XV International Scientific Conference on Industrial Systems (IS'11)

Novi Sad, Serbia, September 14. 16. 2011.

University of Novi Sad, Faculty of Technical Sciences, Department for Industrial Engineering and Management Available online at http://www.iim.ftn.uns.ac.rs/konferencije/is11/

Financial Effects of Implementation of the Enterprise Resource Planning Systems

Ana Polovina
Ph.D. Student, Faculty of Technical Sciences, Trg Dositeja Obradovia 6, Novi Sad, Serbia, polovina.ana@gmail.com

Ljiljana Kikinanin
Ph.D. Student, Faculty of Technical Sciences, Trg Dositeja Obradovia 6, Novi Sad, Serbia, lj.kikindjanin@yahoo.com

Bojana Milievi
Ph.D. Student, Faculty of Technical Sciences, Trg Dositeja Obradovia 6, Novi Sad, Serbia, 26bojana@gmail.com

Abstract One of the main factors that have an impact on companys growth and success of business is the optimization of business processes. Characteristics of modern market require high flexibility and fast reaction of business systems to various changes within and outside the company. Modern systems for enterprise resource management (Enterprise Resource Planning - ERP systems) allow companies to integrate individual functional systems, such as manufacturing, finance, procurement and distribution. Most often, the reasons why decision makers in large and medium-sized companies decide to buy and implement the ERP system are to improve business processes, to provide better data access, to provide faster response to customer demands and to ensure faster adaptation to changing business conditions and new market situations. However, the implementation of ERP system is not simple and it is accompanied with various problems such as - long period of time for the introduction, relatively expensive introduction (which includes training, integration with other systems, analysis and conversion of data, engagement of consultants, etc.), relatively expensive system maintenance, long-term dependence on consultants and system provider, etc. These are just some of the reasons why the decision to implement the ERP system does not necessarily have a positive effect on business success. Financial justification for investing in ERP system is reflected in better overall business performance in the forthcoming period. The relations between investment in ERP system and business results in the period after implementing which are presented are based on financial analysis of several companies in Serbia that have implemented ERP system. Key words: Enterprise resource planning, ERP systems, Financial analysis, Investment decision

1. INTRODUCTION
In recent decades, companies have competed on the basis of two competing values, such as price and quality. However, the current market situation imposes the need for companys greater flexibility and greater willingness to respond to various changes within and outside the company. In this sense, more efficient performance of business operations, faster decision making, access to accurate and updated information, improving communication within the company, as well as communication with other organizations and companies, are the goals that are essential for growth and development of company. Implementation of modern information technology can now be regarded as an indispensable way of increasing efficiency and improving the company's business in general. The advantages of introducing new information technologies are usually reflected in a better association between different business areas, simplifying information sharing, increased efficiency and productivity, better resource tracking capabilities, better ability to predict, as well as greater customer satisfaction.

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Ana Polovina

2. APPEARANCE AND DEVELOPMENT OF ERP SYSTEMS

During the last two decades, innovations in information technology have led to the development of a large number of software applications. These software applications are known as information systems for enterprise resource management (Enterprise Resource Planning Systems). Currently, the most famous companies which offer different ERP software solutions are SAP AG, BAAN, JD Edwards, Oracle Applications and PeopleSoft. Originally, ERP packages were targeted at the manufacturing industry and consisted mainly of functions for general planning and management of core business such as sales management, production management, accounting and financial affairs, etc. In recent years, diverse type of industry has also become possible and the expansion of implementation and use has been progressing on a global level [1]. There are different definitions of ERP systems. ERP system can be defined as flexible application software which includes integrated business solutions for the core processes (e.g. production planning, control, storage management, etc.) and basic administrative functions (e.g. accounting, human resources management, etc.) [2]. ERP is comprehensive software package solution that seeks to integrate a full range of business processes and functions in order to present a comprehensive review of transactions with a single aspect of information technology architecture [3]. ERP is integrated software adjusted to the needs of the company that provides management system for majority of companys business areas (finance, human resources, manufacturing, marketing, etc.). This information system provides a software architecture that connects the flow of information between different business functions in the company [4]. Previous research works have presented the implementation of ERP systems as an extremely complex task, where strong management skills are necessary in order to achieve the best possible results related to the compliance requirements of business processes and capabilities of the software itself [5], [6]. The ability of ERP systems to efficiently and effectively manage the resources of the company by providing total and integrated solutions for information processing has assured both system users and managers in the importance of integrated systems [7]. Successfully integrated ERP system links all areas of the company through different modules (module for purchasing, module for production, module for sales, etc.). On the other hand, in order to have a successfully implemented ERP system and to demonstrate its advantage, it is essential that managers in companies define and structure all business processes, and establish rights and responsibilities and objectives of different business levels.

3. ADVANTAGES AND DISADVANTAGES OF USING ERP SYSTEMS

ERP systems are often perceived as very complex and difficult for implementation [8], [9]. System implementation success depends on many factors, such as vendor selection, the ERP consultant, implementation plan and execution, etc. For many organizations, ERP systems are the largest systems they have worked with, in terms of financial resources invested, the number of people involved and the scale of implementation [10]. ERP systems are large investment for most companies, which radically change the entire information technology environment. In any case, the success of the implementation of ERP systems is often reduced to two indicators: -system has been implemented and can be used, and -the project is completed on time and within the planned budget [11]. In modern literature one can find criticism concerning the lack of analysis of the factors that explain the success of the implementation of ERP system and justification of this decision. These authors focus on the discussions about model for procedures for ERP implementation [12], critical success factors for ERP project [13], as well as topics related to the organization of project implementation [14]. The advantages of implementation ERP systems could be both direct and indirect. The direct advantages are usually improved efficiency, information integration for better decision-making, faster response to customer queries, etc. The indirect benefits include better corporate image, better satisfaction of end users in company, improved customer goodwill, better customer satisfaction, and so on. The main direct benefits of implementing ERP systems are business integration, flexibility, better analysis and planning capabilities and use of latest technology. The benefit of business integration refers to automatic data updating (automatic data exchange among applications) between related business components. ERP systems provide the possibility to grasp business details in real-time, and carry out various types of management decisions in a timely manner based on that information. Flexibility means that diverse multinational environments such as language, currency accounting standards and so on are covered in one system, and functions that comprehensively manage multiple locations can be implemented automatically. Another advantage is connected to better possibilities of planning through many types of decision support systems and simulation functions. Use of latest technology refers to taking advantages of the latest technologies like open systems, client/server technology, Internet/Intranet, CALS (Computer-Aided Acquisition and Logistic Support), electronic commerce, etc [1]. All these technology possibilities affect better satisfaction of both customers and users of the system.

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However, ERP systems have many disadvantages, and the implementation itself carries a certain level of risk. There are various issues to be taken into account when deciding on the implementation of ERP systems. This kind of project requires enormous time, human and financial resources [15]. Most of the costs are not related only to price of software, but also to the price of implementation, configuration customization, consulting services, etc. [16]. Also, the implementation of ERP systems, because of the difficult integration of technical and business requests, often requires more time than it was planned. Most of the ERP implementation failures are the result of a premature decision on the adoption of the software and lack of business justification for this investment [17]. The problem can often be a mismatch between the objectives of ERP system and organizational and IT strategic goals. If such a discrepancy exists, the result will often be insufficient use of the advantages of ERP. On the other hand, investment in the ERP system, for no other reason than to follow market or industry trends, may also be a reason for failure of ERP project [18]. Considering the high costs and risks of implementation which ERP system brings with it, the question is why most large and successful companies make decisions about investing in ERP systems. The answer lies in technical reasons (replacing the current system) or in business reasons (improvement of operational processes and increase of efficiency) [19]. Some of technical reasons are related to the replacement of existing information systems by single integrated system [16]. Also, ERP systems provide tested security system which guarantees that a company will be able to count on data security and to do business in accordance with the standards of safety [20]. Business reasons are related to automation and business process reengineering [16]. Other business reasons are connected to better management, improved data availability and re-engineering of business processes. Some of the business reasons are the improvement of cooperation and teamwork among employees [21]. Measurable financial benefits of implementing ERP system are reflected in lower costs and shorter duration of operations, while immeasurable advantages are related to better connectivity information, better quality of information and better satisfaction of employees [19], [22]. Especially in industrial companies, it should be expected that the implementation of ERP systems has impact on reducing costs and shortening time, because it connects the production function with other functions within the company (purchasing, sales, etc.) [23].

systems. This information should be considered as an indicator of the quality of earlier made decision [11]. Companies that sell and implement ERP systems promise better business, greater customer satisfaction and better financial results. In this regard, managers expect positive effects very soon after the implementation of ERP systems. However, in some cases the effects of these investments are not reflected on financial results even 3-4 years after implementation. Furthermore, sometimes these decisions can contribute to increase of loss in business [24]. Financial effects on investment decisions for the implementation of ERP systems are long term and carry a risk of worsening the financial situation of the company due to slower return of the invested funds than it was planned. Even after payment of costs of software implementation, the company continues to have the costs of system maintenance, costs of consulting services, temporary adjustments of the software company's needs, as well as the cost of buying new software versions. If the advantages of using ERP systems, which are reflected in higher productivity and higher efficiency, do not have positive influence on financial results of enterprises, investment in ERP systems will be, from the financial point of view, regarded as unjustified. Since the implementation of ERP systems are expected to reduce costs and accelerate decision-making process through the securing of accurate and timely information, the effects of these goals should be reflected in the improved operations of the company and better financial results [24]. There are a large number of studies that analyze the relationship between the implementation of ERP systems and business performance of companies after the implementation. Some studies have shown that there is a positive relationship between investment in implementation of ERP systems and improvement business performance, while other studies prove otherwise. Although in literature one can find that ERP systems improve the business performance of the company, yet there are some discussions concerning the existence of decrease of some indicators of business performance in the period before and after implementation of the system [16]. Some of the indicators that have been analyzed indicate financial performance in the period before and after implementation. It often happens that company, after the investment in ERP system, has worse financial results than in the previous period. This can be seen from the examples in study of Kennerley and Neely, where they concluded that the sales revenue remained unchanged after the implementation of ERP systems [25]. A study conducted by Wieder also confirms that there are no specific financial benefits from using ERP systems, when comparing companies that use it with those which do not use ERP system [26]. Nicolaous findings show that the relationship between general and administrative costs (G&A) and sales are even worse in those companies that use ERP than in those that do not [19]. Wei said that some researchers find long-term

4. FINANCIAL ASPECTS OF INVESTING IN ERP SYSTEM IMPLEMENTATION

From the financial standpoint, ERP system represents a capital investment, which has influence on both costs and revenues. Information based on an analysis of costs will in most cases serve as feedback on the justification of investment in the implementation of ERP

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4 positive effects of ERP systems on the company's financial results, while other researchers conclude that ERP systems do not have significant effect on the companys business performance and do not affect the improvement of financial results [27]. All these opposite views suggest that the subject of this work is still very current, and that more research is needed.

Ana Polovina

implementation on the companys financial performance has been analyzed. 5.1. Sample selection Research has been conducted on the sample of seven companies operating in Serbia, which have recently implemented one of the ERP systems (SAP, BAAN, Oracle, etc.). Those companies are: - Dijamant A.D. Zrenjanin, - Kompanija Dunav osiguranje a.d.o. Beograd, - Sojaprotein akcionarsko drutvo za preradu soje Beej, Swisslion-Miloduh preduzee za - AD proizvodnju i promet Kragujevac, - Farmaceutsko-hemijska industrija Zdravlje AD Leskovac, - Institut Mihajlo Pupin Beograd, and - Vojvoanska banka AD Novi Sad. The limiting factors in sample selection were: - publicly available data about investment in ERP system implementation, - publicly available information about companys financial results, and - structural and organizational changes which have large influence on companys financial results. Since the period of adjustment to the new system is usually between 4 and 12 months after implementation [28], the research is based on data from financial statements of the first and second year after implementation (Table1).

5. ANALYSIS OF FINANCIAL JUSTIFICATION OF INVESTMENT IN ERP (CASE OF COMPANIES IN SERBIA)

Many medium and large companies in Serbia are trying to keep abreast of modern innovations in information technology. In last few years, more frequently managers of these companies make decision about investing in the implementation of a modern ERP system. It is difficult to reach an answer to the question why such decision is made whether it reflects real business need of the company or it is a result of following trends and improving companys image. However, it is possible to investigate the impact of this investment on the later company's financial results in order to provide an answer to the question whether the decision to invest in ERP is financially justified or not. The aim of this research paper is to deeply investigate the fact that there is a constant upward trend in companies in Serbia that decide to implement one kind of the ERP systems, despite of the relatively high costs of software and implementation. Based on comparisons of financial results before and after the implementation, the effect of the ERP

Table 1. Review of data from financial statements of analyzed companies (in thousands dinars)
YEAR BEFORE IMPLEMENTATION Values in financial statements Operating expenditures Operating revenues Total revenues Costs of salaries and other personal expenses Operating expenditures / Operating revenues Values in financial statements Operating expenditures Operating revenues Total revenues Costs of salaries and other personal expenses Operating expenditures / Operating revenues Values in financial statements Operating expenditures Operating revenues Total revenues Costs of salaries and other personal expenses Operating expenditures / Operating revenues Dijamant (2005) Dunav (2008) Sojaprotein (2006) Swisslion (2006) Zdravlje (2007) Institut MP (2007) 5,412,321 6,253,080 6,926,282 854,342 0.8655 8,433,649 14,720,066 18,498,730 850,619 0.5729 12,669,590 13,182,804 14,440,751 485,485 0.9611 115,691 90,409 128,585 32,469 1.2796 2,655,362 3,172,254 3,376,822 950,056 0.8371 1,352,070 1,411,134 1,439,990 516,582 0.9581 Vojvoanska Arithmetic Mean banka (2008) (X) 6,969,208 8,365,412 10,824,283 2,830,233 0.8331 5,372,555.86 6,742,165.57 7,947,920.43 931,398.00 0.9011

1. YEAR AFTER IMPLEMENTATION Dijamant (2006) 7,134,547 7,513,712 8,581,543 879,728 0.9495 Dunav (2009) Sojaprotein (2007) Swisslion (2007) Zdravlje (2008) Institut MP (2008) 7,851,511 14,555,781 16,289,495 897,590 0.5394 14,698,054 15,861,737 17,192,753 546,773 0.9266 75,174 74,592 79,787 41,116 1.0078 2,678,627 3,324,763 3,532,594 1,025,944 0.8057 1,353,618 1,393,673 1,434,619 595,501 0.9713 Vojvoanska Arithmetic Mean banka (2009) ( X) 5,988,212 8,062,013 9,449,872 2,837,065 0.7428 5,682,820.43 7,255,181.57 8,080,094.71 974816,71 0.8424

2. YEAR AFTER IMPLEMENTATION Dijamant (2007) Dunav (2010) Sojaprotein (2008) Swisslion (2008) Zdravlje (2009) Institut MP (2009) 8,603,446 9,004,861 9,364,842 866,453 0.9554 7,882,790 14,109,703 16,549,473 1,044,539 0.5587 17,255,277 19,196,941 20,319,608 371,950 0.8989 238,288 213,957 215,703 39,180 1.1137 2,608,817 2,953,688 3,294,813 1,000,134 0.8832 1,323,120 1,358,848 1,387,229 633,042 0.9737 Vojvoanska Arithmetic Mean banka (2010) ( X) 6,312,192 7,373,464 8,369,733 2,690,712 0.8561 6,317,704.29 7,744,494.57 8,500,200.14 949,430.00 0.8914

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5.2. Hypotheses Implementation of ERP system affects both operating expenditures and operating revenues. For that reason, the ratio of operating expenditures and operating revenues in the year before implementation has been compared with the ratio of operating expenditures and operating revenues in the first or second year after implementation. In this sense, the first hypothesis is: H1: operating expenditures/operating revenues AFTER < operating expenditures/operating revenues BEFORE As the main objective of ERP implementation is to increase productivity and efficiency, which is reflected in better business and higher revenues, the second hypothesis, is: H2: total revenues AFTER > total revenues BEFORE ERP systems automate many operational and administrative tasks. This effect of ERP implementation, in most cases, results in a reduction in the number of employees and reduction in costs of salaries and other personal expenses. In this sense, the third hypothesis is: H3: costs of salaries and other personal expenses AFTER < cost of salaries and other personal expenses BEFORE 5.3. Results Hypothesis 1 Comparison of operating expenditures and operating revenues ratio in the year before implementation and first and second year after implementation of ERP systems, have obtained the following results:
x (operating expenditures/operating revenues BEFORE)

2.YEAR AFTER

/ x

BEFORE

= 1.0695), the hypothesis H2 is

accepted. Hypothesis 3 Comparison of costs of salaries and other personal expenses (OPE) in the year before implementation and in the first and second year after implementation of ERP systems, have obtained the following results: x (costs of salaries and OPE BEFORE) = 931.398,00
x (costs of salaries and OPE
x (costs of salaries and OPE
1.YEAR AFTER 2.YEAR AFTER

) = 974.816,71 ) = 949.430,00

Since the arithmetic mean ( x ) of the costs of salaries and other personal expenses, in both the first and the second year after implementation, is higher than in the year before the implementation of ERP systems ( x
1.YEAR AFTER

/ x

BEFORE

= 1,0466; x

2.YEAR AFTER

/ x

BEFORE

1,0193), hypothesis H3 is rejected.

6. CONCLUSION
6.1. Summary of findings Based on a sample of seven companies operating in Serbia that have implemented one of the ERP systems over the past few years, it can be concluded that the implementation of ERP system positively affects the financial results of company in the future. The ratio of operating expenses and operating revenues was better in the first and second year after implementation compared with the year before the implementation of ERP systems. Second, total revenues were higher in the first year after implementation compared with the year before implementation, as well as in the second year after implementation in relation to the first year after implementation. This reflects the fact that revenues have been continuously increasing after the implementation of ERP systems, although this growth is relatively low (1,66% in the first and 6,95% in the second year compared with the year before implementation). Analysis revealed that there was no impact of implementation of ERP systems to reduction in human resource costs (costs of salaries and other personal expenses). It can be concluded that in the first and second year after implementation, the company could not expect that higher degree of automation of business processes could replace the number of employees in order to achieve savings that way. 6.2. The limitation of results Since there are numerous internal and external factors affecting the companys business, financial results in the period after the implementation are not only the result of investment in the implementation of ERP systems. There are factors such as the current state of the industry as well as different market disruptions affecting business results [16].

= 0,9011 x (operating expenditures/operating revenues

AFTER

1. YEAR

) = 0,8424
2. YEAR

x (operating expenditures/operating revenues

AFTER

) = 0,8914 the arithmetic mean

( x ) of operating expenditures and operating revenues ratio in the year before was higher than in the both first and second year after the implementation, the hypothesis H1 is accepted. Since Hypothesis 2 Comparison of total revenues in the year before and first and second year after implementation of ERP systems, have obtained the following results:
x (total revenues BEFORE) = 7.947.920,43 x (total revenues 1.YEAR AFTER) = 8.080.094,71 x (total revenues 2.YEAR AFTER) = 8.500.200,14

Since the arithmetic mean ( x ) of total revenues, in both the first and the second year after implementation, is higher than in the year before the implementation of ERP systems ( x 1.YEAR AFTER / x BEFORE = 1.0166; x

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6 It is also important to note that the validity of the results of this survey depends on the quality of financial reporting and accuracy of data from financial statements of the analysed companies. 6.3. The contribution of this research and suggestions for further research This research has confirmed the assumption that implementation of ERP system have a positive relationship with business results in the future. On the other hand, it was confirmed that ERP software, in the beginning of use, cannot replace a part of the human factor, and companys managers should not expect a significant reduction in the cost of human resources immediately after the implementation of ERP systems. Further research should analyse the trend of financial results in the third, fourth and subsequent years after implementation in order to minimize the impact of various market influences on the financial results, and therefore on the results of the research. Based on the fact that the topic of this study is exclusively related to the financial aspect of contributions of the ERP implementation in several companies in Serbia, future research should analyse some of the intangible contributions of using ERP systems in those companies (faster job performing, improvement of communications and team work, greater customer satisfaction, etc.). Furthermore, the research that would be based on comparison between influences of ERP systems implementation in companies in Serbia and influences of ERP systems in companies in other, more developed, countries would give us some new answers related to this subject.

Ana Polovina [10] Chang, M.K., Cheung, W., Cheung, C.H. and Yeung, J.H.Y. (2008), Understanding ERP Systems Adoption from the Users Perspective, International Journal of Production Economics 113, 928-942. [11] Rosemann, M. and Wiese, J. (1999), Measuring the Performance of ERP Software a Balanced Scorecard Approach, Proc. 10th Australian Conference on Information Systems. [12] Kirchmer, M. (1998), Business Process oriented Implementation of Standard Software, Springer-Verlag, Berlin, Heidelberg [13] Sumner, M. (1998), ''Critical Success Factors in Enterprise Wide Information Management Systems Projects'', Proceedings of the 5th Americas Conference on Information Systems, Milwaukee, Wisconsin, USA, August 13-15. [14] Mahrer, H. (1999), ''SAP R/3 Implementation at the ETH Zurich. A Higher Education Management Success Story?'', Proceedings of the 5th Americas Conference on Information Systems, Milwaukee, Wisconsin, USA, August 13-15. [15] Laukkanen, S., Sarpola, S. and Hallikainen, P. (2007). Enterprise Size Matters: Objectives and Constraints of ERP Adoption, Journal of Enterprise Information Management, 20 (3), 319-334. [16] Hitt, L. M., Wu, D. J. and Zhou, X. (2002), Investment in Enterprise Resource Planning: Business Impact and Productivity Measures,Journal of Management Information Systems, 19 (1), 71-98. [17] Gupta, O., Priyadarshini, K., Massoud, S. and Agrawal, S. K. (2004). Enterprise Resource Planning: A Case of a Blood Bank, Industrial Management & Data Systems, 104 (7), 589603. [18] Kang, S., Park, J.-H. and Yang, H.-D. (2008), ERP Alignment for Positive Business Performance: Evidence From Korea's ERP Market, Journal of Computer Information Systems, Summer 2008, 25-38. [19] Nicolaou, A. (2004). Firm Performance Effects in Relation to the Implementation and Use of Enterprise Resource Planning Systems, Journal of Information Systems, 18 (2), 79-105. [20] Fu, C., Gmeiner, R., Schiereck, D. and Strahringer, S. (2007), ERP Usage in Banking: An Exploratory Survey of the Worlds Largest Banks, Information Systems Management, 24, 155 171. [21] Federici, T. (2009), Factors Influencing ERP Outcomes in SMEs: a Post-Introduction Assessment, Journal of Enterprise Information, 22 (1/2), 81-98. [22] Loh, T., Koh, S. and Simpson, M. (2006), An Investigation of the Value of Becoming an Extended Enterprise, International Journal of Integrated Manufacturing, 19 (1), 49-58. [23] Matolcsy, Z. P., Booth, P. and Wieder, B. (2005), Economic Benefits of Enterprise Resource Planning Systems: Some Empirical Evidence, Accounting & Finance, 45, 439456. [24] Poston, R., Grabski, S. (2001), Financial impacts of enterprise resource planning implementations, International Journal of Accounting, Information Systems 2 (2001), 271-294. [25] Kennerley, M. and Neely, A. (2001), Enterprise Resource Planning: Analysing the Impact, Integrated Manufacturing Systems, 12 (2), 103-113. [26] Wieder, B., Booth, P., Matolcsy, Z. P. and Ossimitz, M.L. (2006), The Impact of ERP Systems on Firm and Business Process Performance, Journal of Enterprise Information Management, 19 (1), 13-29. [27] Wei, C.-C. (2008), Evaluating the Performance of an ERP System Based on The Knowledge of ERP Implementation Objectives, The International Journal of Advanced Manufacturing Technology (39), 168-181. [28] Hkkinen, L. and Hilmola, O.P. (2008). ERP Evaluation during the Shakedown Phase: Lessons from an After-Sales Division, Information Systems Journal, 18, 73-100.

7. REFERENCES
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