Manager's Guide to Enterprise Resource Planning (ERP)

Systems
Les Pang, Ph.D.

Over the last decade, many organizations have experienced significant changes in their core business applications.
These applications have moved from a centralized mainframe platform toward a distributed client-server architecture,
changed from monolithic customized software systems to commercial off-the-shelf (COTS) software modules with
graphical development tools and expanded from a local area network environment to one with the broad reach of the
World Wide Web. Business applications also have changed to support the globalization of their organization with the
addition of multisite and multicurrency functionalities.

Along with these changes, many managers have wanted integration among functional applications that support data
flow among the business units and have a common look and feel among the modules. Business managers have long
been aware of the limitations evident in an environment of stove-piped systems and databases. When data need to
flow from department to department, data must flow slowly in batches and often need to be repackaged and even
manually reentered because of the differences in format, platform and data meaning among the functional
departments. Managers have recognized the benefits of integrated systems where there is a centralized data source
shared among the departments. The advantages of this approach include: a rapid and seamless access to data, all
data represent the "single truth," and a reduction of errors associated with repackaging data.

To address these many changes, a new type of software system was developedenterprise resource planning
(ERP) systems. These systems are applications of integrated software solutions that support enterprisewide business
requirements. They consist of modules that focus on specific aspects of the enterprise's business such as finance,
human resources, logistics and procurement.

What Is an ERP?
An ERP integrates all departments and functions across an organization onto a single computer system that aims to
serve practically everyone's particular needs. It eases the exchange of data and facilitates communication among
departments. ERP systems run on client-server networks--personal computers connected to more powerful servers
(including possibly mainframes) that feed them data. Each module works separately, performing specific data-
processing functions.

Examples of ERP modules include the following:

Human resource management

Financial management
Supply chain management
Procurement
Logistics and materials management
Planning and budgeting
Sales and distribution
Student administration

Many ERPs include the capability to interface data warehouses to support managerial reporting and business
intelligence requirements such as online analytical processing and data mining.

Current ERPs are structured on a client-server architecture that consists of presentation, Internet-enabling,
application and database layers. These layers could either be installed in one server, e.g., an enterprise server or
mainframe, or distributed among a number of servers for scalability. Also, the heart of the ERP is a relational
database management system that ensures data consistency and integrity. Another feature is a workflow manager
that supports the management of a dynamic work process.

Historical Background
The origin of ERPs goes back to the 1960s and 70s in the form of materials requirement planning (MRP) systems.
This precursor to ERP systems aimed to support inventory requirements for a manufacturing systems. These
systems expanded to accommodate master schedules that controlled the sequence of components for the final
assembly of products. In 1972, five former IBM employees in Mannheim, Germany, created an ERP system with the
vision of an end-to-end business application that would address all of the needs of an enterprise. In 1978, a
mainframe-based ERP architecture was developed. It evolved to a client-server platform in 1992.

ERP systems have grown in popularity astronomically. In 1993, ERP revenue in North America was US $319 million;
by1999, it grew to US $17.7 billion, representing a 55-fold increase. In 2000, estimated revenue grew to US $23
billion, a 30 percent increase in just one year. The Y2K preparation in 1998 and 1999 drove the implementation of
ERP in many organizations.

A number of ERP vendors have experienced occasional slumps in sales and revenue but the overall long-term trend
for ERPs has been continued growth.

ERP Vendors
ERP vendors include the following:

SAP (Systems, Applications and Products in Data Processing) is the global market leader in ERPs; it has
approximately 30 to 60 percent of the world market. The strengths of its R/3 product include support for
multicountry, multicurrency environments and wide scalability. The company spends a large percentage of
its revenues in research and development.
Oracle is the second-largest software company in the world. Its ERP product, Oracle Applications, includes
the popular Oracle Financials module. It has the reputation for developing a product that can be interfaced
with others to create a best-of-breed ERP package. It should be pointed out that Oracle Applications should
be distinguished from the Oracle relational database management system, which often is part of other ERP
products such as PeopleSoft and SAP.
PeopleSoft has its origins in human resource management software that evolved to a full feature product
with the addition of other modules. However, its strength still remains its human resource management
systems. PeopleSoft has a major presence in the US federal government.
Baan has developed a number of componentized products. Recently, it has struggled financially because of
questionable financial reporting practices and changes in leadership. However, it is still a relatively dominant
player in the ERP market.
JD Edwards has a product called OneWorld with origins in the AS/400 environment. Its target customers are
primarily smaller organizations wiht less than 2,000 users.
Figure 1 shows the approximate market share by vendor.
There are many other ERP vendors, most of which are primarily aimed at specific markets. Microsoft
recently acquired Great Plains, a company traditionally known for its financial management applications.
SAP, Oracle, PeopleSoft and other vendors have financial modules that are certified by the US
government's Joint Financial Management Improvement Program. This program supports the improvement
of financial management practices in the US government and is supported by the US Treasury, General
Services Administration, Office of Personnel Management and Office of Management and Budget.
There are numerous other vendors, which support the companies listed previously. They include
consultants, trainers, implementers and others. These vendors constitute a major expense to ERP end
users in terms of implementation support and maintenance.
Benefits of ERP
Besides integrating organizations' activities, ERPs employ best practices that have been proven in the real world. At
least one ERP software package incorporates more than a thousand best practices.

ERPs also enable organizational standardization. The user interface, the sequence of operations for a process and
system maintenance procedures can become common standards across the organization.

ERPs improve information management by having a single database as opposed to multiple, often duplicative
systems. Because of this centralized data source, ERPs provide online and real-time information and facilitate intra-
and inter-organization communication and collaboration.

ERP Drivers
From a business perspective, factors that drive organizations to implement ERPs include: customer satisfaction,
more efficient processes, meeting business process reengineering requirements, competitive challenges and labor
shortages.

From an information technology perspective, drivers include: addressing the Y2K problem (which may no longer be
applicable), the need for systems integration that is difficult to do with legacy systems, modernization of hardware and
software systems built decades ago and the need for online collaboration, particularly on the Internet.

Who Is Using ERPs?

In the private sector, 70 percent of the 1,000 largest companies have implemented ERPs. Major corporations include
Microsoft, IBM, General Motors, Hewlett Packard, CSX, Boeing and Mercedes-Benz.

ERPs only recently have been implemented within the US federal government. In the US Department of Defense,
agencies either planning to implement or who have implemented ERP modules include:

Defense Logistics AgencyBusiness systems modernization

National Security Agency/Defense Intelligence Agency/National Imagery and Mapping Agency--Integrated
human resources and payroll solution across all three agencies
Defense Finance and Accounting System (DFAS)Defense procurement pay system--Contract and vendor
pay entitlements; DFAS corporate database (DCD)Standard general ledger for the Air Force
Navy--Interim modernization for the NavyAccounting, payroll, human resources, acquisitions,
procurement, operations
Army--Wholesale logistics modernization program
Non-defense agencies implementing or that have implemented ERPs include:

Interior, Health and Human Services, General Services Administration, Labor, Veteran AffairsHuman
resources
Treasury's US MintConsolidated information system (COINS) and human resources
NASA Jet Propulsion LabFinancial and human resources including payroll
Energy--Administration and resource management
Transportation, CommerceFinancials

Key ERP Issues

Process issues concern whether an organization follows the practices dictated by the software or the organization
customizes the software to match the current process. In the first case, such an action will mean considerable
business process changes for the organization. This will generate considerable turmoil particularly in terms of people
issues. In the second case, implications include high cost, additional maintenance requirements associated with
upgrades and compatibility issues.

People issues include employee resistance that requires retraining and reorientation on the part of employees and
management. ERPs often require more data collection screens than legacy systems, thereby increasing employee
workload. A key issue involves employee retention. In anticipation of an ERP implementation, some employees may
leave the organization or retire early. Individuals directly involved with the ERP may exit the organization due to the
high demand for experienced ERP programmers and implementers. Also, security is an issue because employees
are exposed to enterprisewide business data instead of limited departmental or legacy system data.

Technology issues include the difficult data migration from legacy systems to the ERP database; the lack of
interoperability among different vendor products, particularly when applying the best-of-breed approach; and the
continual maintenance of the ERP.

A critical financial issue is the high cost of ERP software. The typical range of cost is between US $400,000 - $300
million. It has been estimated that the total cost of ownership is US $53,320 per user. There are significant hidden
costs with ERP implementation including training, integration and testing, data conversion, data analysis, consulting
fees and turnover.

ERP Horror Stories

As with most emerging technologies, ERP efforts have had their share of drawbacks. The following are descriptions
of recent catastrophic ERP failures in the private sector:

Hershey FoodsA 19 percent drop in earnings was caused by an incompetent ERP implementation that
wreaked distribution havoc during one of its most profitable seasons in the US: Halloween.
FoxMeyer DrugsThis pharmaceutical distribution company was forced to declare bankruptcy after an
unsuccessful ERP implementation.
WhirlpoolERP implementation crippled its shipping system, leaving appliances stacked on loading docks
and not delivered to paying customers for a full eight weeks.
VolkswagenSignificant delays in parts shipments caused product inventories to build up to costly levels.

It has been estimated that half of the issues in ERP disasters are not technical but are people- and culture-related.
Many of the failures can be attributed to poor change management in the form of inadequate training. Trainers need
to understand the legacy system processes and know how to translate these process into the new processes called
for in the ERP.

In the US government, the General Accounting Office has identified the following problem with ERP implementations:
 Department of DefenseDefense civilian personnel data system: Costs rose US $248 million to about US
$1.3 billion, and deployment was pushed from September 1999 to March 2001.
Labor Department: Costs jumped from US $26.5 million to US $71 million, due to underestimating
implementation and operating costs.
Department of Veteran's Affairs: Costs jumped from US $170 million to US $417 million, and the project is
currently two years behind schedule.
NASA: Its ERP failed to produce accurate financial reports. The system was unable to close year-end books
on a Cal Tech contract.

These horror stories point out a number of key considerations. First, there is a need to carefully plan and execute an
ERP implementation, because the failures can be catastrophic. This undertaking is definitely not for risk-averse
organizations unless there is a crisis driving the organization toward an ERP. Second, ERP vendors rarely discuss
these failures (unless they involved a competitor); therefore, you must be able to see through the hype and
understand possible consequences of ERP implementation. Finally, these horror stories serve as valuable
experiences, keeping other implementers from falling into the same trap. (Note: These stories were considered in the
development of the list of lessons learned discussed later in this article.)

Implementation Strategies
Implementation steps are summarized below, using, as a guideline, the accelerated implementation techniques used
by SAP consultants. They include:

Project preparationDetermine the implementation strategy, organize the project team, define the system
landscape, identify technical demands, select the hardware and database vendors and gain consensus
among stakeholders.
Business blueprint and realizationCreate the technical design and, based on this design, configure the
ERP software. Based on the requirements, test the software, install the production system and start planning
the data migration strategy from the legacy systems.
Final preparationCheck the system settings, test the system throughput for key business processes and
establish a help desk.
Go live and supportStart the production system, ensure its availability, monitor key business processes,
manage the help desk and define the long-term release strategy.

Key Planning and Implementation Decisions

This discussion looks at a number of the key decisions that need to be made when considering an enterprise
integration effort.

ERP or Not to ERP?

The decision to implement an ERP should be based on a business case rationale. Possible business cases involve
technology, process improvements, productivity improvements and strategic considerations.

Technology justifications include the need to address the Y2K problem (in most cases, this is no longer applicable),
integrate the functions of disparate systems, replace poor-quality existing systems and merge acquisitions with new
capabilities such as web accessibility into the business environment. Process improvements address actions that
result in personnel and IT cost reductions. Productivity improvements include the need to close the financial cycle
and increase overall production from an enterprise standpoint. Strategic considerations address the ability to
implement new strategies not supported by the current software, improve customer service and satisfaction, respond
to competitive pressures and enhance customer responsiveness.

Follow Software's Processes or Customize?

This key decision may determine the success or failure of the ERP effort. If the organization decides to follow the
processes of the software, this will result in the organization following best practices within its sector, thereby giving it
a chance to improve and standardize their processes. This approach will also facilitate future changes to the ERP
software. However, this approach can create significant turmoil by requiring employees to change their ways of doing
business.

If the organization decides to stick with its current processes and customize the software to fit these processes, the
organization obviously will not have to experience the pain and stress associated with changing its processes.
However, it will be very costly to customize and maintain the software over time. Interfaces and modular compatibility
need to be sustained.

Inhouse or Outsource?
Outsourcing has the advantage of allowing the organization to continue to focus on its core mission, avoid a relatively
substantial financial commitment (in some cases) and minimize the impact on the MIS department. On the downside,
providing opportunities to those external to the organization may poorly impact employee morale and may give rise to
security issues.

The upsides to an inhouse implementation include: a better match between the software and the business,
applications optimized for the organization and better maintained security. However, an inhouse approach cannot be
accomplished if there is a lack of internal expertise and personnel to support such an effort.

"Big Bang" or Phased Implementation?

A "big bang" implementation involves having all modules at all locations implemented at the same time.
Characteristics of this approach include no need for temporary interfaces, limited requirement to maintain legacy
software, cross-module functionality and lower overall cost if no contingencies arise.

Phased implementation is when modules are implemented one or a group at a time, often a single location at a time.
Benefits of this approach include: a smoothing of resource requirements, an ability to focus on a particular module,
availability of existing legacy systems as a fall-back, reduced risk, the knowledge gained with each phase and the
usefulness of demonstrable working system.

Other implementation approaches include:

The wave approachThis approach involves the application of different waves of change to different
business units or regions.
Parallel implementationsThis approach involves both ERP and an existing system running together for a
period of time. Its attributes include: having a basis of comparison; existing system serves as backup;
requires more computing and human resources--more costly; existing system may not be properly
maintained during the period; and reengineering not supported by existing systems.
Instant cutovers (flip-the-switch)This approach is lower in cost, motivates users to seriously convert to the
new system and reduces the need for redundant systems. However, it tends to be risky, stressful to users
and requires a high level of contingency planning.

Single Package or Best-of-Breed?

Single package implementation involves the installation of the full suite of a vendor's ERP software. Advantages
under this approach include high interoperability among modules, common look and feel, and standardization.

A best-of-breed approach involves selection of the most appropriate modules coming from different vendors.
Characteristics of this approach include: the required functionality is met, higher cost and an incompatibility among
modules and among systems thereby requiring customized interfaces.
Which ERP Package?
In general, the ERP package an organization selects should be based on four factors: functional capabilities,
technical attributes, partnership and cost. Detailed considerations include the following:

Functional fit with the organization's business practices

Degree of integration among components of the ERP system
Flexibility and scalability
User friendliness
Quick implementation
Ability to support multisite planning and control
Technology--Client-server capabilities, database independence, security
Availability of regular upgrades
Amount of customization required
Local support infrastructure
Costs--License, training, implementation, maintenance, customization, hardware requirements

Lessons Learned
Based on experiences from recent ERP implementations both in the public sector and in industry, the following
lessons were identified:

Define the business value--Identify what benefits the organization needs to get out of an ERP, and focus on
these benefits throughout the implementation to ensure that they are achieved.
Set up regular review measures--Establish metrics to measure how well the objectives of the ERP effort are
being met.
Don't underestimate the art of change management--Keep management and users well informed of
changes, provide the necessary training and support throughout the transition and involve all stakeholders.
Make sure that every vendor involved in the project has "skin in the game"--Every vendor should share in
the risk of the venture; consider using the "fix time, fix price" type of contract to ensure the effort is
completed on time and within budget.
Do not lose sight of the impact on the customer--The implementation should be transparent to the customer.
Assign a high-level business manager to the project, adding credibility to the effort and forcing upper
management to takeownership of the project.
Engage the users throughout the process--Make sure they are aware of the progress of the implementation
and upcoming changes.
Avoid customization--This can be very costly both as a one-time expense and whenever there are upgrades
to the vendor software. However, there are times when customization is required because the software does
not address some aspect of the user requirements.
Ensure that the infrastructure can support the ERP, for example, the network should be built to support the
web-access capabilities of ERPs.
Outsource--This will target situations when the organization does not have a sufficient skill pool to support
an ERP implementation.
Stick with a mainstream vendor--Using a vendor that may not be around in a few years is risky. For
example, in the US government, agencies should select financial modules that comply with Joint Financial
Management Improvement Program (JFMIP) Certified Software (www.jfmip.gov) standards. This is an
indication that the vendor's financial module meets governmental financial system requirements.
Perform pilot implementations--This helps minimize risks associated with large implementations.
Be prepared for turmoil during the transition phase--The transition period can produce a stressful
environment for managers and employees.
Provide staff training and orientation--This training should not be the one-size-fits-all type; it must be
customized for the particular environment. Trainers need to be familiar with the processes associated with
the legacy system and understand how these processes map against the processes associated with the
new ERP system.
Maintenance of an ERP
ERP projects do not end with its implementation. It is a continuing effort that must address new and/or changing
requirements associated with the following:

System bugs
User assistance
Changes to system
Managment of different input and output requirements
Documentation
Training
Maintenance and update of software
Budget

Future of ERPs
ERPs will enhance web interfaces to better support e-commerce, enterprise portals and extensible markup language
(XML), which facilitates data interchange over the Internet. Also, application service providers (ASPs) will have a
growing role in the outsourcing of the often expensive ERPs.

Improvements in enterprise application integration (EAI) middleware for linking ERP with legacy systems are
expected probably in terms of CORBA and COM technologies.

"ERP II" is the term, recently coined by the Gartner Group, for the next generation of ERP tools that "better support"
internal and external collaboration, have more industry-specific requirements and human capital management.

Conclusions
The implementation of an ERP and its associated business practices is a major business and IT strategy for meeting
an organization's vision and goals. It has the potential of high reward, but at a price--high cost and high risk of failure.
To address the risk, carefully planned change management is a critical success factor involving the smooth
transitioning of people, process and systems to the new ERP environment. One way to accomplish this is to follow
ISACA's Control Objectives for Information and related Technology (COBIT) guidelines, which provides a framework
for management to understand and manage technical risks in an uncertain environment. COBIT 3rd Edition is
available as a complimentary download from www.isaca.org//templateredirect.cfm?section=cobit6.

Note: This article has an accompanying web site at: www.members.aol.com/lpang10473/erp.htm

References
Bilbrey, Darrell, PeopleSoft Administrator's Guide, San Francisco, Sybex, 1999
Brand, Hartwig, SAP R/3 Implementation with ASP: The Official SAP Guide, San Francisco, Sybex, 1999
Dietz, Lisa Ramsey, What Every Business Needs to Know about SAP, Rocklin, CA, Prima Publishing, 1999
Gartner Group, The Next Evolution of ERP, Stamford, CT, Gartner Group, 2000
US Joint Financial Management Improvement Program, available at www.jfmip.gov/jfmip/default.asp
Koch, Christopher, et al, "The ABCs of ERP." CIO Magazine. available
at www.cio.com/forums/erp/edit/122299_erp.html
O'Leary, Daniel E, Enterprise Resource Planning Systems: Systems, Life Cycle, Electronic Commerce, and Risk,
Cambridge, Cambridge University Press, 2000
PriceWaterhouseCoopers, Technology Forecast, Menlo Park, CA, Price WaterhouseCoopers, various years
Prince, Dennis, Getting Started with SAP R/3, Rocklin, CA, Prima Publishing, 1998
United States General Accounting Office, Selected Agencies' Use of Commercial off-the-Shelf Software for Human
Resources Functions (GAO/AIMD-00-270), Washington, DC, 2000

Disclaimer
The views expressed in this article are those of the author and do not reflect the official policy or position of the
National Defense University, the Department of Defense or the US government.

Les Pang, Ph.D.

is a professor of Systems Management at the Information Resources Management College, which is part of the
National Defense University in Washington, DC, USA. He teaches courses to military and civilian leaders on
enterprise applications, data management technologies, modeling and simulation, the Internet, software technologies
and multimedia technologies. He received a Ph.D. in engineering from the University of Utah in 1983 and a Masters
in Business Administration from the University of Maryland College Park in 1988.