Risk Management in ERP Projects

1. Introduction

Enterprise Resource Planning (ERP) has expanded beyond core administrative and operational boundaries to the end-to-end process backbone of organizations. ERP system enables organizations to plan for utilization of transactional, back-office oriented enterprise resources to meet customer expectation. Deployment of ERP system facilitates the recording, storage and retrieval of inventory and financial information. However, customer, purchase order and sales order masters are also being maintained by typical ERP suites. ERP essentially helps to run the business strategy by cost optimization, operational and financial control. ERP also supports strategic goals like increasing market share, improving understanding of the market, reducing response time.

India is the third largest ERP market in Asia-Pacific region with a 12.1% of the market share of the region^[1]. The top 4 ERP vendors in India are: SAP, Oracle, Microsoft and Infor. As per CyberMedia Research the overall Business Applications market in India grew by 16% in 2009^[2]. ERP applications revenue grew from Rs 1206 Crores in 2008 to Rs 1303 Crores in 2009 with a growth rate of around 8%. The growth drivers in India were: need of domestic industries to meet globalization, growth of India’s offshore industries. Finance, telecommunications, manufacturing and government sectors were the major sectors in terms of ERP uptake. This creates lucrative opportunities for ERP vendors and service providers in Indian market. However, as per a Gartner study the trends in India indicate failure rates of 15% to 30%, and 35% to 45% of projects considered "compromised”, the global figures for failure is 20% to 35% and 50% to 60% respectively[3]. The slightly lower rates in India indicate that a greater number of Indian organizations are getting ERP right. But at the same Indian organizations have a scope to reduce the failure rate through better risk management

The benefits from ERP deployment comes with a cost attached to it. ERP implementation projects are complex and are perceived as risky. The perceived failure late of ERP projects is as high as 60-70%. Stories of underachievement of ERP deployment objectives, extension of project tenure, complexity of the system are common.

ERP implementation in organizations needs to be taken as a challenge. Risk of ERP project comes with commensurate reward. Gone those days where ERP deployment was considered as a tool of competitive advantage, it is increasingly turning as an absolute business necessity these days. ERP projects with meticulously planned risk management makes ERP implementation successful.

This report aims to review some of the available literatures related to risk management in ERP projects to find out answers to the following questions: Why and How ERP projects fail? What are the risk factors associated with ERP projects? Which phases of ERP lifecycle are critical? How risk management is achieved?

2. Understanding ERP Risk Factors

Risk essentially involves two elements: uncertainty and potential loss. Any variable that can cause failure of an ERP project could be considered as a risk. Such variables could be conceptualized, defined and analysed in different ways. In ERP literature these variables are often termed as “risk factors”, “uncertainty factors”, “critical success factors” (CSF).

2.1 Causes of ERP Risk

Risk originates from failure of ERP projects. ERP projects fail if they don’t achieve the planned objectives, overshoot the budget, and fail to meet the user expectations, make the processes complex and uncontrollable. Failures associated with ERP projects can be classified into four categories (Figure 1).

Figure 1: Classification of ERP project failure

 

 

Process failures are characterised by budget extension, time extension, and project stop. Low fitting with strategic goals, poor financial performances etc. are specific symptoms of correspondence failure. Effects like poor business performance, inadequate system reliability and stability, low user friendliness could be associated to expectation, interaction or correspondence failure. Many times organizations fail to associate the effects to the causal risk factor. Understanding of the possible effects of ERP risk factors is crucial for risk management in ERP projects.

ERP projects involve business processes that cut across organizational functions. Unlike most of the  IT deployments that are specific to particular disciplines of an organization, ERP projects are interdisciplinary in approach. Consequently, ERP projects face risks that are specific to ERP. At the same time risks generic to IT projects also surface in ERP projects.

3. Critical Risk Factors in ERP Projects

Risk factors associated with ERP projects could broadly be classified under six different categories (Table 1). These are: management structure and strategy, organizational readiness, skill mix for ERP projects, user involvement level, technology planning and integration.

Table 1: Crucial risk factors in ERP projects

Category	Risk Factor	Unique to ERP
Management structure and strategy	Lack of top management commitment
	Ineffective strategic thinking and planning
	Ineffective communication system
	Poor leadership
Organizational readiness	Inadequate change management	Yes
	Lack of process-streamlining	Yes
	Inadequate BPR	Yes
Skill mix for ERP projects	Lack of internal expert with both business and technology knowledge	Yes
	Poor project team skill
	Poor project management techniques
	Ineffective consulting services
User involvement level	Failure to convince key users
	Inadequate training and instruction	Yes
	Ineffective communication system
Technology planning and integration	Complex architecture and high no of implementation module	Yes
	Poor legacy system management	Yes
	Inadequate IT system use
	Inadequate IT system maintainability
	Inadequate IT supplier stability and performance	Yes

3.1 Lack of top management commitment

ERP deployment fundamentally affects the way business operates. Thus ERP projects demand time, involvement, support and commitment of the top management. The importance of the projects by top management (CEO, CIO, COO, CFO, SBU head) must be visible to the middle management and staff level. This will have a trickle-down effect and will build confidence of the end users, IT department and the ERP project team. In absence of top management commitment it is not advisable to run ERP projects.

3.2 Ineffective strategic thinking and planning

Organizations must have clarity on the critical benefits and business objectives expected from ERP deployment. Alignment of ERP objectives with business unit/group objectives is the key to success. A strong alignment automatically attracts the requisite support from the top management. Expectations from ERP systems without knowing why it is being deployed could cause severe disaster.

3.3Ineffective communication system

Business processes cuts across business functions, so is ERP. Effective communication amongst different functional units is inevitable for ERP projects. Both vertical communication in functional hierarchy and horizontal communication across functions act as a link for the business processes bringing optimum benefit to all actors.

3.4 Poor leadership

Strong and committed leadership brings open and honest communication. ERP project may go through phases where commitment of project managers and steering committee to figure out solutions becomes crucial. Strong leadership can provide direction and confidence to the project team. 

3.5 Inadequate change management

Unlike most of the other IT projects, ERP project is not a merely technological project. Many times ERP projects bring radical changes necessitating huge change management efforts. Underestimating the factors like group inertia, structural inertia, power dynamics with the organization and effect of ERP deployment on organizational politics could fail the project. Change management is one of the biggest risk factors in ERP projects.

3.6 Lack of process-streamlining

Standardization of processes and streamlining them is an essential prerequisite for ERP deployment. In absence of well-documented processes, ERP deployment is meaningless.

3.7 Inadequate BPR

ERP packaged softwares are prepared on the basis of industry best practices. Often, the practices used in the organization differ from that of ERP software package. This requires restructuring of organization’s business processes. Overlooking the elements of Business Process Reengineering is a huge risk factor that can smash the project.

3.8 Lack of internal expert with both business and technology knowledge

ERP projects require a thorough understanding of business requirements as well as technology involved in ERP deployment. In addition to this, experience in ERP projects, idea on industry practices, understanding of ERP life cycle is required in the project team. Internal experts alone may not be able to handle the behemoth tasks involved in the project. In absence of resources to hire external service provider, the organization my subject the ERP project to this risk.

3.9 Poor project team skill

The project team contribute to the success (failure) story of ERP projects through their business and technological competence. A skill-balanced project team includes both internal and external experts, diverse managerial competencies, deep understanding of the processes, IT skills and knowledge. Generally a project team disintegrates after ERP installation; hence, their role is strong in earlier stages of ERP life cycle especially in training of staffs, motivation, and problem solving activities.

3.10 Poor project management techniques

Project management techniques are crucial right from the initiation of the project to its completion. In adequate project management technique is a risk factor significantly affecting project success. Project characteristics like size of the project, experience with technology etc. decide the project planning and control activities. Some ERP software vendors provide adequate risk management applications for project techniques. In absence of such risk management application many companies prefer to deploy generic methodologies.

3.11 Ineffective consulting services

Due to lack of internal experts with ERP project handling experience, external service providers (consultants) are appointed for ERP projects. External service providers play a pivotal role in risk mitigation by virtue of their experience, knowledge of software modules, techno-managerial acumen, and knowledge of industry practices, experience with similar software applications and their implementation.

3.12 Failure to convince key users

Key users once convinced that the ERP system will make their task easier will get involved in ERP projects. Their involvement is crystallized by the project champions. Project champions are people with vision to keep the project going and ability to push the project in presence of competing project priorities. They go the extra mile to convince the key users of the potential benefits. Convincing the key users is crucial on early implementation stage.

3.13 Inadequate training and instruction

ERP softwares are not very popular for their user-friendliness. This necessitates adequate training of the application and its use. In absence of training ERP projects are doomed to failure. Training and right instructions improve the acceptance of the applications and their use.

3.14 Complex architecture and high no of implementation module

Project complexity increases with the increase in implementation modules. Initiation and adoption phases require thorough consideration of the architecture related issues. In absence of proper architecture additional tools and personalization requirements will emerge. As a result the complexity and integration needs will add to the risk of the project.

3.15 Poor legacy system management

Legacy system could act as a burden for ERP projects. Parallel use of legacy system will put additional burdens on users de-motivating them to use the new ERP system. Excessive integration of ERP will old legacy system also causes problem due to complexity issues. Focus of ERP projects should be on migration of all users to ERP system with no other parallel system.

3.16 Inadequate IT system use

Pre-implementation study of impact of technical software capabilities on business processes is crucial. User-friendliness, scalability, portability, modularity, versioning management, upgradeability, flexibility, security, presence of complete guide etc. are essential. ERP software is integrated in nature. Loophole in any of the IT system element could emerge as a bottleneck for the entire system.

 3.17 Inadequate IT system maintainability

IT systems used in ERP require schedule as well as unscheduled maintenance. Maintainability refers to the ability to meet operational objectives where maintenance activities could be performed under operational conditions. The cost associated with maintenance should be as low as possible. In general both maintenance and upgrade cost is around 25% each of the initial ERP implementation cost.

3.18 Inadequate IT supplier stability and performance

Unlike most of the other IT projects, ERP systems require continuous investments. These investments are required for addition of new modules, upgrades to add new functionality, achieving better fit between business and ERP system. In absence of business support for these activities the business value derived from the system degrades over time. Hence, IT supplier support is a crucial risk factor. 

Gartner identifies five key risk factors of ERP implementation[4]. The five factors and the action items suggested by Gartner for risk reduction of these items are provided in Table 2.

Table 2: Risk factor, manifestation life cycle phase, action items suggested by Gartner

Risk Factor: Lack of executive management commitment Manifestation Lifecycle Phase: Strategize

Action Item: -Top management support must be obtained, sustained and visible throughout the ERP life cycle. -Involve senior management in project sponsorship, project steering committees, quality reviews, and issue and conflict resolution. Involvement in these governance mechanisms helps sustain management support by keeping managers informed of the project's progress.

Risk Factor: Insufficient or inadequate budgeting Manifestation Lifecycle Phase: Evaluate

Action Item: -Don't look for cost savings in change management, training and project management. -Turn your attention, instead, to the use of rapid implementation methods and tools -Gather and document your estimated costs for the implementation using a tool such as

Risk Factor: Inadequate change management and training Manifestation Lifecycle Phase: Execute

Action Item: - Develop communications mechanisms (such as a Web site with regular updates, a monthly newsletter and road shows) to channel information to end users. -Conduct educational activities that assist the staff in grasping the importance of the project, its benefits and its effects on the enterprise. -Set realistic expectations by compiling a detailed business case that clearly states the process changes and functionalities involved in the project and ties them to specific benefits. - Don't stop training efforts after the "go live" date. Establish a continual training program that caters to new hires, staff shifts, and organizational and process changes. -Don't overlook the IT workforce training needs associated with ERP implementations. If the ERP solution is supported and maintained in-house, then adequate investment in training, reskilling and professional development of IT staff is important to the success of implementation.

Risk Factor: Inexperienced project management and project team Manifestation Lifecycle Phase: Evaluate

Action Item: -Appoint a strong, experienced project manager at the outset of the project. -Consider providing incentives for the project manager to stay for the life of the project. - Empower implementation teams to make the final decisions regarding issues such as configuration and process change without consulting management. If possible, place people on the team who have been through ERP implementations before and who are motivated, enthusiastic and good team players. -Provide post-implementation support. Many projects fail as seconded staff return to their departments or as experienced contractors end their assignments. Use competency centers to help the critical post-go-live support requirements

Risk Factor: Extensive modifications Manifestation Lifecycle Phase: Evaluate

Action Item: -Study other ERP implementations in the industry segment, and review what modifications were required to meet industry-specific requirements, as well as local market requirements, and consider similar modifications. -Perform a thorough gap analysis, analyze the business value associated with each gap, prioritize the gaps and determine how best to close each gap. -Set clear expectations regarding modifications from the project's outset, and develop and follow firm guidelines. -Develop a business case for the ERP solution as a whole, and revisit it periodically throughout the ERP project's life cycle -Prepare to retire and remove modifications after an upgrade if the functionality is provided as standard in the next release.

4. ERP Project Risk Management

Once risk factors are identified, assessment and management of risks are crucial to the success of any ERP project. Risk management is an iterative approach that starts with assessment context of risk progresses to risk identification, risk analysis, risk evaluation, risk treatment, monitoring and review, required communication and consulting (Figure 2). Out of these risk identification, analysis and evaluation comes under risk assessment.

Generally two distinct approaches are used for risk management strategy:

·         Reduction of risk circumstances

·         Treatment once risk has appeared

Figure 2: Risk management phases

5. ERP Life Cycle and Risk Factors Associated

ERP life cycle goes beyond the initial ERP project life. Hence, the attention to ERP applications must address to the entire ERP life cycle. Long-term success of ERP will depend on how risks are addressed at every stage of the life cycle. Hence, both the IT team and top management need to recognize the need of attention to the requirements of ERP lifecycle. Gartner is a report has suggested the action items for risk diminishing in ERP cycle [1](Figure 3).

Strategize stage: Many India organizations face the problem of creating a meaningful business case and ensuring an appropriate governance mechanism to manage ERP. Successful implementation of ERP requires understanding clear strategy, documenting strategy in a sound business case and supporting it with an efficient governance mechanism throughout the ERP life cycle.

Evaluate stage: Selection of right software and service partner takes place in the evaluate stage. It is crucial that the software selected best fits the organization’s need for enabling its business processes and fills the identified gaps. Appropriate selection of service provider provides right expertise and level of participation to supplement internal team. Indian SIs brings frameworks, methodologies and toolkit to assist implementation.

RFI and RFP are two important components of SI selection process. The RFI is an investigatory document that seeks high-level information from vendors on their capabilities and pricing. It helps to determine the options available in the marketplace that may fulfill the organization's requirements. The RFP documents the detailed requirements so that a selected group of vendors can provide firm pricing, timing and other aspects of a proposal. Organizations should use the RFI process to learn about the market and select a shortlist of providers to invite into the RFP process.

Execute Stage: Implementation and its attendant issues are prime focus of execute stage. Rapid implementation tools and methods could help organizations to streamline implementation process. Post-implementation support is often overlooked in the rush to final line. Instead it should be viewed as a signal to change focus from startup to production operation.

Figure 3: Action items for Risk diminishing in ERP Life cycle

Source: Gartner, December 2008

Review Stage: Post-implementation reviews determine which aspects of the project were successful, what needs to be improved, whether return on investment expectations will be met and whether further cost savings can be derived. These reviews offer golden opportunities for improving not only the application solution, but also the organization's project management disciplines. Indian organizations need to ensure that appropriate governance mechanisms are in place so that periodic review can identify the need for upgrade.

Innovate phase: The innovation phase underpins the other phases of the ERP life cycle to support IT-business alignment. For driving innovation it is critical to understand organizational strategy and needs and to support them by IT.

7. Conclusion

Rewards are associated with Risk. In order to reap the benefits of ERP projects structured and systematic approach of risk management is inevitable. ERP projects unlike many other IT projects changes the fundamentals of business of organizations. Thus, such projects demand attention and support of top management. Once this is achieved, the risk factors associated with each stage of ERP projects are to be identified, assessed and analyzed. The action items suggested in various literature help to manage the risk factors in a planned manner. However, organizations implementing ERP must identify the most critical risk factors that are specific to the organizations due the culture, processes, path and position of the company and without neglecting other risk factors maximum efforts must be put to control these critical risk factors. A prudent risk management system has to look beyond the ERP project life to the entire ERP life cycle. Ability of the organization to identify and manage the dynamic risk factors that prop up during different phases of life cycle squeezes the maximum business values out of ERP system.

8. References

1.      Davide Aloini , Riccardo Dulmin , Valeria Mininno; Risk management in ERP project introduction: Review of the literature; Information & Management 44 (2007) 547–567

 2.      Joseph Bradley; Management based critical success factors in the implementation of Enterprise Resource Planning system; International Journal of Accounting Information Systems 9 (2008) 175–200

3.      Severin V. Grabski, Risks and Control in the implementation of ERP system, The International Journal of Digital Accounting Research; Vol. 1, No. 1, pp. 47-68

4.      Mary Sumner; Risk factors in enterprise-wide/ERP projects; Journal of Information Technology (2000) 15, 317–327

5.      Denise Ganly et al., ERP in India, 15 December 2008; Gartner

6.      Denise Ganly, Address Five Key Factors for Successful ERP Implementations, 29 August 2008, Gartner

7.      Yanna Dharmasthira, ERP Software market Share Analysis and Trends, Asia/Pacific, 2008 and 1H09, July 2009, Gartner

8.      Mahek Chawla, Business Applications: Just a patch of red, Industry Analysis 2009, Dataquest

---

[1] Denise Ganly et al., ERP in India, 15 December 2008, Gartner

[2] Yanna Dharmasthira, ERP Software market Share Analysis and Trends, Asia/Pacific, 2008 and 1H09, July 2009, Gartner

[3] Mahek Chawla, Business Applications: Just a patch of red, Industry Analysis 2009, Dataquest

[4] Denise Ganly et al., ERP in India, 15 December 2008; Gartner

[5] Denise Ganly, Address Five Key Factors for Successful ERP Implementations, 29 August 2008, Gartner