Critical Risk Factors - Essay Example

?Critical risk factors and its impact on an ERP Implementation Organizations are physical structures and sometimes virtual structures, in which employees after recruitment will be apportioned into various departments for better streamlining of work. Employees after being placed in various departments will be allocated specific tasks; accomplishment of those tasks will contribute to the overall fulfillment of organizational tasks and goals. Importantly, to accomplish these tasks, there has to be optimum coordination, cooperation and communication between all these departments. Departments in an organization cannot function without flow of information from other departments, and has to coordinate, cooperate and communicate through one channel or other. This is where ERP (Enterprise Resource Planning) comes into the picture. ERP in the form of software applications will integrate all the departments and thereby will integrate the internal and the external management information across the organization. By integrating the information and then making it available to the needed departments, ERP will optimize the various organizational processes. With ERP producing optimal benefits, it is being implemented in organizations in various sectors. However, the implementation process will not be a smooth flowing affair, as various risk factors could impede it. When ERP is implemented, apt change management practice has to be initiated. However, various risk factors could arise during this change management process, thus turning out be a major impediment for ERP implementation. In addition, when the employees are trained and equipped to handle ERP, another set of risk factors will arise. Then, there could risk factors related to the software customization according to the organizational processes. So, this paper as part of literature review will discuss various views and perspectives regarding ERP implementation and how risk factors could emerge during the processes of change management, training, and software configuration and customization. Literature Review As stated by ERP Iskanius (2009) ERP, when successfully implemented, will link all functions of an organization including its “manufacturing, human resources, financial systems, and distribution with external suppliers and customers into a tightly integrated system with shared data and visibility”. Singla and Goyal (2006) adds to this perspective by stating, how ERP can upgrade an organization’s ability to generate timely, relevant and accurate information needed for the various organizational processes throughout the enterprise and its supply chain. ERP made its appearance in the 1990’s, when Information Technology (IT) and its applications made its presence in various spheres of human life, particularly in business organizations. It was also during that period, many firms around the world started shifting their IT strategy from “developing information systems in-house to purchasing application software such as enterprise resource planning (ERP) systems.” (Hong and Kim 2002). Sumner (2000) adds additional perspective by stating how organizations are initiating various projects by using ERP packages like SAP, Peoplesoft and Oracle, and how these projects often represent the single largest investment in an information systems (IS) project in the histories of these companies. (Sumner 2000). Organizations are making such large investments in ERP because of the benefits that will be returned by it. Singla and Goyal (2006) lists out various benefits of ERP, which include shortening of the production cycles, accuracy accentuation regarding the demand for materials management, etc. While Singla and Goyal (2006) provided benefits of ERP’s implementation in the manufacturing side, Iskanius (2009) gives a list of benefits across various departments, which includes “cost reduction, productivity and quality improvement, customer service improvement, better resource management, improved decision-making and planning, and organizational empowerment”. Because of such optimum benefits, ERP is being implemented in various organizations, however all benefits could not be actualized even in short term or in long term because of the various risk factors, that will arise during the implementation. As stated by Grabski, Leech and Lu (2001), implementation of ERP systems has been problematic for many organizations, and as organizations have discovered after trying out, ERP implementation can turn out to be a monumental disaster unless the process is handled carefully. Singla and Goyal (2006) validates this by stating that ERP systems could be a failure either in the design or importantly its implementation stage. Among the many risk factors, which could impede ERP implementation, the risk factor of how lack of alignment of the ERP system to the organizational processes, is the key one. That is, when the change management process is not properly carried out in line with ERP implementation, this non-alignment will occur. As Brown and Vessey (2003) state poor understanding of the change management processes that is needed prior to starting the ERP implementation is a main reason for any ERP project failure. However, Hong and Kim (2002) put forward the point that ERP implementation process is dynamic in nature, and it only could lead to radical organizational changes. Hong and Kim (2002) further add up by stating unlike the during the implementation of a custom software, packaged softwares like ERP requires that its implementing organization change its organizational processes to match the workings of the application packages. Iskanius (2009) puts forward certain other points on how change management during ERP implementation could be risk factor. That is, many ERP implementations are difficult, lengthy and over budget, and could be abandoned, or scaled down, or even failed to achieve their business objectives, and the one explanation for the high failure rate is the poor change management. As pointed out above, ERP packages maximally cannot be custom made according to the organizational needs, processes and practices. This being the case, organizations has to make the changes in its processes and practices. However, Brehm, Heinzl and Markus (2000) states that it would be difficult for the organization to change easily, as its business practices may have evolved over time, acquiring idiosyncrasies that may working effectively. Brehm, Heinzl and Markus (2000) further adds how organizations may be unwilling to abandon their practices, thus making ERP implementation a difficult process for the employees as well as the people who back and run ERP. This change management process could act as a major risk factor for ERP implementation, when there is also lack of support from the senior management to it. That is, when the change management process needs to be started to fit with the ERP, it is the leader and senior management who has to initiate it, run it and manage it optimally. This fact was validated by Sumner (2000) who stated that without question, top management support is critical, as they only had to lead the way for the change management in line with ERP. Thus it is clear that only if the risk factor of change management is managed aptly during ERP implementation, the implementation will be successful. “A careful use of communication and change management procedures is required to handle the often business process reengineering impact of ERP systems which can alleviate some of the problems” (Singla and Goyal 2006). Apart from changing the currently running organizational processes in line with ERP implementation as part of change management, organizations as a further extension of that will also initiate training for the employees regarding ERP. On the same lines, Hong and Kim (2002) state when the existing business processes are changed to the standard business process of ERP; other organizational processes particularly training process must also be changed together. Even then, there could be lack of knowledge and expertise regarding ERP among the employees, and this could act as major risk factor for ERP implementation. The fact is, before introducing new process or technology like ERP in an organization, the employees has to be first trained, as they will not be aware of its functionality and its application. To train them, external consultants with apt knowledge of ERP will be normally hired. Sumner (2000) states when organizations do not have the needed expertise internally, they will bring in the consultants, especially the ones, who are specialists in specific applications. Aloini, Dulmin and Mininno (2007) also stress their importance by stating that the skills and knowledge of the consultants are important in providing expertise in areas where employees lack knowledge. Although, this is an apt step in ERP implementation, the risk factors will arise, when the organizations fails to retain these consultants for a sizable time. As Sumner (2000) stated it has become difficult for the organizations to recruit and retain efficient ERP specialists because these consultants are high in demand and their market rates are very high. With such high demand, these consultants may jump to newer organization even in the midst of an ongoing ERP implementation, putting in jeopardy the training for the employees. As discussed earlier, during ERP implementation, the organizational processes will be maximally changed to fit with the ERP, and not the other way round. As stated by Grabski, Leech and Lu (2001) the desire will be mainly to “adopt the “best practices” inherent in the chosen software solution rather than changing the software to match current business practices.”. It cannot be case all the time, because in cases when organizations are not able or not willing to change its organizational process for ERP implementation, then ERP and its related software has to be changed. However, this is where the next risk factor arises because as stated by Brehm, Heinzl and Markus (2000) making changes to ERP software code (called modification) is usually discouraged by vendors and implementation consultants, as it will lead to time wastage and could also incur extra costs during the implementation process, even while diluting the original configuration. This view was seconded by Aloini, Dulmin and Mininno (2007), who state that “software modification is expensive and costs heavily in maintenance”. Brehm, Heinzl and Markus (2000) further add ERPs which comes in packages and “are designed to meet the general needs of a class of organizations, rather than the unique needs of a particular organization.” This way organization is known to reduce the costs, as well as the risks that may be associated with the custom software development. Even then, due to mismatching of organizational processes and ERP, certain organizations are taking the risk of modification during the implementation process. This argument was supported by Huang, Chang, Li and Lin (2004) who stated that software development problems regarding ERP have been a major issue until now. Thus from the above analysis, it is clear that that ERP implementation process could be plagued by various risk factors. These risk factors during Change management process, training period and as part of customization will impede proper implementation of ERP. Only if these risk factors are eliminated or even minimized, ERP can be optimally implemented in an organization, thereby providing the organization with many benefits. Word Count: 1754 Case Study Cisco Systems, leader in consumer electronics, networking and other communications technology and services, was growing at optimal rate that exceeded 50 percent; however it needed a replacement for its failing operational core of its mission critical IT systems. In addition, Cisco Systems is having an ambitious target to become a $5 billion-plus enterprise in the near future. But, to support their growth plans, their application did not provided the degree of redundancy, reliability, etc. So, the network software has to be upgraded to the advanced version of ERP packages, which can support the heightened computational load to reach the operational target. After the search for their required software in the market, they zeroed in Oracle, as lot of positive factors was going in its favor. ERP project was being driven pretty strongly by manufacturing and Oracle had a better manufacturing capability than the other vendors. They did not follow the customization process. There is a tendency during the implementation of ERP systems, which is, the organizations will want the ERP to mirror their method of operation or organizational process. Instead, they got a number of promises regarding the long-term development of functionality in the package. The other part of it was the flexibility offered by Oracle's was quite attractive. With Cisco starting the implementation of the new versions of ERP at the earliest, ahead of than the standard fourteen months for implementations, they started working backward with the stipulated time deciding the implementation. It also has the advantage to drastically reduce the operational expenses owing to the stoppages. “By managing operating costs more effectively, many businesses can easily realize a similar gain in profitability”. (morebusiness.com). The pricing was also aggressively pitched to get a better deal for Cisco Systems. Cisco systems with its right application software in the form of Cisco’s ERP can get optimal benefits, thereby accentuating its organizational processes ever further, leading to positive results. References Aloini, D., Dulmin, R and Mininno, V 2007, Risk management in ERP project introduction: Review of the literature, Information & Management, vol. 44, pp. 547-567. Brehm, L., Heinzl, A and Markus, ML 2000, Tailoring ERP Systems: A Spectrum of Choices and their Implications, Proceedings of the 34th Hawaii International Conference on System Sciences, Track: Organizational Systems and Technology, Minitrack: ERP System Issues and Answers, Island of Maui (Hawaii, USA), January 3-6, 2001 Brown, C and Vessey, I 2003, Managing the Next Wave of Enterprise Systems: Leveraging Lessons from ERP, MIS Quarterly Executive, vol. 2, no. 1. Grabski, SV., Leech, SA and Lu, B, Risks and Controls in the Implementation of ERP Systems 2001, The International Journal of Digital Accounting Research, vol. 1, no. 1, pp. 47-68 Hong, KK and Kim, YG 2002, The Critical success factors for ERP implementation: an organizational fit perspective, Information and Management, vol.40, pp. 25-40 Huang, SM., Chang, IC., Li, SH and Lin, MT, Assessing risk in ERP projects: identify and prioritize the factors, Industrial Management & Data Systems, vol. 104, no. 8, pp. 681– 688 Iskanius, P 2009, Risk Management in ERP Project in the Context of SMEs, Engineering Letters, vol. 17, no. 4. morebusiness.com, Reducing Operating Expenses: Company Purchasing Procedures, viewed on April 22, 2011 http://www.morebusiness.com/running_your_business/profitability/tip7.brc Singla, AR and Goyal, DP, 2006, Managing risk factors in ERP implementation and design: an empirical investigation of the Indian industry, Journal of Advances in Management Research, vol. 3, no. 1, pp.59 - 67 Sumner, M 2000, Risk factors in enterprise-wide/ERP projects, Journal of Information Technology, vol. 15, pp. 317–327 Read More