Enterprise Resource Planning: Costs and Risks

Enterprise Resource Planning (ERP) is specific software that is used in organizations to manage all business processes as a system and with the help of applications. Organizations often choose ERP for optimizing and improving their operations regarding the integration of a complex automatic system in the work of all departments (Huang et al. 682). However, despite such benefits as the high-quality management of resources, effective automation of processes, and integration of systems, the implementation of ERP often becomes a challenging task for organizations, and much attention should be paid to the analysis of associated costs and risks.

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The costs of implementing ERP in the organization are high, and the whole project can last about two years. As a result, the implementation costs can increase depending on the period required for the integration of applications into a system used in the company (Osterland 89). For instance, Hershey Foods Corporation spent $112 million to implement ERP as the basic management system in the organization (Stedman 1).

Also, according to Huang et al., “the ERP system implementation costs companies at an average of approximately one million dollars” (681). One of the problems associated with integrating ERP in the organization’s system is the necessity of the regular evaluation of processes and outcomes that requires additional spending to cover the procedure of fixing errors. Therefore, the costs of implementing ERP are different for each organization, and many factors can influence them. From this point, it is important to refer to risks that are associated with the ERP implementation and that can affect possible increases in costs.

Risks can be defined as potential problems that are related to the ineffective implementation of ERP or failures in using the system. The first problem to pay attention to is the risk that the standardized ERP package can be inappropriate for the organization because of its business processes (Osterland 90). Software that is aimed at supporting standardized processes can be ineffective to address the particular needs of the business, and customization can be problematic. While referring to the failure in implementing ERP in Hershey Foods Corporation, it is possible to identify such critical risk as to the complexity of software.

The SAP R/3 system was planned to be implemented in Hershey Foods Corporation, but managers did not focus on the fact that the system was very complex and required much time and resources to be integrated successfully (Osterland 90). Therefore, the other risk is the lack of time necessary for implementing the system and fixing errors. The period for implementing ERP in the organization should be selected mindfully because of risks connected with applying the system during busy seasons (Osterland 89). Also, about six weeks should be reflected in the plan to determine and fix certain problems.

However, one more risk to discuss is failure due to implementing too many applications or platforms simultaneously. According to Stedman, Hershey Foods Corporation’s mistake was in implementing not only the complex SAP system but also “companion packages from two other vendors, simultaneously during one of its busiest shipping seasons” (1).

It is a difficult task to implement ERP successfully because the software is complex, but the implementation of more packages makes the project completion goals almost unachievable. Even if all applications are implemented effectively, managers can fail to measure the results to conclude regarding positive or negative outcomes associated with the ERP implementation. Managers need to not only measure and predict risks, but they also should apply key performance indicators that are useful to assess results.

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The other group of risks is associated with administering the process of implementing the ERP system. Managers often ignore relying on consultation, and they fail to convince employees regarding the necessity of integrating the new system and re-skilling. If little attention is paid to training employees regarding the use of new software, the risk of failure increases (Huang et al. 683). To achieve high results, employees need to be educated and trained regarding the implementation and use of ERP because this package changes the management of processes significantly (Osterland 91). The companies which ignore using consultants and do not provide sufficient training for employees are at risk of facing failure and financial losses.

The analysis of costs and risks related to ERP indicates that this software system should be implemented mindfully and with the focus on its type, appropriateness for the firm, complexity, and costs. The lack of training and errors in determining the time necessary for the system’s implementation can lead to significant material losses. Also, many problems are associated with the attempts of managers to implement all effective applications to optimize business processes simultaneously. As a consequence, none of the proposed systems can work appropriately and guarantee expected results.

Works Cited

Huang, Shi-Ming, I-Chu Chang, Shing-Han Li, and Ming-Tong Lin. “Assessing Risk in ERP Projects: Identify and Prioritize the Factors.” Industrial Management & Data Systems 104.8 (2004): 681-688. Print.

Osterland, Andrew. “Blaming ERP.” CFO Magazine 1.1 (2000): 89-92. Print.

Stedman, Craig. “Failed ERP Gamble Haunts Hershey.” Computerworld 33.44 (1999): 1-3. Print.

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