A Preliminary Empirical Study of The Diffusion of ERP Systems in Austrian and British SMEs

Edward W. N. Bernroider, Nelson K. H. Tang

Working Papers on Information Processing and Information Management

Nr./No. 03/2003

Institute of Information Processing and Information Management

Vienna University of Economics and Business Administration

Augasse 2-6 · 1090 Vienna

ABSTRACT

This paper presents the work in progress regarding an international research project based on an

empirical survey. It focuses on the early stages of making the adoption decision, thereafter

evaluating and selecting an Enterprise Resource Planning (ERP) system prior to implementation in

Small to Medium sized Enterprises (SMEs). The project seeks to close some of the identified gaps

in ERP research. In addition, it attempts to link the results of the early stages of decision making to

implementation, usage and evolution success in order to allow important conclusions to be made,

for example, on the best practices in decision making or decision quality and success. This project

will be restricted to the case of ERP software but will also give insights into the potential of

integrating ERP and other important applications such as Customer Relationship Management

(CRM) or Supply Chain Management (SCM). The proposed research seeks to identify any

differences and similarities contributing to the analysed research areas between British and Austrian

companies. The choice of companies originating from two different regions in Europe is an

important precondition in order to formulate results that will be applicable to the European Union in

general. Due to the pervasive nature of ERP systems, our research results should be of interest to a

wide range of professional and scholarly communities (from software engineering to accounting), in

addition to the Information Systems (IS) field. The results presented should especially help

practitioners in SMEs facing the important task of introducing an ERP system into their company.

KEY WORDS

Enterprise Resource Planning, ERP, SME, ERP decision, ERP evaluation, ERP selecting, ERP

implementation, ERP usage, empirical survey

INTRODUCTION

An Enterprise Resource Planning (ERP) system is a software infrastructure embedded with "best

practices", thus providing the best ways to do business based on common business practices or

academic theory. The aim of an ERP is to improve the co-operation and interaction between all

departments in organisations (such as product planning, manufacturing, purchasing, marketing and

customer service department). ERP is a fine expression of the inseparability of IT and business. As

an enabling key technology, as well as being an effective managerial tool, ERP systems allow

companies to integrate at all levels and to utilise important ERP applications such as supply-chain

management, financial and accounting applications, human resource management and customer

relationship management (Boubekri, 2001). They represent large, complex, computerised and

integrated systems which can strongly influence long-term business success.

The following proposed research project will be based on an empirical survey and will focus on

ERP software adoption decisions, system evaluation and selection in SMEs. It seeks to identify

differences and similarities contributing to the analysed research areas, for example, in the use of

evaluation methods employed in British and Austrian companies.

This proposal is presented in the following nine sections. First, ERP related literature is

reviewed. The next section outlines the relevance of the proposed research to business. Goals and

objectives are then set out, followed by the research methodology. Next, contacts and collaboration

are described, followed by information on the workplan. A table detailing the appoximate project

costs is then given. The proposal concludes with the list of preliminary work and related research

material already published.

LITERATURE REVIEW

Firstly, we propose to position the adoption decision and system acquisition within a wider ERP

system lifecycle, as originally proposed by J. Esteves & Pastor (1999), in order to supply a

framework for the following literature review.

The lifecycle covers the six different stages that an ERP system passes through during its life within

an organisation (see Fig. 1).

Fig. 1. An ERP Lifecycle model (J. Esteves & Pastor, 1999)

Concerning the first stage, that of adoption decision, a need for further research into the planning

phase of the adoption process has been expressed by Oliver & Romm (1999). They also outlined

some of the principles that should form the basis of empirical research in this area and provided a

qualitative analysis of ERP adoption within universities. Other researchers have described the

significance of ERP systems with case-based approaches (Hirt & Swanson, 1999). The question as

to whether data quality is a reason to acquire an ERP system, together with other aspects relating to

data quality, have been investigated byXu, Nord, Brown, & Nord (2002). Based on structured

interviews with ten Canadian government organisations, Kumar, Maheshwari, & Kumar(2002)

analysed ERP adoption as an organisational innovation process and applied an "ERP System

Experience" model. This was originally proposed by Soh & Markus(1995) and then adapted by

Markus & Tanis(2000) and reflects an organisation's experience with ERP systems from adoption

to success. Kumar et al.(2002) also give interesting insights into other stages of the lifecycle model.

But due to the limited number of analysed units, their results are not capable of general application.

Previously published material relating to the acquisition area focused on an ERP methodological

acquisition approach (Sistach & Pastor, 2000; Sistach, Pastor, & Fernandez, 1999), frameworks for

the selection process (Bernroider & Koch, 2002; Stefanou, 2000), purchasing criteria (Brown,

Vessey, & Powell, 2000), game-playing behaviour (D.E. O'Leary, 2000) and case studies (J.

Verville & A. Halingten, 2002; J. C. Verville & A. Halingten, 2002).

A review of the work published in the main IS journals and conferences showed that research

conducted in the area of ERP systems has concentrated on issues related to the implementation

phase of the ERP lifecycle (José Esteves & Pastor, 2001). Issues attributed to the implementation

stage can be classified as implementation approaches (Hazebrouck & Frerichs, 1999; Scheer &

Habermann, 2000), implementation success (Bingi, Sharma, & Godla, 1999; Dong, 2000; Hong &

Kim, 2002), case studies (Galliers, Newell, Huang, & Pan, 2002; Motwani, Mirchandani, Madan, &

Gunasekaran, 2002; Trimmer, Pumphrey, & Wiggins, 2002), empirical surveys (Buxmann &

König, 1997) together with other issues such as the role of consultants (Westrup & Knight, 2000),

information technology architecture options (Chan, 1999) and change management strategies during

implementation (Aladwani, 2001; Al-Mashari, 2000).

The attention of scholars in the IS area has been directed more to the post implementation stages

rather than the stages prior to implementation. Contributions to the use and maintenance stage

benefits, risks, limitations and factors that affect ERP usage and organisational performance have

been analysed by Beretta(2002); Poston & Grabski(2000); Pozzebon(2000)and Shang(2000). Other

authors have analysed technological aspects such as architectural issues, maintenance tasks,

databases performance, security and fraud prevention ((Iyer, 1996; Ng & Ip, 1998).During the

evolution phase ERP applications act as a technology enabler for ERP extensions or applications

and systems such as SCM (Boubekri, 2001; Knolmayer, Mertens, & Zeier, 2000).

Not all publications on ERP can be directly related to a specific ERP lifecycle phase, as in some

cases, they can consider aspects attributable to the lifecycle as a whole. For example, the

application of decision models during the life of ERP projects was analysed by Shakir(2000),

Daniel E. O'Leary(2002) focused on knowledge management across the whole lifecycle of an ERP

solution. Several researchers point to the linkages between ERP and Business Process

Reengineering(BPR), where the former is considered a driving technology of BPR (Al-Mashari,

2002; Huang, Kwan, & Hung, 2001; Koch, 2001). Important research issues which can be related to

any stage of the lifecycle model are proposals on how to analyse the value of ERP applications

(Martin, Mauterer, & Gemünden, 2002). Although a considerable number of articles contribute

towards analysing the value of information systems, packaged software solutions or Commercial

Off The Shelf (COTS) products (Muschter & Österle, 1999; Ward, Taylor, & Bond, 1996), only a

few have focused on the specific case of ERP systems.

Some studies investigated certain factors in the ERP context specific to smaller organisations

mainly for the area of implementation (Gable & Stewart, 1999). Contributing to the acquisition

stage, work has been published concerning a methodological approach to the acquisition of ERP

solutions by SMEs (Sistach et al., 1999) and also on certain specific aspects of the acquisition

process of Austrian SMEs (Bernroider & Koch, 2000).

In response to the widespread application of ERP systems, academic institutions introduce ERP

system gradually in their IS curriculum (Al-Mashari, 2002). This also originates from the market

demand for highly qualified ERP specialists. ERP vendors provided a special arrangement that

encourages universities to incorporate their ERP systems and helps to integrate the teaching of these

emerging technologies into their current education processes (Watson, Rosemann, & Stewart,

1999). As a consequence, researchers also focused on the processes and mechanisms that some

universities implemented to introduce ERP into education (Becerra-Fernandez, Murphy, & Simon,

2000; Hawking, Ramp, & Shackleton, 2001).

Although all major IS conferences dedicate at least a track or mini-track to ERP systems, the

number of publications within the information systems community on ERP systems appears small

when compared to the size of the business they generated (José Esteves & Pastor, 2001). As the

widespread application of ERP systems continues, research in the ERP area is still lacking and the

gap in the ERP literature is huge (Al-Mashari, 2002). Considerable research effort has been directed

towards the implementation and to large parts of the post-implementation phases. The lack of

attention applies especially to the stages of system adoption and acquisition, as well as on how to

analyse the value of ERP systems, and to the special situation faced by SMEs.

RELEVANCE OF THE PROPOSED RESEARCH

ERP software solutions have become the central nervous system for almost any major large

company. The effectiveness of these software applications directly relates to the effectiveness and

competitiveness of the firm and its long term viability. ERP systems promise the development and

sustainment of competitive advantage in the global marketplace through enhanced decision support,

reduced asset bases and costs, more accurate and timely information, higher flexibility or increased

customer satisfaction (T. H. Davenport, 1998; T.H. Davenport, 2000; Poston & Grabski, 2000;

Rizzi & Zamboni, 1999). An empirical survey reported that two-thirds of the interviewed IT

managers responsible for their organisation’s ERP projects viewed the ERP systems as their

organisation’s most strategic computing platform (Sweat, 1998).

The acquisition and implementation of ERP systems are very effort-intensive processes. An

empirical analysis of the implementation process in European companies revealed mean

implementation costs of EUR 1.5 Million. and a mean implementation time of 13.5 months

(Buxmann & König, 1997). In addition, high risks are also involved in every ERP project. The farreaching

structural changes following an ERP software implementation can be disastrous as examples show (Bingi et al., 1999; Buckhout, Frey, & Nemec Jr., 1999; Scott, 1999) . A market research company reported that 70% of ERP implementations fail to achieve their corporate goals (Buckhout et al., 1999). It can be assumed that major mistakes were already made in the early stages of the ERP lifecycle prior to the implementation process.

Despite the importance of ERP systems, the high effort expended by companies to implement

these systems and the high risks involved, the answers to many questions regarding different

aspects (especially in the early stages of the lifecycle of ERP systems) remain unanswered.

Examples include the relationship between decision approach and implementation, as well as usage

success or the area of analysing the value of ERP systems (Martin et al., 2002).

The present research proposal seeks to close some of these perceived gaps in ERP research. It

focuses on the early stage of evaluating and selecting an ERP system prior to implementation. In

addition, it links the results of the early stages of decision making to implementation, usage and

evolution success in order to allow important conclusions; for instance, on best practices in decision

making or decision quality and success.

This research will focus on the decision-making situation faced by SMEs. This is of particular

importance because SMEs are experiencing more and more the need for integration, (especially for

inter-organisational integration), and they are expecting ERP software to fulfil these needs. The

availability of relatively inexpensive hardware is fostering this situation (Gable & Stewart, 1999).

In general, decision making in SMEs features much greater constraints on the ability to gather

information in order to reduce uncertainty about their investment (Cobham, 2000).

On the other side of the debate, ERP vendors are searching for new challenges to generate higher

revenues and have turned to the small and medium-sized market segment. In recent years ERP

software packages sales have flattened. A saturation of the market occured as most large

organisations have already implemented an ERP solution and thus has decreased the annual ERP

market growth (PDC, 1999). By 1998 approximately 40% of companies with annual revenues over

1 billion USD had implemented ERP systems (Caldwell & Stein, 1998). The small and mediumsized

market segments, however, is far from being saturated (PDC, 1999). The total European

midsize market for IT products and services surpasses US 50 billion dollars per year (Everdingen,

Hillegersberg, & Waarts, 2000)

Due to the pervasive nature of ERP systems, the results of our proposed research should be of

interest to a wide range of professional and scholarly communities (from software engineering to

accounting), in addition to the IS field. The results presented should especially help practitioners in

SMEs facing the important task of introducing an ERP system into their company.

Another aspect of the proposed work is that results would also contribute to the development of

any e-initiative (CRM, SCM, etc.) on the basis of ERP systems and to handling decision problems

regarding any other type of enterprise wide standard software package.

In this section the research objectives are presented in more detail. The proposal seeks to provide

findings for the following topics, which are presented corresponding to the order of the ERP

lifecycle stages to which they can primarily be assigned. The last category (6) contains topics which

cover more than one stage of the ERP system lifecycle.

(1) Adoption Decision

(Topic i) Drivers for the decision to implement ERP.

The adoption initiation is strongly influenced by the expected benefits of an

implemented ERP system in the organisation (Kumar, Maheshwari, & Kumar, 2002).

The recognition of a need or perceived opportunity of ERP may initiate the adoption

process. It is important to classify the type of need or opportunity, which can have

strong implications for the further stages of the project. As Kumar et al.(2002) remark,

an ERP adoption initiated for mainly technological reasons may configure ERP as a

technology-driven project. Also, how and by whom the project is initiated may have

important implications on ERP adoption characteristics. ERP adoption needs top

management commitment and support from the initiation of the idea to its successful

implementation (Bingi, Sharma, & Godla, 1999; T. H. Davenport, 1998; Xu, Nord,

Brown, & Nord, 2002). An explorative study investigating ERP implementation in ten

Canadian organisations showed that top management initiated ERP adoption in 70% of

the responding organisations. Therefore, besides showing how, by whom, and which

reasons initiated the idea for ERP, in the proposed research, we want to validate the

following hypothesis which also pertains to the stages following the ERP adoption

decision.

H: The level of commitment of top management to an ERP adoption project

positively influences project success

Most large enterprises have adopted ERP. The market segment of large enterprises is

largely saturated (Gable & Stewart, 1999) and this has already decreased the annual

ERP market growth (PDC, 1999). Large enterprises may be increasing the pressure on

their smaller business partners to adopt ERP because they demand integration

functionality, e-business support and other IT related issues.

H: Large organisations with implemented ERP systems are pushing more and more

SMEs into the same direction.

Fast growing SMEs may consider their organisational requirements on a long term

basis. As they will grow up to be large enterprises, they may reach the conclusion that

an investment in ERP is necessary to support their long term goals.

H: Fast growing SMEs are likely to adopt ERP.

(2) Acquisition

(Topic ii) Configuration of project team.

An ERP decision produces not only large technical changes but also large

organisational changes (managerial and institutional ) that affect almost all employees

in an organisation. It has been indicated (Guha, Grover, Kettinger, & Teng, 1997) that

not only the technical aspects play a significant role in a successful decision and

implementation process. Also, the effective balancing of forces between in favour of a

change over and forces of resistance is an important task; this is also a major element in

change management theory (Kettinger & Grover, 1999; Stoddard & Jarvenpaa, 1995).

Organisations, groups, or individuals will resist changes that are perceived as a threat

(T.H. Davenport, 1993; Guha et al., 1997). The principles of change management apply

especially to ERP system implementation (Aladwani, 2001). It is important that the

employees relate to the new software environment. On that basis, and with better

change management practices, staff motivation will be higher. As has been argued

(Appleton, 1997; T.H. Davenport, 1993; Hammer & Champy, 1993; Montazemi,

Cameron, & Gupta, 1996; Willcocks & Sykes, 2000) , the participation of the people

affected by the system and knowing the business processes leads to better decisions and

a higher rate of acceptance later(Guha et al., 1997). Tayler(1998) suggested possible

benefits arising from a participative type of team structure that included the

motivational improvement of local participation and attention to individual quality of

working life, as well as the necessary attention to strategic purpose and to reciprocal

and coordinative social roles. On the other hand, it has to be noted that a participative

form of decision making might lead to game playing behaviour if one or more parties

try to influence the decision process to arrive at their preferred solution (O'Leary, 2000).

Given this situation, we suggest that the majority of organisations implementing an ERP

solution rely on a participative evaluation strategy and that these organisations

outperform the others regarding overall ERP adoption success:

H: Participative forms of ERP system decision making, respectively group decisions,

have a positive impact on ERP adoption success criteria.

Due to scarce resources and broader control by top management in SMEs (Gable &

Stewart, 1999) it is assumed that they tend to establish centralised decision making,

(characterised by a high involvement of top management and a strong focus on the IT

and organizational departments) with only small participation of other internal

departments and minor or no employment of consultants.

H: SMEs engage in a more centralized form of project team configuration for the

adoption of ERP than larger enterprises.

(Topic iii) Considered Evaluation Criteria for ERP

Smaller organisations tend to be more flexible than larger ones as their organisational

structure is less rigid and can be changed more easily. This also applies to their business

processes. Therefore, and also because they face greater environmental uncertainty due

to lesser influence (Gable & Stewart, 1999), smaller organisations have the need, and

also the means, to be more flexible. As the information systems in use have to be

aligned with the business strategy and the current business processes, they have also to

offer more flexibility in order to fulfill this requirement. The information systems in

smaller organisations should therefore offer possibilities to implement the current

business processes, (which might not necessarily follow the standards which are derived

from larger organizations), and be able to be changed easily in order to accommodate

changes to these processes. It can be assumed that this necessary requirement for

increased flexibility will also affect the evaluation and selection of ERP packages.

H: Higher flexibility is valued more highly by smaller organizations than larger

organisations.

(Topic iv) Considered and chosen ERP packages.

Pertaining to the hypothesis that "higher flexibility is valued more highly by smaller

organisations" the preferred ERP system needs to flexible. Due to the lack of financial

resources faced by SMEs, it also needs to meet these financial limitations. Both costs

and flexiblity have been perceived as being disadvantages of the ERP system offered by

the market leader SAP (Xu et al., 2002). Although SAP approaches the SME market

segments by offering shorter, (and therefore cheaper), implemention cycles (the ASAP

implementation approach) by selling pre-customized "ready to run" solutions which can

be industry focused, it seems to remain inflexible.

H: SMEs are turning towards specialised ERP solutions from small vendors primarily

due to financial and flexiblity reasons.

(Topic v) Applied information gathering efforts.

(Topic vi) The use of formal evaluation techniques

The evaluation of information systems, especially ERP solutions, is one of the more

difficult problems to tackle in IT management. Nevertheless, at least one methodology

from the vast set of evaluation techniques must be chosen in order to have a tool for an

effective and transparent comparison of the different choices of action investigated.

However, conventional financial and economic evaluation techniques alone will not

suffice. Research in IT has extended the range of tools to include productivity measures

and return on management and information economics (to name only a few) and

various taxonomies of methods have been put forward (Bannister & Remenyi, 1999;

Jones & Hughes, 1999; Kontio, 1996; Lawlis, Mark, Thomas, & Courtheyn, 2001;

Remenyi, 1991; Sedigh-Ali, Ghafoor, & Paul, 2001).

Decision makers tend to describe their decisions as being based to a greater or smaller

extent on instinct or on individual experiences. The more complex the decision, the

more likely this seems to be. We suggest that a such defection from the solid ground of

rational decision-making should be avoided, and for every ERP software decision,

formal evaluation methodologies should be applied. It has been confirmed that those IT

executives who systematically collected information and analyzed it made more

effective decisions than those who did not (Ranganathan & Sethi, 2000).

H: Organisations apply formal evaluation techniques other than conventional

financial methods in the ERP system selection process.

SMEs are usually much more informal and unstructured in their management style or

definition of strategy than larger companies. This allows them to compete in a very

dynamic and competitive environment through high flexibility and responsiveness. This

is a major premise for SMEs to be always close to their markets and customers.

Regarding IT investments, many SMEs often seem to lack an explicit IT plan or

strategy, or even a defined IT budget (Dans, 2001). Dans states that decisions to adopt a

particular technology are in many cases driven by personal attitudes or perceptions of

the firm's owner, rather than by any formal cost-benefit or strategic analysis. Gable &

Stewart(1999) proposed that a decisional specificity attributed to SMEs is less usage of

formal models when evaluating SAP R/3 systems. Thus, we consider that SMEs apply

less formal and less complex evaluation techniques than large organisations in the ERP

system selection process.

H: SMEs apply less formal and less complex evaluation techniques than large

organisations in the ERP system selection process.

(Topic vii) Situational factors, e.g. IT/IS architecture characteristics, influencing

the effect of ERP software on organisational performance.

(Topic viii) Current needs and problems of organisations in the field of IT

integration and functionality aspects.

(3) Implementation

(Topic ix) Accompanying Business Process Improvement (BPI) or Business

Process Reengineering (BPR) efforts.

(Topic x) The implementation approach chosen.

(4) Use and Maintenance

(Topic xi) The perceived utilisation of ERP benefits.

(5) Evolution

(Topic xii) The value of ERP systems as an enabling technology especially for

Supply Chain Management (SCM) and Customer Relationship

Management (CRM)

After the implementation and "going live" of an ERP system, many companies

perceived that their system did not meet the functionality required. Reasons are the lack

of funds, expertise, or time, especially in the year 1999 where companies were

struggling to achieve a Y2K compliant information system (Willis & Willis-Brown,

2002). Also many useful, but not system critical, features are often left out when

implementing ERP systems (Willis & Willis-Brown, 2002). We therefore seek to

establish an overview of the level of functionality which was achieved when the ERP

system was going live.

Many functions needed by an organisation are currently not fully featured by ERP

systems, therefore companies are turning to third-party products to meet these needs

(Willis & Willis-Brown, 2002). When evaluating vendors it thus seems necessary to

emphasize on the ability to integrate with other products. Important applications of ERP

systems comprise SCM and CRM. Wills and Willis-Brown propose that a solid ERP

foundation is the backbone of such extensions (Willis & Willis-Brown, 2002) and

intend to investigate the perceived value of this enabling advantage for ERP adopters.

(6) General Directions

(Topic xiii) Decision Success and Quality.

As reported in academic literature, there is a dip in performance after going live with an

ERP system (Willis & Willis-Brown, 2002). A measure of the success of the stages

prior to usage is the length and depth of the performance dip encountered.

(Topic xiv) The influence of acquisition process characteristics and the type of

implementation strategy chosen on the performance of the system in

use later .

(Topic xv) Differences between large and small to medium sized enterprises

(SMEs) in the overall acquisition process of ERP systems.

Smaller organisations face more severe restrictions on their resources, including (among

others) financial and human resources than larger companies. This ‘resource poverty’

constitutes also part of the organisational specificity of smaller organisations (Gable &

Stewart, 1999). Slack resources are often scarce or nil (Dans, 2001). The lack of

resources refers to all human, financial and material aspects. It can therefore be assumed

that this factor plays a role in the context of ERP selection. This may, for example, also

include the ways in which information regarding alternatives and their respective

quality is gathered, and also in the composition and size of the project team responsible

for the decision making.

H: Smaller organisations spend less effort during all stages of the decision making

process than larger organisations.

RESEARCH METHODOLOGY

This work will build on empirical findings from two different regions within the European

Union: The United Kingdom and Austria. The choice of companies originating from these two

different European regions is an important pre-condition for the formulation of results that will be

applicable to the European Union in general.

The approach to this research project is two-pronged. Firstly, a research model and hypotheses

will be formulated based on implications from current perceptions in the literature, from case

studies under progress and from preliminary results from prior research. These preliminary results

cover primarily the decision making process for ERP software systems. The research activities will

be done in co-operation with the Aston Business School,Aston University in the UK and with

Department of Information Business, Vienna University of Economics and Business Administration

in Austria.

The methodology to be employed in the second stage for testing the research hypothese is an

empirical survey. For such an empirical study the design of a questionnaire is necessary, which will

be validated in several pre-tests. Random sampling will be employed with a sample size of 1000 for

each country, thus resulting in a total of 2000 enterprises. The samples will be divided into

subgroups according to company size. If the number of subjects in any group falls below a certain

limit then stratified and disproportional sampling will be applied. As a consequence of the

disproportional sampling method, the variables of the empirical data gathered in the main step of

analysis must be weighted to calculate the real distributions. Subsequently, mailings with separate,