Chapter 1 - Introduction

1.1. Introduction

Enterprise Resource Planning systems (ERPS) are applied Management

Information Systems (MlSs) that integrate and automate many of Xhe business

practices associated with the operations or production aspects of a company. It is

an Information System (IS) that supports the functional units of an enterprise like

finance and accounting, HR, marketing and sales, manufacturing and logistics

(Sadagopan, 1999). ERR has its roots in manufacturing as it has evolved from

IVIanufacturing Resource Planning (MRP II) (Davenport, 2000).

ERPS are computer-based systems designed to process an organization's

transactions and facilitate integrated and real-time planning, production, and

customer response (O'Leary, 2000). An ERP system is modular in nature. The

main modules in a typical ERP package are finance and accounting, customer

order management, MRP, materials management and decision support/data

warehousing.

Deloitte Consulting^ (1999) defined ERP as a packaged business software

system that allows a company to:

• Automate and integrate the majority of its business processes

• Share common data and practices across the entire enterprise

• Produce and access information in a real time environment.

Via automation of business processes, organizations were able to achieve higher

productivity, profitability and increased efficiency (Gupta et al, 2004). ERP has

done to organizations, what internet has done to communication i.e. it has

Deloitte Consulting is the largest private professional services organization in the world that delivers audit, tax, consulting, enterprise risk and financial advisory services through its nnember firms

eliminated boundaries (Davenport, 2000). Today tliese systems are an IT

strategy of choice, especially for large enterprises and have become an unwritten

requirement to remain connected, in this network economy, to other businesses

(Boykin, 2001). Thus, the ERP suite is a software package that allows a

company to automate and integrate a majority of its business processes.

Though ERP systems were initially applied to capital-intensive industries like

manufacturing, construction, aerospace and defence, today they have

transcended this boundary and are used in various verticals like finance, health

care, education, insurance and telecommunication sectors to name a few

(Shehab et al., 2004; Leon, 2008). ERP systems have evolved to ERP II systems

which include Customer Relationship Management (CRM), Supply Chain

Management (SCM), Business Intelligence etc.

In the pre-ERP era, companies were largely serving the local markets and all

managerial functions were managed by a single set of people. This changed as

businesses became global and companies' activities grew beyond local

boundaries. Companies had to now focus on providing better value to customers

and work on better working relationships to improve their performance and

competitiveness. They focused on improving their customer service, reducing

costs and looked for ways to respond quickly to the dynamic market conditions.

They needed flexible ways to respond to changing business requirements and

change the way they do business.

The main challenge faced by organizations today lies in the management of

information generated from the vast amounts of data about customers, suppliers,

employees and so on. In order to stay competitive. Organizations have to not

only identify their information needs but also ensure that the information

infrastructure provides the right support to serve the enterprise, its customers

and suppliers. By not doing so, it runs the risk of being disconnected and

excluded from future opportunities (Siriginidi, 2000). To survive, thrive and beat

competition, enterprises the world over need to manage information effectively

(Leon, 1999). An integrated information system lil<e an Enterprise Resource

Planning (ERP) system helps in addressing this need.

The sale of ERP software took off in the 1990s and these systems have been in

great demand ever since. Though initially the sale of ERP increased due to the

Y2K2 (year 2000) problem, the spending on ERP systems worldwide is

increasing due to various other reasons. Some of the reasons for this are

(Stensrud, 2001; Boykin, 2001; Shehab et al., 2004):

• Vendors are continuously increasing the capabilities of their ERP system

by adding additional functionality like Business Intelligence, Supply Chain

Management (SCM), Customer Relationship Management (CRM) etc.

• Vendors have shifted to web-based ERP.

• The demand for web-based ERP will increase due to the perceived

benefits of e-commerce.

• ERP systems are considered today as the price of entry to run a business.

• Many multinationals restrict their business to those companies that have

the same ERP software as the multinational firm thereby requiring those

firms to implement the same ERP system.

An economic downturn is always a reason for firms staying away from investing

in any new venture including investment in technology. But a sound economy

gives the foundation for IT/IS development and ERP implementation (Huang &

Palvia, 2001). While the sales of ERP systems would have dipped during 2009-

10, due to the recession, it has picked up in 2011. According to a Nasscom

report of 2010, the global market for ERP is expected to touch USD 49.8 billion in

2013.

Most large enterprises, the world over, have either implemented an ERPS or are

in the process of doing so. Several companies like Cisco Systems, BMW,

Monsanto, Texas Instruments, Nike, Compaq, etc. have benefited tremendously

2 Y2K: Y2K or year 2000 problem was a problem for both digital and non-digital documentation and data

storage situations which resulted from the practice of abbreviating a four-digit year to two digits.

from the implementation of ERP systems (Davenport, 2000). There are other

enterprises like FoxMeyer drugs that went bankrupt after taking up an ERP

Implementation. The number of implementations across the world is increasing.

Thus for ERP vendors, the large enterprise segment had reached a near

saturation with no possible appetite for fresh investments other than for

maintenance and upgrades. They shifted their focus to the Small and Medium

Enterprise (SME) segment. Sale of ERP in the SME segment the world over has

increased also due to the fact that today prices of hardware have reduced and

the need for integrating systems between organizations has gone up (Gable and

Stewart, 1999).

ERP vendors like SAP, Oracle, Microsoft etc. are all targeting the SME segment.

In 2003, most industry leaders in the enterprise application space went in for

acquisitions to consolidate their positions with SSA Global buying BaaN,

PeopleSoft buying JD Edwards, Business Objects buying Crystal decisions; and

Oracle buying PeopleSoft and SAP buying a host of smaller players. Many of

these acquisitions have been made to increase the number of SME clients and to

target the SME segment worldwide (Zimmermann, 2003).

1.2. ERP in India

In India, the need for ERP was felt soon after liberalization of the economy in the

early 1990s. Indian companies realized the importance of customer focus,

improving the speed of delivery and cost competitiveness to compete with MNCs.

In the face of such competition, companies needed to proactively work on

building their capabilities and competencies to stay ahead. They, needed to

competitively differentiate themselves from the rest of the industry. To help them

to respond quickly to the dynamic market conditions, they looked towards

Enterprise Business Solutions.

The Indian ERP market received a boost when the market leader SAP

announced its plan to invest $125 million in Indian operations in 2001 (Business

Line, 2001). JD Edward's, another ERP vendor, followed suit and announced

plans to set up a 100% subsidiary in India by early 2002 to enter the Indian

Market. According to industry analysts, the growth of e-business provided a fillip

to the ERP market. Indian companies were looking for an ERP solution that

incorporated e-business elements such as CRM and SCM. This was provided

for by ERP II solutions (Subhadra, 2002).

The total cost of ownership of an ERP dropped significantly with vendors offering

country specific localization, besides a large pool of skilled functional and

technical talent available. It was observed that awareness about the concept of

ERP increased with the employee size of an organization - it was highest in the

services segment, and among large organizations. The awareness level about

ERP was the highest in the IT/Software segment (Subhadra, 2002).

In India companies both in the public and private sectors, have successfully

implemented ERP and are reaping the benefits. Manufacturing firms in India

were the earliest to embrace ERP systems, closely followed by FMCG,

automotive, steel, oil, textile and pharma companies. Companies like TISCO,

TELCO, Nestle, Reliance, Godrej, Larsen & Toubro, HLL, Maruti, BPCL, lOCL,

Coke, Pepsi, ITC, P&G, Shoppers' Stop and Mahindra & Mahindra were some of

the major companies who decided to implement an ERP system.(Jaiswal, 2003;

Subhadra, 2002). Some of the highly successful ones were BPCL, lOCL, Godrej

and Mahindra and Mahindra (Jaiswal, 2003).

Analysts felt that though large organizations were aware of ERP and ready to

adopt it, the SME segment would fuel growth in the future due to the saturation in

the large enterprise segment. This was true also due to the fact that SMEs are

operating in a global arena.

1.3. Small and Medium sized Enterprises (SMEs) The SME segment is one of the fastest growing industrial sectors in the world

economy. They provide several benefits to the nafional economy by creafing a

vibrant^ manufacturing sector, increasing exports and employment opportunifies

and invigorating the local economy. Global economic conditions have spurred the

rise of SMEs over the last 10-15 years. Some of the reasons for this are (SME

Whitebook, 2009-10):

• Decline in agriculture in the developing world

• Focus on core business leading to outsourcing of services by large

corporations

• Desire for Independence or an innovative idea

With the opening up of the economy, the pressure on SMEs is even higher. They

have found it very difficult to respond to the changing customer demands and

cope with volatile financial markets as they lack the robustness of large

companies. Earlier the operations of SMEs were restricted to local markets. But

today owing to web-based technologies and community networks their arena has

widened. They are no longer insulated from the effects of globalization.

The business drivers for SMEs are no different from that of large firms namely

the need to manage operational activities, identify suppliers, understand

customer requirements and consider the impact of competitor actions. It is

imperative for them to continuously improve their competitiveness and assert

themselves in the global market place (Shehab et al., 2004). SMEs have to tap

the power of IT and an integrated information system to stay competitive and

customer oriented and often ERP is considered the answer for their survival

(Rao, 2000).

Table 1.1: The Indian ERP Market (Source: Express Computer India, October 2001)

Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

Market Size 270 620 1340 2500 4600 6500

(in Rs. Million)

Though the ERP market in India grew substantially with a CAGR of 70% during

the late 1990s (as in Table 1.1), mainly on account of a large number of SMEs

adopting ERP systems (as in table 1.2), a large number of these implementations

failed. There were reports of several SMEs being driven to bankruptcy

(Subhadra, 2002). Analysts attributed the failure to poor understanding, planning

and implementation of the system.

Table 1.2: Ratio of SMEs to Large Organizations Adopting ERP

Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004

Ratio 1:3 3:5 4:5 5:4 6:3

(Source: IDC (India) Limited, 2000)

The failures and the increase in the number of implementations across the world

and in India prompted researchers to find out what was going wrong with the

implementations. They tried to better understand how implementations should

happen and how to avoid failures. Thus there is a growing body of literature on

ERP implementations.

1A.ERP Implementation

Implementing an ERP system is a major project that requires a significant level of

resources, commitment and change throughout the organization. For most

organizations, the ERP implementation maybe the single largest project they

ever undertake. Due to this, the issues surrounding implementation have been

one of the major concerns in industry. Additionally several implementations have

failed including a few which have been disastrous and have led to the demise of

the company (Moon, 2007).

Despite the significant benefits that ERP software packages provide in managing

and integrating cross-functional business processes, they often cost millions of

dollars to buy and install. Added to that, they result in disruptive organizational

changes (Volkoff, 1999). It is because of this several companies have decided to

give up on ERP implementation (Soh, 2000).

Cliffe (1999) reported that 65% of executives believe that ERP systems have at

least a moderate chance of hurting their business because of the potential for

implementation problems. Martin (1998) reported that over 90% of ERP

implementations were either late or over budget. Some implementations like tfiat

of Foxmeyer Drugs ended in failure and resulted in legal action (James, 1997;

Shanks etal., 2000; Davenport, 1998).

In India too, most ClOs who were interviewed by a research analyst at Frost and

Sullivan^ (2001) had the view that ERP packages cost the earth, take ages to

implement and deliver nothing. According to a Gartner4 study conducted in India

in 2001, it was reported that the average cost overrun in Indian ERP

implementations was 178%, the average time overrun was 230% and the

average decline in productivity was 59% (Subhadra, 2002).

ERP implementation is of utmost importance due to its high risk (Kumar et al.,

2002) and the process and organizational changes it calls for (Luo and Strong,

2004). This has prompted researchers to understand how to go about a

successful implementation.

The process of implementing an ERP system and the Critical Success Factors

(CSFs) concerning an implementation, have been the subject matter of many

research papers (Holland and Light, 1999; Bingi et al., 1999; Somers and

Nelson, 2001; Nah et al., 2001; Akkermans and Van Helden, 2002; Al-Mashari et

al., 2003; Zhang et al., 2003; Dowlatshahi, 2005). In addition, several authors

have proposed models/frameworks to ensure desirable results. The differences

in implementation practices between developed and developing countries,

change management issues, project management concerns are the other topics

authors have focused on.

A major share of this extant research has been on ERP implementations at Large

Enterprises (LEs), while a few studies have also focused on SMEs. The body of

literature in this area has been growing in the last few years. But most of these

studies are country specific and case study based.

3

Frost & Sullivan is a global growth consulting company that partners with clients to support the development of innovative growth strategies.

^ Gartner is a research and advisory firm providing research services to its clients in the field of technology.

1.5. Problem Statement This study proposes to examine the implementation of ERP systems at Small

and Medium sized Enterprises. In addition, it also tries to understand the attitude

of non-adopter SME towards ERP adoption and use. Yet another area the

researcher delves into is the view of vendors, implementation partners and

consultants on ERP implementation at SIVlEs in India. The title of the research

project is "Enterprise Resource Planning (ERP) Implementation at SMEs: Issues,

Challenges and Prospects".

Acquiring ERP is a very challenging task for large and small companies alike.

Due to the organizational specificity of small organizations having fewer people

and not being knowledgeable about ERP systems, they do not approach ERP

acquisition the way large organizations do (Bernroider and Koch, 2001).

According to industry experts, less than 20% of SMEs use updated ERP

products, which indicates a lack of awareness about ERP systems and their

benefits (indiacompanynews.com, 2010). Therefore, SMEs are unable to make

an informed decision when it comes to acquiring ERP systems.

It is important to understand from the experiences of SMEs in India, who have

adopted ERP, how they approach ERP implementation and the challenges they

face. It is necessary to identify tlie reasons for a delayed implementation

amongst SMEs and adopt steps to overcome them. It is also necessary to

understand if the challenges faced by small and medium enterprises are

different.

The needs, operating requirements and financial capabilities of SMEs are greatly

different from that of Large Enterprises (LEs) (Huin, 2004). It is essential to

understand the attitude of non-adopter SMEs (non-adopters of ERP)

towards ERP systems and their implementation. The reasons for non-

adoption and the challenges faced by them when they decide to implement an

ERP system are worth delving into.

Vendors of ERP systems like SAP, Oracle, Microsoft Dynamics and others

design and develop ERP systems. Vendors and Implementation Partners (IPs)

9

along with consultants implement the ERP system at SIVIEs. The view of ERP

vendors and consultants towards implementation at SMEs and the

challenges they face was another research question that was addressed.

1.6^11 Annotated Bibliography of Studies done during the period (1999-2010)

Bingl et al. (1999) discussed the issues that must be considered while

implementing an Enterprise resource planning software system in an

organization. They emphasized the need for a very carefully planned execution

of an ERP implementation to ensure success. While strong commitment from

upper management is the top contributor for success, reengineering the business

processes and integrating the other business applications to the ERP system are

the other important factors.

Gable and Stewart (1999) elucidated the implementation issues for SIVIEs with

specific reference to SAP R/3 ERP pacl<age. They reveal that the sale of ERP in

the SME segment has increased due to the fact that today prices of hardware

have reduced and the need for integrating systems between organizations has

gone up.

Everdingen et al. (2000) did a study on ERP adoption by European midsize

companies. From this study, the following facts emerged: European midsize

companies focus more on product characteristics and less on supplier

characteristics. For them, the vendor being the market leader or having a

superior corporate image does not matter. Also, short implementation times and

lower costs are very important to SMEs.

Ravarlnl et al. (2000) opined that due to the year 2000 issue and the adoption of

the new European currency most companies, irrespective of their size, chose to

radically rethink their information systems. Many of them decided to adopt an

ERP system which calls for a major change from a company built on business

functions to an organization based on business processes. This change involves

significant impacts from both organizational and cultural point of view, both of

10

which are difficult for SIVlEs to deal with. To help SMEs to evaluate the

acquisition of ERP systems, and choose the right system, the authors have

proposed a framework.

Adam and O'Doherty (2000) did a study on 14 firms in Ireland, majority of who

were SMEs and reported that the duration of the ERP implementation may be

related to the size and complexity of the client organization. They found that the

ERP implementations that are ongoing in Ireland are different from projects

reported elsewhere in two respects. The implementations are happening at

organizations that are far smaller than the case studies reported in literature and

the duration of the implementations are far shorter than that reported in literature.

They also discovered that the software implementers play a key role not only in

technical terms but also in managerial and political terms as they can help in

correcting the expectations and perceptions of an ERP system and its

implementation.

Bernroider, E. and Koch, S. (2001) studied Austrian companies to understand

the difference between ERP system selection process between SMEs and large

enterprises. Their study showed that SMEs and large enterprises differ in the

software package selected, importance attached to evaluation criteria, size and

structure of team responsible for the decision, methods employed and efforts

expended. This study revealed that organization size had a significant influence

on ERP package selected. SAP R/3 was selected by large organizations while

SMEs often chose products that were priced lower. Another finding of the study

was the importance given to adaptability and flexibility of software by SMEs,

which indicates their need to retain processes unique to their business.

Zhenyu Huang and Prashant Palvia (2001) observed that ERP software is

designed to support the major functions of a business and has been adopted by

large enterprises in developed countries. ERP is also being implemented by

companies in developing countries. This paper brings out a comparison between

ERP implementations in developing and developed countries and puts forth the

11

view that ERP technology faces additional challenges in developing countries

related to economic, cultural, and basic infrastructure issues.

M. Tagliavini et al. (2002) reported that studies show how SMEs fail to

recognize the economic and organizational impacts related to the implementation

of ERP systems. They did a study on 79 Italian SMEs and concluded that SMEs

adopt ERP solutions mostly for contingency, exogenous reasons rather than due

to an accurate analysis of their need. Amongst SMEs the use of ERP systems

was not correlated to business complexity but was strongly influenced by

employee strength and turnover.

Kenneth J. Trimmer et al. (2002) opined that though most ERP systems are

aimed at large enterprises, smaller organizations can also benefit from it. This

paper focuses on identifying the critical success factors for ERP implementation

in small health-care organizations and identifies top management commitment

and maintaining employee morale as two of the several factors critical to ERP

implementation success. Employees should be convinced that the new system

will have positive effects and not threaten their future.

K. Subhadra (2002), in this case study, describes in great detail about the

successful implementation of an ERP system at BPCL. At a time when most ERP

implementations in the country were failing, the BPCL success story was a boost

to ERP implementation. It tells us about the learning from the ERP

implementation at BPCL.

Kyung-Kwon Hong and Young-Gul Kim (2002) examine the effect of

organizational resistance to ERP systems due to a lack of alignment between

business and Information technology strategies. If they are aligned and an

organizational fit is achieved then the ERP implementation has a higher chance

of success.

Akkermans and Van Helden (2002), in their paper, identify the critical success

factors (CSFs) for successful ERP implementation and establish a correlation

between the CSFs and ERP implementation success. It also emphasizes the

significance of the attitudes of the stakeholders for ERP implementation success.

12

Barker et al. (2003) studied the ERP implementation at a soft drink plant and

identify the key areas for success. Success can be achieved with proper planning

and considering ERP implementation to be a new business endeavor and not

just another software installation. The implementation should be approached with

a team attitude and should have the backing of all involved to be successful say

the authors.

Sheu Chwen et al. (2003) say that most of the ERP implementation studies

focus on single-site and domestic implementations while their research paper

performs a study of multinational implementations and how national differences

affect them. They say that understanding these differences will allow managers

to be better prepared when dealing with a multi-site implementation.

Verville and Halingten (2003) divided the ERP acquisition process into six

stages namely the planning process, the information search process, the

selection process, the evaluation process, the choice process and the negotiation

process. During the planning process, the acquisition team is fomied. The next

step is where information about vendors and packages is gathered and

screened. During the next process a short list of possible vendors is created who

are evaluated in the evaluation stage. In the choice stage, the result of the

evaluation process is used to make the final choice. The negotiation stage may

conclude with the signing of the final contract. This study proved that contrary to

the belief that IT acquisition is a fairly simple activity, the task of acquiring ERP is

complex, involved, demanding and intensive.

Loh and Koh (2004) have tried to identify the critical elements necessary for a

successful ERP implementation. Interviews were carried out with eight SMEs in

the UK to determine the critical success factors and their constituents. The

research suggests that in order to ensure a successful ERP implementation,

these critical factors have to be identified and managed at each phase of the

implementation.

13

Koh and Simpson (2005) investigate now enterprise resource planning (ERP)

systems could create a competitive advantage for small and medium-sized

enterprises (SMEs). An attempt is made to study the impact of change and

uncertainty, characteristic of dynamic manufacturing environments, on ERP

systems. It concludes that ERP systems help organizations to respond to change

but not to uncertainty as ERP systems are stochastic in nature.

Gupta et al. (2004) opine that ERP in India is being offered to SMEs by small

localized players who customize it to the SMEs needs. A case of a blood bank in

\'n&'&, P"ra\ VY\a \s oo"P.ssdeved av\<i ftvNcimgs \'P/i\cate v !rease'd eflVy encv awi betta-r

quality among other benefits of ERP.

Sun et al. (2005) propose a framework to assess the CSFs during an ERP

system implementation. They also propose a structured approach to help SMEs

identify key requirements and measurements that assess the success of its ERP

implementation. One of the key outcomes of this study was that great emphasis

should be placed on people to ensure a successful implementation. This study

was restricted to the manufacturing sector.

Motwani et al. (2005) use a case study methodology grounded in business

process change theory to identify the fgictors that result in ERP implementation

failure/success. The authors suggest that a cautious implementation process

accompanied by careful change management, network relationships, and cultural

readiness will have a positive impact on an ERP implementation.

Buonanno et al. (2005) perform a comparative analysis between SMEs and

large companies with regard to factors affecting ERP adoption. The analysis of

the empirical data shows that companies seem to be disregarding ERP systems

as an answer to their business complexity. Also SMEs do not state financial

constraints as the main cause for £RP system non-adoption, suggesting

structural and organizational reasons ^s major ones. This pattern is partially

different from what was observed in large organizations where the first reason for

not adopting an ERP system is organisational. Moreover, the decision process

regarding the adoption of ERP systems within SMEs is still more affected by

14

exogenous reasons or "opportunity of the moment" than business-related factors,

contrary to large companies that are more interested in managing process

integration and data redundancy/inconsistency through ERP implementation.

Ziaee et al., (2006) propose a two phase procedure to select an ERP vendor and

software. During phase 1, a project team is formed and information is gathered

on ERP vendors and their products and the systems characteristics identified.

Phase 2 comprises of a modular approach to ERP vendor selection and

proposes a 0-1 programming model to minimize total costs associated with

procurement and integration.

Harindranath et al. (2007) share that most SMEs in the southeast of England

are in general positively inclined towards adoption and use of ICT. SME

owner/managers perceive ICT to be often costly and complex and are wary of

consultants and vendor organisations. The study also revealed that SMEs are

largely unaware of existing policy instruments designed to help them in the

adoption and use of ICT.

Rantapuska and Ihanainen (2008) have investigated the use of knowledge by

managers when making ICT investment decisions. The qualitative study was

earned out at 6 SMEs in Finland and revealed that in ICT investments there are

three contributing factors namely problem, product and provider.

Snider et al. (2009) conducted five case studies of Canadian SMEs. They

included interviewing individuals from five roles at each organization and

gathering project documents. Following an evaluation of each project's success

(within-case analysis), cross-case analysis was conducted to elicit influential and

distinctive factors. By identifying relevant CSFs for SMEs, managers can better

prioritize implementation efforts and resources to maximize success of ERP

implementations.

Upadhyay and Dan (2009) opine that the SME sector in India, contributes

almost to half of India's GDP. In the need to remain competitive, supply chain

and Enterprise Resource Planning (ERP) solutions seem to have emerged as

ready made solutions to many SMEs. Therefore, it is of particular interest to

15

analyze the operating implementations, in order to identify the success cases,

the nature and measure of the benefits obtained and the context and project-

related factors which can influence the chances of a positive outcome.

Shiau (2009) in their dissertation reported that with the vagueness of success

measurement, many SMEs have negative attitude toward e-business even

though it is widely believed that successful implementation of e-business brings

important values to enterprises. The dissertation tries to study the insight of IS

success measurement and the influential factors of ERP adoption. The author

assesses an ERP system's success by validating an updated Delone and

McLean (D&M) IS success model and examines influencing factors of ERP

adoption by developing measures to assess the ERP adoption of SMEs.

Moutaz Haddara (2009) says that though there is a belief that SMEs do not

need ERP systems, many factors have led SMEs to take the ERP adoption

decision. When SMEs take this decision, they need to think of the cost of ERP

adoption. This paper focuses on factors that influence costs in the ERP adoption

process, starting from the vendor selection to the Go-Live phase. And it proposes

a conceptual framework with several research efforts that will lead to the

construction of a cost estimation model (CEM) for ERP adoption in SMEs.

Kale et aL (2010) did a survey of 130 SMEs in one of the industrially advanced

cities in India. It reveals that most of them have implemented ERP to integrate

the existing information system and found ERP implementation mainly beneficial

in reducing inventory, improving customer services and improving

communications. Top management support, and user involvement and

participation are found to be the major contributors to ERP success.

Wickramasinghe and Gunawardena (2010) opine that ERP implementation

project performance significantly differs between successful and unsuccessful

implementations. The importance given to Critical Elements of training and

education, user involvement, managing user expectations, interdepartmental

cooperation, ERP teamwork and team composition, software development,

testing and troubleshooting, project management, project champion, BPR and

16

customisation, cliange management programme and culture, and effective

communication significantly differ between successful and unsuccessful

implementations. Although ERP implementation project performance does not

vary by the number of ERP modules implemented, product type, and number of

employees affected by the ERP, several CEs were found to vary by these three

contextual variables.

1.7. Need for the Study stories abound in journals and trade magazines about successful ERP

implementations in large organizations. Software providers, vendor web sites etc.

create an impression of ERP systems as being the holy grail of information

systems (Mabert et al., 2001). There is also a lot of criticism for ERP systems

that they are difficult to implement and very costly.

Most ERP solutions are very costly and their implementation takes several years

(Bingi et al., 1999; Davenport, 2000). Several ERP implementations have failed

and companies have lost not only the capital invested but also a portion of their

business as mentioned earlier.

While the success stories abound, there are very few failures that get reported

for fear of the organizational image being affected. But a large number of highly

publicized failures like Dell Computer Corporation, Dow Chemical, Foxmeyer

Drug, Whirlpool, Hershey Foods etc. have caused a lot of companies especially

SI\/IEs to be skeptical about the benefits of a system like ERP. Due to the high

costs and the complexity of the system, a failure would be detrimental to the

health of the firm.

According to an AMR^ Research report (2007) i.e. the Enterprise Applications

Market Sizing Report, Enterprise Resource Planning vendor revenue across

segments across the world was expected to grow from $28.8 billion in 2006 to

$47.7 billion by 2011. The ERP software market is growing rapidly across the

^ AMR Research, Inc. was an independent research firm and is now part of Gartner Research and focused on the global supply chain and its supporting technologies.

17

world. According to Nasscom^, the SME segment accounted for 50-60% of the

S/W and services marl<et in 2008 with revenues touching $34 billion. These

figures are set to grow.

The global market for ERP is expected to touch USD 49.8 billion in 2013 at a

CAGR (2008-2013) of 2.7% providing a huge market for Indian vendors

(Nasscom, 2010). In 2006, according to International Data Corporation (IDC), a

market research and analysis firm, it was predicted that over the next five years,

the ERP market in India was expected to reach Rs. 1,550 crore ($341 million). Of

this, the SME potential in India for the enterprise class is projected to be Rs. 728

crore ($160 million), 47% of the overall market. Thus the implementation of ERP

systems amongst SMEs is set to increase.

While a large portion of the research done this far focuses on ERP

implementations at LEs, only a few studies have taken up the case of SMEs

(Gable et al., 1999; Everdingen et al., 2000; Ravarini et al., 2000; Rao, 2000;

Bernroider and Koch, 2001; Tagliavini et al., 2002; Loh and Koh, 2004; Koh and

Simpson, 2004; Buonanno et al., 2005). But most of these studies are country

specific and case study based. Very few studies have taken up the case in SMEs

and particularly so in the Indian context (Dalai and Babu, 2004; Gupta et al.,

2004; Upadhyay et a!., 2009; Ganesh et al., 2010). Additionally, no study that the

author knows of has tried to consider the views of

• SMEs who have implemented ERP systems

• SMEs who have not adopted ERP systems as well as

• Vendors, Implementation Partners (IPs) and consultants.

to understand the issues, challenges and prospects of ERP implementation at

SMEs in India. This gives a panoramic view of the problems SMEs face today

^ Nasscom, the National Association of Software and Services Companies, the Indian chamber of commerce is a consortium that serves as an interface to the Indian software industry and Indian BPO.

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while implementing or considering implementing an ERP system. Moreover,

there are very few studies which have considered SMEs as defined by the

Ministry of SMEs (The definition is based on the investment in plant and

machinery and appears in chapter 2).

The study becomes significant as it is important for Indian SMEs to understand

the requirements for a successful implementation. Being aware of the factors

responsible for a successful implementation, companies who want to invest in

ERP systems would be better prepared to meet the challenges of an ERP

implementation. This will ensure that companies reap the benefits of an ERP

solution.

Based on these findings, the researcher has attempted to evolve a framework for

effective ERP implementation in SMEs to aid future implementations. There is a

need to understand the truth about ERP systems and their implementation and

dispel the myths that surround it. Part A of this study addresses this need.

Part B of the study focuses on the attitude of SMEs (non-adopters of ERP

systems) towards ERP. It is important to understand what SMEs think about

ERP and their reasons for non-adoption of ERP. This part of the study is

important because the literature on this topic is scant.

Part C of the study throws light on what vendors and consultants of ERP

consider to be the true challenges of implementing ERP at SMEs. This Is an

area that has not been well researched and It Is Important to study this

aspect so as to be able to understand both sides of the story of an ERP

Implementation.

The findings of this study would be important for both the SMEs and ERP

vendors. The SMEs would be better prepared to implement an ERP solution and

would know what pitfalls to avoid. The vendors would be able to understand the

reasons for non-adoption amongst SMEs and would be able to provide better

solutions to meet SME needs.

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1.8. Objectives of the Study

This study aims to aciiieve tiie following objectives:

1. To determine the key drivers for ERP adoption by SMEs

2. To assess how SMEs evaluate and select an ERP system

3. To identify the factors that contribute to the success of an ERP

implementation at a SME from amongst the Critical Success Factors

(CSFs) for an ERP implementation

4. To identify the problems faced by SMEs while implementing an ERP

system

5. To determine if small and medium enterprises differ in how they select and

implement an ERP system

6. To understand non-adopter SMEs outlook towards ERP systems and its

adoption and the challenges faced by them

7. To understand the viewpoint of Vendors, Implementation Partners and

Consultants on ERP adoption by SMEs in India

8. To suggest a suitable framework for successful ERP implementation by

SMEs

1.9. Hypotheses

Part A - SME Adopters

For part A of the study the following hypotheses were formulated:

Key Drivers for ERP Adoption

Hypothesis 1: SMEs decide to implement an ERP owing more to pressure from

external entities (competitors, customers, suppliers, business associates,

industry experts, consultants) than due to internal reasons (to avoid duplication of

data entry, integration, streamline business processes, better inventory control

etc.).

Hypothesis 1.1: Small and medium enterprises differ in the reasons for ERP

adoption.

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Evaluation and Selection

Hypothesis 2: SMEs do not follow a structured approach to ERP selection.

Hypothesis 2.1: Small and medium enterprises differ in their approach to ERP

system evaluation and selection.

Hypothesis 3: While evaluating an ERP package, the price of the ERP package is

given more importance than other factors.

Hypothesis 3.1: While evaluating an ERP package, the importance accorded to

evaluation criteria by small and medium enterprises differ.

Influencing Factors

Hypothesis 4: SMEs being price conscious, price is the major influencing factor

while choosing an ERP package.

Hypothesis 4.1: The factors that influence ERP selection are different for small

and medium enterprises.

Critical Success Factors

Hypothesis 5: A few factors positively influence ERP implementation.

Barriers to Success

Hypothesis 6: A few factors negatively influence ERP implementation.

Part B - Non-Adopter SMEs

For part B of the study the following hypotheses were formulated:

Reasons for non-adoption of ERP systems

Hypothesis 7: There are varied reasons for non-adoption of ERP systems by

SMEs.

Hypothesis?. 1: Respondents from small and medium enterprises differ

significantly in the reasons for non-adoption of ERP systems.

Challenges faced by non-adopter SMEs

Hypothesis 8: There are varied challenges non-adopter SMEs would face if they

were to adopt ERP systems.

Hypothesis 8.1: The challenges that Small and medium enterprises would face if

they were to implement ERP systems differ significantly.

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Outlook towards ERP Systems

Hypothesis 9: Non-adopter SMEs' outlook towards ERP systems and their

implementation is unfavorable.

Hypothesis 9.1: Small and medium enterprises differ in their outlook towards ERP

systems and their implementation.

Status of Current Information Systems

Hypothesis 10: Non-adopter SMEs are satisfied with their existing Information

systems.

Hypothesis 10.1: Small and medium enterprises differ significantly in their level of

satisfaction with respect to their existing information systems.

Options to help non-adopter SMEs with ERP adoption and use

Hypothesis 11: There are varied options that could help SMEs in their adoption of

ERP systems.

Hypothesis 11.1: Small and medium enterprises differ in their choice of options

that could help them in ERP adoption.

Part C - Vendors, Consultants and Implementation Partners

For part C of the study, the following hypotheses were formulated:

Hypothesis 12: Vendors believe that SMEs' awareness for ERP being low is the

biggest challenge they face while implementing an ERP system at a SME.

Hypothesis 13: The presence of a set of factors has a negative influence on ERP

implementation and use, as per vendors and consultants.

Hypothesis 14: The presence of a set of factors positively influences ERP system

implementation and use by SMEs, as per vendors, IPs and consultants.

1.10. Research Design and Methodology This Is an exploratory study which uses a combination of quantitative and

qualitative research. For part A and B of the study, empirical evidence was

gathered from 54 SMEs who had adopted an ERP system and 36 non-adopter

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SMEs, all of who were listed in the Confederation of Indian Industry (Cll) member

directory for Karnataka (2009).

In each of these companies, the CEO was contacted and requested to participate

in this study. Two questionnaires were designed for the purpose of data

collection. The link to the online questionnaire (SurveyMonkey.com) and a

covering letter were then mailed to these SMEs across Karnataka. Majority of the

respondents chose to answer the questions via an interview as opposed to filling

the online questionnaire. The data was collected between February 2009 and

May 2010.

For part C of the study, 25 respondents were chosen randomly from amongst

ERP vendors. Implementation partners and consultants across Karnataka. Care

was taken to consider vendors and implementation partners, both big and small.

Consultants, comprised of both independent consultants and those employed by

the vendors. Data was also gathered from secondary sources like web sites,

newspapers and magazines.

1.11. Scope of the Study

The study focuses on understanding the issues, challenges and prospects of

ERP implementation at SMEs. For the purpose of the study, SMEs who are

members of Cll in Karnataka were approached. Of that, for part A of the study,

SMEs who have implemented ERP systems were contacted to understand the

challenges they face while implementing ERP systems.

For part B of the study SMEs who had not adopted ERP systems were

approached. SMEs believe that ERP solutions are only meant for large

organizations, are very highly priced and take years to implement. The Return on

Investment is also not immediate. These and other reasons were examined to

understand SMEs attitude towards ERP adoption and the challenges they would

face if they were to choose to adopt an ERP system.

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The implementation of an ERP solution involves the Vendor, Implementation

Partners and Consultants. For part C of the study, vendors, implementation

partners and consultants in the ERP space across Karnataka were contacted.

The challenges they face while implementing an ERP system at an SME was

understood. In addition, their advice to SMEs who wish to embark on an ERP

journey was sought.

1.12. Limitations of the Study Some of the limitations of this study are:

• This study is limited to the manufacturing sector as the respondents are

manufacturing units across Karnataka and hence the study cannot be

generalized to other sectors.

• The respondents are SMEs who are members of Cll in Karnataka and

hence the sample may not be truly representative of SMEs in the country.

• The study relies on inputs from CEOs, CFOs, IT heads, vendors, IPs and

consultants and is based on their perceptions.

• Identifying knowledgeable informants at each of the SMEs was daunting.

Senior officials did not have the time and redirected me to less senior

officials who could not answer many questions.

• Being a full time faculty, my research work was constantly interrupted by

my commitment to the Institute where I work. Thus there was a major

limitation on time.

• Since this is not a sponsored project, there was a constraint on money.

1.13. Overview of the Remaining Chapters

This thesis has been divided into 5 chapters namely:

1.13.1. Chapter 1-Introduction This chapter provides an introduction to the study, the problem statement, the

need for the study, the objectives, the hypotheses, the research design, scope

and limitations of the study. It ends with an overview of the rest of the thesis.

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1.13.2. Chapter 2-Theoretical Background to the Study & Literature Review In this chapter, an overview of an ERP system, an introduction to SIVlEs and ERP

system implementation is provided. This is followed by a review of the literature

on the topic of study.

1.13.3. Chapter 3-Research Methodology The research methodology adopted for the study is described in detail in this

chapter. It begins with the operational definition of terms used for the study and

goes on to explain design of the study, the sampling framework, the tools for data

collection and the statistical techniques employed. The profile of the respondents

is provided too.

1.13.4. Chapter 4-Data Analysis This chapter contains an analysis of the data collected during the survey. The

data thus processed is interpreted and the hypotheses proposed are tested.

1.13.5. Chapter 5-Findings, Suggestions and Conclusion This chapter contains the findings of the study and suggestions that the author

proposes to enable SMEs to implement ERP systems successfully. It also

contains parting thoughts and avenues for future research.

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