Analysis of minimum size requirements of organizations for the implementation of enterprise resource planning systems

Table of Contents

List of Figures and Tables

Abbreviations

Abstract

1 Introduction

2 Investment requirements and costs of ERP system implementation
2. 1 Structure of incurred costs
2. 2 Analysis of minimum requirements for successful rollout
2. 2. 1 Hardware & Infrastructure
2. 2. 2 Software
2. 2. 3 Consulting
2. 2. 4 Implementation Team
2. 2. 5 Training
2. 3 Benchmark data for minimum expenses
2. 4 On-going expenses from ERP systems

3 Generic benefits of implementation of ERP systems
3. 1 Cost savings
3. 1. 1 Productivity
3. 1. 2 Human Resources
3. 1. 3 IT maintenance
3. 2 Customer satisfaction
3. 2. 1 Service aspects
3. 2. 2 Quality aspects
3. 3 Aggregation of benefits in relation to organization size

4 Comparison of costs and benefits for threshold organization size

5 Resume

References

List of Figures and Tables

Figure 1: Structure of incurred costs

Table 1: List of required infrastructure

Figure 2: ERP system benefits versus costs

Abbreviations

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Abstract

The research will focus on finding benchmark data on the required size of companies that is necessary for a full SAP Enterprise Resource Planning (ERP) system implementation. The analysis will look into benefits and costs of the implementation and long term prospects generated by the system. Practical examples will be used to illustrate the main findings, both from a positive as well as a negative viewpoint.

1 Introduction

Although SAP has widened its product range to accommodate different organizational sizes, including small and medium range businesses,^[1] we find that a full fledged ERP system implementation has to go along certain requirements. The central underlying assumption for this research will therefore be the implementation of an extensive ERP system that handles close to all operational tasks along the value chain. Consequently we are not talking about the minimum implementation of one module or a pre-packaged standardized software solution (e.g. an online shop or accounting software) that can easily be achieved by businesses of all sizes.

A systematic study of costs and benefits is essential for all organizations that are considering the adoption of a new system. Competitive pressures require a fast and efficient workflow along the value chain. To achieve the highest level of workflow efficiency integrated ERP solutions that cross departmental borders and organizational structures have to be in place. In the recent past many companies have adopted such systems and more will do so in the near future. ERP systems are understood as a management tool, used to coordinate and maneuver the primary activities of the firm. Large, mostly multinational companies where the first to introduce the system, while medium-sized businesses followed consecutively, increasing the cumulated adoption rate to at least 30000 businesses.^[2]

2 Investment requirements and costs of ERP system implementation

2. 1 Structure of incurred costs

The implementation cost breakdown suggests that five categories of cost have to be considered that consume resources to a differing degree. Figure 1 illustrates the average expenses, which may vary widely from case to case, while they still provide for a general benchmark.

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The following paragraphs will investigate minimum levels of each factor that have to be achieved for a winning set-up. The goal is to find a threshold level that is indicative for organizational size in terms of total number of employees, users of the system, number of customers, number of products/parts and such key characteristics of operational magnitude.

2. 2 Analysis of minimum requirements for successful rollout

2. 2. 1 Hardware & Infrastructure

Most organizations will at this point already have extensive information technology (IT) infrastructure in place. Nevertheless an integrating ERP system will usually require additional servers and other infrastructure.^[3] Additional storage capacity and processing speed is required for a fully functioning arrangement. Figure 2 illustrates how Sun Microsystems, a leading hardware and infrastructure supplier categorizes the required investments. For our analysis only the implementation costs are relevant, while we should not neglect on-going support requirements in the final evaluation. The essential aspects are Desktop and local area network (LAN) hardware, Server hardware and accompanying utilities software. The listed training and services can be added to this category, because they are targeted towards the infrastructure and not at the ERP system itself.

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The total cost depends on the number of users and organizational size in terms of revenue, as well as previously available infrastructure. For small to medium sized organizations (less than $300 million revenue) the cost can vary between a few thousand dollars and up to $500,000.^[4]

2. 2. 2 Software

Software is the core piece discussed in most publications. SAP’s R/3 software is the leading product, and has a market share of about 33%.^[5] The software product is the basis for the system, but cannot work without the other elements. The big software vendors have formed partnerships to enable a flawless implementation, providing for the other aspects required elements through own resources (in-house consulting and training staff) or by working with partners, like major hardware and infrastructure vendors (Sun, etc.).

Software selection is not an easy task! Before the more difficult part of software selection begins, a company should start with defining software needs by examining current processes that govern its flow of information and material throughout the order-to delivery process and ultimately the entire supply chain. There is a common tendency to shortcut this very important activity, but a company will suffer later on when it neglects this evaluation. A comprehensive methodology to plan, guide and control the effort has the potential for dramatic savings, not to mention the most important benefit: avoiding big mistakes. Another common mistake is the delegation of the selection of an ERP System to the IT department. The idea that this is strictly a technology project because software is involved is wrong and, in fact, is one of the leading causes of ERP failure. The IT function is not well-positioned to evaluate the business implications of various tradeoffs or to determine their impact on day-to-day operating results versus strategic intent.

So we can highlight that the ERP software search, evaluation and selection process must be done right to minimize big risks. A good generic approach will start with thorough planning, which should follow a strategy-, people and process-focused methodology. This is very important to be successful with ERP implementation in the first attempt and it is the only way to manage the involved risk effectively. A good methodology covers all planable issues, but when the unexpected pops up, as it usually does, the company will be prepared to handle these exceptions without severe negative consequences, using a consistent risk and backup plan. According to a survey by the META Group the software expenditures account for 17% of the total cost of ownership, hardware accounts for 14%, professional services for 46%, and internal staff costs for 23%.^[6]

Usually the price for the ERP software is calculated on a per user basis. Big companies with a high number of users tend to get big discounts per user, so that they have an advantage because of their economies of scale. It is not unusual for smaller companies to pay as much as three times more than bigger companies.^[7] The total price of the ERP software is a mixture of the numbers of users and the number of ordered applications. Depending on these two aspects the cost of software can range from a few hundred to $300,000.^[8]

2. 2. 3 Consulting

The planning and design of a new system require consulting services. Some major companies have formed in-house consulting units (HP, Siemens), while most mid-range companies are dependent on external consultants. Accenture (world wide), as well as Mummert & Partner (mainly Germany) are examples of big consulting companies that provide SAP consulting services. The consultant can help with the planning and decision of a suitable system, as well as the actual implementation and customization of the system to organizational and industry requirements.

To help ensure a smooth transition from the old system to the SAP enterprise system, Accenture for example performs a range of change management activities, including an analysis of the impact the effort would have on the organization, regular communications about the initiative, the development of "coach-the-coach" training, and the creation of an online quick-reference tool.^[9] Another very important aspect of SAP consulting includes the training of the company’s user community, and the management of the SAP implementation on an ongoing basis. The training aspect is discussed later and will show its impact on the whole implementation. In this whole discussion the implementing company has to make sure that the costs for consulting services do not take an overproportional part of the whole implementation budget because this aspects of the incurred cost (see Figure 1) is the most delicate and has the biggest potential for increasing the overall cost of the project. Although thorough consulting services are necessary to evaluate recent situations and especially to select the right system, consulting represents an expensive entrance in the ERP implementation. To avoid huge consulting expenses, companies should identify objectives for which its consulting partners must aim when training internal staff.

Depending on the size of the project, alas the number of modules to be implemented and the amount of change for the specific organization, depending on previous experience and systems, consulting companies will provide an offer. This offer will among other things provide a scheduled amount of “man days”, as well as personnel with different experience and rates for the positions required (programmers, debuggers, project managers, roll-out team, testers, etc.). Such teams can range from one person that is committed to the project up to a consulting staff of more then 100 for major projects.^[10] The overall size of the project will also affect the rates charged per “man day”. These can vary from $250-1500.^[11]

The range of man days can be assumed to lay between 1 x 70 to 50 x 250.^[12] Assuming the “one man show” being charged top dollars ($1500) and the “big team effort” with an average or rather low price tag per man day ($350), we can estimate the total cost for consulting to range from $105,000 to $4,375,000. For small to medium size companies the previous analysis indicates a consulting cost of up to $600,000.^[13] Very small companies may reach far below the projected $105,000, because they may not use top consulting services and get better rates from associated companies or fellows. The projected range from $105,000 to $600,000 for the cost of consulting services seems realistic and can be used for further discussion.

[...]

^[1] See http://www.sap.com/solutions/smb/northamerica/index.asp?printview.

^[2] See Mabert/Soni/Venkataramanan, 2001, p. 72.

^[3] See Sun, 2000, p. 2. Furthermore it is more likely for smaller companies to require additional hardware, while bigger companies use their existing infrastructure to upgrade.

^[4] See Sun, 2000, p. 11. Using data from the Sun Microsystems case study and the previously noted average cost components the range has been calculated.

^[5] Number was given by Prashanth B. Nagendra, Ph.D. in the SAP-ERP class at IUP in Spring 2002.

^[6] See META Group Survey: ERM Solutions and Their Value, 1999.

^[7] See point 2.3 – Benchmark Data.

^[8] Number derived from Sun, 2000, p. 11 (as previously discussed in point 2.2.1) and Mabert/Soni/Venkataramanan, 2001, p. 73 (see also Figure 1).

^[9] See Accenture, 2002.

^[10] Personal experience from consulting work conducted with Accenture in 2001.

^[11] Personal experiecen from consulting work with Accenture and Agiplan in 2000 and 2001. These rates only apply to Germany and this type of “Implementation Consulting”.

^[12] Assuming the smallest project to involve one committed consultant for four months (approximately 70 working days) and the biggest project consuming 50 people (because big project will not constantly have a very high number of staff, but it will fluctuate rather strongly over time: smaller numbers in the beginning and end, while the highest number of people is assigned to the project during the programming stage) for one year (250 working days).

^[13] See Sun, 2000, p. 11 (as previously discussed in point 2.2.1) and Mabert/Soni/Venkataramanan, 2001, p. 73 (see also Figure 1).