ERP system procurement in SMEs two contrasting ways

Transcription

1 ERP system procurement in SMEs two contrasting ways Master thesis 15 HEC, INFM03 in Informatics Presented: June, 2012 Authors: Romualdas Laurinavicius Aide Venckauskaite Supervisor: Examiners: Björn Johansson Agneta Olerup Paul Pierce

2 Title: ERP system procurement in SMEs two contrasting ways Authors: Romualdas Laurinavicius Aide Venckauskaite Publisher: Department of Informatics, Lund University Supervisor: Björn Johansson Examiners: Agneta Olerup Paul Pierce Presented: June, 2012 Thesis type: Master thesis Language: English Keywords: ERP system procurement, SMEs, SME specificities Abstract ERP systems have originally been developed for large enterprises (LEs). However, market saturation, integration of supply chains and improvements in technology have led to more and more small and medium-sized enterprises (SMEs) adopting ERP systems. Though there is a focus shift from LEs to SMEs in the ERP market, most academic literature on ERP systems is based on findings from LEs. In addition, while the ERP system adoption life cycle consists of three stages: procurement, implementation and post-implementation, academic discourse has been mostly focusing on implementation or post-implementation phases, indicating a knowledge gap on ERP system procurement stage, especially in SMEs. In our study we have investigated how ERP system procurement is carried out in SMEs. Based on academic literature we built a theoretical framework on ERP system procurement in SMEs, which we later used as a foundation for our empirical investigation. We then conducted five interviews with individuals representing different parties participating in ERP system procurement: three of them with consultants working with ERP procurement and implementation, one with an ERP vendor, and another with an SME that has recently procured an ERP system. Based on our empirical findings we have identified two contrasting ways SMEs are likely to carry out ERP system procurement. In addition, we have found a number of SME specificities and other factors affecting the procurement process in SMEs. Lastly, we have explained the effects that our identified specificities and other factors have on ERP system procurement in SMEs.

3 Table of Contents 1 Introduction Background Research questions Purpose Delimitations Theoretical starting points ERP system implementation in SMEs Importance of ERP procurement process ERP procurement frameworks ERP system procurement stages Formation of acquisition team Examination of business requirements and constraints Formulation of evaluation criteria Evaluation and selection of the best fit Research framework Research method Procedure Data collection method Interview guide and checklist Informant selection Conducting interviews Analysis techniques Quality of the research work Source criticism Generalizability Reliability Validity Ethical aspects Empirical findings Factors affecting ERP procurement process Organizational dimension factors Decisional dimension factors... 35

4 4.1.3 Psycho-sociological dimension factors Information systems dimension factors Other factors ERP procurement process The More Formal ERP procurement process The Less formal ERP procurement process Results from the interview with SME Discussions SME specificities, factors and characteristics Discussing ERP procurement processes Discussing Effect Illustrating discussions Conclusions Appendix 1: Interview guide, English Appendix 2: Interview guide, Lithuanian Appendix 3: Interview Checklist, English Appendix 4: Interview Checklist, Lithuanian Appendix 5: participation request, English Appendix 6: participation request, Lithuanian Appendix 7: Interview Briefing, English Appendix 8: Interview Briefing, Lithuanian Appendix 9: Coded transcript citations, Informant Appendix 10: Coded transcript citations, Informant Appendix 11: Coded transcript citations, Informant Appendix 12: Coded transcript citations, Informant Appendix 13: Coded transcript citations, Informant Appendix 14: Interview transcript, Informant Appendix 15: Interview transcript, Informant Appendix 16: Interview transcript, Informant Appendix 17: Interview transcript, Informant Appendix 18: Interview transcript, Informant References

5 List of figures Figure 1.1 ERP system adoption life cycle 7 Figure 2.1 ERP procurement process (Poon and Yu, 2010) 14 Figure 2.2 Derivation from objectives and requirements to criteria 19 Figure 2.3 Research framework 23 Figure 3.1 Relationship between research questions and interview guide 26 Figure 5.1. Factor effects on ERP procurement process 55 List of tables Table 2.1 SME specificities affecting ERP system implementation (Gable and Stewart, 1999, pp ) 10 Table 2.2 Requirements for acquisition team formation in ERP system literature 15 Table 2.3 Requirements for business requirements and constraints examination stage in ERP system literature 16 Table 2.4 Requirements for evaluation criteria formulation stage in ERP system literature 18 Table 2.5 Requirements for evaluation and selection of the best fit stage in ERP system literature 21 Table 3.1 Overview of the interviews 27 Table 3.2 Coding scheme 29 Table 4.1 Organizational dimension factors 35 Table 4.2 Decisional dimension factors 36 Table 4.3 Psycho-sociological dimension factors 37 Table 4.4 Information systems dimension factors 38 Table 4.5 Other factors affecting ERP procurement in SMEs 39 Table 4.6 Distinction of procurement processes 40 Table 4.7 More Formal ERP procurement process 41 Table 4.8 Less formal ERP procurement process 43 Table 4.9 Background of SME and procurement project (I5) 45 Table 4.10 ERP procurement process in SME 46 Table 5.1 Comparison of factors in empirical data and theory 47 Table 5.2 Contrasting characteristics of factors 51 Table 5.3 Comparison of procurement process in empirical data and theory 52 Table 5.4 Characteristics of the organization of I5 56 Table 5.5 Comparison of more formal and SME procurement process 57

6 1 Introduction 1.1 Background An Enterprise Resource Planning (ERP) system is a highly complex enterprise system that automates and integrates business processes as well as all business transactions in order to provide information as a unified enterprise view of the business for decision making (Umble, et al., 2003; Andersson and Wilson, 2011; Baki and Cakar, 2005). Despite the fact that ERP systems are seen as a way to increase strategic and competitive advantage, now they are also considered to be, as Kumar and Van Hillegersberg (2000, pp. 24) state, the price of entry for running a business. However, many failure cases of ERP implementation, for instance, FoxMeyer Drugs and Dell Incorporated, indicate that not all companies succeed adopting an ERP solution effectively and considerable investments (in 2010, an average ERP project cost was $5.48 million, according to Panorama Consulting Group (2011)) are spent without receiving expected return and impact (Poon and Yu, 2010; Scott and Vessey, 2002; Wu, et al., 2007). An ERP implementation project is considered to be unsuccessful to a major or minor degree if the original user organization s expectations about costs, time and competitive advantages are not fulfilled (Cannon, 1994; Davenport, 1998; Robey, et al., 2002; Kumar, 2002). Regarding time, cost, and scope objectives, many of ERP implementation projects do not follow them, for example, an international study of companies that have implemented an ERP system within 2010 showed that 61.1 percent of ERP projects had time overruns and 74.1 percent exceeded budget (Robey, et al., 2002; Panorama Consulting Group, 2011)). Taking into consideration significant financial investment that is made, potential risks and benefits of ERP implementation, selection of an appropriate ERP system is considered to be extremely important (Teltumbde, 2000). While successful selection of an ERP system may lead to overall project success, wrong selection may either cause failure of the project or lower the possible benefits of the system as well as company s competitive advantage (Wei, et al., 2005; Sen, et al., 2009). However, as Wei, et al. (2005, pp. 47) state, due to limitations in available resources, the complexity of ERP systems, and the diversity of alternatives, selecting an ERP solution is a time consuming and highly complicated task. European Commission (2011) defines three classes of enterprises: micro employing up to 9 persons, small and medium enterprises (SMEs), where small have 10 to 49 employees and medium from 50 to 249, and lastly large enterprises (LEs) employing 250 or more employees. ERP systems have originally been designed for LEs, however, as many of these companies have already adopted ERP systems, a competitive focus shift from LEs to SMEs can be seen among ERP software vendors (Ravarini, et al., 2000; Morabito, et al., 2005; van Everdingen, et al., 2000). A number of reasons have led to this shift, including: market saturation among LEs, integration of supply chains between LEs and SMEs, bigger number of SMEs compared to LEs (according to European Commission (2011) SMEs accounted for 99.8% of all 6

7 enterprises in EU in 2010) and technology developments leading to lower hardware prices and software availability (Morabito, et al., 2005; Gable and Stewart, 1999). Though ERP system vendors have shifted their orientation towards SMEs, several authors (Haddara and Zach, 2011; Loh and Koh, 2004; Muscatello, et al., 2003) agree that most academic findings are based on studies of LEs, thus highlighting a lack of focus on SMEs in ERP system discourse. 1.2 Research questions ERP system adoption life cycle consists of three stages: procurement, implementation and post-implementation (Stefanou, 2001). The procurement phase (also referred to as preimplementation or acquisition), as shown in Figure 1.1, begins when the initial idea of adopting an ERP system receives support from management and ends once an ERP solution is purchased from a chosen vendor (Poon and Yu, 2010). Decision to adopt ERP system ERP solution is purchased Figure 1.1 ERP system adoption life cycle However, most academic work has focused either on implementation or post-implementation, leaving the procurement stage unexplored (Poon and Yu, 2010). In addition, due to its focus on LEs, the discourse on ERP systems lacks findings from SMEs, illustrating that there is a knowledge gap on ERP system pre-implementation stage, especially in SMEs. A number of obstacles are faced by SMEs when implementing ERP systems due to their specificities and peculiarities. Firstly, SMEs do not possess large amounts of money, therefore ERP system implementation is a relatively large investment (Ravarini, et al., 2000; Morabito, et al., 2005). Secondly, SMEs do not have a special team dedicated to handle the implementation and post-implementation work (Morabito, et al., 2005). In addition, SMEs seldom rely on formal business strategies, and often approach their IS management in a nonformal way, thus the decisions they make are not based on formal information and decision models (Ravarini, et al., 2000). Lastly, the procurement process normally involves two organizations: the client-user organization, and an external consultancy firm helping the client organization (Andersson and Wilson, 2011). This results in a process, where ERP system purchase decision is a product of collaborative work between several parties. For these reasons, we believe that SMEs arrange the procurement process differently than it is described in literature. Therefore, we are interested to investigate ERP system procurement processes in SMEs and factors affecting this process. We believe that the findings will provide evidence illustrating certain similarities and differences between practice and the procurement process described in ERP discourse. 7

8 Our main research question is: Q1: How is ERP solution procurement carried out in SMEs? In order to answer our main research question we need to ask the following sub questions: Q2: What stages are included in the process of ERP solution procurement in SMEs? In literature ERP procurement is commonly presented providing descriptions of distinctive stages included in the procurement process (Poon and Yu, 2010; Wei and Wang, 2004; Wei, et al., 2005; Verville and Halingten, 2003). Therefore, in order to compare the procurement carried out in practice to the one described in the literature, it is necessary to identify stages included in the procurement process carried out by SMEs. Q3: What and how SME specificities affect ERP solution procurement process in SMEs? A number of SME specificities and peculiarities have been mentioned above, which are believed to influence the ERP procurement process in SMEs, however, we have not found studies focusing specifically on the specificities of SMEs affecting ERP procurement. In addition, the effect of previously mentioned specificities on the ERP procurement process has not been defined. Therefore, it is first necessary to determine what SME specificities are affecting the procurement process, and afterwards explain the effect itself. We believe that the answer to Q3 will allow us to relate the described ERP procurement process from the answer to Q2 to certain specificities of SMEs. This should explain how exactly ERP solution procurement is affected by SME specificities, thus enabling us to describe the ERP procurement carried out in SMEs, which is the answer to Q Purpose The purpose of this study is to describe how ERP system procurement process is carried out in SMEs. To accomplish it, we firstly aim to identify the steps carried out during procurement and, secondly, we aim to define what SME specificities affect the procurement process and explain their effect. 1.4 Delimitations Data collection for this study was conducted only in Lithuania, thus due to the market, cultural or some other differences, in organizations from other countries ERP procurement process may be carried out differently than presented in our findings. 8

9 2 Theoretical starting points 2.1 ERP system implementation in SMEs It has been noted by several authors, that ERP systems were originally developed for large manufacturing organizations (Ravarini, et al., 2000; Teltumbde, 2000; Kumar, et al., 2002), in fact, Shehab, et al. (2004, pp. 359) claim: It is a fact that ERP is for big firms. However, the market saturation of ERP systems among LEs, the pressure from large organizations, and the shift of ERP software vendors to smaller organizations, have led to more and more SMEs adopting ERP systems (Gable and Stewart, 1999; Seethamraju and Seethamraju, 2008; Shehab, et al., 2004). A number of authors have indicated that the specificity of SMEs has a strong impact on ERP system adoption by these organizations (Gable and Stewart, 1999; Ravarini, et al., 2000; Morabito, et al., 2005; Buonanno, et al, 2005). The general assumption that the principles of a big business apply to a smaller business in a smaller scale has been investigated by Welsh and White (1981) and fundamental differences between LEs and SMEs have been identified. According to Welsh and White (1981, pp. 32), the management of SMEs is characterized by: severe constraints on financial resources, a lack of trained personnel, and a short-range management perspective imposed by volatile competitive environment. Raymond (1984) has proposed a model, showing four dimensions of organizational specificity that might affect the success of IS implementation in small businesses. Based on Raymond s (1984) model, Gable and Stewart (1999) have developed a framework illustrating specificities of SMEs that have a significant effect on ERP system adoption. The framework, as shown in Table 2.1, analyses SMEs in four dimensions, including: organizational, decisional, psycho-sociological and information systems, and lists the factors affecting ERP system adoption specific to SMEs. The effects of the factors on ERP system adoption in SMEs are as follows (Gable and Stewart, 1999): Organizational dimension. As SMEs are commonly arranged in a simple and centralized structure, their management has broad control over ERP related activities. However, simplicity of a structure implies less specialization of functions among employees, thus requiring more generic ERP solutions. In addition, size of SMEs determines that these organizations can hardly control their extra-organizational situation, therefore have less influence on the market and less power when negotiating with ERP vendors. Lastly, due to their size, SMEs are resource poor both in terms of financial and human capital, thus only a limited number of individuals can be allocated to system implementation and maintenance and their ERP system choice is often determined by financial constraints. Decisional dimension. As SMEs have little influence on the market situation, they need to be highly responsive to changes in their business environment. Therefore, decisions in SMEs are often reactive and short term. In addition, SME decision makers rarely use formal management or decision making strategies. In fact, they base decisions on less information 9

10 and rely on personal judgment. For these reasons, SMEs tend to underestimate potential costs or benefits of ERP solution alternatives, thus it is more likely that a chosen system will not be the best fitting among alternatives. Table 2.1 SME specificities affecting ERP system implementation (Gable and Stewart, 1999, pp ) Dimension Factors Description Organizational Structure Simple and centralized Resource Resource poverty Extra-organizational Situation Uncontrollable Decisional Decision Cycle Short term, reactive Decision Process Intuitive and judgmental Less use of information Less use of formal management techniques Organizational Maturity 1 Immature Psycho-sociological Domination by the CEO Less sharing of information Less delegation of decision making Management Ideology More individualistic Psychological Climate More positive attitudes Less expectations of organizational computing Information systems IS Function In its earlier stages Less managerial expertise, IS experience and training IS Sophistication Emphasis on transactional and packaged applications Less technical expertise IS Success Underutilization of organizational IS Little impact on decisional and organizational effectiveness Psycho-sociological dimension. The CEOs of SMEs commonly have the highest authority in these organizations, and are often characterized as unwilling to share information or delegate decision making to other employees. A CEO being the only one making ERP implementation related decisions may result in evaluation of alternative ERP solutions lacking critical attitudes from other individuals. In addition, Gable and Stewart (1999) have identified that lack of ERP system knowledge and experience among CEOs, may result that CEOs have lower expectations from systems and are less critical when evaluating them. Information system dimension. Lack of managerial expertise, IS experience and training result in SME managers being often unaware of potential benefits that sufficient IS management can deliver to organizations, thus functionality of ISs is underestimated. Usually functionality of SME s ISs is in its early stages of evolution, or serving as a tool for accounting. Furthermore, lack of technical expertise determines low level of system sophistication, therefore mostly transactional and packaged applications are used. Lastly, unawareness of potential benefits that ISs may bring leads to ISs being underutilized by SMEs, having little impact on decisional and organizational effectiveness. 1 This factor was not mentioned by Gable and Stewart (1999), but was noted by Raymond (1984) and we believe it is relevant for our study, thus we included it in this table. 10

11 The topic of ERP systems in SMEs was further discussed by other authors. Ravarini, et al. (2000), in their study of ERP system acquisitions by SMEs, name a number of SME peculiarities that determine the suitability of an ERP system for the SME: Adoption of ERP systems is often imposed by exogenous factors, rather than being a voluntary strategic decision. Therefore, little time is spent rethinking IS alternatives, IS management is approached in a non-formal way; SMEs are strictly financially constrained, however require highly customized ERP solutions; SMEs seek solutions that do not impose important organizational change. Morabito, et al. (2005) have also noted the financial and human capital constraints faced by SMEs previously mentioned by both Gable and Stewart (1999) and Ravarini, et al. (2000). In addition, the authors identified, that SMEs avoid lock-ins in ERP systems, unless absolutely certain about future requirements, thus they are afraid of purchasing these systems. 2.2 Importance of ERP procurement process In order to survive organizations need to overcome numerous obstacles. Companies are surrounded by a constantly changing business environment, compete with their products, deliveries, price and quality, aiming to bring the best customer satisfaction while remaining flexible and responsive (Teltumbde, 2000). In order to remain competitive in these dynamic markets organizations adopt ERP systems (Kumar and Van Hillegersberg, 2000). ERP systems are business management systems consisting of integrated sets of comprehensive software, which are used to manage and integrate various functions and processes within an enterprise (Shehab, et al., 2004; Kumar, et al., 2002). The established benefits that successful implementation of an ERP system brings to an organization have determined that ERP systems have become widespread among many companies. In fact, implementing an ERP system is defined as the price of entry for running a business (Kumar and Van Hillegersberg, 2000, pp. 24) or as a necessity to remain connected to other enterprises in a network economy (Boykin, 2001), because multinational organizations often limit their partners to those using the same ERP software as themselves (Shehab, et al., 2004). The recognized ERP system contribution to the competitive performance of organizations, has resulted that ERP software is currently among the fastest growing segments within information technology (IT) industry (Karsak and Özogul, 2009). In addition, market research shows that average ERP software costs, project costs and project duration have been decreasing within the last years (Panorama Consulting Group, 2011). ERP software market has matured to level, where more and more generic ERP software is being customized, thus niche markets are creating niche products and niche vendors (Jacobs and Weston, 2007). These reasons illustrate that ERP software market is maturing, more and more software is being tailored to suit specific needs of organizations, while at the same time ERP software costs are decreasing, thus ERP software is becoming more available. 11

12 Faced with the challenges of a global dynamic market, and pressured by other companies, organizations often rush to implement ERP systems (Teltumbde, 2000). Being exposed to the variety of alternatives of ERP software while disposing limited resources, makes the selection process tedious and complicated (Wei, et al., 2005). Often organizations base their selection on the conventional financial cost and benefits criteria or other common criteria, which are not tailored to organization s requirements, competitive strengths and business strategies (Teltumbde, 2000; Wei, et al., 2005). Having no systematic selection framework results in decisions where a chosen system does not meet the organizational requirements, it conflicts with organizational goals, thus is insufficient to support organization s performance (Wei, et al., 2005). Organizations often do not realize that selection of an appropriate system is a significant decision. Many times new IT systems are adopted to mechanize old ways of doing business or pave the cow paths, which however, does not address initial deficiencies of organization s performance (Hammer, 1990, pp. 104). Changes imposed by the implementation of an ERP system, are described as: all-or-nothing proposition with an uncertain result (Hammer, 1990, pp. 105). A particular system has enterprise-wide implications, requires resource commitment, and implies potential risks as well as benefits related to its implementation (Kumar, et al., 2002). In fact, some describe it to be a decision on how to shape the organizational business as ERP systems lock organizational processes and principles in its software (Kumar, et al., 2002, pp. 510). In addition, ERP systems tend to replace majority of organization s legacy systems, therefore implementation of an ERP system is often the largest IT investment in any organization (Teltumbde, 2000). A wrong choice may have adverse effects on multiple areas of an organization, in worst case may even threaten the existence of an organization (Verville, et al., 2005). The reasons mentioned above illustrate that selecting and purchasing an appropriate ERP solution significantly impacts both the overall ERP project and the organization, thus highlighting the need for a systematic framework for ERP acquisition. 2.3 ERP procurement frameworks Since, ERP acquisition is highly complicated and time consuming, various approaches are suggested for conducting and managing the ERP procurement process (Wei, et al., 2005). One of the methods for selecting an ERP solution was proposed by Ptak (2000), suggesting that alternative ERP solutions should be quantitatively compared using a developed weighting of critical system elements, thus providing subjective judgments of the acquisition team. Teltumbde (2000) developed a framework where an ERP solution is selected using: the Nominal Group Technique - for development of pre-selection criteria, and adopting the Analytical Hierarchy Process (AHP) for joint evaluation, based on ten system evaluation criteria. The AHP method was also used in a framework developed by Wei, et al. (2005), where it served as an evaluation method, judging on criteria representing a system s ability to fulfill its objectives. Wei and Wang (2004) suggest using fuzzy set theory to determine 12

13 system s suitability and rank suitable vendors. Kutlu and Akpinar (2009) propose using the fuzzy methodology to distinctively categorize alternative choices. Other methods for evaluating ERP solution alternatives include: 0-1 programming (Ziaee, et al., 2006; Badri, et al., 2001; Lee and Kim, 2000), nonlinear programming (Santhanam and Kyparisis, 1996) analytical network processing (Lee and Kim, 2000) and the data envelopment approach (Lall and Teyarachakul, 2006). It is important to notice that many of these frameworks use sophisticated mathematical calculations, which according to Wei, et al. (2005) weaken these methods as they are hard to understand and many of the suggested evaluation attributes are difficult to quantify in real world. In addition, for necessary data to be obtained for the calculations, the models predetermine processes that are carried out during the system procurement. This emphasizes the final system evaluation and the purchase decision, while looks down on other activities of procurement process. For this reason, the models are claimed to lack consideration of different data sources and organization s strategic concerns (Wei, et al., 2005; Wei and Wang, 2004). A more generic approach is described by Stefanou (2001) suggesting an ex-ante system evaluation approach, considering four phases of system life cycle. However, this method mostly focuses on system cost and benefit identification for comparison of alternatives, but does not evaluate a system s suitability or fitness to the organization s needs. Another model is suggested by Verville and Halingten (2003), presenting ERP system procurement analyzed from Organizational Buying Behavior field s perspective. The model consists of six stages of the buying process of an ERP system, presenting a high-level overview of the buying principles observed in organizations. Nonetheless, the high-level approach of the model determines that the stages described lack detail and specificity for use in ERP software procurement the authors claim the model depicts the principal processes that pertain to the acquisition of packaged software (Verville and Halingten, 2003, pp. 593). However, as it was discussed in previous sections due to their enterprise-wide implications ERP systems are more significant than most packaged software. To provide a base for the theoretical framework of this study a procurement framework suggested by Poon and Yu (2010) was chosen. The authors present four stages of ERP solution procurement process and demonstrate the framework in use in four case organizations. The reasons this framework (Poon and Yu, 2010) was chosen are, firstly, the suggested procurement stages are more generic than those suggested by other authors mentioned above: as the framework is not based on a particular mathematical model or a decision making approach, it does not impose procurement steps only necessary for a certain method. Secondly, the suggested procurement stages are general and inclusive of other more detailed stages described by other authors, therefore providing a comprehensive overview of the procurement process. Lastly, while some other frameworks include phases or processes of: business vision (Stefanou, 2001) and implementation of a chosen system (Wei and Wang, 2004), which are out the scope of this study, this framework only illustrates the preimplementation or procurement phase of ERP system adoption life cycle. 13

14 2.4 ERP system procurement stages The ERP system procurement framework developed by Poon and Yu (2010) was chosen as the foundation for the research framework of our study. Poon and Yu s (2010) framework was developed and empirically verified in four cases of ERP system procurement in different organizations. The framework, as shown in Figure 2.1, consists of four major stages involved in ERP procurement process, including: (1) Formation of the acquisition team, (2) examination of business requirements and constraints, (3) formation of evaluation criteria and (4) evaluation and selection of the best fit. In the following sections each of these stages are described in detail: a number of empirically verified academic articles are reviewed, comparing different descriptions of procurement processes by various authors. Based on the comparisons, a comprehensive description of activities suggested to be carried out during each stage is developed. Figure 2.1 ERP procurement process (Poon and Yu, 2010) Formation of acquisition team Describing ERP procurement process several authors (Poon and Yu, 2010; Teltumbde, 2000; Verville, et al., 2005; Verville and Halingten, 2003; Wei, et al., 2005) emphasize the importance of acquisition team formation stage. The main reason behind this is that the existence of formal acquisition team is one of the critical success factors of the ERP acquisition or even the entire adoption project (Poon and Yu, 2010; Verville and Halingten, 2003; Verville, et al., 2005). Various steps for this stage are suggested in ERP system discourse, thus an overview of acquisition team formation in ERP literature is presented in Table 2.2, followed by a more extensive description of the steps used in research framework. The steps for acquisition team formation in Table 2.2 marked as others are not included in our research framework, because these steps were identified only in one literature source and we regard them as insignificant for our research framework. Thus, we use and further describe the three most commonly mentioned steps: skills and roles of team members, diversity in acquisition team, assessment of the need of outside experts. 14

15 Table 2.2 Steps for acquisition team formation in ERP system literature Steps Article Skills and roles of team members Diversity in acquisition team Assess the need of outside experts Other Poon and Yu (2010) X X X Regular project meetings Formal project plan Teltumbde (2000) X Verville, et al. (2005) X X - - Verville and Halingten (2003) X X X Project leader Long-term availability individuals Wei, et al. (2005) - X - - Skills and roles of team members Since the presence of a formal acquisition team is one of the critical success factors for a procurement project, choosing the right people for a team is very important (Poon and Yu, 2010). Skills that are required from the acquisition team should be identified and selection of the members should be based on these well-defined criteria (Teltumbde, 2000; Verville and Halingten, 2003). What is more, each individual team member should have the appropriate skills that enable them to complete specific tasks or responsibilities in the acquisition project (Verville, et al., 2005). It is also important to define specific roles for the individuals in the team, based on their abilities and past experiences as well as to inform each team member what role belongs to him or her and which roles are shared among members (Verville and Halingten, 2003). According to Poon and Yu (2010), it can be very valuable to have a team member with past ERP adoption experiences and prior knowledge, since it may help to shorten the procurement process, however this can also lead to a biased procurement decision. Besides that, Bernroider and Koch (2001) emphasize the need of knowledge of business processes in the acquisition team. Diversity in acquisition team Since an ERP system is a complex and diverse in nature technological solution, the members of acquisition team should also have equally diverse skills (Verville, et al., 2005). The main idea of this diversity in acquisition team is to have a team consisting not only of IT people, but also of business people from various departments (Verville and Halingten, 2003). In addition, Poon and Yu (2010) and Verville and Halingten (2003) suggest using stakeholder process approach, where team is formed from cross-functional stakeholders, both users and IT staff, affected by the ERP system. In addition, Poon and Yu (2010) indicate that it is critical to see ERP adoption as an enterprise-wide project, thus senior executives who possess the strategic business vision should actively participate. Similarly, Wei, et al. (2005) indicate that decision makers and senior representatives of user departments should actively participate in acquisition team 15

16 work, because the support of top management significantly influences the success of ERP adoption. According to, Verville and Halingten (2003), the representative from the purchasing department should be selected to the acquisition team and be involved from the earliest stages of the acquisition process. Teltumbde (2000) also points out the importance of top management for acquisition process success, suggesting that top managers should select and assign members for the acquisition team, as ERP procurement projects are of strategic importance. Assess the need of outside experts When the acquisition team is formed from internal experts, it should be assessed whether all requirements for acquisition team members skills are fulfilled (Verville and Halingten, 2003). If a knowledge and skill gap is identified in the internal acquisition team, recruitment of external consultants should be considered, because qualified outside experts can be enrolled to solve problems that are beyond the expertise of the internal team members (Poon and Yu, 2010; Verville and Halingten, 2003) Examination of business requirements and constraints Defining ERP procurement process several authors (Poon and Yu, 2010; Stefanou, 2001; Teltumbde, 2000; Verville, et al., 2005; Verville and Halingten, 2003; Wei, et al., 2005, Wei and Wang, 2004) indicate the stage of examination of business requirements and constraints. Since ERP is an enterprise wide system, ultimately integrated into company, it is essential to acquire a system that could be aligned with the overall business vision as well as specific business requirements (Poon and Yu, 2010). Still, various steps are suggested for this stage in ERP system discourse, thus an overview of business requirements and constraints examination in ERP literature is presented in Table 2.3, followed by more extensive description of steps used in research framework. Table 2.3 Steps for business requirements and constraints examination stage in ERP system literature Steps Article Determining objectives Defining requirements Describing constraints Process mapping or business process reengineering Poon and Yu (2010) X X X - Stefanou (2001) X X X X Teltumbde (2000) - X - X Verville, et al. (2005) X X - - Verville and Halingten (2003) - X - X Wei, et al. (2005) X - X - Wei and Wang (2004) X - - X 16

17 Determining objectives As ERP system procurement is a strategic action, which may have substantial consequences for the competitive position of the company, clarification of the overall business vision is a starting point when acquiring an ERP system (Stefanou, 2001). Also, companies adopt ERP systems for various reasons, which are triggered by problems in meeting the business requirements and customer needs (Poon and Yu, 2010; Wei, et al., 2005). Thus it is important to identify business problems and opportunities behind this initial rationale to adopt an ERP system (Wei, et al., 2005; Verville and Halingten, 2003). When the decision to implement an ERP system is not solely based on the wish to purchase a sophisticated system or driven by a competitor s successful ERP adoption, strategic objectives and goals of the project can be determined (Poon and Yu, 2010; Wei, et al., 2005). However, Wei and Wang (2004) argue that objectives should derive from the general business vision and be structured systematically. Defining requirements When the main objectives of ERP adoption project are defined, specific business requirements and customer needs should be examined (Poon and Yu, 2010). Thus, a matrix or a list of business functionalities should be prepared, including different levels and functional areas that are directly or indirectly affected by ERP implementation (Stefanou, 2001; Teltumbde, 2000; Verville, et al., 2005). These business requirements should not only cover current business needs, but also take into consideration possible future needs (Stefanou, 2001; Verville and Halingten, 2003). While Verville and Halingten (2003) suggest defining as many requirements as possible, Stefanou, 2001 argues that companies should avoid systems that are capable of providing functionalities beyond company s capability to absorb in a daily routine. Describing constraints Decision to purchase a particular ERP solution has to be made according to both business needs and various limitations, which fall into five main categories: technical, organizational, human resources, financial and time constraints (Poon and Yu, 2010; Stefanou, 2001; Wei, et al., 2005). While technical constraints can be mainly related to the capabilities of the existing company s IT infrastructure, which can be enhanced by supportive IT investments, organizational constraints such as management structure or company s culture, although, are very important for successful implementation of ERP, are not easily transformable (Poon and Yu, 2010; Stefanou, 2001). Human resource constraints include lack of experienced and qualified employees as well as external consultants in ERP implementation, whereas financial and time constraints are limitations of budget including hidden costs and deadlines for the selection and implementation process (Poon and Yu, 2010; Stefanou, 2001). Process mapping or business process reengineering Due to the ERP solution adoption, existing processes will require major or minor redesign, thus all the core processes in the areas that will be affected by the new system should be mapped (Teltumbde, 2000; Verville and Halingten, 2003). However, when it comes to process redesign, there are two opposing views: business process reengineering (BPR) and 17

18 ERP-driven approach (Poon and Yu, 2010; Verville and Halingten, 2003). In general, BPR involves extensive revision of many existing processes, aiming to rationalize and standardize the workflows of business processes in advance (Verville and Halingten, 2003; Wei and Wang, 2004). In contrast, ERP-driven approach excludes explicit process redesign and suggests following standard processes and best practices already incorporated in ERP system (Poon and Yu, 2010). Although, there are various arguments in analyzed ERP literature supporting and contradicting each view, Verville and Halingten (2003) suggest assessing company s willingness to change existing processes as well as Poon and Yu (2010) recommend evaluating risk of additional uncertainties in comparison to potential benefits achieved by carrying out BPR Formulation of evaluation criteria Determining ERP procurement process several authors (Poon and Yu, 2010; Teltumbde, 2000; Verville and Halingten, 2003; Wei, et al., 2005, Wei and Wang, 2004) point out the stage of formulation of evaluation criteria. In order to conduct a comprehensive ERP system evaluation and comparison, it is essential to map and define precisely all the desired characteristics of an ERP system (Teltumbde, 2000). Various steps are suggested for this stage in ERP system discourse, thus an overview of evaluation criteria formulation in ERP literature is presented in Table 2.4, followed by a more extensive description of steps used in the research framework. Table 2.4 Steps for evaluation criteria formulation stage in ERP system literature Steps Article Derivation from objectives and requirements Comprehensive and detailed list Vendor and system criteria Ranking Other Poon and Yu (2010) X X X X External consultants recruiting Stefanou (2001) X - X X - Teltumbde (2000) - X X - - Verville Halingten (2003) and X X Wei, et al. (2005) Wei and Wang (2004) X X - - X - X X Decomposable, nonredundant, measurable, and minimal Quantitative and qualitative attributes The steps for evaluation criteria formulation in Table 2.4 marked as others are not included in our research framework, because these steps were identified in only one literature source and we regard them as insignificant for our research framework. We use and further describe the 18

19 four most commonly mentioned steps: derivation from objectives and requirements, comprehensive and detailed list, vendor and system criteria as well as ranking. Derivation from objectives and requirements Business objectives and requirements, defined in previous step, are used to identify and form the evaluation criteria list enabling company to evaluate and compare several ERP solutions (Poon and Yu, 2010). What is more, in order to be able to follow evaluation criteria derivation from business objectives, it is important to have a clear hierarchy as well as measurable quantitative and qualitative attributes that indicate the degree to which the corresponding objectives are achieved (Wei, et al., 2005; Wei and Wang, 2004). This derivation ensures that ERP solution choice based on evaluation criteria covers the main problems that lead to the strategic decision to adopt an ERP system as well as the specific business needs. Although, various sources mention the importance of derivation (Poon and Yu, 2010; Wei, et al., 2005; Wei and Wang, 2004; Verville and Halingten, 2003), this relationship as well as business objectives, requirements and evaluation criteria terms are not clearly defined. Therefore, for our research framework we use relationship shown in Figure 2.2., where evaluation criteria derive form business requirements and requirements come from business objectives. Figure 2.2 Derivation from objectives and requirements to criteria In addition, as presented in Figure 2.2., we will use these definitions: business objectives - strategic goals behind the decision to adopt ERP systems, business requirements specific business needs related to ERP adoption, evaluation criteria a comprehensive and detailed list enabling ERP solution and vendor evaluation (Poon and Yu, 2010; Wei, et al., 2005; Wei and Wang, 2004; Stefanou, 2001; Teltumbde, 2000; Verville and Halingten, 2003; Verville, et al., 2005). Comprehensive and detailed list Since there are various alternative ERP solutions that are complex enterprise wide systems, covering thousands of diverse functionalities, it is essential to develop an inclusive and detailed list covering business requirements and desired ERP system characteristics (Poon and Yu, 2010; Teltumbde, 2000; Wei, et al., 2005). These criteria fall into three main categories: project factors, such as implementation time and cost, software system factors, such as features of the system, and vendor factors, such as vendor s reputation (Wei and Wang, 2004). However, Wei, et al. (2005) indicate that it is important not to overload the criteria list with unnecessary attributes. In addition, Poon and Yu (2010) argue that companies without 19

20 prior experience and external consultant help may find it hard to create the comprehensive criteria list. Vendor and system criteria Since the main purpose of evaluation criteria list is to evaluate, compare and select an ERP solution, it is important not only to focus on business requirements, but also take into consideration the ability of a system to support business requirements, technical characteristics on which the system operates as well as vendor s ability to support system implementation and maintenance (Wei and Wang, 2004). In general, when using the evaluation criteria it should be possible to actually evaluate the ERP solutions and the vendors providing these ERP solutions (Poon and Yu, 2010). Ranking As finding an ERP solution that fits all identified evaluation criteria is usually infeasible, there is a need to prioritize criteria, by assigning each criteria a different level of importance (Poon and Yu, 2010). In order to create ranking, weights to each criteria should be assigned, as Wei and Wang (2004, pp. 163) state, by direct assignment or pairwise comparisons. In addition, Wei and Wang (2004) recommend using a scale of five linguistic terms: very low, low, medium, high, and very high Evaluation and selection of the best fit Describing ERP procurement process several authors (Poon and Yu, 2010; Stefanou, 2001; Teltumbde, 2000; Verville, et al., 2005; Verville and Halingten, 2003; Wei, et al., 2005, Wei and Wang, 2004) indicate the stage of evaluation and selection of the best fit. Since, in reality, an ERP solution matching all the specified evaluation criteria can hardly be found, it is necessary to assess advantages and disadvantages using a certain ERP product or vendor and choose the most satisfactory option (Poon and Yu, 2010). Various steps are suggested for this stage in ERP system discourse, thus an overview of evaluation and selection of the best fit in ERP literature is presented in Table 2.5, followed by more extensive description of steps used in our research framework. The steps for evaluation and selection of the best fit in Table 2.5 marked as others are not included in our research framework, because these steps were identified in only one literature source and we regard them as insignificant for our research framework. Thus, we further use and describe the four most commonly mentioned steps: selection and decision-making approach, marketplace analysis, accurate and reliable information, contacting vendor, as well as authorization of the final choice. 20

21 Table 2.5 Steps for evaluation and selection of the best fit stage in ERP system literature Steps Article Selection and decisionmaking approach Marketplace analysis Contacting vendor Authorization of the final choice Other Poon and Yu (2010) X X X - - Stefanou (2001) X Teltumbde (2000) X - X X - Verville, et al. (2005) User participation and buy-in Verville Halingten (2003) and X X X X Negotiation Wei, et al. (2005) X X Wei and Wang (2004) X X X - - Selection and decision-making approach In order to properly manage the evaluation and selection process as well as reduce uncertainties associated with this process, appropriate selection approach should be carefully chosen (Poon and Yu, 2010; Teltumbde, 2000; Verville and Halingten, 2003). However, different authors suggest various approaches. First, Poon and Yu (2010) argue that there are three main approaches towards ERP selection: detailed requirements, key requirements, and proof-of-concept. While in the detailed requirements approach a relatively long list of vendors and ERP solutions is evaluated using detailed list of evaluation criteria and numerical scores are developed to represent overall fit of each package, in the key requirements approach a short list of vendors and ERP solutions are compared to each other according to their ability to address the company s key problems and opportunities (Poon and Yu, 2010). In comparison, the proof-of-concept approach is applied when a company believes that they know which ERP solution is the right choice and just wants to confirm the selection by comparing it to business needs (Poon and Yu, 2010). Poon and Yu (2010) also suggest several decision-making strategies and styles. The optimizing strategy assumes that decision makers search for the best alternative maximizing the benefits achieving company s goals (Poon and Yu, 2010). However, due to the lack of access to relevant information, there is no possibility to generate all possible alternatives and accurately identify consequences it is too idealistic, alternatively, a more realistic, satisfying strategy can be used, which seeks for a satisfactory solution, best fitting evaluation criteria (Poon and Yu, 2010). In addition, Poon and Yu (2010) discuss two contradicting decisionmaking styles taking into consideration group involvement: group-consultative style, where team members share their ideas and suggestions with the team leader, which takes the final decision, and group-agreement style, where team members together with the team leader try to reach consensus (Poon and Yu, 2010). 21

22 Second, Stefanou (2001) proposes ex-ante evaluation, which is based mainly on financial estimates and assesses benefits, costs and risks expected in the entire ERP lifecycle. Still, ERP adoption brings various intangible benefits that cannot be assessed easily in monetary terms and requires human judgment, thus ex-ante evaluation model provides a conceptual estimate of potential benefits, costs and risks (Poon and Yu, 2010; Stefanou, 2001). Third, Teltumbde (2000), Wei, et al. (2005) as well as Wei and Wang (2004) propose using the Analytical Hierarchy Process (AHP) method developed by Saaty (1980), which is a multiattribute evaluation method that consists of three phases: decomposition, comparative judgments, and synthesis of priorities. In the first phase, the AHP hierarchy model from the fundamental objective hierarchy is developed, then in comparative judgments phase paired comparisons of the attributes and alternatives are evaluated, and in the third phase paired comparison process is repeated (Wei, et al., 2005). Since AHP synthesizes the judgments of each team member, it may create conditions for development of consensus among multiple decision makers and assist in objectively prioritizing alternatives. (Wei, et al., 2005; Teltumbde, 2000) Marketplace analysis ERP system marketplace analysis starts by creating a list and collecting information concerning possible ERP systems, both from major players and less widely known vendors (Verville and Halingten, 2003; Wei and Wang, 2004). Then, shortlisting, filtering and screening procedures are carried out to shorten the list of ERP candidates, where high-level criteria employed to evaluate both vendors as well as functional and technical characteristics of ERP solution are transformed into a questionnaire and distributed to listed vendors inviting them to provide information (Poon and Yu, 2010; Wei, et al., 2005; Verville and Halingten, 2003). Afterwards, the acquisition team assesses the information and eliminates unqualified vendors, resulting in a short list of potential vendors and ERP solutions (Wei, et al., 2005; Wei and Wang, 2004; Verville and Halingten, 2003). Contacting vendor When the short list of potential vendors and ERP solutions is developed, in order to be able to evaluate potential solutions using the comprehensive criteria list, there is a need to contact vendors regarding more detailed information (Poon and Yu, 2010). There are two most commonly used methods for information requesting: potential vendors are invited to respond to requests for information, proposal or quotation (RFI/RFP/RFQ) or to make presentations and demonstrations on their ERP solutions (Poon and Yu, 2010; Teltumbde, 2000; Verville and Halingten, 2003; Wei and Wang, 2004). When vendors respond to RFIs/RFPs/RFQs, the acquisition team evaluates how provided information satisfies the evaluation criteria (Poon and Yu, 2010; Verville and Halingten, 2003). The presentations method follows in advance prepared schedules, scenarios, and questions, during which the team members collect information and evaluate solutions (Wei and Wang, 2004). Authorization of the final choice Furthermore, since the acquisition team is not always accredited to take the final decision, there is a need to get an approval of the selected solution from the top management 22

23 (Teltumbde, 2000; Verville and Halingten, 2003). Therefore, if the acquisition team does not have the necessary authorization, it is important to note that the final recommendation should be presented to the authority group, such as steering committee or the board of directors, who authorize the final choice (Verville and Halingten, 2003). 2.5 Research framework The developed research framework, shown in Figure 2.3, graphically presents a condensed overview of the literature used in our study. The framework shows the relationship between ERP system procurement process and the specificities of SMEs. SME s specificities (Table 2.1) Organizational dimension Decisional dimension Psychosociological dimension Information systems dimension Effect ERP procurement process Figure 2.3 Research framework The stages of ERP procurement process are based on a framework developed by Poon and Yu (2010) and, as it is shown in the Figure 2.3, each of the stages has a reference to one of the tables discussed in previous sections. Referenced tables include a more specific description of what has to be done in each of ERP system procurement stages, according to academic literature. The specificities of SMEs shown in the framework present several dimensions of SME peculiarities that might affect ERP system procurement process presented by Gable and Stewart (1999) and discussed by other authors (Ravarini, et al., 2000; Morabito, et al., 2005). Lastly, the one-sided arrow Effect, shown in Figure 2.3, represents that in our study we are investigating how the specificities of SMEs affect the ERP procurement process, but not the opposite effects. This means that effects of ERP procurement on the organization are out of the scope of our study. 23