Implementation of ERP in SMEs

Definition of Small and Medium Enterprise

Small and Medium Enterprises are companies or organisations which operate with low or medium range of capital, employees and profit structure. The definition of SMEs can be different in different parts of the world based on the economy and size of large and small organisations in a country. There are several interpretations of SMEs which are based on several components in different parts of the world. Companies in the United Kingdom which are not subsidiaries of other companies and have less than 50 employees are classified as SMEs. It should also be considered that the definition of SMEs should be based on qualitative and quantitative elements. The qualitative elements would include policy, procedure and objective of a company and the quantitative element would view the financial aspects and number of employees working in that organisation (Romm and Sudweeks 1998).

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Most people view that organisations are defined or classified as Small and Medium Enterprises by the number of employees working in these organisations. Albeit the number of employees is a determining factor in classifying an organisation as a Small and Medium enterprise but other factors should also be considered. Companies should be classified as SMEs on the basis of number of employees; revenue o profits generated in a year, capital structure of the company and size of an organisation within a sector as compared to other companies n that sector. Some countries may classify SMEs on the basis of capital invested and number of employees working in an organisation. In most parts of the world organisations employing up to 200 workers are designated as Small and Medium Enterprises. In Australia a company comprising of more than 20 but less than 200 workers is referred to as a medium organisation while a company employing less than 20 employees is considered a small company. In Canada a manufacturing firm with less than 100 employees is considered a small enterprise and a service firm employing less than 50 workers is referred to as a small firm and if a company employs 100 to 500 workers it is termed as a medium enterprise. Germany designates SMEs on the basis of number of employees and turnover of an organisation. If a company in Germany has less than 10 employees and the average turnover is less than on e million it is designated as a small enterprise and if a company has an average turnover ranging between 1 million and 50 million and the number of employees between 10 to 49 it is designated as a medium enterprise. Japan defines small and medium enterprises based on various industries and the size of the firm is analysed through amount of capital invested and number of employees. The maximum number of employees designated as an SME by the European Union is 250 (OECD Working Party on SMEs and Entrepreneurship 2008).

Description of ERP

Enterprise Resource Planning – ERP is a software solution that provides centralised management and coordination of functions, processes and information in a company. The basic concept of ERP is based on sharing of information among various departments within an organisation. Entity Resource planning software is based on several modules relevant to each department or function in an organisation (Esteves and Pastor 2001). Mostly these modules consist of functions such as sales, accounting and finance, human resource, marketing and production. The ERP system integrates these modules to achieve effectiveness in the overall management of the organisation. The increased efficiency of organisational functions and popularity of ERP systems paved the way for increased use of these systems in especially in large and multinational organisations (Parr and Shanks 2000). The implementation of ERP systems was initially quite costly for organisations but it eliminated the reliance of these organisations on individual software and systems in various areas and increased the efficiency in operations. The long run effectiveness of ERP systems on organisational performance was taken as an added advantage of these systems. ERP systems became more cost effective with the passage of time and scenarios of implementing ERP systems to small and medium sizes organisations started being analysed. Davenport (1998 p.122) stated that “the business world’s embrace of enterprise systems may in fact be the most important development in the corporate use of information technology in the 1990s”. This also indicates the phenomenal growth of ERP systems and the reliance of organisations on information technology. ERP is largely implemented in organisations due to the system’s ability to adapt with business environment and customisation of individual modules regarding organisational requirements.

Reasons for Focus of ERP Vendors on SMEs

The implementation of ERP systems in large organisations has proven to be quite effective as individual components of an organisation are integrated to provide a simple yet comprehensive solution for business operations. This integration of several business functions into one system not only increases individual efficiency of these functions but also streamlines business functions to provide a better internal control mechanism. Venkatesh (2003 p.6) suggests that implementation of ERP system in SMEs is quite low as compared to large organisations due o lack of awareness. He argues that SMEs have very low awareness which is less than 35 percent as compared to large organisations which are more than 80 percent aware of benefits related to implementation of ERP systems. As it was highlighted in previous sections that large organisations have implemented ERP systems since a long time and these companies have become quite dependent on these ERP systems for carrying out business.

Since there is almost no room left for ERP implementation in large organisations and fierce competition, ERP vendors are now focusing on SMEs for development and implementation. Vendors of ERP solutions focus on SMEs to boost sales and generate higher profits as the SME market is still quite unexplored and in order to sell a higher number of ERP solutions to SMEs these vendors suggest that integration, connectivity and streamlining business functions is the key to success. ERP vendors also acknowledge the fact that the SME market is still unexplored up to a great extent and the main reason for this is the lack of awareness among SMEs regarding the effectiveness and efficiency of implementing ERP to business processes.

The main factor behind the focus of ERP vendors on SMEs is the fact that there are practically no large organisations left where ERP has not been implemented. ERP vendors are left with no other choice than to sell ERP solutions to SMEs and if these vendors fail in the process and do not achieve any productive results they will have to close their businesses. When ERP systems were first introduced companies were hesitant towards its implementation initially regarding the related cost and outcome of these systems. The basic strategy followed by ERP vendors was to create awareness among these organisations regarding the integration and streamlining of business activities to achieve efficiency. As companies started implementing this system the benefits became more clear and other organisations started implementing ERP as well. The implementation of ERP became common place in large organisations with the passage of time and eventually it became impossible to accomplish objectives without implementing ERP in major enterprises. The marketing strategy pursued by ERP vendors was to extend awareness regarding the benefits of ERP implementation. These vendors plan to follow the same strategy for SMEs for marketing this concept (The Financial Express 2002).

Problems in Implementation of ERP systems in SMEs

It was thought that ERP systems were only meant for large and elite organisations and SMEs did not even consider implementing this system. When ERP vendors started campaigning for increasing awareness among SMEs, these companies started realising the benefits of ERP in a business. Although ERP have several advantages for businesses there are still many issues which have to be dealt with in order to implement ERP in SMEs effectively. Some of the problems in implementation of ERP in SMEs are described below.

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Cost

A major aspect of ERP systems is the customisation of its modules according to customers’ requirements. This customisation enables ERP to adapt to differing business environments in different companies. The ERP vendor has to design the system according to the specific individual requirements of a customer. The cost of this customisation increases with the degree of changes required in each of the modules of the system. The ERP vendors have to offer lower prices to SMEs as small and medium sized companies are quite reluctant in implementing these systems. Although vendors have to offer lower prices but they also have to consider that the quality of the system in not compromised as low quality or any problems with the system may result in an adverse outcome and affect the company operations negatively. The vendor needs to keep a balance between cost and quality of the system as high cot would mean that the SME completely rejects the proposal.

Changes Required for Implementation

The implementation of ERP systems may sometimes require the company to change its operating processes to confirm with the ERP design and layout. Some of these changes may cause the cost of doing business to increase significantly. These changes may also require experienced employees of the business to receive training and change the way of working which may sometimes result in experienced workers leaving the company as people are often reluctant to change. The ERP system would be implemented with all modules but at a cost of experienced workers and increased expenses. The company would have ERP but with shortage of experienced workforce (Stair and Reynolds 2008).

Conflicts with Other Systems

The ERP system being implemented may have conflicts with other systems previously implemented in the company and the company may have to amend or completely remove these systems to make the ERP system more applicable and effective. Companies may also require additional systems to incorporate previously implemented systems with ERP.

Customisation

ERP vendors have a great deal of experience with larger organisations and customising ERP for these organisations usually follows a similar pattern in an industry as the individual modules are quite similar in larger corporations but when these vendors implement ERP in small or medium organisations the customisation would require major changes to be done for each customer according to the individual requirements even in a similar industry. The smaller companies require ERP vendors to do more for less as SMEs may feel that the cost of implementation is too high and they are not receiving the parallel benefits from the system when compared with system cost (ERPwire.com 2009).

Selection of Vendor

Every company needs to asses ERP vendors according to its requirements of individual modules in the system. The selection causes a big problem for SMEs as switching form one vendor to another vendor entails high costs and if the company fails to recognise the selection as an importance factor it would face dual risk. The first risk is comprises the failure of implemented system and the second risk is high cost of changing vendors.

Strategies Used by ERP Vendors

ERP vendors have to formulate strategies based on requirements of SMEs with respect to individual modules of ERP and ERP as a whole. Several ERP vendors including established brands and smaller vendors have developed certain strategies and solutions for meeting requirements of SMEs. The first strategy implemented by various companies to focus SMEs is to offer predesigned ERP compact packages. These compact packages are ready to use off the shelf systems which can be implemented in much less time than a standard ERP package. General modules relevant to a specific industry are included in these packages with very low or no customisation options. The two main advantages of these packages are lower costs and reduced time for implementation (Hossain, Patrick and Rashid 2002). SMEs with minimum customisation requirements can easily implement these preconfigured ready to implement packages and even if a need arises for slight modifications, the vendor firm can be requested to make the adjustments necessary for implementation. Another strategy implemented by ERP vendors is slashing prices by a significant margin for SMEs. In 2007 major ERP vendors including SAP, Oracle and Microsoft slashed prices by up to 50 percent to increase sales in the SME market (Mukherjee 2007). This strategy still continues to date where ERP vendors offer lowered prices to SMEs in hopes of generating higher revenues and achieving greater market share. A relatively recent technology has been developed and implemented by ERP vendors is Software as a Service – SaaS which save considerable time and money for SMEs. The infrastructure of ERP system under SaaS is hosted at a location other than the SME and all modules and processes of the system are available to the company for use from another location through internet connectivity. This is quite suitable for SMEs as no cost would be incurred in database management, management of IT issues on premises, extensive hardware requirements and data handling. All data and information is fed from the SME but the processing takes place at a remote location. ERP vendors can take advantage of the SaaS technology to increase sales to SMEs and increase market share by a significant margin. Albeit the sales can be increased vendors have to consider the added cost of SaaS as implementation would require added costs of data warehousing and mining for vendors (Modernomics 2009).

Software as a Service Technology

The Software as a Service – SaaS technology uses remote hosting for providing enterprise software solutions to a company. The main ERP or other software required by a company is hosted on a remote location instead of being installed in company office computers and the software is managed by the vendor on its own servers. Hurbean, Danaiata and Hurbean (2008 p.13) state “There’s a good chance that SaaS is right for SMEs, as a future leading delivery mechanism. Although SaaS penetration into this space is slow, there are many reasons for SaaS to prevail.”

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SaaS technology has various advantages and disadvantages in comparison with traditional ERP system which include the simplicity of implementation as SaaS based ERP can be deployed with much ease. There is no need of additional hardware for installing ERP software. SaaS can be implemented at a much lower cost than traditional ERPs as no additional hardware is required, there is no need of extensive training and no requirement of onsite troubleshooting. The portability and mobility of SaaS is an added advantage as it is based on the internet it can be implemented in all divisions, departments and branches of an organisation with much ease. The two main disadvantages of SaaS include inflexibility and lack of control. SaaS system cannot be customised according to company requirements once it has been implemented. The company does not own the ERP software as it is hosted by the vendor on another location and if the internet experiences any problems the operations of the company may be highly affected (Kimberling 2008).

SaaS Offering by a Vendor

The best example of SaaS offering by vendor is that of Oracle which not only offers SaaS directly to companies but also to other vendors and provides hosting services for these vendors. The Oracle platform for SaaS provides services to various customers in a wide range of areas. Oracle also provides technological support required for shifting from traditional ERP to SaaS. The technological support includes providing training, guidance and other technical resources. Oracle also offers a wide range of business support functions for SaaS which include deployment, implementation and hosting of ERP solutions for other vendors and customers (Oracle 2009).

Case Studies

An analysis of two case studies relevant to implementation of ERP in SMEs is presented for a comprehensive understanding of ERP sourcing strategies and success of implementing ERP in SMEs.

Case Study on ERP System Sourcing Strategies

This case study has been carried out with an objective of reviewing ERP system sourcing strategies at the disposal of SMEs. The research is based on qualitative research approach and case study method while data has been collected using interviews, emails and informal conversations with employees of the company. The ERP software application and related documentation were analysed and employees were examined in interaction with ERP. The case study presents information in a fashion that is useful for academic as well as practical application. The research paper of the case study opens with an introduction and background of ERP and SMEs with reference to ERP implementation in SMEs. A literature review of SME sourcing strategies in the research provides previous studies and researches carried out in this area. The case study is based on a private small enterprise Kane bridge Corporation operating out of New Jersey. The overview of company background, IT environment and methods including functions of IT implemented and the company’s desire for change provide an admirable insight to the case. The various strategies at the disposal of the company with respect to ERP system sourcing as analysed in the case study include make or buy decisions, outsourcing development of system and assigning development to off shore vendors. The conclusion drawn from the case study implies that a small sized company can easily identify various options available in implementing ERP system and software and after identification the company can evaluate these options to implement a certain strategy successfully (Sledgianowski and Tafti 2008).

Case Study on Success of ERP Implementation in SMEs

The case study analysed here presents the implementation of ERP in Canadian SMEs. This case study examines the success rate of ERP implementation in five Canadian SMEs. The methodology applied for research purposes in the case study was qualitative in nature and based on case study and cross case methods to evaluate the success factor in Canadian Small and Medium Enterprises. The case study is quite effective as it evaluates five companies instead of one or two companies which provide a thorough evaluation of ERP implementation success in SMEs. The research paper of the case study provides a detailed introduction and background of SMEs and implementation of ERP systems in SMEs. The research approach and methodology applied by researchers has been explained comprehensively with appropriate explanation of the data collection and analysis techniques. The five companies selected for case analysis belong to industries of Natural Resources, Chemicals, Electronics and Plumbing and Heating. Three companies analysed in the case study are small in size and two are medium which implement ERP software from different vendors. The variables identified in the case study for evaluating success of ERP implementation in these companies include benefits of implementing ERP systems, cost incurred for ERP software, hardware training and consulting, time duration after implementation of ERP software and its affects. The evaluation was performed by analysing the changes in these variables by interviewing participants from the five companies. An overall assessment of these variables indicated that the implementation of ERP in one company was very successful, successful in two companies, unsuccessful in one company and vey unsuccessful in one company. It was found through the case study that success of SMEs in relation to ERP implementation was associated with outsourcing the management of the system to an external consultant and continuous review and revision of documents during the implementation phase (Snider, Da Silveira and Balakrishnan 2009).

List of References

Davenport, T. 1998. ‘Putting the Enterprise into the Enterprise System. Harvard Business Review , 121-131.

ERPwire.com. 2009. What are the common problems for ERP in SME’S?  Web.

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Esteves, J. and Pastor, J. 2001. ‘Enterprise Resource Planning Systems Research: An Annotated Bibliography’. Communications of AIS , 2-52.

Hossain, L., Patrick, J. D. and Rashid, M. A. 2002. Enterprise Resource Planning: Global Opportunities and Challenges. Hershey: Idea Group Inc.

Hurbean, L., Danaiata, D. and Hurbean, C. 2008. Enterprise Applications Implementation in Romanian SMEs. Timisoara: West University of Timisoara.

Kimberling, E. 2008. SaaS vs. Traditional ERP: Five Key Differentiators. Web.

Modernomics. 2009. SaaS Gives SMEs The Power to Ride Out Recession. Web.

Mukherjee, P. 2007. ERP Vendors Drop Prices by Fifty Percent. Web.

OECD Working Party on SMEs and Entrepreneurship. 2008. Removing Barriers to SME Access to International Markets. Paris: OECD Publishing.

Oracle. 2009. Oracle SaaS Program. Web.

Parr, A. and Shanks, G. 2000. ‘A Model of ERP Project Implementation’. Journal of Information Technology , 289-304.

Romm, C. T. and Sudweeks, F. 1998. Doing Business Electronically: A Global Perspective of Electronic Commerce. London: Springer.

Sledgianowski, D. and Tafti, M. A. 2008. SME ERP System Sourcing Strategies: A Case Study. Industrial Management & Data Systems , 108, 421-436.

Snider, B., Da Silveira, G. C. and Balakrishnan, J. 2009. ‘ERP Implementation at SMEs: Analysis of Fve Canadian Cases’. International Journal of Operations & Production Management , 29, 4-29.

Stair, R. and Reynolds, G. W. 2008. Fundamentals of Information Systems. London: Cengage Learning.

The Financial Express. 2002. ERP Vendors Eye The SME Segment.

Venkatesh, S. V. 2003. ‘ERP for SME’. Times B2B , p. 6.

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