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Concepts of Enterprise Resource Planning (ERP)

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Published: Wed, 07 Mar 2018

CHAPTER I

1.0 Introduction

This paper will labour to explicate the intricacies of enterprise resource planning (ERP), a concept that has long fascinated many in both academic and professional work environments. The United Nations (UN) has expressed the need to implement ERP. As part of their examination into this procedure, the UN has implemented ERP at the United Nations Development Program (UNDP) in Pristine, Republic of Kosovo, and other agencies of the UN. As they look into the ramifications of ERP implementation, so does this case study. This study attempts to make predictions of the impact of ERP implementation on the business processes and organisational culture of the United Nations secretariat based on results from the UNDP.

1.1 Introduction to the Problem

Since the latter part of the 1990s, firms have rushed to implement enterprise resource planning (ERP) systems, e.g., one study showed that more than sixty percent of Fortune 500 companies had adopted an ERP system (G. Stewart et al., 2000). The United Nations, as one of the largest organisations in the world, has lagged behind in adopting the transformation in the management of its resources.

The United Nations has been seriously hampered its ability to deliver results effectively and efficiently due to the lack of an integrated information system for managing its resources (Report of the Secretary-General, 2008). According to Davis and Olsen (1985), ERP is an integrated system that provides information to support operation management and decision making functions in an organisation. Therefore, the goal of implementing an ERP system and business process reengineering (BPR) is to build an integrated global information system that fully supports the needs of the United Nations, enables the effective management of human, financial and physical resources, and is based on streamlined processes and better practices. (Report of the Secretary-General, 2008)

1.2 Background of the Study

1.2.1 Existing System

Currently the United Nations uses an in-house developed system—commonly referred to as Integrated Management Information System (IMIS)—for the management of human, financial and physical resources. The development of IMIS was a milestone in the use of information technology as a discipline that can beneficially affect many if not all areas of administration and management in any given organisation. IMIS was developed as a functionally integrated system, which combines all the departments to support key processes such as human resources management, payroll, finance and accounting, requisitioning and funds control, budget execution and travel management. IMIS was introduced in conjunction with desktop, networked computing and office automation tools such as electronic mail in all offices where IMIS was being used.

“If an organisation is not yet sure of the need for client-server networks, the state of the art in enterprise-wide computing, it has only to consider the Integrated Management Information System (IMIS) of the United Nations,” (Rowe & Davis, 1996: 122). The launching of IMIS was subsequently affected and conditioned by major developments in the technological market, and an accelerated shift of focus in the United Nations to field activities. In short, IMIS was designed and developed at a time when the context began to change rapidly and profoundly. Yet, only a few years after the implementation of IMIS, it has become evident that the system cannot take full advantage of the advancement in technology; e.g., even though IMIS is functionally integrated, it was deployed and managed locally at each geographical location, which makes reporting and global management very difficult. The implementation in the United Nations peacekeeping operation was partial, as it is a separate department in the UN, and was not able to support the supply chain and logistical management. (Report of the Secretary-General, 2008)

“The IMIS was not an alternative communication technology to paper and telephones, but it involved the synchronization of multiple data sources and the linking of them to several mainframes,” (Rowe & Davis, 1996: 122). An investment in tactical systems, which includes a stand-alone system and a modular integration into IMIS through interfaces, a bridging system between two different systems to allow data sharing, was able to address the functional gaps of IMIS. However, the organisation today faces challenges that demand profound transformation beyond the capabilities of IMIS and its ancillary legacy systems currently being used. (Report of the Secretary-General, 2008)

1.2.2 The need for change

“The United Nations struggled to get everybody in their building to connect electronically. It soon realised that it was time to connect the world with a client-server network,” (Rowe & Davis, 1996: 122). The need for the United Nations to adopt the International Public Sector Accounting Standards (IPSAS) lead to the requirement of significant change in the accounting processes and systems in order to achieve compliance with the international public sector accounting standard. The requisites changes, indeed, were so fundamental that it is fair to say that the life of IMIS has come to an end after fourteen years since it was first implemented; moreover, the benefits that the staff and managers expect from the information system in day-to-day operations and decision-making no longer match the cost of maintenance and ongoing support. This is because IMIS is no longer able to cope with the fast technological development, and the cost of maintenance and ongoing support has become very expensive. (Report of the Secretary-General, 2008)

“The success of your organisation’s quality initiative depends upon your ability to communicate the need for change throughout the organization,” (Arcaro and Arcarco, 1997: 146). The United Nations as an organisation needs to improve the quality and cost-effectiveness of the services it provides. They report that the existing systems are not up to the standard, not integrated, duplicative, and are inefficient. (Report of the Secretary-General, 2008) According to the UN, the effective management, planning and decision-making have been hampered by the lack of integration and complete data on resources. (ibid) As the organisation continues to grow in complexity in its activities, they are dissatisfied with the lack of integration and data sharing between different departments as it has become a bigger problem, and the need for a new ICT global enterprise system for streamlining and simplifying processes has become more crucial as the nature of the organisation is changing itself. (ibid)

1.2.3 Goals and objectives of implementing an Enterprise Resource Planning System

The United Nations reports that the implementation of an ERP system will present the opportunity to fully combine resources and functions across the organisation by replacing the existing IMIS system. (ibid) Minahan (1998) reports ERP to be a complex software system that ties together and automates the basic processes of business activities such as finance and budget management, human resources management, supply chain management, central support services, and other corporate core functions. Most importantly, the main value of an ERP system is the opportunity to streamline and improve the operations of an entire organisation through process reengineering, sharing of common data, and implementation of best practices and standards, and perform as the inter-organisation information backbone for communication and collaboration (O’Leary, 2004).

According to reports from the United Nations (Report of the Secretary-General, 2008), the main objectives of the ERP project can be summarised as follows: To have a global operating system that precisely captures core resource data from each department and agency at the UN while linking them together to provide better decision-making. This will minimize the time required to perform administrative processes and enable easy access to necessary reports for each department, thus increasing the efficiency of the organisation and directing the focus to high priority situations.

The main functionalities sought from the new ERP system are expected to encompass functions such as programme planning, budgeting, contributions and performance; human resources management and administration; payroll, including management of benefits and contribution to pension, medical and insurance schemes; supply chain management, including procurement; assets and facilities management; general accounting, travel and other administrative flows; reporting to management and stakeholders, and more. (ibid)

Specific United Nations peacekeeping operations functions such as logistics, transportation, fuel and rations systems need to be supported by the new ERP system as these functions are not held in common with other organisations of the United Nations’ operations.

1.3 Purpose and Significance of the Study

The research done in this study will attempt to answer the following question: What will be the impact of ERP implementation on the business transformation and business culture of the United Nations? Specifically, the study will attempt to establish the relationship between the business process transformation and organisational culture change offered as the result of ERP.

These questions and findings are expected to provide an increased ability in evaluating the performance and standardisation of the business processes within the United Nations, as well as an increased awareness of its effect on the business culture and productivity over time of the UN.

In addition, answers to these questions will subsequently enable other researchers to gain more insight into ERP implementation and business process reengineering. It will also enable the management of the United Nations to see how ERP can be a better means of technological reform, thus providing the opportunity to re-evaluate the existing business processes even further.

1.4 Research Questions

The question that constitutes the primary point of pivot for the paper is: What will be the probable future impact of ERP on the business process transformation and business culture of the United Nations?

The three subsidiary questions of the present work are:
> How will ERP implementation make the organisation better off in the foreseeable future?
> What will be the effect on the reformed business culture in terms of productivity?
> How does the organisation perceive the benefit of ERP on the standardisation of business processes?

1.5 Structural Approach

The rest of the thesis has been structured as follows. Chapter 2 provides a review of relevant literature, including ERP, business process reengineering, and their impact on organisational culture. Chapter 3 discusses the methodologies used for the empirical analysis and describes the data and the various proxies employed for analysing ERP implementation in the United Nations. Chapter 4 provides empirical findings of the relationship between ERP implementation and its effects on business processes and organisational culture. Chapter 5 analyses the research findings. Chapter 6 concludes the research by pointing out the key impacts of ERP on the UN. Chapter 7 makes various recommendations for policy direction and potentially fruitful areas of ERP systems for further research. Chapter 8 reflects on the study as a whole.

CHAPTER II

2.0 LITERATURE REVIEW

The following Literature Review will focus on four main areas of evaluation regarding enterprise resource planning (ERP) on the business process transformation (BPR) in organisations, and more specifically, the United Nations. These are:

1. ERP: definition, evolution, implications
2. BPR: definition, evolution, implications
3. ERP and organisational culture
4. BPR and organisational change

This review will analyse the abovementioned systems and related processes insofar as the available data in the literature will allow for a comparison of ERP and BPR and their effects on the United Nations and other large organisations.

2.1 Enterprise Resource Planning (ERP): Definition, Evolution, and Implications

Enterprise resource planning (ERP) systems are commonly described as commercial software packages that allow the assimilation of data and processes throughout an organisation (Markus & Tanis, 2000, cited in Kim et al., 2005). ERP enables the flow of information among all business areas such as “finance, human resources, manufacturing, sales and marketing,” (Tan and Theodorou, 2009: 52). Basically, it allows data from all departments to exist in one computer system (Pang, 2001), making the managerial dream of unification of all information systems into one computer system come true (Adam & O’Doherty, 2003, cited in Revia, 2007). This unification should offer many benefits to the UN and other large organisations. Large organisations may have a more difficult time relaying information from one sector to another as they have many different departments and even multiple locations. The combination of all department in one system, presents benefits of relaying data in a timely manner. Rather than sending files through inter-office mail or needing to track down one particular staff member, each employee will have access to the information required for their job by simply logging into the system. The researcher will attempt to discover whether this unification does indeed allow for more time-efficiency as well as making simple operations’ tasks easier to accomplish in the UN.

The start of ERP systems came about in the 1960-1970s with the invention of Inventory Control (IC) and Materials Requirement Planning (MPR) systems, which managed inventory in manufacturing. In the 1980s, Manufacturing Resources Planning (MRP II) systems came into use to manage both inventory and production requirements together. In 1973, the first ERP system was created with the goal of supporting all business needs. Since then, ERP systems have become much more popular. In fact, by the year 2000, enterprise resource planning systems were estimated to have serviced $23 billion USD in profits for the various organisations that have been implementing them (Pang, 2001). ERP applications are the largest, fastest growing and most influential in the industry (Corbett & Finney, 2007). This is probably why the UN has shown such interest in ERP.

The increase in ERP implementation does not seem surprising as ERP allows corporations to update to a new integrated system cutting out the previous legacy systems known for their difficulties in maintenance, large size, and old age, as they are segregated systems (Martin, 1998; cited in Boudreau, 1999). This appears to be helpful for the UN as they reported difficulty with their current legacy system (Report of the Secretary-General, 2008). It is likely that employees of the UN will be satisfied with the replacement of the legacy system due to the reported problems it has. However, there is a chance that employees may be intimidated by this change as they will have to learn an entirely new system.

Advantages of ERP systems for organisations include overcoming fragmentation by streamlining activities and processes, which provides direct access to real-time information by supplying a group of software modules that encase all departments of a business (Koch, 2003, cited in Corbett & Finney, 2007). This appears to be an accurate statement due to the convenience of having all departments existing together. This implies that all information accessed through the new system will be current as it is constantly being updated by various employees based on the tasks they complete. Rather than there being pieces of information in various places, all information regarding the same issue will be together implying that employees can look in one place and have all the information they need rather than searching through various documents or consulting multiple co-workers. This aspect of ERP systems will be investigated at the UNDP in Kosovo in order to determine whether this feature is beneficial.

Furthermore, ERP systems are said to provide cost-reduction in addition to increased flexibility (Siriginidi, 2000 cited in Al-Fawaz, Al-Salti, and Eldabi, 2008). These two benefits appear to be linked as decreasing operation costs would imply having more flexibility to perform other processes. For the UN, this would mean more money to use for their peacekeeping missions or other operations. However, flexibility does not depend on cost-reduction. It’s possible for the availability of data to imply flexibility in making decisions or flexibility could result from rearranging the organisation’s processes and being better equipped to perform certain tasks. ERP systems have been reported to enhance business performance by accelerating the merger of organisational resources as well as strengthening the operational efficiency of the company through minimising human error (Shin & Knapp, 2001, cited by Wang, 2006). The implication that ERP reduces human error seems to be correct as there is less opportunity to make a mistake for employees because there is generally only one time they need to input information for data-sharing as opposed to the multiple steps needed to take before. These benefits should assist the UN in accomplishing some of their proposed goals such as linking all departments within one operations system, which decreases the time required for administrative processes. The UN hopes implementation will increase their operational efficiency by allowing valuable time to be spent focusing on high priority situations rather than simple operations’ tasks (Report of the Secretary-General, 2008). More advertised benefits include improved information accuracy and decision-making capacity (Siriginidi, 2000 cited in Al-Fawaz, Al-Salti, and Eldabi, 2008). The UN wants to make use of these proposed advantages (Report of the Secretary-General, 2008). Decision-making is a large part of the UN as they have to make difficult decisions everyday that effect large numbers of people; making a bad decision is not necessarily easily corrected in this case. Furthermore, many situations the UN deals with are time-sensitive; if it’s easier to access data, and the accuracy of that data is improved, officials can rest assured that they are making decisions with proper knowledge.

In implementing ERP, organisations no longer have to create their own applications that are then unique to their company. They now have standard software available for their business processes, referred to as Best Business Practices (BBP). BBPs came into existence around the same time as ERPs. BBPs are general guidelines to assist companies in the way of handling certain business processes, meaning that each company can now improve itself on the basis of the experience of other corporations that share similar functional processes (SAP, 2007, cited by Revia, 2007). It seems any organisation would be hesitant to implement a system that has not proved to benefit other large organisations as the risks of failure are high (source). BBPs should definitely help the UN as they will be benefitting from previous experiences of other corporations.

Some of the disadvantages of ERP are that the implementation requires time, costs and risks (Boudreau, 1999), as they tend to be “large, complicated, and expensive” (Mabert et al., 2001, cited by Al-Fawaz, Al-Salti, and Eldabi, 2008: 3). ERP implementation calls for serious time commitment from all involved as it is often the biggest project that an organisation will ever face (Moon, 2007). ERP execution requires new procedures, employee training and managerial and technical support (Shang & Seddon, 2002, cited by Al-Fawaz, Al-Salti, & Eldabi, 2008), which can be accomplished through good communication of the corporate strategy to all employees (Umble et al., 2003, cited by Al-Fawaz, Al-Salti, and Eldabi, 2008). Consequently, the biggest problem is not actually the implementation itself but the expectations of board members and senior staff as well as not having a clear plan or realistic projections (Somers & Nelson 2004, cited by Al-Fawaz, Al-Salti, and Eldabi, 2008). However, the UN has already proposed clear goals and plans for their implementation. The question is whether or not they will be able to successfully translate these goals/plans to all employees of the organisation and whether or not they will be successful.

Finally, the importance of selecting the appropriate ERP package is stressed. Corporations must make sure they select the appropriate ERP package that will match their organisation as well as its business processes (Chen, 2001, cited in Corbett & Finney, 2007). This seems obvious as every organisation is different. Some corporations strategise around providing excellent customer service while others focus on decreasing costs to customers as a way to attract more business. However, there are studies that show that customising ERP packages beyond minimal adjustments is discouraged; these studies show that organisations should adjust their processes to fit the package rather than adjust the package to fit the processes (Murray & Coffin, 2001 cited in Al-Fawaz, Al-Salti, & Eldabi, 2008).

2.2 Business Process Transformation (BPR): Definition, Evolution, and Implications

Business process reengineering (BPR) was not very popular until the release of the book Re-engineering the Corporation by Michael Hammer and James Champy (Barker, 1995). Hammer and Champy introduced the term “Business process reengineering” in 1990 and defined it as a “fundamental redesign of business processes to achieve dramatic improvements in critical areas such as cost, quality, service and speed” (Hammer, 1990). Business process reengineering is also defined as a strategic redesign of important business processes, including the systems and policies that support them, in order to achieve maximum productivity of an organisation (Manganelli & Klein, 1994). This would suggest a link between ERP and BPR as they are both structured around the redesign of core business processes. In fact, some goals of BPR are the reduction of cost, cycle-time, defects, and the increase of worker productivity (Hales & Savoie, 1994), very much the same as ERP. The aim of BPR is to change current business processes in order to make them more efficient overall, again mimicking ERP. In fact, Some researchers suggest that ERP systems “are the major tools for making business processes better, leaner and faster through associated business process reengineering,” (Shang & Seddon, 2003, cited in Revia, 2007: 25).

It is not yet known whether or not BPR will be performed at the UN. It is assumed that it will as it is so closely related to ERP. Additionally, reports have shown that ERP often causes BPR to occur due to its very nature (Martin et al., 1999). It seems that in order for ERP to be most successful, BPR should be performed (Sumner, 2000 cited by Law & Ngai, 2007), otherwise the UN may not recognize exactly which processes are most important for their operations. Or, they may not be fully aware of the exact way in which ERP should be performed in relation to the core business processes, which is vital to understand for the selection of the proper ERP package. BPR has its origins in the private sectors as a management tool for companies to deal with change and reorganise their work to “improve customer service, cut operational costs, and become world-class competitors,” (Hamid, 2004, cited in Wang, 2006: 5). Generally, business process transformation takes business processes and allows them to be done routinely through a computer system. It incorporates peoples’ perspectives and input to make sure that the processes fit needs specific to each corporation (Wang, 2006). This suggests benefits for ERP implementation in any organisation as the systems are supposed to be designed around core processes specific to each company. It would be helpful for the UN to determine which processes are vital to their operations. Furthermore, cutting operational costs should prove to be very valuable for the UN as many of the services it provides are non-profit. If BPR is performed as a result of ERP, it seems that cost reduction will be achieved. Here is a further look into what a core business process is: A core business process is one that gives value to the customers or stakeholders of the company. These are the most important processes within the organisation and are the ones that will set a company above their competitors if done well. In order to figure out what processes are core, one may ask the following questions.

1) Does the process make valued contributions to the customer? Does it improve customer service, increase response-time, decrease customers’ costs?
2) Is it important for the production/operation of the company?
3) Can it be used for other businesses?

If the answer is yes to one of these questions, then the process under consideration can be considered core (McHugh, Merli, & Wheeler, 1995). The UN may consider any process involving cash flow to be core as that is a huge component to many of the services they provide. Furthermore, any documentation of information from one department to another is probably considered core as this organisation relies on data-sharing for its decision-making capabilities. Therefore, it seems that these types of processes will be affected by ERP implementation and will most likely be reengineered.

The three most basic strategies that increase a business’ success are lowering prices, offering more value in products, or focusing on less diversity in commodities and specialising in a certain area (Berrington & Oblich, 1995). This suggests that BPR would be structured around these strategies when reorganizing core business processes. If the UN is restructuring using BPR, they are likely to focus on a combination of strategies. As already mentioned, the cost of operations is a huge factor for the United Nations to consider as they provide aid to many countries without expecting any favours in return. This implies they would focus on reduction of costs. However, the main reason they are an organisation is to provide services to those in need. That would suggest they would reorganise their business processes around the strategy of offering more value in their services. In implementing BPR, organisations are asked to choose five or six of the processes that are central to the operation of the company and focus on those to see the ways in which they can make them more efficient (McHugh, Merli, & Wheeler, 1995). Concentrating on making sure core processes are completed to the best of the company’s ability only ensures the organisation will do better. In the case of the UN, focusing on data-sharing and managing cash flow suggests an increase in the efficiency of the organisation as those components are vital to their operation. These changes would suggest benefits for both the cost-reduction strategy as well as providing better service to “customers.”

2.3 Enterprise Resource Planning (ERP) and Organisational Culture

Organisational culture is a set of core beliefs, values, and behaviours shared by all members of one company, thereby affecting the productivity of the business. It is often described as “a pattern of shared assumptions produced and manipulated by top management” (Schein, 1992 cited by Boersma & Kingma, 2005: 131). Organisational culture is influenced through many aspects, including leadership, personal characteristics, interactions of members, as well as tradition. Culture has visible signs and hidden insinuations. Visible signs include behaviour while the hidden insinuations entail morals and beliefs (Rousseau, 1990 cited by Cooper, 1994). The culture of an organisation is even displayed in the way certain processes are done as well as the outcomes of these processes, which will be examined at the UNDP in Kosovo. Because ERP systems involve most departments in a company, they change many business processes and thereby affect the more deep-seated organisational culture of a corporation. Companies that focus on incorporating their cultures into organisational efforts are said to have an edge in accordance with their productivity. Organisations can focus on culture and work with the people to shape new values, morals and work ethics. If employees are happy to be working for the organisation, they will be more apt to want to work, implying there will be an increase in productivity (Farbrother & Marc, 2003). Enterprise resource planning can lead to changes in organisational culture i.e., ERP is implemented in order to increase productivity by changing current business processes (Deal & Kennedy, 1982 cited by Cooper, 1994). These changes are maximal and cannot be simply brushed aside. When a company implements ERP, if the organisational culture is ready for the changes it will bring, the employees can work with the system to increase productivity. Consequently, the culture within the business must be one that can be made amenable for change (Nah et al., 2001 cited in Corbett & Finney, 2007). There is the belief that positive and supportive attitudes of those embarking on implementation of ERP will actually bring about a successful transition (Chatterjee et al., 2002 cited in Law & Ngai, 2007). However, if the culture has not been made ready for change or the employees are unwilling to change, the system will be less likely to succeed. A system cannot work if there are no users.

“System implementation represents a threat to users perceptions of control over their work and a period of transition during which users must cope with differences between old and new work systems,” (Bobek & Sternad, 2002: 285). The social setting of a company and its technology most definitely shape each other; they are hardly independent of one another (Boersma & Kingma, 2005). A mistake companies frequently make is to presume that people can change their habits easily when in actuality such changes are considerably taxing for many people. These companies underestimate the effect ERP implementation will have on their employees. Many employees panic when nothing looks the way it used to, nothing works the way it used to, and they can no longer go through their workday with the previously earned sense of familiarity and assurance (Koch, 2007 cited in Revia, 2007). One study showed that it took over two years for users of the new system to forget the process problems they found initially and to gain new knowledge of the system (Seddon & Shang, 2003 cited in Revia, 2007). A Chief Information Officer from Nestle sums up this concept very well—she says, “No major software implementation is really about the software. It’s about change management…You are changing the way people work…You are challenging their principles, their beliefs and the way they have done things for many, many years” (Boersma & Kingma, 2005: 123).

It seems the best way to ensure that employees are on board with proposed changes is to make them aware of these changes. It is important for them to feel that they are included in the decision to create new values and procedures for the company. Otherwise, they will be clinging on to the old culture and ways of doing things. The change will be stressful and forced rather than welcomed with ease. They should feel that the change is happening because of them rather than happening to them. The most senior level of management initiates enterprise resource planning, but its success depends on its acceptance by the company’s ordinary workers (Obolensky, 1996). Cultures can be manipulated by those in management (Handy, 1985 cited by Cooper, 1994). Change can be intimidating and needs to be managed well. Therefore, the conclusion is drawn that managers need to make sure each and every employee is doing their part. This literature suggests that leaders are the most important players in any change scenario. Employees won’t decide to change their behavi


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