Chapter 3 ERP System Options Selection Methods Alternative

Chapter 3: ERP System Options & Selection Methods Alternative ERP project forms Budgeting methods

IS/IT Projects • Typically – Late – Over budget – Fail to satisfy design specifications • ERP projects – Are larger than normal – Can be expedited (if you do it vendor’s way) – Cost range $5 million to over $100 million (+)

Alternative ERP Options Method Advantages Disadvantages In-house Fit organization Most difficult, expensive, slowest In-house+vendor Blend proven features with supp. organizational fit Difficult to develop Expensive & slow Best-of-breed Theoretically ideal Hard to link, slow, potentially inefficient Customize vendor system Proven features modified to Slower, usually more expensive fit organization than pure vendor Select vendor modules Less risk, fast, inexpensive If expand, inefficient and higher total cost Full vendor system Fast, inexpensive, efficient Inflexible ASP Least risk & cost, fastest At mercy of ASP

Changing Nature of IT • Technology is highly dynamic • ERP projects often take years to install – Vendors are responding by expediting • As long as you do it their way • Improved versions may be on market by the time you install your system – This is one advantage of an ASP

IT Selection Practice • Hinton & Kaye [1996]: – IT tends to be viewed as capital budgeting – Implication is that clear financial return is expected • Sound thinking, but benefits often intangible (yet real) • Some strategic investments require bold judgment • Conversely, companies have gone broke buying IT

IS/IT Project Risk Factors Simms [1997] 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Project manager ability Experience with this application type Experience with programming environment Experience with language or system Familiarity with modern programming practices Availability of equipment, software, language tools Completeness of project team Personnel turnover Project team size Relative control of project manager over project team

Financial techniques for Capital Budgeting 1. Payback 2. Discounted cash flow 3. Cost-benefit analysis These are the more formal mechanisms implied by Hinton & Kaye as capital budgeting Anything with as great an impact as ERP needs to have some estimate of cost, benefits – Need to recognize that precise numbers not worth obtaining

Bacon [1992] survey of IT project selection methods • Financial Criteria – NPV, IRR, payback – profitability index – budgetary constraint • Management Criteria – Requirements, respond to competition, etc. • Development Criteria – Technical/ learning new technology, probability

Bacon findings • More formal methods often not used – Why waste effort if know you will do it? – Many numbers used inaccurate anyway – More formal methods reserved for larger project (like ERP) • Management criteria focus on intangible • Technical a matter of maintaining state-ofthe-art systems

Survey of Manufacturers Mabert et al. (2000); Olhager & Selldin (2003) FORMAL METHOD ROI Use in US Use in Sweden 53% 30% Payback 35% 67% Expected NPV 15% 12% Other 11% 20%

Expected Installation Time Mabert et al. (2000); Olhager & Selldin (2003) Time to Install ERP US Sweden 12 months 34% 38% 13 to 24 months 45% 49% 25 to 36 months 11% 8% 37 to 48 months 6% 4% > 48 months 2% 1%

Estimated Installation Cost Mabert et al. (2000); Olhager & Selldin (2003) Installation Cost US Sweden < $5 million 42% 40% $5 million to $25 million 33% 35% $26 million to $50 million 10% 18% $51 million to $100 million 7% 7% > $100 million 7% In prior

Cost Proportions Mabert et al. (2000); Olhager & Selldin (2003) Where money spent US Sweden Software 30% 24% Consulting 24% 30% Hardware 18% 19% Implementation team 14% 12% Training 11% 14% Other 3% 1%

Mabert et al. [2000] Survey of 400+ manufacturers Expected ROI Reported < 5% 14% 5% to 15% 18% 16% to 25% 36% 26% to 50% 18% > 50% 13%

Expected ROI Mabert et al. (2000); Olhager & Selldin (2003) Expected ROI US Sweden < 5% 14% 17% 5% to 15% 18% 38% 16% to 25% 36% 30% 26% to 50% 18% 11% > 50% 13% 4%

Mabert et al. [2000] Survey of 400+ manufacturers • Even for ERP systems, only 53% used formal methods – For smaller IT projects, payback most popular • Most systems expected to take years to install – Trend is to make much faster • Cost varies widely – You have a choice as to where you spend – Training tends to be underbudgeted • Not all expect big return

Points • A variety of evaluation techniques available • Pure monetary analysis hard, expensive, inaccurate – Payback a commonly used shortcut • Other methods exist – Value analysis – Multicriteria analysis