Enterprise Resource Planning Saad Ahmed Javed Ph D

Enterprise Resource Planning Saad Ahmed Javed, Ph. D Scholar (Engr. Mgt. ) National College of Business Administration & Economics

Ethics & ERP A Case of SAP CHAPTER # 5

Business Ethics? • What is it? ▫ Business ethics is a form of applied ethics (matters of moral judgment) that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and business organizations as a whole.

Dow Jones Sustainability Index • What is it? ▫ The DJSI follow a best-in-class approach through analysis: of corporate economic, environmental and social performance ▫ Assesses issues such as: corporate governance, risk management, branding, climate change mitigation, supply chain standards and labor practices.

FTSE 4 Good Index • What is it? ▫ Was designed to measure the performance of companies that meet globally recognized corporate responsibility standards, and to facilitate investment in those companies. Global Challenges Index • What is it? ▫ Recognizes companies for transparency and anti-corruption.

Why is this relevant? • Dow Jones Sustainability Index ▫ SAP is named the leader in the software industry for upholding ethical, environmental, social, and governance values in its products and services. • FTSE 4 Good Index ▫ Sap is recognized for its sustainable business practices by the Global 100 list of the most sustainable corporations in the world. • Global Challenges Index ▫ SAP has been named to recognize transparency and anti-corruption.

Governance, Risk, and Compliance • SAP strives to conduct business ethically and to pursue sustainability assertively, all under the umbrella of sound corporate governance. • Solid governance and responsible business practices contribute to SAP’s success and sustainable economic development at the macro level.

Corporate Governance • What is it? ▫ Set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. ▫ Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.

German Corporate Governance • Rules and principles of the German Corporate Governance Code. : ▫ Management and supervisory functions are segregated into two distinct bodies: Executive Board Supervisory Board ▫ The Supervisory Board is led by the chairperson and approves the members of the Executive Board, who in turn lead the company. Members of one body are not allowed to be part of the other. ▫ Germany’s unique corporate laws of co-determination provide for employee participation on the Supervisory Board.

Ensuring Ethical Business Practices • SAP conducts business dealings with integrity. All employees sign a Code of Business Conduct when they join the company. • The code covers: ▫ Conduct with customers, suppliers, competitors, and partners ▫ Fair competition ▫ Conflicts of interest ▫ Anti-corruption ▫ Insider trading ▫ Confidentiality

SAP Corporate Governance

Code of Business Conduct • A statement of the company's commitment to safeguarding investors and customers against unfair competitive practices, corruption, or misleading statements. • Sets the standard for all dealings with customers, partners, competitors, and vendors. • International differences in culture, language, and legal and social systems make the adoption of a uniform code of business conduct across the entire SAP Group somewhat difficult.

Climate Change – some facts • The United States constitutes 5% of the world population and contributes to 22% of world’s carbon emission. • Above 600, 000 deaths occur worldwide every year due to climate change. 95% of these deaths take place in developing countries. • Around 15% of the carbon released in the environment is due to deforestation and change in use of land. • Hurricanes, droughts and coral deaths are few of the natural disasters caused due to climate change.

• In USA, a separate budget of US$ 40 million has been allotted for climate change research since 1990. • Average temperature of Earth has gown up to 15 o from -180 since medieval ages. • The rising temperatures will cause more deaths not due to natural reasons but as a result of overheating and rapid spread of deadly diseases.

FTSE 4 Good • SAP is a founding member of the UN Global Compact*. SAP participates in the anti-corruption working group and endorses the UN Global Compact Caring for Climate initiative to advance practical solutions and help shape public policy and public attitudes on climate change. • SAP increased anti-corruption standards to include: ▫ A binding obligation upon partner sales agents ▫ A prohibition against facilitation payments/bribe. *UNGC is a United Nations initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation.

Do we need Money or Sustainability? If your answer is ‘Money’ go to the next slide, & If your answer is ‘Sustainability’, clap for yourself!

Enron • Enron was once one of the world’s leading electricity, natural gas, pulp and paper, and communications companies until 2001 when Enron filed for bankruptcy. • In 2000 Enron claimed nearly $101 billion in revenues with approximately 22, 000 employees. • Enron was touted as the seventh largest company in the U. S. • Fortune magazine named Enron "America's Most Innovative Company" for six consecutive years. • Enron shares traded at $90. 75 at its height in August of 2000.

Enron Collapse • Enron claimed to generate profits and revenue from deals with special purpose entities* that were actually limited partnerships which Enron controlled**. • Enron was claiming billions in profits while it was actually losing money. • Enron was using these partnerships to sell contracts back and forth to itself and booking revenue each time and to hide debts and losses that it suffered by not reporting them on its financial statements. • By the late 1990 s, Enron had begun shuffling much of its debt obligations into offshore partnerships. Chief Financial Officer Andrew Fastow created many of these offshore partnerships. *SPE is a legal entity (usually a limited company) created to fulfill narrow, specific or temporary objectives. **LP is a limited partnership must have at least one general partner and at least one limited partner. In LP things are less transparent and control is more centralized, relative to SP

Enron Collapse (cont. ) • On October 16, 2001 Enron posted a $638 million loss for the third quarter leading to reduction of $1. 2 billion in shareholder equity (assets-liability). • On November 8, 2001 Enron revised its financial statements for the previous five years, acknowledging that instead of taking profits, it actually had posted $586 million in losses (Posting losses on backdates!). • Its stock value fell below $1 per share by the end of November and was de-listed on Jan. 16, 2002. • Enron filed for bankruptcy on December 2, 2001 • The scandal caused the dissolution of one of the world’s top accounting firms Arthur Andersen. In 2002 the firm was found guilty of obstruction of justice for destroying documents related to Enron’s audit.

Why Enron failed? Do they lack qualified people? • Andrew Stuart Fastow , CFO ▫ B. A (Economics), Tufts University, USA ▫ MBA, Northwestern University, USA • Jeffrey Keith Skilling, CEO ▫ MBA, Harvard Business School, USA ▫ “in the top 5% of his class” • Rebecca P. Mark-Jusbasche, Vice Chairman ▫ MBA, Harvard Business School, USA • Dr. Kenneth Lee, Chairman, ▫ Ph. D (Economics), University of Houston, USA

Sarbanes-Oxley Act • Is the reaction to a number of major corporate and accounting scandals including Enron, Tyco International, Adelphi, Peregrine Systems and World. Com. • Was enacted on July 30 th, 2002. • Approved by the House by a vote of 423 -3 and by the Senate 99 -0. • Sec. 302 contains the rules for corporate responsibility for financial reports and disclosure • Sec. 404 requires management and the external auditor to report on the adequacy of the company's internal control over financial reporting.

Sarbanes-Oxley Act • Not only affects the financial side of corporations, it also affects the IT departments whose job it is to store a corporation's electronic records. • Sec. 802(a) deals with destruction, alteration, or falsification of records. • Sec. 802(a)(1) defines the retention period for records storage. • Sec. 802(a)(2) refers to the type of business records that need to be stored, including all business records and communications, including electronic communications.

Sarbanes-Oxley Act • The Sarbanes-Oxley Act requires companies listed in the United States to declare whether they have a code of ethics that, at minimum, applies to certain levels of management. • SAP's Code of Business Conduct for Employees meets the standards set by the Sarbanes-Oxley Act and the regulations pursuant to the act.

Sarbanes Oxley and SAP

Enterprise Resource Planning • The First Boom ▫ In the late 1990 s, ERP system vendors saw sales skyrocket as organizations raced against the pressures of Y 2 K (upcoming century, i. e. , 21 st). ▫ The systems at the time were of unique valueorganizations could be the first in their industry to take advantage of the values of an enterprise resource system. ▫ After Y 2 K, vendors found themselves at a bottom of a peak and without the unique value hook

Enterprise Resource Planning • The First Boom (continued) ▫ Organizations questioned the real value of the highly expensive new systems. • ROI increases would not be evident for years • Original factor behind purchasing the software was due to Y 2 K compliance. As a result, many organizations were never fully trained to effectively use the software in their organizations

Enterprise Resource Planning • The Second Boom ▫ Sarbanes-Oxley brought a new light to ERP vendors as organizations sought out upgrades to their systems since original systems were not designed for compliance with the new standards ▫ Vendors stressed to unsatisfied customers that they could receive benefits from the previously purchased software • Organizations must be willing to implement the system into their business processes

“Best Practices” ▫ One way software vendors market their systems is by offering “best practices” pre-configured in software. Best practices: the most efficient methods that businesses should be following ▫ In order to use the software, businesses must alter or redesign their current practices and business structure to incorporate these best practices.

Customization ▫ Vendors do offer customization allowing organizations the ability to create enterprise resource planning software to fit their current processes ▫ Costs are exceedingly high • Majority of the costs come from the customizations not from the cost of the ERP system ▫ Upgrading systems more difficult • Additional money to re-customize or un-customize to change their processes

Customization (cont. ) • ERP designers contest customization was the biggest mistake in the Y 2 K boom and recommend integrating the best practices into the business models and not customization. • Integrating best practices in business models brings standardization in ERP and reduces cost.

Additional Reasons for ERP ▫ ERP upgrades and new modules were needed by companies in growth stages. For example, companies who had implemented separate systems in countries where they operated needed to integrate a centrally managed global system for better efficiency and management of the company’s productions. ▫ Installations done for Y 2 K were no longer adequate for their current needs ▫ 2003 -2004, companies tightened their IT budgets to invest in e-commerce and security, and now were returning back to their budgets and technological improvements.

Software Upgrades ▫ Software vendors continue to make improvements and upgraded models of ERP systems ▫ To receive the greatest value of their systems, organizations must continue to purchase the upgrades ▫ Critics of the ERP system, question the power of software vendors that this creates (They can regard your ERP obsolete whenever they desire!) ▫ EXAMPLE: Dow Chemical Co. was one of the first companies to adopt SAP into their business processes by purchasing an extensive customized system.

Software Upgrades (cont. ) ▫ EXAMPLE: Dow Chemical Co. was one of the first companies to adopt SAP into their business processes by purchasing an extensive customized system. They continued to use the system even as newer SAP upgrades were released SAP discontinued support for this older version Dow Chemical CO. was faced with the decision of either keeping their customized system and relying on their own knowledge and support or redesigning their system again in order to incorporate newer versions.

In General: Six Dirty Vender Tricks 1. 2. 3. 4. 5. 6. The magic Demo Underbid, then overcharge The customer “headlock” The billing “mistake” The forced upgrade march The clueless customer

The Magic Demo • A software vender comes into your business, provides you with selling software that has all the answers to your companies’ needs and that their enterprise software package will deliver the tools to prove it

Underbid, then Overcharge • Venders will come into a business and offer an lower price to initiate the sale of the product ▫ Make up the difference in added charges after the contract has been signed in possible service contracts and implementation fees

The Customer “Headlock” • Once a vendor has completed a sales contract with a company, they do everything in their power to keep them as clients ▫ High implementation costs ▫ Use of the venders own engineers to implement the software ▫ Upgrades and maintenance fees

The Billing Mistake • Vendors charging for services, fees, upgrades, or software not contracted ▫ Fewer than one in ten customer notice that the error has taken place

The Forced Upgrade March • Coercing companies to upgrade their software; even when it is relatively new or a newer version will soon be out. ▫ Example: A vendor sold a program in US. Three weeks later, a newer version of the program came out. When confronted, the company explained they couldn’t divulge* such information about the upgrade at the time. *Divulge: disclosing sensitive or confidential information

The Clueless Customer • Customers put too much trust in systems integrators and vendors; and fail to do their own due diligence/effort. ▫ Most projects fail because of conflicting agendas between customers, system integrators, and vendors. ▫ Example: A system is not functioning due to a burned plug but vendor is suggesting entire module needs upgradation.

Any Questions?