Exploring the use of ERP systems by SMEs

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Exploring the use of ERP systems by SMEs

  1. 1. Exploring the use of ERP systems by SMEs M. Tagliavini, P. Faverio, A. Ravarini, F. Pigni, G. Buonanno CETIC -Università Cattaneo – LIUC Corso Matteotti, 22 I-21053 Castellanza (VA) – ITALY Phone: +39 0331 572226 Fax: +39 0331 572320 ABSTRACT the validity of the variables the model is based on, through an empirical research on a sample of 79 SMEs. Nowadays most of large companies have been using an ERP system, thus ERP vendors are moving their attention toward small and medium enterprises (SMEs), by offering simplified 2. CONCEPTUAL FRAMEWORK and cheaper solutions. Such an approach is mostly due to The theoretical model [33] suggests four different approaches to SMEs’ lack of internal competence and resources, while most of IT adoption: it is based on two main variables: the level of large companies have been investing time, money and human business complexity and the extent of organizational change resources to modify their strategies and exploit the opportuni- the company plans to achieve. ties related to the business use of information technologies. Experiences on the field show that SMEs often fail in recogniz- Business complexity Business complexity was assessed by identifying a set of busi- ing the economic and organizational impacts related to the use ness variables, each supported by the most qualified literature: of ERP systems; as a consequence, the evaluation of acquiring Company size (classified as micro, small, medium): existing an ERP system, instead of choosing a system supporting spe- literature seems to confirm the existence of a mutual depend- cific business functions, is a strategic decision that, mostly ence between size and business complexity. Size, together with within SMEs, should be supported by evaluation models. other aspects, is widely accepted as an indicator of organiza- Starting from a theoretical model analysing the opportunity of tional complexity [21]. Kimberly [21] stressed out the necessity acquiring an ERP system according to the evaluation of both to make use of a different approach depending on the industry the business complexity and the level of organizational change, the company belongs to: for the services industry the number of this work aims at verifying on the field the hypotheses of this employees has a better fit, while for manufacturing companies model as well as to look for other criteria suggesting the most the turnover seems to better suit. Therefore, organizational suitable solution according to the business features. This paper complexity is affected by size as well as by other issues increas- will describe in detail the results coming from a survey on a set ing the need for co-ordination and control of organizational of 79 Italian SMEs. activities [18,39]. Keywords The market area (local, regional, national, international): the ERP, SMEs, business complexity, organizational change, survey hypothesis of correlation between the level of internationaliza- tion and the business complexity seems to find a justification in the different legal and cultural issues that need to be managed 1. INTRODUCTION [6,14,32,36] and by the competitive pressures that international The evaluation of the contribution of Enterprise Resource Plan- firms have to face [2,34,35]. ning (ERP) systems in terms of both value creation and eco- The membership of a group (either as the holding or as a con- nomic returns is a difficult task, because of the organizational trolled firm): this variable seems to be strongly related to the changes needed by their implementation as well as the difficulty issue concerning the business co-ordination of dispersed busi- in predicting the return on investment [27]. In spite of the bene- ness units. This is true in terms of alignment of processes and fits potentially offered by ERP systems [1,6,9,15,29], these procedures both between the holding and the controlled compa- issues assume particular importance within small and medium nies and among controlled companies themselves. However, if enterprises (SMEs), where the implementation and the evalua- the imposition of common operating processes on all units tion of the potential benefits are still a difficult task [33]. could lead to a tight coordination between the controlled com- Due to the saturation of the large companies market, ERP ven- panies’ business, in a multiregional context strict process uni- dors have been moving their attention toward SMEs [8] by of- formity could be counterproductive in terms of flexibility [6]. fering simplified and cheaper solutions [22] from both the or- The presence of branch offices (where, how many): nowadays, ganizational and technological points of view. Although ERP for companies with branch offices which need to be remotely vendors are concentrating on the customization process needed controlled, the information flow management is a crucial issue. to match the ERP system modules with the features of existing In larger organizations [17] the development of intranets is of- processes, several studies show that configuring and implement- ten characterized by a lack of coordination and supervision. ing ERP systems is still an expensive task [7], even more in SMEs face different issues (i.e. the cultural and technological small firms [26]. Chan [3] asserts that many SMEs either do not level of knowledge of the entrepreneur): this is one of the as- have sufficient resources or are not willing to commit a huge pects that must be considered to fully comprehend the fall-outs fraction of their resources due to the long implementation times in terms of management complexity, organizational impact and and high fees associated with ERP implementation [4,10,11]. required competencies. As a result, the rate of adoption of ERP systems by SMEs has The level of diversification (in terms of products, markets, been slow. The resource scarcity, the lack of strategic planning technologies): complex organizations are characterized by oper- of IS [5,25,40], the limited expertise in IT [25] and also the ating in different product-market combinations [39]. In related- opportunity to adopt a process-oriented view of the business are diversified firms, an increase in the number of businesses adds among the factors that strongly influence, either positively or information-processing demands by increasing business-unit negatively, ERP adoption by SMEs. interdependencies [16,20,28,30]. In unrelated-diversifiers, as the A previous research [33] suggested a model supporting the number of businesses increases, the information-processing evaluation of ERP system adoption through the qualitative requirements associated with maintaining efficient internal capi- evaluation of the business complexity as well as the strategic tal markets also increase [19]. Moreover, because of the greater and organizational objectives. The aim of this work is to verify need for co-ordination and control of activities, complex or- 1
  2. 2. ganizations will tend to have specialized planning departments, employ a larger number of planners and consequently devote a A high level of business complexity does not necessarily im- substantially larger amount of financial resources to strategic plies the need of a ERP system. Another issue to be considered planning [12,23]. is the organizational impact: a ERP system imposes its own The degree of functional extension (number of activities car- logic on the company strategy, organization and culture [6]. ried out internally): there are companies which consider certain Thus, this decision affects most of the company business func- business functions trivial: the degree of functional extension tions and directly involves a significant number of people. The refers to the number of strategic functions directly managed project team responsible for ERP implementation will be chal- within the company. lenged to either match the functionality of the application to business practice or find ways to adapt or change current proc- Organizational change esses and procedures. Furthermore, the project team could face The extent of organizational change is based on entrepreneur’s organizational resistance to changing the status quo [24]. There- choice of desired transformation level. This measure depends on fore the second hypothesis is focused on the matching between the evaluation of the organizational and economic impacts, such organizational issues and ERP adoption. as the competence of the internal staff or their resistance to change, expected from new technology adoption. Thus, each • H2: The extent of the desired organizational change is company should identify the transformational level where bene- directly related to the use of ERP systems (the greater is fits are in line with the potential cost (efforts) of the needed the desired organizational change, the greater is the rate of organizational changes [38]: adoption of ERP systems). • local automation of existing procedures; • internal integration of existing business processes; EXTENT OF • business process reengineering; ORGANIZATIONAL ERP ADOPTION • business network redesign; CHANGE • redefinition of company boundaries through the creation of inter-organizational relationships; How many organizations actually achieve the proposed enter- prise-wide integration? To what extent is the necessary process The hypotheses to test are: knowledge available within the organization in the first place? • H1: The business complexity is directly related to the To what extent can it be ‘discovered’ through interaction with use of ERP systems (the greater is business complexity, the individuals who participate in the process or manage the the greater is the rate of adoption of ERP systems) process? It is also likely to encounter significant problems when organizations implement limited functionality, thus not really realizing an enterprise-wide system or when the ERP implemen- BUSINESS ERP tation pushes a company toward generic processes even when COMPLEXITY INDEX ADOPTION customized processes may be a source of competitive advan- tage, weakening important sources of advantage [6]. Further- more, the process knowledge embedded in the ERP system may In order to better understand the reasons beneath H1 and to be inconsistent with the process knowledge retained in other validate it, firstly it is necessary to highlight the correlation parts of the organization leading to imperfect integration [37]. existing between each variable of the set and the business com- Those issues are often a consequence of an under-evaluation of plexity. From the empirical point of view this implies the verifi- the organizational impacts of an ERP system adoption: thus H2 cation of the following sub-hypotheses: aims at evaluating the correspondence between SME knowledge on the level of organizational change needed and the rate of Company size adoption of ERP systems. Finally, another issue that deserves H1.1 particular attention is the way SMEs actually exploit ERP appli- Market area cations: the trend in terms of available functions is clearly H1.2 showing a mounting attention by vendors to the development of Membership of systems suitable to guarantee the integration with business part- ERP a group H1.3 ADOPTION ners. The question is if SMEs want and are ready to exploit such Presence of functionalities, and if an “IT-based” integration with partners is H1.4 branch offices one of the motivating reasons that lies under the decision of Level of adopting an ERP system. H1.5 diversification Degree of 3. METHODOLOGY functional H1.6 After the identification of both the set of business complexity extension and organizational change variables, a complete questionnaire was developed. The questionnaire is composed of three parts • H1.1: The company size is directly related to the use of with different focus: the company demographics, the assessment ERP systems of each business complexity variable and the extent of the or- • H1.2: The market area is directly related to the use of ganizational change. Because of the “business-oriented” kind of ERP systems questions, data were collected through direct interviews to • H1.3: The membership of a group is directly related to CEOs. The questionnaire has been proposed to a sample of the use of ERP systems about 2000 Italian companies of any size and industry, mainly • H1.4: The presence of branch offices is directly related located in the northern part of Italy. Data from 134 companies to the use of ERP systems were collected and filtered to resolve inconsistencies and correct • H1.5: The level of diversification is directly related to anomalies, resulting in a final sample of 122 valid question- the use of ERP systems naires. Since this study focuses on SMEs, we excluded larger • H1.6: The degree of functional extension is directly re- organizations, resulting in a total sample of 79 SMEs. The sur- lated to the use of ERP systems veyed companies were classified by size (number of employees 2
  3. 3. and turnover) according to current definition provided by the 5. RESULTS European Community (Table 1), and finally by industry. Criteria Micro enterprises Small-sized enterprise Medium-sized enterprise Business complexity (Hypothesis 1) Max. number of employees <10 <50 <250 To evaluate the quality of the set of indicators chosen to repre- Max. turnover in million € - 7 40 sent the business complexity, it was necessary to aggregate the Max. balance sheet total in million € - 5 27 result. For each indicator we defined a threshold value and Table 1 EC definition of SMEs evaluated the business complexity according to the number of 8% of respondents are micro enterprises, 53% are small compa- indicators which values were above or below the corresponding nies, while 39% have a medium size. On the other hand, with threshold. The cross tabulation analysis of the complexity index respect to the business sector, the sample is concentrated into and ERP adoption shows inconclusive results: there is not evi- three main groups: manufacturing (67%), services (20%) and dence of a growth in ERP adoption in correspondence of higher trade (13%). business complexity values (from 54% to 46%). Moreover, 59% The last research step will entail a statistical approach in order of respondents with a high value of business complexity are not to investigate, test and verify the proposed hypotheses. making use of ERP systems. Conversely, most of companies characterized by a low value of complexity actually are not using ERP systems. 4. VARIABLE MEASUREMENT According to the theoretical framework, the empirical research ERP Total NoERP ERP is focused on the analysis of two variables. Business Low Business Count 32 15 47 The business complexity: the global business complexity index complexity complexity has been evaluated through the means of the 6 indicators de- % within BComplex 68% 32% 100% % within ERP 63% 54% 59,5% tailed in the table below. Respondents were asked to qualita- High Business Count 19 13 32 tively assess each variable of the set in order to build a global complexity measure of business complexity. % within BComplex 59% 41% 100% % within ERP 37% 46% 40,5% Total Count 51 28 79 Business complexity Threshold 2 variables Measures adopted in the questionnarie value χ =0,631 p-value=0,427 What is the number of the company’s employees? Company size ❑ 1-10 ❑ 11-50 ❑ 51-250 > 11-50 The evaluation of these results required a further analysis to What’s the company’s turnover? understand the reasons for these values. First of all, we analysed >7 million € ❑ <7 million € ❑ between 7 and 40 million € the whole sample (including large companies) and tried to fig- The market area * How wide is the market area? > Regional ure out if the business complexity index was better correlated to The membership of ❑ Local ❑ Regional ❑ National ❑ International What is the company configuration? ERP system adoption. Is Member an industrial group of a group ❑ It’s member of a group ❑ It’s an independent company The presence of Does the company have other geographically distributed ERP Total branch offices offices/branches? Yes NoERP ERP ❑ Yes ❑ No Business Low Business The level of What is the competitive strategy of the company? complexity Count 33 22 55 diversification * Diversify complexity ❑ Diversification ❑ Other % within BComplex 60% 40% 100% How many company’s activities are carried out internally? % within ERP 55% 30% 41% ❑ Inbound and Outbound Logistic High Business ❑ Production Count 27 52 79 ❑ Marketing, Sales and services complexity The degree of functional ❑ Supplying % within BComplex 34% 66% 100% extension ❑ Human Resources Management Count > 4 % within ERP 45% 70% 59% ❑ R&D ❑ IS Management Total Count 60 74 134 ❑ Infrastructural Activities (administration, finance, quality χ2=8,744 p-value=0,003 mgmt ❑ Other _______________________________________ In this case the complexity index provides a better fit with data In order to assess the pursued business strategy, two different (χ2=8,744, p-value=0,003). As pointed out in the table above, aggregations were proposed (diversification and other strate- the inclusion of larger companies leads to a noteworthy 65% of gies, including cost-based and differentiation strategies. The companies with a high value of business complexity which degree of functional extension (the number of activities carried make use of an ERP system (versus 41% of SMEs). Conse- out internally) has been assessed by proposing a set of typical quently, in order to confirm such assessment, we explored each activities, already adopted in a previous research on IS effec- business complexity variable also to better understand if some tiveness within organizations. The classical representation of the of them were still viable. value chain [31] has been integrated with a more recent measure Company size (Hypothesis 1.1) used to assess the impact of BPR on manufacturing firms [13]. Firms with a number of employees between 51 and 250 have a rate of ERP adoption of 68%, while within smaller companies The level of organizational change: the aim is to evaluate the (11-50 employees) this data decreases to 29%. This trend seems level of organizational change the company is prepared to face to be confirmed by turnover too: only 17% of respondents hav- to achieve competitive advantage through the use of IT. The ing a turnover lower than 7 million € use an ERP system, while variable has been assessed through a question suggesting the the percentage increases to 75% for companies with a turnover five levels of organizational change described by Venkatraman between 7 and 40 million €. By considering companies with a [38]. higher turnover, although the number of companies using and Measures used in the questionnarie not using ERP systems is exactly the same (21) it is interesting Business to highlight the increasing adoption of ERP systems with re- Is the company planning any organizational change? transformation ❑ Local automation of existing procedures spect to companies having a turnover lower than 7 million € (7 ❑ Internal integration of existing business processes ❑ Business process reengineering companies only), confirming a trend of ERP adoption from ❑ Business network redesign, through the integration with external partners larger companies. Thus, accordingly to literature, both the num- ❑ Redefinition of company boundaries through the creation of inter- organizational relationships ber of employees and the company turnover seem to be consis- tent measures with reference to ERP systems adoption. 3
  4. 4. ERP Total ERP Total No ERP ERP No ERP ERP Number of 1-10 Count 5 1 6 employees % within Number of employees 83% 17% 100,0 No Count 35 16 51 % within ERP 10% 4% 8% Branch % within br. offices 69% 31% 100% 11-50 Count 34 8 42 Offices % within ERP 69% 57% 65% % within Number of employees 81,0% 19,0% 100,0 Yes Count 16 12 28 % within ERP 67% 29% 53% % within br. offices 57% 43% 100% 51-250 Count 12 19 31 % within Number of employees 39% 61% 100,0 % within ERP 31% 43% 35% % within ERP 23% 68% 39% Total Count 51 28 79 Count 51 28 79 χ2=1,042 p-value=0,307 χ2=14,91 p-value=0,001 ERP Total No ERP ERP Diversification (Hypothesis 1.5) Turnover <7 Count % within turnover 30 81% 7 19% 37 100,0 By considering only those companies using ERP systems, di- % within ERP 59% 25% 47% versification seems to positevely influence the adoption of ERP 7-40 Count 21 21 42 % within turnover 50% 50% 100,0 systems by SMEs (from 43% to 57%). Despite this interesting Total % within ERP Count 41% 51 75% 28 53% 79 trend, diversification does not seem to be a reliable variable to assess ERP adoption, since there are 40 diversified companies χ2=8,305 p-value=0,005 (71% of all diversified companies) not making use of any ERP solution. Membership of a group (Hypothesis 1.2) The result of the cross tabulation shows an inverse correlation to ERP Total No ERP ERP ERP systems adoption (68% of companies non belonging to a Diversification No Count 11 12 23 group make use of an ERP system, while the same data de- % within DIVER2 48% 52% 100% creases to 32% for those companies belonging to a group). De- % within ERP 22% 43% 29% Yes Count 40 16 56 spite the hypotheses of existing literature, the membership of a % within DIVER2 71% 29% 100% group is not directly related to the use of ERP systems. % within ERP 79% 57% 71% Total Count 51 28 79 ERP Total χ2=3,969 p-value=0,046 No ERP ERP Membership Standalone Count 35 19 54 company Functional extension (Hypothesis 1.6) % within Membership 65% 35% 100,0% The relationship between functional extension and the rate of % within ERP 75% 68% 72% ERP systems adoption shows a direct correlation (from 7% with Membership Count 12 9 21 5 areas internally managed up to the 54% for those companies % within Membership 57% 43% 100,0% which are characterized by a full internal management of busi- % within ERP 25% 32% 28,0% ness activities. But once more this evidence is not sufficient to Total Count 47 28 75 clearly state that the more the number of internally carried out 2 χ =0,38 p-value=0,537 activities increase, the more SMEs need to adopt an enterprise Market area (Hypothesis 1.3) system. In fact, among the 51 companies which state the maxi- At a first glance the growth of the market area seems to be re- mum functional extension, only 15 firms (equal to only the 19% lated to the use of ERP systems. Only a small subset of compa- of the whole sample) have adopted an ERP system. nies with a limited market area make use of ERP systems, while ERP Total this values grows for companies with a national market area No ERP ERP (28%) and even more for those companies acting on interna- 5 Count 3 2 5 tional markets (57%). Nevertheless, the high percentage of Functional % within Functional ext 60% 40% 100,0% extension % within ERP 6% 7% 6% companies with an international market area which do not use 6 Count 2 6 8 ERP systems (65%) makes the fit with business complexity % within Functional ext 25% 75% 100% difficult to claim. % within ERP 4% 21% 10% 7 Count 9 4 13 ERP Total % within Functional ext 69% 31% 100% No ERP ERP % within ERP 18% 14% 16% Market Local 8 Count 36 15 51 Count 3 1 4 area % within Functional ext 71% 29% 100% % within market area 75% 25% 100% % within ERP 6% 4% 5% % within ERP 71% 54% 65% Regional Count 3 3 6 Total Count 51 28 79 % within market area 50% 50% 100% χ2=8,822 p-value=0,116 % within ERP 6% 11% 8% National Count 14 8 22 % within market area 64% 36% 100% % within ERP 28% 28% 28% Extent of Org. Change (Hypothesis 2) International Count 30 16 46 The results of the data analysis seem to highlight that SMEs % within market area 65% 35% 100% % within ERP 60% 57% 59% prefer the ERP solution when their need to integrate business Total Count 50 28 78 processes becomes a priority. Only 11% of companies making χ2=0,752 p-value=0,861 use of ERP solutions exploit IT just for local automation pur- Presence of branch offices (Hypothesis 1.4) poses, while 44% of respondents achieve internal integration. According to the literature, the presence of branch offices The number of companies approaching more advanced solu- should be a factor influencing the business complexity and con- tions (business scope redefinition and business network redes- sequently the adoption of ERP systems. On the contrary, the ign levels) is very low and only a small percentage of them empirical analysis seems to demonstrate that no correlation make use of ERP solutions. A reason for this result could be the occurs between the extent of geographical dispersion of the way SMEs interpret the role of ERP systems: they probably still company and the use of ERP systems: this solution has been consider these systems a tool to improve the internal process adopted by 57% of respondents with no branch offices and only management and not a technological solution to integrate the 43% of companies with branch offices. company activities with business partners (like more recent proposals by ERP vendors, such as “mySAP”). 4
  5. 5. No ERP ERP ERP Total plex organization may benefit from ERP systems acquisition Organizational Local automation Count 8 1 9 and usage. With reference to the proposed theoretical model, the change % within Orgchange 89% 11% 100% % within ERP 30% 4% 17% suggested indicators of business complexity do not seem good Internal integration Count % within Orgchange 7 39% 11 61% 18 100% predictors of ERP acquisition within SMEs, whereas they seem % within ERP 26% 44% 35% to better explain and justify the use of such solutions by larger BPR Count 4 7 11 % within Orgchange 36% 64% 100% companies. % within ERP 15% 28% 21% We can conclude that SMEs make use of ERP solutions mostly Business Network Count Redesing 6 5 11 for contingency, exogenous reasons rather than as a result of % within Orgchange % within ERP 54% 22% 46% 20% 100% 21% accurate analyses of their needs and opportunities. However, the Business Scope Count 2 1 3 strategic evaluation of ERP use within SMEs is a relatively new Redefinition % within Orgchange 67% 33% 100% issue, and definitely needs more research work. % within ERP 7% 4% 6% Total Count 27 25 52 χ2=7,510 p-value=0,111 A global evaluation of the results concerning each variable con- firms the low significance of the business complexity index (H1.1). Thus, when considering SMEs, the use of ERP systems does not seem to be correlated to the business complexity. In- stead, it seems to be strongly influenced by dimensional factors, such as the number of employees and the turnover. This result can be viewed from a twofold perspective, both economic and organizational. From the economic point of view, the correla- tion existing between the company turnover and the rate of ERP adoption let us argue there is a threshold value beyond which an ERP solution is considered accessible. Since the dimensional issue is a global (meaning turnover and number of employees) measure of business complexity, as asserted by the literature, the data analysis results make it plausible to highlight that the growth in terms of number of employees has a counterpart in ERP systems adoption too. This second assessment seems to be confirmed by two results: first, the correlation between the number of employees and the rate of ERP systems adoption; second, the targeted usage of ERP systems by SMEs. The in- creasing complexity induced by a growth in the number of em- ployees seems to be indirectly confirmed by the conclusions drawn analyzing the results of H2: it seems that by exceeding a dimensional threshold (in terms of increased complexity as confirmed by the literature) SMEs seem to choose ERP systems mostly to improve the integration of existing processes. Proba- bly SMEs face dimensional growth issues by exploiting ERP systems in order to achieve the maximum efficiency of internal processes. Thus, to further explore the above mentioned results, another step in the data analysis has been carried out by investi- gating the possible influence of other factors on ERP systems adoption by SMEs. We observed that ERP is mainly used to support process integration (H.2), to improve order processing efficiency, to substitute obsolete hardware or software, to avoid data duplication and inconsistencies and to reduce inventory excess. As a matter of fact, all those reasons seem to relate more to contingency than to business complexity. % Process integration 54% Why did your Resolve order processing issues 50% company Hardware and Software obsolescence 50% adopt an ERP Resolve data duplication and system? 38% inconsistencies Reduce stock/inventory excess 35% Conclusions The results of data analysis highlight some trends: the strongest signal is the existence of a clear correlation between company size and ERP adoption. This result can be analyzed from a two- fold perspective, both economic and operative. A larger size in terms of turnover seems to point out the presence of a threshold value beyond which the expenditure for an ERP system be- comes a concrete possibility for SMEs. Similarly, the correla- tion between a growth in the workforce and the rate of usage of ERP systems highlights that management issues in a more com- 5
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