Chapter 3: ERP System Options & Selection Methods

1. Chapter 3: ERP System Options & Selection Methods Alternative ERP project forms Budgeting methods

2. IS/IT Projects • Typically • Late • Over budget • Fail to satisfy design specifications • ERP projects • Are larger than normal • Can be expedited (if you do it vendor’s way) • Cost range $5 million to over $100 million (+)

3. Alternative ERP Options

4. Changing Nature of IT • Technology is highly dynamic • ERP projects often take years to install • Vendors are responding by expediting • As long as you do it their way • Improved versions may be on market by the time you install your system • This is one advantage of an ASP

5. IT Selection Practice • Hinton & Kaye [1996]: • IT tends to be viewed as capital budgeting • Implication is that clear financial return is expected • Sound thinking, but benefits often intangible (yet real) • Some strategic investments require bold judgment • Conversely, companies have gone broke buying IT

6. IS/IT Project Risk FactorsSimms [1997] • Project manager ability • Experience with this application type • Experience with programming environment • Experience with language or system • Familiarity with modern programming practices • Availability of equipment, software, language tools • Completeness of project team • Personnel turnover • Project team size • Relative control of project manager over project team

7. Financial techniques for Capital Budgeting • Payback • Discounted cash flow • Cost-benefit analysis These are the more formal mechanisms implied by Hinton & Kaye as capital budgeting Anything with as great an impact as ERP needs to have some estimate of cost, benefits • Need to recognize that precise numbers not worth obtaining

8. Bacon [1992] survey of IT project selection methods • Financial Criteria • NPV, IRR, payback • profitability index • budgetary constraint • Management Criteria • Requirements, respond to competition, etc. • Development Criteria • Technical/ learning new technology, probability

9. Bacon findings • More formal methods often not used • Why waste effort if know you will do it? • Many numbers used inaccurate anyway • More formal methods reserved for larger project (like ERP) • Management criteria focus on intangible • Technical a matter of maintaining state-of-the-art systems

10. Survey of ManufacturersMabert et al. (2000); Olhager & Selldin (2003)

11. Expected Installation TimeMabert et al. (2000); Olhager & Selldin (2003)

12. Estimated Installation CostMabert et al. (2000); Olhager & Selldin (2003)

13. Cost ProportionsMabert et al. (2000); Olhager & Selldin (2003)

14. Mabert et al. [2000]Survey of 400+ manufacturers

15. Expected ROIMabert et al. (2000); Olhager & Selldin (2003)

16. Mabert et al. [2000]Survey of 400+ manufacturers • Even for ERP systems, only 53% used formal methods • For smaller IT projects, payback most popular • Most systems expected to take years to install • Trend is to make much faster • Cost varies widely • You have a choice as to where you spend • Training tends to be underbudgeted • Not all expect big return

17. Points • A variety of evaluation techniques available • Pure monetary analysis hard, expensive, inaccurate • Payback a commonly used shortcut • Other methods exist • Value analysis • Multicriteria analysis