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Iadispaper erpevolutionandsmeconstraints-120215113510-phpapp02

  1. 1. ERP EVOLUTION AND SME CONSTRAINTS Abayomi Baiyere International Masters in Management of Information Technology IMMIT IAE, Aix Graduate School of Management, France.ABS TRACTSmall and M edium-size Enterprises (SM Es) are in contrast to larger organizations in possession of limited resources.ERP Implementation, however, is a process that requires and is dependent hugely on the use of resources - from tangibleto tacit resources. This apparent situation prompts two logical questions: Would SM Es have to wait till they have enoughresources? Or would ERP’s evolve to accommodate the constraints of SM Es? This paper examines the evolvinginnovation trend of ERP systems and the future tendencies, in light of the constraint posed by the SM E market.KEYWORDSSmall and Medium-size Enterprises (SMEs), Enterprise Resource Planning (ERP), ERP Evolution, SM Eresources.1. INTRODUCTIONDue to the increasing tough nature of modern day business competition, both large and small & med iu m-sized businesses are continuously in search of better ways to imp rove their processes and achieve competitiveadvantage in their domain. With the advent of Enterprise Resource Planning (ERP) system, both businesseshave turned to this integrated informat ion system as a means of acquiring this adv antage (Koh et al. 2009). The general environment for ERP adoption and implementation has prior to now been more focused onlarge companies (Everdingen et al. 2000). Ho wever, there is an increasing awareness and positive perceptionby small and mediu m sized enterprises (SMEs) on the potential benefits accruable fro m the adoption of ERPsystems. This has subsequently translated into an increase in the nu mber of SM E businesses interested andeven adopting ERP systems. Despite this emerg ing trend, there also exists a major section of SM Es withconcerns about the relative cost of resources and associated challenges involved in the successfulimplementation of ERP systems. (Equey & Fragnière 2008). This paper therefore observes the interplay of the evolution of ERP systems and the impendingconstraints on the adoption of these systems by SMEs. The paper is further structured to present an emergingpossibility for the evolution path of ERP technology in the future by examin ing two driv ing questions:Would SMEs have to wait till they have enough resources? Or would ERP’s evolve to accommodate thisunderserved sector? An observation from several academic literatures on ERP shows that there has been more focus on largeorganizations and this observation can easily be correlated with the fact that the development of ERP systemstargeted large organizat ions fro m the onset. Existing literatures on ERP and SM Es have generally reflectedthe urge and will of SM Es to emb race ERP systems into their operations in order to gain competitiveadvantage (Metaxiotis 2009). Ho wever, research has also pointed out that SMEs are faced with the dauntingchallenge of the necessary financial, material, human, and infrastructural resource and skill requirements thatare essential for a successful adoption and implementation of an ERP system. Furthermore, it is of particular interest to note the choice of ERP vendors from which SM Es obtain theirERP systems from. Several factors have been identified as propelling reasons for the choice of ERP vendorsopted for by SMEs. Some factors that mostly affect these decisions are price, depth of organizationalchange/fit and type of ERP vendors (Federici, T. 2009). Consequently, the traditional large vendor co mpanies of ERP – Oracle and SAP whose products aretargeted to large mult inationals are increasingly recognizing the growing demand in the SME markets. This Accepted for publication in IADIS Information Systems conference – Ger many, 2012
  2. 2. emerging market dynamics is changing the face of ERP systems with the introduction of SME-specific ERPsystems by new vendors, offering less complex ERP systems at reduced costs (Koh et al. 2009). This research paper is a result of a literature review of case studies, professional journals, news articles,and industry web sites concerning SME’s ERP adoption challenges, ERP evolution tendencies in cludingmarket and information technology drivers. The purview of this paper is focused on the effect of theincreasing demand of ERP systems by SMEs. The paper however does not focus on large businesses andother value adding Information systems. Our research is therefore informed by prior research that provides aframework for the analysis as well as our analysis of several perceptions of the research question of SMEconstraints and ERP evolution being evaluated.2. ERP VS SME2.1 Enterprise Resource Planning (ERP) SystemsAccording to Watson and Schneider (1999) and Klaus, Rosemann and Gable (2000), an Enterprise ResourcePlanning (ERP) system can be easily described as a generic term used to for an integrated enterprisecomputing system. It basically integrates the complete range of a businesss processes and functions so as topresent a holistic view of the business from a single informat ion and IT architecture. ERP systems arecomprehensive packaged software system which handles the majority of an enterpris es informat ion systemsrequirements. It facilitates the efficient flow of info rmation among all functions within an organisation. ERP software is majorly offered by a range of vendors that specialise in this particular segment of thesoftware market. Currently, The major ERP vendors are SAP, Oracle, and Microsoft (Panorama 2010). ERPsoftware is highly configurable to accommodate the diverse needs of users across most sectors of thebusiness world (Klaus et al. 2000). Identifiable attributes that characterizes an ERP system includes thefollowing:Technical Perspective 1. Packaged Software: A co mmercial product provided by specialized vendors. 2. Co mprehensive: It is generic, able to support variety of organizational functions and must be suitable for a wide range of business organizations. 3. Configurat ion: needs to be configured before it can be used. (Klaus et al. 2000) 4. Modular: Functionalities are logically built into different business processes in modules . 5. Real time: Allow access to data in “real time”Organisation Perspective: 6. Best business practices: Has a collect ion of the best business processes. 7. Integration: Integrates majo rity of a business’s processes 8. Co mplexity : Tedious imp lementation process 9. Cost: Expensive to adopt 10. Skills: Requires high knowledge skills With these selected characteristics, ERP systems have proven to be easily targeted to and easily adoptedby large organizations. This is primarily due to the fact that these organization require the strategic andcompetitive advantage offered by ERP and they have the resources to overcome the characteristics on itsnegative axis. These same advantages are also the propelling force and reasons why SMEs are craving toadopt and imp lement this system, however crossing over the negative axis has been a dete rrent to many suchSMEs.2.2 The World of Small & Medium Sized Enterprises (SME)There is no globally accepted definition of an SME, however for the purpose of clarity in this paper, we willconsider SM Es to be organizations having most (but not necessary all) of the fo llo wing characteristics: 1. Size: Dependent on a limited nu mber of personnel ( less than or equal to 250). 2. Turnover: Less than or equal to Fifty million Eu ro (50,000,000 Eu ros)
  3. 3. (European Co mmision 2005) 3. Leadership: The Owner and the Manager/CEO are often the same person. (Sh iau et al. 2009) 4. Customer Relations: Close relat ionship with customers and partners 5. Flexib ility: High flexibility and agile adaptability 6. Specialist: Usually specialized with niche strategies 7. Funds: Limited funds to solely finance expensive investments 8. Co mpetitors: The business is usually small in co mparison to larger co mpetitors in the sector. (Recklies 2001 and Kets de Vries 1993) 9. ERP Users: less than a 100 ERP (potential) users. 10. Operation Sites: Usually have one or a few sites. An important feature of SMEs that will be useful in this foregoing analysis is the perceived importanceattached to SMEs on a national level. By extension this imp lies that governments will be logically willing tosupport its growth and this could be an important factor that can be essential in the forthcoming evolution ofERP systems. (Deep et al. 2007)2.3 Constraints to SME’s Adoption of ERPFro m the foregoing list of characteristics drawn above for ERP systems and SMEs, it becomes apparent thatfor most SMEs, a major constraint to adopting ERP solutions, is primarily the lack of necessary resources(Metaxiotis 2009). The different types of resources that could be lacking in an SM E - ranging fro m softresources like skills to physical resources like cash (Vilpola et al. 2005) - as mentioned above, can be easilyobserved by looking side by side at the attributes of SMEs and ERP (as listed in the previous section). Furthermore, if we take a step beyond the obvious resources barrier, another observable constra int thatcan be identified is the issue of “Fit”. SM Es are characterized by flexibility and agile adaptability unlike largecorporations with rigid and fo rmalized structures. Most SME firms depend on their id iosyncratic processes,which enables them to serve customer demands in a flexib le manner but the rigid structure imposed by anERP could be a threat to such flexible methods of functioning. (Sia 2008). Present ERP systems thereforefind a better and easier fit in larger organizations than in SM Es (Deep et al. 2007). Consequently SMEs have to go through either a process of thorough customization or in most caseschange their processes and systems to align with the fitness requirement of the ERP system. Th is can in somecases mean losing the inherent strategic advantage accruable to their flexibility and agile processes (Dieng2005). A lso due to the unpredictable nature of most SMEs’ strategic future, their strategic plan is usually an“emerging vision” or “strategic awareness”, neither of which fits easily to the explicit definitions necessaryfor a successful imp lementation of ERP (Metaxiotis 2009). However, despite the inundating nature of these constraints, some SME organizations have matured to alevel that they have enough resources and a good enough fit to want to proceed with the adoption of an ERP Figure 1: Factor of likely risks during ERP implementationsystem like vanilla imp lementations. A challenge that however surfaces at this point is that of implementationsuccess. As highlighted in the characteristics of ERP above, ERP implementation takes time and there is a
  4. 4. history of SMEs that have implemented ERP systems without success. In fact research shows that largerorganizations have a higher success rate than SMEs (Federici 2009 & Metaxiotis 20 09). Implementing an ERP system can be very valuable and beneficial to an SME but the price of a failedimplementation could be really grave and even catastrophic in some SM E cases (Suna et al. 2005). Hence,another constraint to the adoption of these system by SM Es can be simply identified as the risk of a failedERP implementation (Vilpola et al. 2005). As an instance, a survey of 1,600 organizat ions that have selected or imp lemented ERP systems over thepast four years was conducted by Panorama consulting group and they analyzed the risk factors that arelikely to occur during an ERP imp lementation (Panorama 2010) – see figure 1. With the apparent high percentage of these unfavorable risk factors, and fro m the risk co mponent ofSME constraints identified earlier, it becomes obvious that the risk factor of imp lementing an ERP will be animportant consideration for SM Es (Deep et al. 2007). This is particularly so due to the fact that a failu re inimplementation could spell doom for such an SME. Fro m figure 1 there is a very high probability that one ormore of the risks will occur. Also based on the probability analysis of the whole samp le, the chance that atleast one negative result will occur is about three out of four (72.4%) and it is close to one in three chance(31%) that two or more unfavorable outcome will occur in any particular imp lementation. (Panorama 2010).3. DISCUSSIONERP has evolved fro m 40 years of trial and erro r. It’s evolution has been to become a strategic tool due tocontinued improvement of the techniques used to manage business and the rapid growth of informat iontechnology. ERP systems evolution can be seen as a reflection of improved layers of functionality to existinggerm-cells of materials requirements planning (MRP) of the 1970s and manufacturing resource planning(MRPII) of the 1980s. (Metaxiotis 2009).3.1 The ERP MarketThere are several ERP vendors in the market, but three major vendors dominate the ERP software sector. TheERP market has been subdivided into four tiers – Tier I to Tier IV. The dominant vendors in the ERPsoftware sector by market share in 2009 as reported by panorama (2010) are shown in figure 2: Figure 2: M arket share of major vendor’s in 2009 As shown in figure 2, Tier II vendors are other vendors other than the major three vendors thatspecifically focus on midsize organizat ions that are a little less than the large Tier I organizations majorlysupplied by the other three. Other tiers: Tier III and Tier IV also exist. Tier III is more appropriate for SM Eswhile Tier IV are basic accounting systems like Peachtree accounting and Quickbooks. It is worth noting that a current problem faced by Tier II vendors presently is that Tier I vendors aremoving into this space (Moeller and Rechnit zer 2008). The ERP market in Tier I is small and gettingsaturated, therefore in order to continue to expand their businesses, they are reducing cost, simplify ingtransaction sets, and other incentives to enable mediu m sized co mpanies to have the broad features of theirTier I pac kage. This tendency and move by the major Tier I vendors to the Tier II and Tier III marketsimplies the opening of a new era and new possibilities for SMEs.
  5. 5. 3.2 Emerging VendorsWhile the major vendors were focusing on large organizations, a new ERP market was emerg ing – the SMEmarket. This consequently resulted in a natural emergence of ERP vendors focused on serving this market.This new vendors were creating ERP systems that are SM E specific and aimed solely at capturing this newmarket. The emergence of these new vendors has introduced new dynamics into the competition model of theERP software segment. Co mpetition is usually a platform that promotes new innovations (Aghion, Bloo m,Blundell, Griffith and Howitt 2005). Due to fierce co mpetition fro m emerging vendors, prices of ERPsystems are dropping (Deng 2005). It thus suffices to say that it is expected that the current market structureand vendor mix will ult imately usher in innovations in the ERP industry. Technological innovations in turneventually impact costs and this could have fostered SMEs to a point where the main constraints are liftedand the full benefit o f ERP becomes readily accessible (Aghion et al. 2005). It can be perceived that, as the major vendors try to compete with SM E specific vendors, the tendency tocompete based on better quality will imp ly bringing functionalities fro m their existing ERP fo r largeorganizations to the SMEs (Sia 2008), wh ile the SME specific vendors will tend to adjust their ERP productsto meet up with the quality co mpetition of the majo r vendors. Thereby creating a movement or merg ingtendencies of functionalities and processes of ERP systems for SM E and large corporations. This imp lies anERP system evolv ing towards having standardized functional features that fits both markets. Furthermore, the specificity of the ERP systems developed by the new vendors to SMEs gives them arelative advantage in the market despite the increasing presence of the major vendors in this market. Anillustration of the importance of SM E specific vendors is presented in the next section.3.3 The China ERP CaseAn examp le of growing tendencies in the SMEs market for ERP that have potential to change the evolutionof ERP systems is the prevailing situation of ERP adoption in Ch ina. Ch ina’s ERP market keeps growing andmost of the market share belongs to Chinese local vendors (Liang and Xue 2005). By 2007, the top threeChinese domestic ERP vendors were UFIDA, Inspur and Kingdee (Srivastava and Gips 2008). What makesthis interesting to note is the fact that in China, SM Es constitute about 98% of China’s total industrial sector(World IT Report 2003 and Liu 2009). Th is therefore imp lies that the vendors serving the Chinese market arebasically serving SM Es. Consequently, a trend that is emerging in Ch ina’s ERP market is that most of the major ERP vendorshave taken actions that strategically target the SME segment (Liang and Xue 2005). This becomes apparentwhen we consider the unfolding of SM E targeted ERP applications by leading Intern ational vendors like SAPand Oracle for both the Chinese market and the global SME market. It therefore becomes noticeable fromobservable cases like this that ERP applications are evolving to accommodate SM Es and large organizationsas well.3.4 Trend drivers3.4.1 Information Technology (History and Innovation)The evolution of Information Technology products like the personal computer and the internet has seentrends that are similar to the observable trend in ERP applications. ERP systems began as high costapplications reserved solely for very large organizations. The current trend now reveals a reduction in ERPcosts and a wider adoption of ERP’s even by SMEs. Taking the mainframe to personal computer as an instance, the early years of the computer wascharacterized by similar attributes as the ERP, that is: high cost mainframes and targeted use solely for largeorganizations. However, the trend today is that the cost of computers have plummeted so much that they cannow be afforded by any SME. The use of computers has also moved away from being a device meant for theoperations of large corporations to include everyday SME operations. Another trend driver fro m the IT perspective is the fast pace of innovation in the IT world. ERP systemsare built and dependent on the evolution of information technology innovations. Therefore, impact ing shiftsin IT could imp ly a shift also in the view of ERP (Hu in 2004). Presently, with emerg ing internet of things
  6. 6. technologies and the development of concepts like cloud comput ing, a new definition of ERP may also be emerging in light of the existing constraints posed by the SME markets. (Conner 2010, Baiyere 2010, Van der Zee 2010, Sanchez 2010 and Turban et al. 2009). Taking Moores Law, Metaclfe’s Law and Gilder’s Law into consideration, these innovations will not only impact ERP functionalit ies, but also tend to reduce the cost of adopting ERP systems which further strengthens the presence of SMEs in ERP utility. (Baiyere 2010 and Deng 2005). 3.4.2 Market Drivers On another axis, a view of the ERP market shows that there are two main market d ivisions - the gradually saturating large organizations market and the emerging SME market. Fro m economics, supply tends to move towards where there is demand. It will be unwise fo r the major v endors to ignore this emerging market due to its enormous potentials. This does imply that the ERP evolution will likely be driven by market demands with a focus on the emerging SME sector. With the evolution of ERP tending towards vendors serving SMEs as analysed above, another important factor that will impact the evolution route of ERP systems would be the customizat ion requirements. From a vendors view, the lesser the customization required for each market segment the more advantageous it is to their costs. Attempts to reduce this will lead to standardization. Thus paving a way for a standardized set of ERP solutions that fits both market seg ments. As an example, we can consider business and technology models like open source ERP solutions and Software as a service (SaaS). While open source strives to become an alternative to proprietary ERP, Saa S tends to offer ERP functionalities over the Internet. Both models are considered preferred model for SM Es and are current trends with increasing potentials to impact the evolution path of ERP systems (OSS ERPGuru 2009 and Hestermann, Pang & Montgomery 2010). 4. A SCENARIO ON ERP EVOLUTION WITH SME CONSTRAINTS Fro m the foregoing literature review and analysis, let’s re-examine our foundational questions. Would SMEs have to wait till they have enough resources, or would ERP’s evolve to accommodate this underserved sector? The obvious answer deduced from our analysis will be – No and Yes. Considering the analysis of the various components that hinder and determine the ad option of ERP systems by SMEs plus the evolution trends examined above, ERP vendors are driven by both environmental and economic factors to take the initiat ive of serving the SM E market segment and meet ing the allev iating constraints faced by SMEs. To further consolidate the foregoing analysis, we will create a scenario model of the possible evolution routes of ERP with respect to the constraints of SM Es (see Figure 3). New Vendors Lead Innovation Different costs/Specific ERP Reduced Costs/Uniform ERP Major Vendors Lead InnovationStatus Quo axis P aradigm Shift axis Figure 3: ERP evolution scenarios
  7. 7. Fro m Figure 3, the two deciding parameters are: Innovation and Cost/ERP Standardization. Firstly, Wholeads innovation? The major vendors or emerging vendors? This will determine to what extent the ERPindustry can experience creat ive destruction and in which market direction it will end up inclin ing towards. The second parameter considers the possibility of the cost of ERP systems reducing and becominguniform with the advent of a uniform ERP system or a scenario where t here are different cost structures forspecific ERP systems in different markets.Scenario 1 - Market S pecific ERP: Th is is a situation that occurs when the new/emerg ing vendors createhigh niche ERP systems targeting the SMEs and the major vendors still maintain their markets in the largecompanies and yet still take part in the SM E co mpetition, thereby imply ing differentiated ERP systems fordifferent markets.Scenario 2 - New Vendors Struggle: This is a scenario in wh ich the major vendors create cheaper ERPsystems and more value added specific SM E applications while still maintain ing their dominance in the largeorganizations, leaving little roo m in the market for emerging vendors.Scenario 3 - S ME Friendl y ERP: In this scenario, new vendors are able to innovate and create ERPapplications that effectively meet the resource constraint of SMEs and can also serve both SME and largeorganizations processes, thereby threatening the dominance of the major vendors from the angle offunctionality and cost.Scenario 4 ERP as a commodi ty: This scenario occurs when ERP systems becomes so standardized thatthere is no differentiation in the strategic and competitive advantage that it offe rs any specific user(SM E/large). According to Carr (2003), IT systems in this state become just a necessity like electricity or aword processing application (MS Word) and hence it loses the esteemed strategic edge it offers.5. CONCLUSIONWith the strategic and competitive advantage offered by ERP systems and the fierce co mpetit ive en viron mentof SMEs, adopting ERP systems is logically a step towards getting an edge amidst competition. However,SMEs are constrained by their limited resources in adopting ERP’s but rather than SMEs wait ing till they getenough resources, it has been demonstrated that ERP systems will gradually tend to evolve to accommodatethe constraints of SM Es. Looking at the evolution possibilities or ERP systems with respect to the challenges posed by SMEs,introduces a different view to the evolutional tendencies o f ERP systems. Additionally, the SME market forERP vendors is emerging and growing fast and the vendor competition for this market segment is on theincrease. All this tendencies are factors that drive a change in the market dynamics, the cost ofimplementation and a move towards ERP standardization. The question of the direction in which ERP will eventually evolves still remains. Will the status quo bemaintained? Or will SM Es be a platform for the paradig m shift that will drive the new face of ERP? Whenthis will occur (not if), is a function of time.ACKNOWLEDGEMENTSpecial thanks to Prof.dr.ing W.J.H. (Willem) van Groenendaal, Yu Han, Xianchao Jiang of TilburgUniversity, The Netherlands and Stuart Short of SAP Labs, France; for their contribution in the concept,writing, reviewing, proofing and presentation of this paper.REFERENCESAghion, P. et al, 2005. Competition and innovation: An inverted-U relationship. The Quarterly Journal of Economics, Vol. 120, No. 2, pp. 701-728
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