“Common ... and Global:” Choosing Standard Artifacts and Processes for ERP Systems

Daniel O’Leary

University of Southern California

Marshall School of Business

Leventhal School of Accounting

Los Angeles, CA 90089-1421

oleary@rcf.usc.edu

Abstract

Implementation of enterprise resource planning (ERP) systems has led to the motto, “Common ...

and Global.” As a result, employing standard ERP systems has led to firms adopting common

artifacts (e.g., vendor numbering systems) and processes (e.g., sales management) for global

implementation. Although there are a number of important reasons for adoption of standards in

an ERP system, unfortunately, adoption of a standard may have differential costs for divisions.

What is optimal for one division or corporate is not optimal for each of the divisions.

As a result, there is concern about how standard artifacts and processes are chosen for ERP

systems. Is it possible to find standard artifacts and processes that are optimal for the corporation

and each of the divisions? What choice process for ERP standards are rational? How can choice

processes for selection of ERP standards be manipulated? This paper addresses these issues

using analytic methods and information gathered from a number of ERP implementations.

Keywords: Enterprise Resource Planning (ERP) Systems; Choosing Standard Artifacts and

Processes for ERP Systems;

1. Introduction

Enterprise Resource Planning (ERP) software is one of the most rapidly growing software

phenomena. It has been estimated by the Gartner Group that the Fortune 1000 is implementing

or has implemented an ERP system (Michandi and Digrius 1997). Further, ERP are a significant

portion of major consulting firm revenues. For example, roughly 50% of Price Waterhouse’s

consulting has to do with ERP implementation (Public Accounting Reports 1997). Currently, the

ERP market is dominated by Baan, J.D. Edwards, Oracle, PeopleSoft and SAP, with estimates

indicating that SAP has over 30% of the market (Busse, 1997). It is because of this wide spread

impact that ERP are beginning to be integrated into both curriculum and research.

One of the critical sets of decisions that needs to be made in any ERP relates to the choice

of standards used in the system, including standard artifacts (e.g., vendor numbering schemes and

lists) and business processes (e.g., order management). The expression “common ... and global”

has received attention as a guideline to help implement those standards in some companies (e.g.,

CIO 1996), forcing the notion that each division or plant will not chose their own standards, but

instead the company will use a similar set of standards across each division. Unfortunately,

adoption of a standard is not necessarily optimal for all divisions or even the company as a

whole: Particular standards may not benefit each division or plant equally. As a result, it is

important to investigate how companies chose standard artifacts and processes, if it is possible to

find standard artifacts and processes that are optimal for the corporation and each of the

divisions, determine which choice process for ERP standards are rational, and how choice

processes for selection of ERP standards be manipulated?

This Paper

This paper proceeds as follows. Section 2 provides some background information on ERP

systems. Section 3 investigates why ERP systems use standard artifacts and business processes,

drawing on evidence from ERP implementations, from the literature. Section 4 analyzes how

firms generate a portfolio of potential standards and choose between them, drawing on case

discussions of two companies. Section 5 investigates the potential for and evidence of conflict

between divisions and the company over choices of ERP standards. Sections 6 and 7 contain the

analytic results of the paper. Section 6 lays out notation and conditions for “rationality.” Section

7 discusses a number of alternative decision making approaches that companies could use in

choosing standards for ERP systems. Section 8 discusses some implications of the choice rules

and investigates issues such as agenda setting and strategic choice making. Finally, section 9

provides a brief summary of the paper.

2. Background: ERP Systems

ERP software allows integration of multiple divisions and plants within an enterprise, typically

employing a relational database system to ensure that all users have access to the same

information, in order to improve company responsiveness to customer needs. For example,

Owens - Corning (White et al. 1997) chose to implement the ERP, SAP to facilitate visibility of

the data and allow quick response to customers.

Up until now, customers called an Owens - Corning shingle plant to get a load of

shingles, placed a separate call to order siding, and another call to order the

company’s well-known pink insulation.

(The company’s new vision was that) Owens - Corning should offer one

call shopping for all the exterior siding, insulation, pipes and roofing material that

builders need. (SAP’s) R/3 will give Owens-Corning the ability to make that

happen by allowing sales people to see what is available at any plant or warehouse

and quickly assemble orders for customers.

Historically, much corporate software has been customized and local, so that individual

divisions and plants could exploit unique characteristics. Artifacts, such as vendor lists and

charts of accounts, were chosen and developed with local processes and decision making needs

in mind. In addition, business processes, such as sales management or purchasing, often were

chosen to meet local needs and resource constraints. Unfortunately, disparate software, artifacts

and processes made it difficult to integrate across multiple divisions. As a result, it became

increasingly difficult to coordinate divisions to meet global customer needs and competition.

Contrary to customized local software, ERP package software is developed by a software

company, facilitating sale to many companies. Further, unlike customized software, common

ERP package software allows integration across all divisions and plants in a company,

facilitating a common corporate view. As noted by Brownlee (1996, p. R18), “When Colgate

employees log on to the network, the same menu options appear on their screens, regardless of

whether they’re in Cambridge or Burlington or New York.”

Since ERP systems are developed for the enterprise, an ERP implementation requires

many enterprise decisions, including which standard artifacts and processes will be used. For

example, in the case of “Vandelay” (McAfee and Upton, 1996), a number of standards were

adopted, including a common chart of accounts, common vendor numbers and common part

numbers, in order to facilitate communication and coordination between different business units,

such as factories and divisions. Unfortunately, some standards benefits particular divisions more

than other divisions. Some standards may be optimal for the company, and not for all divisions.

As a result, an important part of implementing an ERP system is developing approaches to chose

standards.

3 Why Standards for ERP? -- Some Evidence of Benefits

Why do firms adopt a single set of standard processes or system artifacts when they implement

an ERP system? This section summarizes a number of reasons gathered from a range of ERP

implementations including, the software requires it, to get control of processes that seem to have

gotten out of control, because of the need for a common view of the organization, and value

creation and cost reduction.

Software Requires It

Perhaps the most immediate reason that standard ERP artifacts and processes are adopted is

because ERP software requires it. As noted by Chris Roon, a Vice President of Red Pepper

Software (Vaughn 1996, p. 72) “Whether its steel, rubber, or electronics, with SAP it is a

common set of parameters that drive individual plants.” Further, the need for standard product

lists and standard price lists also was seen in the SAP implementation by Owens - Corning

(White et al. 1997)

... Owens-Corning traditionally had operated as a collection of autonomous fiefs.

“Each plant had its own product lines,” says Domenico Cecere, president of the

roofing and asphalt units. Each plant also had its own pricing schedules, built up

over the years of cutting unique deals with customers. ... (SAP’s) R/3, however,

effectively demanded that Mr. Cecere’s staff come up with a single product list

and a single price list. (bolding added)

Get Control of “Out of Control” Processes

In some cases different organizational locations evolve processes that appear to get out of

control. In order to get those processes back under control and to facilitate organizational

adoption of best practices, firms adopt ERP systems. As seen in Vandelay (McAfee and Upton

1996, p. 4-5)

Vandelay’s sites’ operations practices were as varied as their information systems.

There was no uniformly recognized “best” way to invoice customers, close the

accounts at month end, reserve warehouse inventory for a customer order or carry

out an of the hundreds of other activities in the production process that required

computer usage or input. ...

To alleviate ... problems with systems and practices, Vandelay decided to

purchase and install a single ERP system, which would incorporate the functions

of all the previously fragmented software. The company would also standardize

practices across sites.

Common View of the Data

In order to generate a common view of the data a common set of organizing artifacts, such as

chart of accounts, vendor lists and customer lists are required. Those artifacts provide the ability

to gather information in disparate settings in order provide a common view across each of those

settings. For example, as noted by Vaughn (1996, p. 74),

... Elf Atochem North America Inc., Philadelphia ... is moving 13 business units

over to SAP software. ... Elf Atochem came to SAP because its various companies

had been reorganized to work as one. (As a result, the company) ... had inherited

“a lot of different computer systems, a lot of different ways of doing business, and

a lot of hand-offs.” A common view of diverse data was important ...

Value Creation and Cost Reduction

Implementing standard artifacts and processes can create value and reduce costs. For example,

as noted by Pirelli’s director of information technology Arrigo Andreoni, (Wahin, 1998, p. 48)

“The more standardization there is, the easier it is to implement new ideas and respond to new

opportunities.” In addition, Andreoni notes that standardization can reduce costs. As an

example, before standardization, Pirelli had a full service back office and customized software in

each of five countries. ERP software was used to replace the multiple back office staffs with a

single back office staff in Switzerland, cutting costs by 25%. Now offices in each country send

the data to Pirelli’s central servers.

4. Generating and Choosing Alternative Standards

Where do the standard artifacts and processes come from? An interview with the ERP project

manager Nestle’s (US) found how Nestle’s generated different business process options for its

SAP implementation. First, Nestles’ decided that standardization was appropriate, choosing to

implement each of the same business artifacts and practices required for SAP implementation in

all three of its US divisions. Second, each of the three division’s existing artifacts and practices

became candidates. Third, both SAP and the consultant’s best practices databases were used to

generate candidates. Fourth, a multifunctional team used both sets of inputs to decide on

company standard artifacts and business processes.

Which of the portfolio of generated artifacts and processes were chosen? At Nestle’s, in

some cases, existing division practices were adopted. In other cases hybrid systems were

developed and adopted. Finally, in some cases existing consultant and SAP best practices were

adopted.

An interview with the Deputy ERP project manager at Litton Data Systems Group found

that a similar approach was used to generate the portfolio of standards for its Baan

implementation, but that the source of standards was somewhat different because of industry

considerations. As with Nestles, a multiple function and multiple departmental group was

founded to generate choices. However, in addition to other sources, Federal Government-based

standards and artifacts were also a part of some of the portfolios of standard artifacts and

processes.

Which Standards will be Adopted?

Since ERP committees generally include representatives from each of the effected

divisions, divisions can express their preferences as to which standard is adopted through their

representatives on these standard generating and choosing committees. Divisional preferences

may be driven by any of a wide range of motives, including some of the following.

Maximizing Corporate. Ideally, each division will put aside its individual goals and work toward

developing a set of standards that maximize the global needs.

Minimizing Divisional Change Costs. Alternatively, a division may work to keep its own

artifacts or processes in order to minimize change costs such as training personnel who would

use the new standards and hiring different personnel to use and implement the new standards.

However, if a division is unable to promote its own standards, as standards for the company, then

its change and change costs are probably minimized by choosing the standard that is closest to

their own.

Responding to Competition. Global competition has forced many companies to outsource many

activities that used to be done by corporate divisions. Any division within a company faced with

this potential threat may choose to work to respond to that competition by doing extensive

reengineering. Accordingly, in such settings we might see divisions work to implement

substantial change in the standard artifacts and processes (e.g., Hammer, 1989).

It is not the purpose of this paper to choose between these or other motives. Instead, the

purpose is to provide evidence, in conjunction with the following section that companies need to

think about how to choose these common and global standards. In addition, these varying

motives suggest that there are incentives for divisions to try to get the corporation to choose

standards that benefit particular divisions.

5. Evidence of a Conflict of Needs: Global vs. Local

What is adopted for global usage is not always what is best or preferred locally. For example,

Vaughn (1996, p. 72) quotes Chris Roon, a Vice President of Red Pepper Software, who admits

that standard ERP artifacts are “... useful where financial viewers want to consolidate

information across diverse operating units, but ... the common view may not be optimum for

individual divisions.” Although standardization coming from implementation of enterprise

software by standardizing processes and artifacts has global benefits, it comes from sacrificing

local customized capabilities.

In addition, because of differential benefits to divisions and corporate, arising from

standard artifact and process choices, the group decision making can become a political process,

subject to strategic decision making behavior designed to meet division needs. Ultimately,

differences in interests between global views and division views can result in conflicts. Further,

choices of standard artifacts and processes do not necessarily always maximize corporation’s

utility, but may benefit particular divisions, differentially.

This section finds that there is both the potential for conflict between divisions over

choices between standards and evidence of conflict over the choices that have been made.

Example: A Common Standard Artifact -- Product Lists

As an example of a common standard artifact consider the product list. A product list gives a

unique identifier to each product for purposes of entering and reporting data about those

products. If a common product list is adopted across all divisions, then that means each division

uses basically the product list. Typically, a product list must provide sufficient flexibility to add

new products and to capture each of the existing products. Unfortunately, information needs are

not necessarily the same in each division of a company, since divisions have different products,

markets, etc. Some products are likely to be used in only one division; some divisions are likely

to need more extensive and detailed product lists than others, etc.

As a result, in each case, different business divisions and units would each experience a

different set of costs of implementing a standard product list, depending on whose product list

was chosen. If a particular division’s product list were used as the common standard across the

company then that division would face minimal training and implementation constraints.

Further, the product list may fit its interests better than other product lists, facilitating addition of

new products, etc. However, for other divisions it would be an entirely new product list,

requiring training and may not fit that division’s needs.

Further, divisions may find that the common product list is not as efficient as their

previous one. For example, a product list with twice as many digits can take twice as long to

enter those digits for a particular product. Further, the existence of more digits is likely to mean

a higher probability of a data entry errors, suggesting that the quality of the information could

decrease.

Conflicts Occur Over Artifacts and Processes

ERP systems demand common artifact and processes. However, as noted above,

divisions have differential returns associated with particular standards. As a result, conflict

occurs between divisions over choices for both artifacts and processes.

For example, as seen in the SAP implementation by Owens - Corning (White et al. 1997),

there apparently was substantial conflict over an artifact R/3, however, effectively demanded that

Mr. Cecere’s staff come up with a single product list and a single price list. The staff initially

fought ceding control over pricing and marketing to a computer-wielding central command. “My

team would have killed if we’d let them,” he says.

Further, as noted in a discussion about Owens - Corning (CIO, 1996) obtaining common

and global processes was not easy, and apparently resulted in some conflict over how much

divisions would be able to represent their individual needs in the ERP.

“You’ll always have variations in processes at the business unit level with SAP,

particularly around customers ... its my job to make sure the variations are the

exception rather than the rule. It’s a constant struggle.”

Since there is evidence of both the opportunity for conflict and the existence for conflict,

there is reason to pursue analysis of rational choice of standards. Rational group choice of ERP

standard artifacts and processes is the subject of the next two sections.

6. Choice Between Standards: Some Notation and Rationality Conditions 1

How do organizations implementing an ERP system make the choice between different standards

(artifacts and processes)? Before this issue is examined, consider some notation and some

rationality conditions.

Let x and y be different standards that could be adopted by the ERP implementing

company. For example, x and y could represent two different charts of accounts or two different

vendor numbering schemes or two different definitions of (common and global choices) business

processes, for say, order management. Let xRy indicate that x is preferred to or indifferent to y.

R is used to stand for the knowledge of relationships between all x and y. For example, R can be

specified through a utility function à where xRy if and only if à (x) > à (y).

Let S = (x, y, z, ...) be the set of alternatives available for some artifact or business

process being chosen for the ERP system, termed the “environment.” S is the set of alternatives

from which the choice will be made. Let |.| indicate cardinality, and let |S| > 3.

Suppose that there are n-1 divisions and a “corporate office” of the company

implementing the ERP system. Each will be treated as one of n divisions in the set C, the

company. Each division is assumed to have preferences between the choices made for an ERP.

So that each division is assumed to have a preference for artifacts such as a chart of accounts and

business processes. Let Rj represent the preference relationship of company j and Ãj be the utility

function of company j. Let |xR jy| be the number of divisions for which xRjy, for j ? C.

Rj is assumed to be both complete, reflective and transitive among choice between

different standards that could be adopted.

Property 1 (Completeness): Either xRjy or yRjx ? x and y ? S.

Each division is assumed to have a preference between any particular pair of

business artifacts or process choices, e.g., purchasing, that divisions could chose

between. A lack of completeness can translate to an apparent lack of

“decisiveness,” since a lack of completeness makes it appear that the group cannot

make up its mind (e.g., Pattanaik 1978).

Property 2 (Reflectivity): xRjx ? x ? S.

In the case of reflectivity, for each division, the comparison between any

particular business artifact or process is indifferent to itself.

Property 3 (Transitivity): xRjy, yRjz, implies xRjz ? x, y and z ? S.

Suppose that there are at least three definitions of a business artifact or processes

for some activity requiring standard ERP definition across divisions. Transitivity

assumes that for each division there is a preference between each pair, and that

one is preferred among the three.

If Rj satisfies properties 1-3 then it is called a weak preference order relationship. Throughout

the choice of ERP standards, each of the divisions j is assumed to be rational, adhering to

conditions 1, 2, and 3.

7. Approaches used to Choose Standards

As noted above there are a number of sources of ERP standards. Further, the cost to

individual divisions will vary based on which standards are adopted.

How do organizations choose which set of standards, e.g., chart of accounts, to adopt?

Which approaches are used in real world applications? As noted by McAfee and Upton (1996)

companies have some questions as to how to chose standards for ERP systems. For example, in

McAfee and Upton (1996) the project manager is quoted, as having a strong bias toward “input

by many, design by few,” but did not know how to put that statement into practice. How do we

gather input by many? What group choice rules can we use? Are those methods “rational?”

This section investigates four classic approaches, with evidence of their use in ERP system

development, including “majority votes,” “Borda rules,” “Pareto optimality,” and “dictatorship.”

Majority Votes

According to Wakin (1998), Pirelli’s director of information technology, uses what he

calls “democratic governance” across divisions to achieve standardization in core business areas

required for ERP implementation. Although democratic governance can take many forms, it is

suggestive of a “majority votes” approach - whichever standard the majority of divisions prefers

becomes the standard.

Let xRCy indicate that the company (“C”) as a whole prefers x over y.

Choice Rule 1 -- Majority Votes

xRCy if and only if ?

j ?C|xRjy| > ?

j ?C |yRjx|, ? x,y ? S.

A choice rule of majority votes is one where the company adopts standard x over standard

y if more divisions prefer standard x over standard y. Unfortunately, the majority votes rule is

not generally transitive. For example, suppose there are three different divisions each with their

own different business process for billing, b1, b2 and b3. The lack of transitivity is seen in the

following choices:

(b1)R1(b2) ,(b2)R1(b3) ; (b2)R2(b3) ,(b3)R2(b1) ; (b3)R3(b1) ,(b1)R3(b2)

Since two of the three divisions prefer b1 to b2, (b1)RC(b2). Similarly, (b2)RC(b3), and

(b3)RC(b1). As result, RC is not transitive.

Borda Rule

An alternative way to gather input from many regarding standards artifacts and processes

is to have a panel establish a ranking of the options and then and then give a certain number of

points for first place, etc. For example, if there are five different ways to execute the business

process “reserve inventory for clients” then each panel member would rank each of the

alternatives, first place would get five points, second place four, etc. This is known as the Borda

rule (e.g., Fishburn 1971).

An interview with the Deputy Project Director of Litton Data Systems Division (LDSD),

PeopleSoft implementation found that LDSD used a Borda-like approach. First, LDSD defined

“Key Aerospace and Defense Features and Thrusts” including

Defense Business Processes

• Government Forms

• Progress Payments

• Moving Average Actual Costs ...

Financial Management

• Division Budgeting and Resources Planning

• Cost Schedule Control

• Multiple Rates for Labor and Burden

Second, given these and other categories, different ERP vendors were evaluated and ranked

on their ability to provide each feature, with points given for their particular rankings. Third,

choice of ERP system was made based on the relative ranking.

Choice Rule 2 -- Borda Rule

Define a rating function r(x|S, Rj ) = Ê(y ? S| yRjx), where Ê(.) is conditional cardinality, and

the number of alternatives that division j finds at least as good as x. The Borda rule is xRCy if

and only if ? (j ? C) r(x|S, R j) > ? (j ? C) r(x|S, R j) ? x, y ? S

In order to illustrate the Borda rule, consider Fishburn’s (1971) example

Division Preference Order

1 b1; b2; b3; b4; b5

2 b2; b3; b5; b4; b1

3 b5; b1; b2; b3; b4

4 b1; b2; b4; b5; b3

5 b2; b4; b3; b1; b5

The Borda quantities are, respectively, 17, 21, 13, 12, 12, for b1, b2, b3, b4, b5. As a result, the

choice for the corporation as a whole would be b2 since it has the highest total. Unfortunately,

none of the options has a majority of the possible 65 points. As a result, next suppose that the

least preferred options b3, b4, and b5 are removed from consideration. In this situation, the new

preference order would be as follows.

Division Preference Order

1 b1; b2

2 b2; b1

3 b1; b2

4 b1; b2

5 b2; b1

In this reduced set b1 would be chosen (8 compared to 7). The Borda rule provides a

group choice rule that meets conditions 1-3 and so has a weak preference order. However the

Borda rule violates the following property.

Property 4 (Independence of Irrelevance Alternatives).

Any two set of the rankings must have identical corporate choices in S or subsets of S. In

particular, a choice rule has independence of irrelevant alternatives if and only if xRCy (for x,y ?

S’, ? S’ ? S) implies xRCy (for x,y ? S).

Pareto Optimality

As noted above (Wakin 1998), Pirelli’s director of information technology uses what he

calls “democratic governance” to achieve standardization in core business areas required for ERP

implementation. Pareto optimality establishes ordinal preference between pairs of ERP

standards, determining which preferences all of the divisions agree on. As a result, another way

to achieve democratic governance in the choice of ERP standards, is Pareto optimality, if it

exists.

Choice Rule 3 -- Pareto Choice Rule

xRCy if and only if xRjy for all j ? C and ? x, y ? S.

Property 5 (Pareto Optimality)

A choice rule is Pareto optimal if and only if satisfies Pareto’s choice rule.

Unfortunately, Pareto’s choice rule is not complete. Using Fishburn’s example, the only

pairs that have defined Pareto relationships are (b2)RC(b3) and (b2)RC(b4). Thus, in some cases,

such as the current example, groups will not be able to establish relationships between pairs of

standards for an ERP.

Dictatorship

In other settings it is apparent that rather than a majority rules approach, the solution used in

choosing standards for an ERP system is closer to a “dictatorship.” For example, a discussion of

Owens-Corning (CIO, 1996) notes that “it would be relatively easy for the Toledo-based team to

huddle and make SAP process choices for the company unilaterally.”

Further, Colgate (Brownlee, 1996) has implemented a network of “supplier managed”

inventories, for both its customers and suppliers, using SAP. Colgate provided a number of its

most important suppliers with SAP so that they can directly access Colgate’s SAP system. As

part of the trade-off, Colgate does not have to pay for product ingredients it until it actually uses

them. In this setting Colgate specified many of the business processes, and provided standards in

terms of various pricing lists, etc. A division k is likely to be a “dictator” if it is the corporate

office division or a large division with substantial relative power.

Choice Rule 4 (Dictatorship)

Suppose the company chooses division k’s preference, regardless of any other division’s

preferences, so that k is the dictator, i.e., xRCy if and only if xRky, ? x,y ? S.

Arrow’s Impossibility Theorem

A question for firms implementing ERP systems is which of the choice rules meet the properties

1 - 5. Of the four choice rules, majority rules, Borda, Pareto optimality and dictatorship,

unfortunately only dictatorship satisfies properties 1 - 5. This result is known as Arrow’s

impossibility theorem (Arrow 1963).

This means that except for those settings where dictatorship is used, ERP standard choice

will not include choice methods that are “rational” as defined above. Further, as seen in the next

section, unfortunately, virtually all choice rules are subject to manipulation.

Discussion

Earlier in the paper two questions were asked that can now be answered. First, is it possible to

find standard artifacts and processes that are optimal for the corporation and each of the

divisions? Arrow’s impossibility theorem indicates that in general the answer is no. Second,

what choice process for ERP standards are rational? There is only one choice process presented

here that is rational, dictatorship (e.g., by the project leader). Although dictatorships were a

concern to Arrow (1963), with for profit corporations, equity is probably not an issue. However,

dictatorship does not insure a portfolio of artifacts and processes that is optimal for the

corporation, it simply ensures a “rational” solution.

8. Implications of Group Choice Rules

Not only do the choice rules (other than dictatorship) not meet conditions 1-5, but the choice

rules are also subject to manipulation through agenda setting and strategic voting behavior.

Agenda Setting as an ERP Implementation Strategy