For a range of reasons and goaded by growing business needs, few organisations have sought to carefully measure ERP benefits, using both tangible and intangible measures and this in turn has lead to the development of an instrument that can address this need of measurement, so that the evidence of these benefits can be appropriately captured and measured. Companies analyze their Enterprise System investment by justifying the initial purchase with return on investment and trying to find the ROI after implementation.. Cost justification in services and human resources is harder to demonstrate which hinders the effort to evaluate ERP solution and its results.. The timing of benefits measurement is important, due to the fact that most of the benefits of Enterprise System take at least 2-3 years to surface. Calculating the gain from an investment point of view in general requires a deeper understanding of the corporate goals, strategies, objectives, vision, mission and expectations. 7. Introduction to Balance Scorecard approach. At this stage of study it can be comfortably concluded that the information generated by ERP system initiate the need for the use of a measurement tool to assess ERP benefits, leading to understand Balance Scorecard approach. While the aim of this study is to address how the information generated from Enterprise systems can actually be aligned to the benefits that it was initially supposed to deliver and therefore be tactfully measured, with a perfect balance between qualitative and quantitative factors, the ultimate goal is to develop a comprehensive Enterprise Systems Benefits Measurement Instrument. The objectives of this measurement instrument would ideally be to assess the positive impact of the Enterprise System and identify where organizations should focus their benefits realization efforts and further investments accordingly. The study now focuses on the uses of the Balanced Scorecard approach 4 to capture both financial and non-financial aspects of Enterprise System measurement. The most important questions that need to be addressed now are what measure and tools are appropriate and adequate for evaluating ERP system, if the balanced scorecard is an appropriate approach for enterprise system measurement and what perspectives should be considered when measuring the performance of an Enterprise System. The outcome of the approach will significantly contribute to the enterprise system management and general Management Information Systems scope by providing a better understanding of the Balanced Scorecard not just in IT sector but in other domains like public sector if required. For ERP performance evaluation , identifying and justifying specific measures that link to corporate goals, objectives and strategies for successful ERP performance measurement is mandatory. The importance of a structured Enterprise System performance measurement technique emerged after a comprehensive review of various Enterprise System related themes, data acquired from ERP and its application. While the constant efforts and focus finally result in a comprehensive Enterprise System Performance Measurement Instrument and lead to the development of the Balanced Scorecard, the basic design of a preliminary Balanced Scorecard for Enterprise System need to be based on measures identified from the available sources. There is also an inherent need to validate the initially identified Scorecard perspectives and measures and that becomes a very important criteria of determining the effectiveness of Balanced scorecard approach for assessing ERP benefits. The introduction of Balanced Scorecard approach backed with the identification of specific elements to measure ERP related performance can well be summarized in the following section where the aim is to understand how the proposed Balanced Scorecard approach is appropriate solution for ERP performance evaluation. A fundamental feature of the Balanced Scorecard, is that it requires that each measure should relate to the corporate strategies and to each other in a cause and effect relationship. The individual measures at each instance would be unique depending on corporate goals and strategies5. The data gathered from existing ERP system, company’s business objectives and integration of balance scorecard is in sync with the two. Therefore, identifying the corporate goals and strategies in relation to the core perspectives is a critical preliminary step in a Balanced Scorecard approach. 8. A Balanced Scorecard Approach to Enterprise Systems Performance Measurement . It is has been repeated before that organisations have invested heavily in these Enterprise Systems with several expectations ranging between improvements in business processes, better management of information technology, information system and infrastructure expenditure, increased customer responsiveness, integrated data base expertise and other strategic business improvements. Despite tremendous growth in the Enterprise System market, recent research shows growing dissatisfaction with Enterprise System as they have failed to deliver the anticipated benefits6. Keeping in view there have been huge investments in ERP implementations, what becomes evident is to ensure the balanced scorecard approach fulfills the desired result that is expected out of it so that the measurement tool does not add to the damages that have already been reported by various organizations subject to failure to realize any benefits from ERP. Knowing that some of the high profile organisations engaged in this drive of ERP implementations have incurred significant financial losses and also lost business opportunities worth many millions of dollars7, it becomes even more important to make sure the balanced scorecard approach addresses all required aspects of measuring ERP. Many traditional measurement and evaluation methods, for example Return On Investment [ROI], Economic Value Added [EVA], Net Present Value [NPV], Internal Rate of Return [IRR], Return On Capital Employed [ROCE]), have failed to yield an appropriate estimate of the pay back and benefits from these systems8. If the performance indicator rely on financial perspective alone, somewhere there is a compromise in the evaluation. Some claim these performance indicators have a high reliance on financial aspect and therefore reflect only one facet of the organisation. Unfortunately, as discussed earlier, the impact of an Enterprise Systems is so vast and diverse that it cannot be measured by using only traditional financial measures and both tangible and intangible benefits need to be considered to understand its true worth. There are several advantages from applying a performance measurement system in Enterprise System implementation, especially for top management which allows them to plan their business models, future initiatives, build their strategies. The other reasons why the top management look forward to observe the outcome to Enterprise System implementation areEnterprise System expenses are significant and its expenditure grows and becomes a significant portion of business costs. Top management and stakeholders become increasingly interested in being able to find the value for the money invested, compare the value of these expenditure with the obtained benefits and in turn compare those benefits with how other organisations benefit from a similar Enterprise System. To find out the benefit generating areas, top management wants to identify the benefit generating points so that they can further exploit these and apply corrective measures where the benefits are small. Top Management is also keen to have a view of the overall impact on the every activity and operations in an organisation and since Enterprise System performance measures aid in a competitive thrust - performance measures help top management to obtain and maintain Key Performance Indicators (KPI). As an aid for innovation – as a consequence of the above, top managers can identify and exploit areas for deploying innovative business actions in those specific areas. 9. Research on Enterprise System success and failure After introducing the concept of Balanced Scorecard approach in the previous sections, returning to research on Enterprise System success and failure is primarily to now dwell a little longer on the design of the balanced scorecard. Being aware that recent studies indicate that issues pertaining to Enterprise System evaluation and management are of great importance to managers all over the world9, the increased role of and dependency on Enterprise System, and the uncertainty of benefits, have in combination magnified the need to monitor and measure Enterprise System performance. To ensure that Enterprise System is appropriately monitored in line with company goals and data collated from these systems, the tool to measure this need to highly effective covering all aspects of business. Several studies have indicated that while the Enterprise System investment is correlated with organisational revenue; it is not clearly correlated with either productivity or profitability. This situation is very much true in the context of Enterprise System, where in many cases, intangible benefits are harder to quantify. While we are aware that these challenges have generated new interests and research on approaches to performance measurement, performance evaluation and business value creation from Enterprise System, with emphasis on a balance between financial (quantitative and historic) measures and non-financial (qualitative and futuristic) measures 10. The Balanced Scorecard approach is tightly integrated to the outcome based initiative. The expected benefits from the Balanced Scorecard could be far too many depending upon what the priorities of any organization is. It could be to understand the management approach in a holistic manner, relate strategy to performance and action, set performance targets, focus, create competition intelligence, communicate and coordinate effort or improve management and performance of the organisation. The reasons could be a huge list in itself. The proposed Balanced Scorecard need to cover all quadrants - Financial, Customer, Internal Process and Learning and Innovation and a wide spectrum of information needs. The smaller business units i.e. organisational entities need to link their Balanced Scorecards to the overall corporate Balanced Scorecard and lower level strategies should be aligned with the corporate mission and vision. 10. Balanced Scorecard Framework The Benefits Realisation Plan of Enterprise System usually consists of a few main steps like specifying the appropriate business drivers, determining the Balanced Scorecard perspectives, identifying and applying methods of measuring or quantifying the benefit, identifying initiative to achieve the recognised benefit and deploying a risk management strategy including potential risks, constraints and dependencies. We are aware that Balance Scorecard assists organisational decision makers to navigate the organisation towards success. The technique enables organisations to translate their mission and strategy into a comprehensive set of performance measures that provide the framework for a strategic measurement and management system. Organisations have used the Balanced Scorecard to translate vision and strategy, communicate and link strategic objectives and measures, plan, set targets and align strategic initiatives and enhance strategic feedback and learning, and succeed in realizing both tangible and intangible benefits of their investments11 The Balanced Scorecard measures organisational performance, with emphasis on financial objectives. But, it also includes the performance drivers of these financial objectives, and measures organisational performance across four balanced perspectives; (1) financial, (2) customer, (3) internal business processes and (4) learning and growth. It gives a structure to performance review and helps managers identify problems and improve performance. Units can now see the overall implications of their decisions rather than making ad hoc decisions without much thought and analysis of its impact on business. The Balanced Scorecard enables us to see these relationships and implications and therefore promotes organizational alignment. The fundamental concept of the Balanced Scorecard is to derive the objectives and measures from the overall corporate vision and strategy and to use the four perspectives as a “balanced” framework to monitor and achieve these objectives. A properly developed Balanced Scorecard should represent financial and non-financial measures from all levels of the organisation and maintain an equilibrium between external measures developed for the stakeholders and customers and Internal measures developed for the bushiness processes, innovation, learning and growth. It is important to state here that the traditional Balanced Scorecard approach is used to measure the performance of the overall organisation, while the focus of this study is on measuring Enterprise System performance and evaluating the Enterprise System using Balanced Scorecard. There are several organizations that have invested in data warehouses which make highly cleansed data available to an organization for analysis. Only if the Balanced Scorecard can work in conjunction with a data warehouse treating them as key systems for collecting quantitative information, the usage of balanced scorecard can be adequately tapped.. The Balanced Scorecard is nothing but an effective and high level strategic feedback mechanism and represents a performance management application. Any additional analytical applications deployed to provide detailed decision support analysis such as product profitability analysis, customer satisfaction and retention, and risk analysis are highly synergistic with the Balanced Scorecard application and should work in harmony with it. The Balanced Scorecard helps businesses react more quickly as a whole from the executive suite to the front lines. Even more important, in an era of rapidly shifting markets and erratic product life cycles, it helps them anticipate situations so they can plan rather than react. By balancing an organization's scorecard, executives can implement an automated solution to measure the health of their overall business rather than focusing on short-term financial results. 11. Balanced Scorecard Effectiveness A key part of the Balance Scorecard approach is the feedback and learning step, where an organisation is able to quantify where it is on its strategic capability building journey, in the context of its current performance, and possible changing business environment. This information should enable the leadership to determine whether the organisation is on track, and what, if any, interventions/changes need to be made. If changes are required, these could be in the definition of the destination, the pace of the journey, or the redesign of the initiatives designed to build the capability. The Balanced Scorecard's approach of measuring performance through varied indicators and communicating strategic goals via the network is the kind of management system businesses need to survive in the Information Age. The Balanced Scorecard is applied in Private and Public sectors from two different viewpoints. In the Private sector, the main emphasis is on financial indicators for managing the organisation. The Private sector responds to fluctuations in market share, share prices, dividend growth and other changes in the financial perspective. In the Public sector however, entities must respond mainly to legislative acts and are responsible to higher Government authorities. The most common difference between a Private sector Balanced Scorecard and a Public sector Balanced Scorecard lies in the purpose of utilizing the Balanced Scorecard. Public sector focuses on cost reduction and customer satisfaction, while Private sector is mainly focused on revenue generation and profitability. 12. Conclusion The goal of this study was to investigate the impact of ERP system on performance measurements particularly the use of information generated by ERP system, if these data is adequate to strategically align company goals and measure its performance and how this knowledge influence the use of Balanced Scorecard approach. Website References http://www.crm2day.com/library/docs/ap0048.pdf http://www.erpwire.com/ http://www.erpfans.com/erpfans/erpdefinition/erp005.html Topic:  The impact of Enterprise Resource Planning (ERP) systems on the usage of Balance Scorecord (BSC) implementation   Instructions: In this article, my idea is to investigate the impact of (1) ERP system on performance measurements (2) particularly the use of information generated by ERP system (3 )how these information influence the use of BSC approach. I have some articles that discuss about BSC and ERP but all these article just discuss on the side of IT or how to assess the ERP system using the BSC approach. Read More