ERP implementation challenges from a critical failure perspective

Prof. Neerja Nigam Asso.Prof. TIT-MBA Bhopal Mobile No.:09977992477

Abstract
Purpose: The purpose of this paper is to study the various critical factors in detail that causes failure of enterprise resource planning (ERP).The study is based on an in-depth review of literature (1997-2010).The paper helps to explain the complexity of an enterprise resource planning (ERP) system in a non-technical manner which can be easily understood. It has been found that ERP system is much more than just software. Unless clear understanding exists of its components, their integration and factors to be taken care during its implementation, ERP projects will continue to fail. The purpose of this article is to provide a high-level conceptual framework that will assist in understanding what ERP is and how to go about implementing it. Findings: Eight factors are found to be critical in the failure of ERP implementations: 1. Excessive customization, 2. Dilemma of internal integration, 3. Lack of clear understanding of business implications and requirements 4. Lack of change management 5. Poor data quality, 6. Hidden cost 7. Limited training and 8. Lack of top management support. Value: The paper contributes to research in the ERP domain by highlighting ERP implementation challenges from a critical failure perspective and proportion of the failures, as opposed to presenting critical success factors. Failure factors with examples provide a clearer visibility of the costly damages that can be introduced into organizations in the event that these failures are ignored. This will facilitate the successful implementation of ERP systems, thus ensuring project success and, ultimately, organizational success.

Introduction
With the rapid expansion of e-commerce/e-business, enterprises are facing management pressure from customers, suppliers, and competitors. Their customers are pursuing low cost, high quality, and quick supplement responds. The flexibility to reduce the inventory and to decrease the cost during the operation process has become the major tasks of enterprises. For these reasons, the enterprise needs the support of a strong alley to keep the competition advantage and for that enterprise resource planning (ERP) system emerges. Most organizations realize the potential of enterprise resource planning (ERP) systems, yet struggle to materialize real benefits. One out of four ERP projects is over budget and some 20 per cent are terminated before completion. ERP projects often fail to achieve business objectives even a year after the system has been implemented. The return on investment (ROI) also takes six months longer than expected. In addition, PMP research (2001) carried out an ERP related survey on the impact of manufacturing system, and the results revealed that 70 percent of sample companies believed that the average implementation time of ERP system is from six months to two years. Regarding the investment effort of ERP system in US 5000, more than 68 percent of companies would apply the Big Bang methodology to change their system and business processes one time, and the ERP system implementation costs companies at the average of approximately one million dollars, as indicated by the survey results of Keil and Montealegre (2000). It is a big investment

project for an enterprise. But according to the estimation of Standish Group International 90 percent SAP R/3 projects run. And in the case of FoxMeyer Drug, it has led to bankruptcy proceeding (Scott and Vessey, 2002). An ERP is necessary for an enterprise in the world market. It is obvious that ERP has become the core competition ability of the enterprises. The enterprise manipulates the capabilities of ERP to sustain routine operations. How to implement ERP system well is the urgent and important issue. There are many reasons that contribute to the low success rates, yet one common aspect that prevails is a misunderstanding of what ERP entails. The purpose of this article is to provide a high-level conceptual framework that will assist in understanding what ERP is and how to go about implementing it.

What is ERP?
ERP systems are all about ensuring that operational systems being used by an organization are fully integrated. The purpose of using ERP is to improve and simplify the internal business processes, which typically requires re-engineering of current business processes. The idea is to combine various systems into a single database. This approach will enable the organization to have a single view of its business by ensuring that systems that support different functionalities within the organization are combined. These commercial packages promise the seamless integration of all the information flowing through a company financial and accounting information, human resource information, supply chain information and customer information. Hence, ERP systems have become one of todays largest IT investments. The smart organizations today could anticipate and exceed customer expectations that are evaluated on the basis of quality, time, service, availability and efficiency. The one tool that innovative and progressive organizations have is ERP.

ERP can be defined as:

A packaged business software system that lets an organization automate and integrate the majority of its business processes, share common data and practices across the enterprise and produce and access information in a real-time environment. The ultimate goal of an ERP system is that information must only be entered once. It is therefore clear from the above that an ERP system is more than just a product or software. Nah et al. (2001) describe ERP as a packaged business software system that enables a company to manage the efficient and effective use of resources (materials, human resource (HR), finance, etc.) by providing a total integrated solution for the organizations information processing needs. According to Arif et al. (2005), ERP can integrate the planning and management all major business processes with single client/server architecture in real time, including contacts with business partners and with customers.

Advantages of ERP
There are many advantages of adopting ERP as part of as an organizational strategy. For one, ERP systems support an organizations desire for systems integration which means that organizations will not have to manage separate systems independently. In this case, the organization optimizes its processes which then improves the entire supply chain process, and integrates functionalities leading to increased transparency across the organization. In most cases to continue to support this optimization, the organization also develops sets of expert common capabilities. The result is that the organization is most likely to save on operational costs due to rationalization and systems integration. It is expected that such savings on operational costs will be transferred to lower costs for the customer. At the same time, the integration of systems should lead to the provision of a more memorable experience for the customer as service provision becomes more seamless. ERP systems can also empower employees by providing them with real-time data (Davenport, 1998). It is also connected with greater job flexibility by providing a platform that enables the expansion of individual awareness, creativity, and innovation. Overall, existing statistics suggest that 63 per

cent of large ERP customers are of the opinion that they do realise some major business benefits from their ERP implementations (Gould, 2004). ERP systems are however key strategic resources for the majority of organisations. Potential benefits of implementing ERP systems include drastic declines in inventory, breakthrough reductions in working Capital, abundant information about customers wishes and needs, along with the ability to view and manage the extended enterprise of suppliers, alliances and customers as an integrated whole .

ERP implementation:
ERP implementations are notorious for taking a longer time and costing more money than is projected. Hence, in the last decade, organisations have struggled to implement ERP effectively, despite all of the benefits it offers. This is not because ERP solutions are poorly designed, but because there is inadequate understanding of the way that an ERP solution should be implemented It is imperative to highlight that many ERP implementations have been considered as significant failures Examples include Avis Europe Ltds abandonment of its ERP implementation project in 2004 (at a cost of $54.5 million) and Ford Motors ERP purchasing system which was also abandoned in 2004, after the company had spent close to $200 million. Perhaps, the most famous case of ERP system implementation failure relates to the collapse of the US$5 billion (GBP2.5 billion) pharmaceutical giant FoxMeyer Drugs partially driven by a failed ERP implementation in 1995. As ERP implementation is usually complex (as in the case of most corporate level IT/IS projects), it is common that many organisations do allocate significant resources to this phase of the project. Unfortunately, current ERP implementation statistics do not look promising with an estimated 70 per cent of all ERP implementations likely to fail (Sivunen, 2005). Overall, it is important for organisations implementing ERP systems to recognise that the introduction of ERP will most likely result in key organisational changes which, if not managed carefully, can actually result in conflict within the organisation especially in relation to the question of how to integrate the ERP system, the legacy system, and the business processes of the organization

Success and failure metrics. :

In general, the simplest definition of failure consists of projects that are late, over-budget, or do not deliver planned benefits.( Michael Krigsman ,2011) Unsuccessful implementation could be observed from two aspects, completely or partly. Completely unsuccessful projects are considered to be those, in which companies resign from realization before taking-up implementation or failed so miserably, that the company suffered significant long-term financial damage, While partly unsuccessful implementations: Those implementations considered partial failures often resulted in tenuous adjustment processes for the company; creating some form of disruption in daily operations. (Taube and Gargeya, 2005). Analytics usually consider it a non-success if timelines and implementation costs are overrun a few times (over 200 percent), if goals remain unaccomplished (less than 50 percent) or implementation may result in incomplete installations of system modules, and consequently, in lower benefits than hoped for (AlMashari, 2003). Even with significant investments in time and resources, there is no guarantee of a successful outcome (Mabert et al., 2003) and underestimating the complexity of such projects is one of the main reasons for unsuccessful projects. In the same vein, an ERP success can be a complete success one in which everything goes off without a hitch, or one in which there are few alignment problems, resulting in minor inconvenience or downtime. Frequently, these situational circumstances that have to be ironed out in the weeks and months after the go-live date are not severe enough to disrupt the daily operations.

The study:

The study describes five primary results:

1. 2. 3. 4. 5. 1.

ERP implementations take longer than expected ERP implementations cost more than expected Most ERP implementations under-deliver business value Software as a service (SaaS) implementations take less time than on-premise ERP implementations, but deliver less business value Companies do not effectively manage the organizational changes of ERP

Implementation length. The study states that more than half the implementations surveyed exceed planned time. According to Panoramas study, 57% of ERP implementations take longer than expected (see table below). This challenge is partly attributed to the fact that many companies in our study either had unrealistic expectations regarding timeframes and/or did not account for key project activities in their implementation planning processes.
Take longer than Expected 57% Total implementation cost Exceeds budget 54%

2.

Implementation budget. As illustrated in the table above, 54% of ERP implementations go over budget. The finding is attributed to the fact that many organizations in our study failed to identify and budget implementation costs not attributable to software vendors, such as project management, organizational change management, hardware upgrades and the like. 3. Most ERP implementations under-deliver business value

These figures are perhaps the most damning in the study. The report says a significant number of implementations surveyed did not deliver anywhere near the anticipated benefit or value. As Figure (below) outlines, 41% of companies surveyed fail to realize at least half of the business benefits they expected from their ERP systems, and 22% of implementations fail to deliver at least some measurable business benefits from their ERP solutions. In addition, over one in three companies surveyed (40%) realized major operational disruptions after implementation go-live, such as the inability to ship products or to close the books. Finally, only 68% of executives and 61% of employees are at least somewhat satisfied with their ERP solutions.

4. Software as a service (SaaS) implementations take less time than on-premise ERP Implementations, but deliver less business value

The study concludes that SaaS deployments are faster than traditional, on-premise implementations yet are even less likely to deliver expected results. On an average, SaaS and hosted solutions are implemented in less time (11.6 months for SaaS vs. 18.4 for on-premise), at a lower cost (6.2% vs. 6.9% of annual revenue, Figure below) and at a slightly higher level of executive satisfaction (52.6% vs. 50.0%) than traditional onpremise solutions. However, as with any ERP solution, SaaS has its drawbacks. SaaS implementations are significantly less likely to deliver the expected business benefits (23.5% vs. 42.9%) than on-premise solutions. .

60% 50% 40% 30% 20% 10% 0% Totl Cost Executive Realize 50%+ plem ent Im (%sales) Satisfaction Benefits w ithin Budget

Saas On prem ise

5. Companies do not effectively manage the organizational changes of ERP

Implementation change management. The study finds that most organizations have a hard time managing the business transformation aspects of ERP. Since transformation is often an important reason companies take on ERP projects, these conclusions are not surprising: Over 53% of implementing organizations assess their ability to deal with change as fairly poor or very poor. In addition, 47% say communication between management and employees is poor. These types of environments are not conducive to effective ERP implementations. Organizational change management tools, however, help address such barriers to make the rollouts more successful. In addition, over 60% of organizations suffer from poor visibility of data and poor integration in their old systems. This metric suggests that employees using a new ERP system have strong organizational resistance and steep learning curves

Factors found critical for failure of ERP

lack of change management excessive customisation,

5%

3%

5%

12%

dilemma of internal integration poor understanding of business implications poor data quality

9% 7% 8%

13%
lack of top management support Hidden cost Limited Training

1. Excessive customization
Shehab et al. (2004) stress that Organisations face numerous problems when customising ERP packages. ERP system implementations may last several years in large Companies, particularly if the system is heavily customised. It is more beneficial to fit business processes to the ERP package rather than try to

customise the package. However, Helo (2008) argues that from a technical point of view, the key choice in ERP implementation is to find an optimal strategy to balance between customizations of the ERP system versus changing the organisational procedure within the company.

2. Dilemma of internal integration

Elbertsen et al. (2006) advise that the strength of ERP systems lies in integrating modules by coupling them, but this strength can be considered its weakness; the close coupling of modules means less responsiveness to the local requirements in particular functional areas. ERP implementations are challenging due to cross-module integration, data standardisation, adoption of the underlying business model, compressed implementation schedule and the involvement of a large number of stakeholders. The non-flexible nature of ERP solutions forces organisations to fit the package and abandon their way of doing business. This problem affects companies and in some cases, has led organisations like FoxMayer drugs, to bankruptcy. ERP solutions are modular and in light of integration, the greater the modules selected, the greater the integration benefits, but also, the greater the costs, risks and changes involved.

3. Lack of clear understanding of business implications and requirements

It has been observed that the various departments within an organization have their own agendas and objectives that conflict with each other. The critical challenge in ERP implementation has been to first identify the gaps between the ERP generic functionality and the specific organisational requirements (Soh et al.,2000). According to Davenport (1998), even though some of the causes of ERP failures lie with technical challenges, these are not the main reason enterprise systems fail. He stresses that the biggest challenges are business problems in the sense that companies fail to reconcile the technological imperatives of the enterprise system with the business needs of the enterprise.

4. Lack of change management

There are several common problems associated with ERP implementation (Al-Mashari, 2003; Kamhawi, 2008),one among is lack of Change management . There remains a strong need of Change Management. One has to consider various factors relating to top management support, assignment of best people to implementation teams, organizational culture and strong involvement of people from the field are important in reducing the resistance to changes involved in ERP implementation . Another problem is poor training of end-users, who, when the system is up and running, do not know how to use it and maintain it continually. Consequently, a number of issues arose, such as erroneous data input, poor use of the systems, increasing costs of training services offered by the vendors, employee resistance to integration of the ERP system into the business process and the need to hire information technology personnel.

5. Poor Data Quality

One of the issues in information management is getting the right information to the right person at the right time and in a usable form. Information research has demonstrated that inaccurate and incomplete data may severely affect the competitive success of an organisation. Data misfits arise from incompatibilities between organizational requirements and ERP package in terms of data format; resolving these misfits is cumbersome, since this requires changing the structure and relationship of the table objects, which are viewed as prohibitive core changes to the ERP packages .Poor DQ at the operational level increases operational cost because time and other resources are spent detecting and correcting errors. Further ERP integrates different functions of the company and uses data from several departments, delays in the system by one department have a direct impact on the operations of the others. To be truly competitive in todays information era, the business should be able to operate continuously, maintain data availability all the time, and be agile in accessing available data

6. Hidden cost
Tarn et al. (2002) argue that cost is a critical part of an ERP implementation for both large and small businesses alike. They further emphasise that companies that install ERP solutions may underestimate cost that is hidden. The following types of common hidden cost may increase implementation cost dramatically (Slater, 1998; Soh et al., 2000): training is the most underrated hidden cost the cost to train an entire staff on a new system is enormous and often taken for granted; integration and implementation are often overlooked; the cost of data conversion is hidden companies often do not recognise the cost associated with transferring data from the old system to the new package; high-consulting cost becomes inevitable as a consequence of many companies not budgeting consulting fees properly; and

a cost often overlooked is the notion that the project will end on a certain date.

7. Training: The people element and training aspect of an ERP implementation have historically
received the least amount of attention. The paradox of this is that when this factor is ignored or downplayed, primarily because it does not have the largest quantifiable benefit, expenses are greatly increased in the long run. By treating resource training with little regard and financial support, it is not hard to realize the reality of delay, confusion and financial ruin that may result. Some companies insist on assigning a fixed cost or percentage to the training effort, regardless of need or variable conditions. This mistake has certainly been the root cause of many failed implementation attempts.Hence, employees must be trained properly on the new system in order to use it to continue day-to-day operations.

8. Lack of top management support: A successful implementation is only achievable when high-level
executives have a strong commitment to the project (Davenport, 2000). The attitude of senior managers will affect not only the flow of funds and information to the project, but also the subordinates view the project, its future impact upon the company as a whole, and its impact upon the employees as valued and capable individuals.For example: Fujitsu Microelectronics, an international manufacturer of semiconductors, successfully completed its ERP implementation within ten months. They attribute success in part to top management support. During the entire project, company management provided substantial incentives to team members, and ensured that internal communication channels were open at all times. As stated earlier, and reinforced with example, the ERP software can be designed to work perfectly well, but lacking top management support, the project is destined to fail. Senior management has the authority and responsibility to support the project internally through incentives and bonuses, and externally through maintaining open and effective communication channels and a reassuring, positive attitude. By constantly exposing the positive benefits and results of such an endeavor throughout the implementation process, success is much more likely to occur. Furthermore, the larger the ERP project, the higher the chances of failure. And finally, one out of five ERP projects is likely to generate full satisfaction. This supports the analogy that ERP implementations are more likely to fail, be delayed, cost more than forecast or fail to deliver full functionality, than they are to succeed (Aitken, 2002). Aitken (2002) further advises that in order to implement ERP successfully, it is important to be aware of how ERP as a technology evolved, what its strengths and weaknesses are, and the nature of important implementation challenges. When considering and implementing an enterprise system, managers need to be careful that their enthusiasm about the benefits does not blind them to the hazards (Davenport, 1998).

Conclusion:
ERP solutions are appropriate when a company is seeking the benefits of integration and best practices in its information system, and looking for a full range of functionality across its organization. Thus, there is an increasing number of organizations implementing ERP today. However, it has been reported that implementing ERP mostly results in failures. A number of studies have been conducted on these implementations, and the results have led to the conclusion that less than 10 per cent of ERP implementations are successful due to a variety of challenges. This paper presented a number of critical failure factors based on a comprehensive literature review. Whilst, the papers that were studied provided a good insight into the factors that lead to both the successes and failures of ERP implementations, the lack of certain content in some of these papers indicates some degree of incompleteness of the various studies. In light of the above highlighted failures, for future research, it is imperative to conduct a detailed research on each failure factor in its entirety. This brings about an in-depth focus for each critical factor.

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