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AN EMPIRICAL INVESTIGATION OF THE EFFECTIVENESS OF ENTERPRISE RESOURCE PLANNING ERP SYSTEMS, AS ASSESSED BY MANAGEMENT ACCOUNTANTS A Dissertation Presented for the Doctor of Philosophy D

AN EMPIRICAL INVESTIGATION OF THE EFFECTIVENESS

OF ENTERPRISE RESOURCE PLANNING (ERP) SYSTEMS,

AS ASSESSED BY MANAGEMENT ACCOUNTANTS

A Dissertation Presented for the Doctor of Philosophy Degree

The University of Mississippi

K W VanVuren December, 2003

UMI Microform 3115431

Copyright 2004 by ProQuest Information and Learning Company All rights reserved This microform edition is protected against unauthorized copying under Title 17, United States Code

ProQuest Information and Learning Company

300 North Zeeb Road P.O Box 1346 Ann Arbor, MI 48106-1346

To the Graduate Council:

I am submitting herewith a dissertation by K W VanVuren entitled “An Empirical Investigation of the Effectiveness of Enterprise Resource Planning (ERP) Systems, As Assessed by Management Accountants.” I have examined the final copy of this

dissertation for form and content and recommend that it be accepted in partial fulfillment

of the requirements for the degree of Doctor of Philosophy from the School of

Accountancy

J A Shr

Dr Rick Elam, Professor of Accountancy

We have read this dissertation

and recommend its acceptance:

Wake Xx Lesher

Dr Dale L Flesher, Professor of Accountancy

/⁄4_⁄⁄2⁄Z

Dr Brian Reifel, Associate Professor

of Management Information Systems

Copyright © K W VanVuren, 2003

All rights reserved

ACKNOWLEDGMENTS

I would like to sincerely thank the members of my dissertation committee Drs Rick Elam and Mark Wilder particularly put a lot of work into monitoring this work to its final stage of acceptability I learned a lot from both of them about academic research

Dr Brian Reithel was particularly helpful and encouraging in the initial stages of the project Dr Dale Flesher provided his usual expert editorial eye

The above notwithstanding, I would like to dedicate this dissertation to the source

of inspiration for my becoming an academician — Mr Francois Radar LaPhouffle’ (alias, Adam R Rodgers) Frenchy, without your guiding light and steadying hand, I would have quit Thank you

ABSTRACT

AN EMPIRICAL INVESTIGATION OF THE EFFECTIVENESS OF

ENTERPRISE RESOURCE PLANNING (ERP) SYSTEMS,

AS ASSESSED BY MANAGEMENT ACCOUNTANTS

VanVuren, K W., B.B.A., University of Cincinnati, 1975 M.B.A., Xavier University (Ohio), 1979 M.Acc., Miami University (Ohio), 1996 Ph D., University of Mississippi,

2003 Dissertation directed by Dr Rick Elam

Enterprise Resource Planning (ERP) is generating keen interest from organizations

struggling to effectively manage complex operations ERP can be defined as a

management information system that: 1) is comprised of a single, comprehensive data- base, 2) accomplishes real-time dissemination of data, and 3) provides for the availability

of relevant information to users in the organization where it is most needed Despite

intense practical interest and much descriptive work touting the benefits of ERP, there has

been little empirical research as to whether these systems really provide their purported benefits The purpose of this study is to compare benefits and weaknesses of ERP as experienced by organizations Approximately five thousand surveys are sent to

management accountants employed by a combination of organizations using ERP and organizations not using ERP Management accountants are deemed to be appropriate subjects for this study because they generally occupy a good vantage point within a

company to judge the effectiveness of the organization’s management information system

This study presents a model of an organization’s management information system (MIS), which proposes that the effectiveness of a MIS is a function of the benefits and weaknesses of the system The model defines the benefits of a MIS as six business best practices ERP is a particular type of a MIS The best practices include: 1) reconciliation

of conflicting goals, 2) standardization of processes, 3) reduction in cost of product, 4)

reduction in MIS maintenance cost, 5) better decision-making, and 6) quicker decision-

making The model also defines four possible weaknesses of a MIS — that such systems: 1) are overly complex, 2) are inflexible, 3) promote overly centralized monitoring and

control, and 4) require too much time to implement The above benefits/weaknesses are

structured into ten hypotheses All of the hypotheses posit that there is no difference in the benefits/weaknesses of ERP systems versus Non-ERP systems

A series of MANOVA/ANOVA procedures are used to observe differences of

perception among managerial accountants about ERP Both between-subjects and

within-subjects comparisons are made The between-subjects analysis is to compare the perceptions of management accountants who work for organizations currently using ERP with the perceptions of management accountants in organizations not using ERP Also, those management accountants working for organizations currently using ERP are asked

to compare the benefits/weaknesses of their current system with the most recent, prior non-ERP system of the organization

The results of this study indicate that ERP-Users perceive that their systems provide: 1) greater reconciliation of conflicting goals, 2) greater standardization of — processes, 3) increased lowering of product costs, 4) quicker decision-making, and 5) better decision-making than do NON-ERP-Users However, ERP-Users also perceive

more complexity in their systems than do NON-ERP-Users; and ERP-Users think that their systems took too long to implement The overall results of this study indicate that management accountants are seeing improved best practices with MIS that have ERP

characteristics.

TABLE OF CONTENTS

Chapter

L INTRODUCTION L2 S222 221211 111252111111111112111111 11111 Hy Hy 1

OVELVIOW 000 1

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lpqeegev-Euä Ko) 2

I0 ẽẽi›ö›:i33 4

Model Measurement 7

® si) 8

I ñyy2:v.v090:4208.4214ïi2 Ô 9 icexes001i1e;0 AE 9

Benefits and Weaknesses Of ERP - TH nen ngư 11 ERP Constructs for Benefits - Úc 11 8s, 8c vn 12

Constructs for WeaknesSes nọ 15 ERP — Necessity and Hope for the Future -.- 5-55 5s Scszssseereres 17 The Role ofthe Management Accountant - ác site 18 The Evolution in Management Accounting -ss-ss- 18 The Management Accountant - Positioned to Judge the Effectiveness Of MS - À2 22v +21 S13 2312117111512 111110 1 HH Hà TH TH HT HH 20 SUMMALY 3831 21

TH METHODOLOGY ooo ẮẮ.ẮẮ 23

Respondents and Data Collection Úc Hee 23 ›{c-aš0,8 AE -a 24

Independent varlables - - nnsnnsnsrnHH HH re, 24 P2 26e Ai AB ằ.e 25

Hypotheses Testing and Expected Results - SSccscseceere 30 P08.) MA .Ỏ 33 k1 0010 3 36

IV ANALYSIS OF THE DATA -.-2Ặ 2Q Q St S2 SH Hee 37 ae 9)1vì16 0A 37

Characteristics of Respondenfs - - - Sn ng 1112112 38 8y 38

;C 2e: 8 NA 38

Demographics of Control VariabÌes - - - se ssrrrreereree 40 PB vyn 0i NEƯN Ớ -.- aa 49

Deñmtional Variables of MIS - - + SSnS SH H2 treo 49 Benefits and Weaknesses of the MIS : ERP-Systems Versus NON- ERP-Systems NA la 51 Multivariate Tests of Significance «2.2.2.0 eceeseeceeetseeeteseeseteeeeeenseneesees 56 Tests for Significance of Control Variables .0 cccecceceesesseeteeteseeeees 57

ñ

Tests of Potentially Significant Control Variables for Each Dependent

2 59

Dependent Variables — Benefits: ERP Versus NON-ERP 59

Dependent Variables - Weaknesses: ERP Versus Non-ERpP 60

ANOVA Models Testing: Significance of ERP and Control Variables With 0y 1e 62

Hypotheses TestS S212 63 Signiũñcance Level nen tre 63 Comparisons: ERP Versus NON-ERP cee.ee- 63 Hypothesis One ~ Reconciliation of Conflicting Goals 64

Hypothesis Two — Standardization of Processes 64

Hypothesis Three — Reduction of Product Costs - 65

Hypothesis Four — Reduction of MIS Maintenance Costs 65

Hypothesis Five - Good Decision-Making -. -. 66

Hypothesis Six - Quick Decision-Making cà 66 Hypothesis Seven — Too Inflexible - - series 67 Hypothesis Eight - Takes Too long To Implement 67

Hypothesis Nine — Overly Centralized :: eee: 67 Hypothesis Ten — Overly Complex - :::c:ceeeteteeeeeeeeeeerenes 68 Additional Comparisons .-.::-cs:cscecesceeceeecneeseseeseseeceeseneeseensenseeses 68 Current Users’ ERP Versus Current Users’ Most Recent NON-ERP68 NON-Users' Expectations of Future ERP Systems 74

ERP-Users’ Current ERP Systems Versus NON-Users’ Expectations ofFuture ERP Systems - 0 nen re 76 Additional Descriptive Information - . - + 7s ssereererrrre 77 ERP-User Perceptions of Vendor Performance - 77

Overall Impact of ERP, or Need for ERP 80

Desree of Involvement - cà theo 80 Timing of ERP Implemenration -. 7o cccscecerererree 81 kì ooo 82

SUMMARY OF FINDINGS AND CONCLUSIONS 83

Hnzsbs01x:1e 0E 83

Conclusions and ImpliCatiOns - 5 5à S22 85 Limitations of the Study .:.:::c:ccscceceeseeseesseeaeseeesesseseesseseneeeeeeeaee 89 Suggestions for Future Research -c-cecererererrrrerrrrree 90 ;1128/9 6Ÿ 93

F21905 200Ẽ778 103

F ©9009) /2:005230)7 0177 103

B-— SURVEY INSTRUMENT FOR ERP-USERS 105

C - SURVEY INSTRUMENT FOR NON-ERP-USERS 105

7 110

Figure/

Table

1-1

41

4-7

4-8

49

4-10

4-11

4-12

4-13

4-14

4-15

4-16

4-17

4-18

4-19

LIST OF FIGURES AND TABLES

Page

Model: Purported Benefits and Potential Weaknesses of ERP 6

Response Rates 6 ẢẢ 1 39

North American Industrial Classification Codes 41

Respondents” Job Descniption 42

Respondents”" Work Experlence 43

Respondents’ Professional Designation 44

Level of Entity in Reporting Number of Employees 45

Reporting Entity`s Number of Employees 46

Level of Entity in Reporting Sales Volume 47

Reporting Entity`s Amount of SaÌes 48

ERP Definitional Characteristics - Mean Responses 51

Benefits/Weaknesses — Independent Samples — Mean Responses 52

Benefits/Weaknesses — Paired Samples — Mean Responses 54

Benefits and Weaknesses of ERP —- Grand Means 55

Tests for Sigmficance of Control Vaniables 58

Weaknesses — Tests of Potentially Significant Control Variables 61

Tests of SieniRicance of ERP - ANOVAs 62

Benefits/Weaknesses — Current ERP Versus Most Recent Prior ERP 69

Benefits/Weaknesses — Current NON-ERP Versus Future ERP 75

Benefits/Weaknesses — Current ERP Versus Future ERP 77

1X

4-20

5-1

Benefits/Weaknesses — Mean Responses by Vendor Results of Hypotheses Tests 20.00: 0cecc cee ee scene scenes etna eens

today’s business world are known as Enterprise Resource Planning (ERP) It is vitally

important to determine the extent to which these systems for organizing and managing data enhance the ability of organizations to compete and maximize profitability This question can specifically be addressed in terms of various “best business practices” which aid and enhance the profitability of the organization This study takes a look from the

perspective of the management accountant at the extent to which ERP systems are

perceived to enable these best business practices Conversely, ERP systems have been noted to have several potential weaknesses This study examines those weaknesses as

well Because management accountants are extensively involved in planning and control,

they occupy a particularly good vantage point from which to observe and assess the effectiveness of an ERP system in their organization

Research Questions

There are numerous ways in which a MIS can enhance the profitability of an

organization Among those factors are the ability of an organization to achieve: 1)

reconciliation of conflicting goals, 2) standardization of processes, 3) reduction in cost of product, 4) reduction in MIS maintenance costs, 5) better decision-making, and 6) quicker decision-making From the perspective of the management accountant, the effectiveness

of an organization’s management information system can be examined in terms of the degree to which the information system promotes the aforementioned benefits The primary research question for this research is: “Are ERP systems, in the judgment of management accountants, delivering more benefits as compared to NON-ERP systems?”

Although several benefits are claimed for ERP, several possible weaknesses or criticisms have also been cited These potential weaknesses are that ERP systems: 1) are

overly complex, 2) are inflexible, 3) promote overly centralized monitoring and control,

and 4) take too long to implement Therefore, a secondary research question of this research is: “In the judgment of management accountants, how severe are the purported weaknesses of ERP systems as compared to NON-ERP systems?”

Importance of Topic

If one accepts profit maximization as the overriding motive of the firm, it begs the question as to what factors primarily affect the successful achievement of that objective Much has been written about what the predominate profit-inducing factors are for an

organization [Blocher, Chen, and Lin, 2002} Among the possibilities that have been most

widely mentioned are competitive products/services being offered to the market,

competitive processes, competent management, effectively determined and focused

strategy, appropriate company culture, and effective human resource management [The Price Waterhouse Change Integration Team, 1996] To optimize the contribution of all of these disparate aspects of the profit-seeking organization, an effective information system within the firm is necessary ERP is the latest evolution of business information systems

As recently as 2000, it was estimated that license revenue for ERP vendors reached over

$7 billion [Gartner Group, 2001] An ERP implementation for an individual company can cost tens of millions of dollars and take years to complete Given the huge financial and time commitment required of organizations adopting ERP, it follows that management is

keenly interested in the effectiveness of ERP systems

Accountants working within the profit-seeking organization (hereafter called the

“management accountant”) can be thought of as proxies for the top management of the organization Since top management is ultimately focused on maximizing the

-competitiveness and profitability of the organization, it is reasonable to assume that the management accountant has a motivation consistent with that of top management in performing the work that they do Therefore, it follows that the management accountant

is one who is well positioned to evaluate the effectiveness of his firm’s management information system

The Model

This research suggests a model to help explore the linkage between characteristics

of ERP systems and management accountants’ judgment of the benefits and weaknesses of MIS systems deployed in their organizations The consensus of opinion is that successful contemporary ERP systems possess at least three common characteristics Those three are: 1) real-time capture of data, 2) integration of data into a single database, and 3) on- line availability of relevant information being made available to the level of the firm where

it is most needed for decision-making [Davenport, 2000; Kale, 2000] This study further

breaks down “availability of relevant information” into availability of information to “top management” and availability of information to “operations management”

In the proposed model, these four characteristics, or variables, are deemed the

definitional variables Note that two of the component definitions indicated above use

the word “data” while the other two use the word “information” There is an important distinction between the two Data is the raw input into the information system Only after the data has been processed by the system is it transformed into meaningful information to

be used for decision-making This group of four dependent variables is more fully defined and discussed in later sections of this dissertation

A survey of current literature (see Chapter IT) indicates that there is a set of

commonly expected benefits to be derived from an ERP system These are the benefits

variables listed in this model These six dependent variables represent the degree to which the ERP system improves 1) reconciliation/ optimization of conflicting goals, 2)

standardization of business processes, 3) reduction of product cost, 4) reduction of cost to

maintain the information system, 5) better decision-making, and 6) quicker decision- making as compared to NON-ERP systems

This study also utilizes four weaknesses variables: 1) over-complexity, 2)

inflexibility, 3) promotion of over-centralization of monitoring and control, and 4) having too lengthy an implementation period Each of these variables is also defined and

discussed at length later in Chapter 3

The model proposed by this study is that the stronger the positive characteristics of ERP systems (i.e., a single comprehensive data-base, real-time data, and availability of

relevant information to decision-makers), the more successful the ERP systems are

Furthermore, the more successful the ERP system, the greater the effectiveness of the ERP system is in enabling or enhancing the achievement of best business practices

Therefore, the model hypothesizes that as ERP-like characteristics present in an

organization’s information system increase, the degree of business best practices in an organization will also increase Furthermore, as management accountants observe

increased use of best business practices in the organization, they may judge some of the improvement to be the result of the use of ERP This can then be considered to be

evidence of the effectiveness of ERP systems The model also considers the possibility that purported ERP weaknesses or criticisms may have validity To the extent that this is true, as the degree of ERP-like characteristics in an organization’s information system increases, the degree of these weaknesses will also increase, which will decrease

information system effectiveness Figure 1 is a diagrammatic representation of the model

FIGURE 1-1 Model: Purported Benefits and Potential Weaknesses of ERP

Model Measurement

This study provides insights into the question of whether ERP provides benefits by asking management accountants their perceptions of information systems with which they are familiar Some of these systems are ERP, and some are not The ERP versus NON- ERP comparison is done in two different ways First, the study compares perceptions between management accountants working for organizations that are using ERP versus management accountants working for organizations that are not currently using ERP

Second, management accountants who work in organizations that currently use an ERP

system are asked to compare the current system with the organization’s most recent NON-ERP system

The basic comparison is current ERP-User versus current NON-ERP-User, and each of these groups has its separate survey instrument (see Appendices B & C) The

comparisons are made via fourteen specific questions answered on the surveys The fourteen questions are derived from the four definitional variables, six benefits variables, and four weaknesses variables of the model (see prior section) The fourteen variables are measured on a continuous Likert-type scale The “Methodology” chapter explains how the fourteen definitional/benefits/weaknesses variables are structured into questions on the surveys so that the between-group and within-group comparisons described in the

previous paragraph can be done

Contributions

This research presents empirical evidence to answer the two research questions: 1) are the purported benefits of ERP being delivered and 2) how severe are the potential weaknesses of ERP, and it adds to the field of knowledge regarding the effectiveness of ERP systems If ERP systems are effective, management accountants should see

improved best practices in MIS that have ERP characteristics If improvement is not

observed, it may suggest that some organizations are wasting money, time, and effort on ERP installations

Chapter 2 presents a review of ERP literature Chapter 3, “Research Methodology”, discusses the survey respondent pool, data collection, variable definition, and research methodology Chapter 4 is a discussion of the analysis of the data, including hypotheses testing Chapter 5 presents the major conclusions and implications of the study, discusses limitations of the study, and makes suggestions for future research

integrated, enterprisewide, process-driven, and real-time enterprise.”

(Kale, 2000) Some of the key words/phrases in the above definition are “integrated”, “enterprisewide”,

“real-time”, “catering to all the business functions”, and “delivered functionality” The enterprisewide integration of ERP is made possible because these systems are comprised

of one single, integrated data-base Data is input into the system only one time, at one

single entry point, and then is disseminated instantaneously to wherever else in the system

that it needs to go The phrases “catering to all business functions” and “delivered

functionality” imply that the data is transformed into relevant information to be used for

decision-making at the appropriate level of management within the organization

Therefore, the working definition of ERP used for this research is that it is a management information system that: 1) consists of a single, comprehensive data-base, 2) accomplishes

real-time dissemination of data throughout the organization, and 3) makes available

relevant information for decision-making to the appropriate level of management

There has been huge growth in ERP during the early to mid-1990’s Worldwide sale of ERP software has been estimated to have hit the $25-billion-annually range as of

1999 [Smith, 1999] The latest estimates from Gartner Group is that the ERP industry is currently undergoing a slight retrenchment in growth rates — modest 8% growth in 2000, negative growth projected in 2001 and 2002, with positive growth not resuming until

2003 [Topolinski, 2001] Nevertheless, ERP still represents a significant amount of economic activity Gartner Group reports that pure license revenue for ERP vendors was

$7.3 billion in 2000 [Topolinski and Eschinger, 2001] With the additional costs of

hardware installation, networks, and consulting fees, total ERP expenditures might

reasonably be three to five times that amount Even this is a conservative estimate

because it does not take into account the cost of internal resources that firms devote to ERP development and maintenance nor the implicit cost of any consequent loss of focus

on the business As recently as March 2000, the AICPA cited ERP as one of the top ten

technology applications for accountants in the year 2000

Given the tremendous growth in ERP within the past decade, it is appropriate to

take an objective, empirical look at its benefits and weaknesses, which is what this study attempts to do The remainder of this chapter reviews previous ERP literature relevant to

this study The chapter proceeds in two major sections First, the conceptual benefits and

weaknesses of ERP are discussed Second, a review of literature is made that builds the

case that the management accountant is in a singular position to be a good judge of the effectiveness of his/her organization’s management information system

10

Benefits and Weaknesses of ERP

In the rapidly changing, globalized, and complex business environment that exists today, it is becoming increasingly difficult for companies to create and maintain

competitive operations, planning and control systems One tool that has emerged on the business scene during the 1990’s to assist companies in this challenge is Enterprise

Resource Planning (ERP) systems [Ptak and Schragenheim, 2000]

An ERP system is designed to bring together the key accounting, business, and

management functions of a company and provide a high-level overview of what is going

on within a company [Ford, 2000] In other words, ERP integrates the core business processes of the firm under the coordinating umbrella of one software system The goal is seamless integration, with all of the firm’s vital information, both financial and non- financial, being housed in one common database The optimal situation is to enter a

transaction one time, with total integrity, into the firm’s information system and then have

that transaction cascade its way in multitudinous paths throughout the firm This

integration provides for several important benefits to the organization

ERP Constructs for Benefits

There are many positive aspects of an effective ERP system [Challener, 2000] First, ERP provides an organization with a full set of communication tools across the enterprise with the entire company using the same set of numbers The extent of a

positive impact depends upon how far across the organization the integration is taken and whether companies continue to upgrade their systems This leads to a second positive aspect, which is that ERP then can provide a backbone for building enterprise-wide

H

solutions such as advanced planning and customer relationship management ERP also provides data consistency, which is particularly essential for a far-flung global company Finally, by collecting, combining, and analyzing data in a comprehensive way, companies can improve their business systems, practices, and ultimately, their bottom line

Best Business Practices

An implicit assumption underlying the ERP movement is that for these systems to

be successful, the organization must install and execute “best business” practices [Kremers

and VanDissel, 2000; Kumar and Hillegersberg, 2000] One often mentioned best

business practice is the reconciliation of conflicting goals within the organization

In Gattiker and Goodhue’s (2000) study of individual plant locations within several

manufacturing companies, the ERP system was found to provide for better discipline, enhanced interdepartmental coordination, and better-facilitated communications among departments within plants and between plants Another recent study found that the more critical the need for coordination between disparate parts of an organization and

reconciliation of conflicting goals, the more firms tured to ERP for a solution [Banker,

et al., 2001]

ERP systems are instruments for improving and standardizing business processes

[Scheer and Habermann, 2000] In fact, some students of ERP say that standardization of

processes is a requisite for the successful implementation of ERP [Kremers and Van Dissel, 2000] Several studies have observed how severe problems can be created for the

organization if the process of re-engineering, i.e., standardization, is not done up-front in

an ERP project and is not done properly [Gibson, et al., 1999; Markus, et al., 2000] The question follows, then, of just how an organization can gain a competitive advantage

12 -“

based on standardizing business processes Lee and Lee (2000) conducted a study that addressed the question of how one organization can design more competitive processes if competing organizations are adopting their standardized processes from the same

reference models Their study suggested that ERP should be understood by distinguishing

the implementation process from the integration process In the implementation process, firms simply identify and attempt to incorporate into their processes the best process

practices of similar companies This, however, invariably results in some irreconcilable incompatibilities with their specific organizational needs The organization will then adjust

within a reasonable range of capability and options in integrating systems, which will then

determine their particular unique process-based competitiveness Standardization not only facilitates the implementation of ERP itself but also ultimately parlays the operating

efficiencies into cost savings to the organization [Gattiker and Goodhue, 2000] As just

one example, Hirt and Swanson (1999) recently conducted a study of an ERP installation

at Siemens Power Corporation where the cost savings resulting from the process

standardization brought on by ERP was evident

The above suggests another benefit of ERP - that of cost reduction The

conventional wisdom is that ERP systems provide the organization with several kinds of

cost savings [Gattiker and Goodhue, 2000] ERP should allow organizations to

experience increased efficiency not only in the costs of sourcing, producing, and

distributing their products but also in the costs of administering and maintaining the organization’s information system Banker, et al., (2001), conducted a study in which they found that the greater the degree a firm followed a cost leadership strategy, the more likely it was to adopt an ERP system Part of Poston and Grabski’s (2000) ERP study

13

looked at transactions cost economic theory to posit that firms economize on transactions

costs They cited work by Gurbaxani and Whang (1991) to point out that external

sourcing of inputs may entail costs of obtaining market information, communicating with vendors, transporting goods, and holding inventories An ERP system is expected to

provide accurate and accessible data to facilitate the lowering of all these costs There is

empirical research to support the notion that technology enhancements such as improved

management information systems such as ERP can reduce growth in operating expenses {Harris and Katz, 1991] and improve cost efficiency [Bender, 1986]

Another presumed benefit, or manifestation of efficacy, of ERP is that it enables improved (i.e., better/quicker) decision-making within the organization However, there is

little empirical evidence in the literature to support this supposition The most extensive

recent treatment of the topic appears to be part of a study by Poston and Grabski (2000)

of the impact of ERP on firm performance, where “performance” was couched primarily in

terms of cost control (see the preceding paragraph) In their study, Poston and Grabski

first looked at PR Newswire press releases for all companies between 1980 and 1997 that had announced of adoption of ERP solutions from certain major ERP vendors Identifying

54 firms, they then looked at COMPUSTAT tapes to observe relationships between revenues and SG&A, and revenues and cost of goods sold (COGS) Building on models

by Gurbaxani and Whang (1991) and Jensen and Meckling (1992), they established a linkage between better decision-making and costs Their reasoning was that decision- making rights should be located where combined information and agency costs are

minimized within the firm Since ERP is expected to provide more timely and accurate organization-wide decision-making, information processing costs and opportunity costs

14

due to poor information should be reduced Thus, one should be able to observe SG&A and COGS to be reduced in ERP-adopting organizations The results of their study were somewhat ambiguous Perhaps not surprisingly, all costs went up as a percent of revenues

in the year initially after adoption of ERP _ Interestingly, within three years, COGS went down as a percent of revenues (supposedly as the result of improved financial performance resulting from better decision-making), but SG&A as a percent of revenue did not

Constructs for Weaknesses

Unfortunately, despite the recent interest and growth in ERP, it cannot be said that

there is universal satisfaction with ERP At present, the record of ERP success is

decidedly mixed [Gamble, 2000] There is evidence that while ERP has worked fairly well to unite some corporations around a common system, it has sometimes failed to provide the intended functionality required of a single all-purpose system The basic reason for this is that ERP systems are built to be complete and self-sufficient Contrary

to being highly integrative within themselves, ERPs are not meant to interface with a host

of other vendor or in-house-built applications What it appears has happened is that other applications with high-powered functionality have flooded the market, leaving many ERP vendors behind in their efforts to boost the functionality of their own systems

In recent years, a number of cases of high-profile companies that have had

difficulty in implementing their ERP systems have hit the general business press Hershey Foods is a case-in-point [Osterland, 2000] In 1996, Hershey started a massive ERP

installation that involved four different teams of consultants and three different software vendors that were supposed to put the company’s operations on one integrated computing platform The $115 million system was supposed to replace scores of legacy systems that

15

were currently running everything from inventory to order processing to personnel The

plan was to bring all the individual applications of the project together simultaneously It did not happen What did happen was a much-publicized system failure that almost

brought the company to its knees During the busiest part of the year, major customers

like Wal-Mart and K- Mart were buying extra candy for Halloween from competitors such

as Mars and Nestle, while Hershey warehouses were piled to the rafters with perfectly good, but undeliverable, product Financially, the company reported a disastrous 12.4 percent decline in sales and a staggering 18.6 percent decline in net income Other well-

known companies such as Dow Chemical, Boeing, Dell Computer, Apple Computer,

Whirlpool, and Waste Management have also experienced difficulty with their ERP

installations

Upon examination of the ERP failures described above, a few commonalities can

be identified One common weakness of ERP systems is that they are inflexible This is the possible negative side of a system being based upon a single, comprehensive database with standardization of processes Once an organization has “re-invented” and

standardized its ways of doing business, the standardization and coordination must be

maintained, and future changes, therefore, are confined to a fairly narrow range Thus,

there is a certain inflexibility, going forward, in adaptation to change [Davenport, 2000;

Bancroft, et al., 1998]

Another possible weakness of ERP systems is that they require too long to

implement There is empirical evidence showing that a 3 - 5 year implementation period

is not uncommon to install an ERP system in a large organization [Davenport, 2000; Sweat, 1998] Some would say that this creates an untenable situation in the rapidly

16

changing business world that exists today Therefore, it is possible that the

implementation period for most ERP systems is impractical, and simply too long

A third possible weakness of ERP systems is that they promote an overly

centralized management hierarchy for monitoring and control ERP systems do require

that information will be centrally monitored and that organizations have a well-defined hierarchical structure [Davenport, 2000; Bancroft, et al., 1998] Some experts say that the better way to manage most modern organizations is with decentralized “bottom-up” empowerment Therefore, it is possible that the centralized monitoring and controlling of the organization, as is promoted by ERP, is actually a detriment to the organization’s performance

Last, there is an argument to be made that ERP systems are overly complex Generally, the simpler a MIS appears to an end-user, the more complex the system is Complex integration and coordination within the system is required to create the

appearance 9f simplicity to those using the information output of the system ERP

systems, internally in terms of configuration and programming, are relatively complex

[Langenwalter, 2000; Bancroft, Seip, and Sprengel, 1998]

ERP — Necessity and Hope for the Future

In spite of the above-described problems, many observers maintain faith in ERP as the foundation on which tools for competitive advantage are built [Menezes, 2000] When one looks at the extreme complexity, competitiveness, and rate of technological change facing large-scale companies today, one is hard pressed to refute this faith

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Comprehensively integrated operations planning and control systems are the most viable

hope for holding the multinational firm of tomorrow together as a cohesive economic

The Role of the Management Accountant

The Evolution in Management Accounting

Traditionally, all the key information of business must pass through the accounting

“bottleneck” before it can become management information [Shank, 1995] But what if the accounting bottleneck were to be substantially eliminated? Today, data warehouses are replacing general ledgers [Baldwin, 2000] The proliferation in charts of accounts is diminishing, with less and less of the information for management passing through the monthly financial package The formally scheduled monthly close is being replaced by the continuous “virtual” close [Shank, 1995] Financial reports are being replaced by business reports generated by the managers who use them rather than by accountants [Boer, 1996] The financial architecture represented by main frames and flat files is being replaced by client/server networks and relational databases with open access through LANs and

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WANs [Hall, 2001] All of the above changes are being facilitated by the architecture of ERP systems However, the relationship is symbiotic Just as the latest management

information systems are changing the way accountants do their work, accountants should contribute their expertise on the structure and development of information systems

[Kaplan, 1995]

The time has arrived for management accountants to become part of their

organization’s value-added team [Kaplan, 1995; Boer, 1996] In today’s world,

management accountants must participate in the formulation and implementation of strategy and then help translate strategic intent and capabilities into operational and

managerial measures [Porter, 1980 & 1985; Shank, 1989; Bromwich, 1990]

Management accountants are moving away from being just the scorekeepers of the past and are becoming key participants in the design of the organization’s critical management information systems ERP is the essential strategic information system that most large complex companies will have to install and operate successfully in order to compete in the

future [Davenport, 2000]

The AICPA’s Management Accounting Executive Committee recently developed

seven defining trends of a new finance vision [Fisher, 1996] Among those trends was a

greatly enhanced expectation regarding the role of finance as overall business leaders and strategic business partners More specifically, the report cited an acute and growing demand on accountants to supply strategic decision support information as a crucial competitive weapon Also noted was the escalating acceptance of network and integrated system technology as both the enabler and driver of organizational change Network and system integration and change are what ERP is all about Therefore, it is logical that the

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management accountant be someone who will provide strategic leadership in the

development and implementation of organizations’ management information systems

The Management Accountant - Positioned to Judge the Effectiveness of MIS

There have been two recent major studies that have looked at the changing role of

the management accountant in an organization One study, sponsored by the Institute of Management Accountants (IMA), concludes that management accounting in America is

nothing like it was even ten years ago [Siegel, 1999] The report says that companies are moving away from the centralized accounting department to structure work alongside the members of the operations departments they serve and that more than half now work on cross-functional teams Management accountants now spend the bulk of their time

working with others, analyzing and interpreting information

Similarly, a study sponsored by the Economic and Social Research Council found that the changes taking place were not in the use of the management accounting

techniques but in the use of the management accounting information The data used for

key performance indicators is becoming increasingly non-financial and strategic in nature

Management accountants need to be more flexible, using both financial and non-financial data to aid management at all levels

The connection between ERP and management accounting can now be

summarized ERP has several purported benefits and weaknesses The benefits, if true,

are substantial Despite the weaknesses, it appears that in the near future ERP will be the system of choice for most large organizations To be successful, ERP requires the support

of a skillful management team that possesses an integrative, strategic vision Since |

Management accounting has evolved to be largely strategic in nature, it follows that the

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management accountant, in many organizations, is a key player in development,

installation, and subsequent use of an ERP system For this reason, management

accountants are in an excellent position - perhaps more so than any other generic group of persons in an organization — to judge the effectiveness of their organization’s MIS system

Summary

In the last decade there has been huge growth in the number of organizations using

ERP systems These systems are characterized as: 1) having a single, comprehensive data-

base, 2) with real-time collection and dissemination of data, while providing 3) relevant information to top-management for decision-making, and 4) providing operational-

management relevant information for decision-making Despite the apparent popularity of ERP systems, there is mixed opinion as to their effectiveness This research examines the

perceived effectiveness of ERP by looking at six benefits and four weaknesses that have been reported in the literature regarding ERP The perceived effectiveness of ERP

systems is measured relative to the perceptions of users of management information

systems that are not ERP The six benefits are: 1) reconciliation of conflicting goals, 2) standardization of processes, 3) lowering of product costs, 4) lowering of MIS

maintenance costs, 5) promoting good decision-making, and 6) promoting quick decision- making The weaknesses are that ERP: 1) is too inflexible, 2) takes too long to

implement, 3) is too centralized, and 4) is too complex By examining the perceptions of

management accountants, who are a group of professionals with a uniquely informed

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position in which to observe ERP systems, this research presents evidence of the degree that organizations are actually experiencing the benefits and weaknesses of ERP

The next chapter presents the variable constructs used in the study and describes the data collection and analysis methodology to be used Hypotheses testing and expected

results are also discussed.

CHAPTER Il

METHODOLOGY

Respondents and Data Collection

This study addresses the research question of whether ERP systems are effective in improving the operations of organizations The perspective adopted is that of the internal

accountant working as an employee for the business entity This paper labels such a

person a “management accountant”

The respondent pool for this dissertation consists of management accountants working for profit-seeking organizations These people were reached via a mailing list

obtained from the Institute of Management Accountants (IMA) With over 60,000

members, the IMA is the world’s largest non-profit organization dedicated to being the leading voice of accounting, financial, and information management executives The researcher obtained from the IMA a randomized mailing list from its membership roster One objective was to get the survey instrument in the hands of management accountants who truly have an interest in the efficacy of ERP, and consequently have a strong

motivation to learn about how ERP might be cost effective for their organization

Therefore, in an attempt to reach respondents with significant knowledge and authority, the mailing list was selected from among IMA members with titles such as CFO,

Controller, CIO, etc

Approximately five thousand survey instruments were mailed A cover letter explained to the recipients the nature of the research project and solicited their

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participation Also included in the mailing were two survey instruments — one for ERP-

Users and the other for NON-ERP-Users (See Appendices (A) cover letter, (B) “ERP- User” instrument, and (C) “NON-ERP-User “instrument) The cover letter clearly

explained that only one of the two instruments should be filled out and retuned Thus,

the selection of membership between the two groups of ERP-Users versus NON-ERP-

Users was entirely self-selected The respondents themselves decided to which group they

belonged The inducement for recipients to participate by fillmg out and returning one of

the surveys was an offer to share the subsequent results of the research with them via e-

mail or access to a web-site

Research Model

Independent variables

The independent variables in the model examined by this study are of two basic types: 1) treatment and 2) control The treatment variable has two levels: 1) ERP-User or 2) NON-ERP-User Several control variables, described below, are also examined

Treatment variables (ERP-User versus NON-ERP-User) — ERP-User respondents are asked about: 1) perceptions of effectiveness of their current ERP system and 2) perceptions of effectiveness of their most recent NON-ERP system Similarly, NON- ERP-Users are asked about: 1) perceptions of the effectiveness of their current NON-ERP systems and 2) perceptions of the effectiveness of a future ERP system that their organization might adopt Two primary comparisons are of interest: 1) current ERP-

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Users versus current NON-ERP-Users and 2) the current system of ERP-Users versus

their most recent NON-ERP system

Control variables — The control variables used by this study address demographic

features of the sample organizations and their respondents Control variables are: 1) the nature of the product or services of the organization, as indicated by NAICS code

(NAICS), 2) job description of the respondent (JOB), 3) respondent’s years of work experience (EXPER), 4) professional designations held by the respondent (CMA, CPA, et al.), 5) number of employees of the company/division (EMPNUM), and 6) annual sales

volume of the company/division (SALESAMT)

Dependent Variables

Management information system characteristics are operationalized by three types

of dependent variables: 1) definitional variables, 2) benefits variables, and 3) weaknesses

variables These variable constructs are represented by questions 1 through 24 on both

survey instruments All dependent variables are measured “continuously”, (i.e., they are couched in terms of an 8-point Likert-type scale)

Definitional variables — The definitional variables elicit from the respondent

management accountant an assessment of their current management information system

An examination of the dependent variables of: 1) integration of data into a single

comprehensive data base, 2) real-time creation of data, 3) relevant data made available to the top management of the firm, and 4) relevant data made available to the operational level of the firm are used to establish validity of this construct If the above four

definitional variables are truly what distinguishes an ERP system from a NON-ERP system, then a between-subjects analysis (ERP-Users versus NON-ERP-Users) should

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produce statistically different means to questions soliciting ratings of the degree of the

existence of these characteristics in the MIS of their organization

1) integration of data into a single comprehensive database - An unfortunate characteristic of NON-ERP information systems is their heterogeneity, i.e., they tend to be comprised of a disparate mixture of non-integrated processes and databases From an MIS perspective, they are commonly plagued with problems such as incompatibility among functional subsystems, differing standards, interfacing issues, limited upgrade

paths, costly maintenance, high operating costs, costly training and support activities, and inconsistent documentation, etc [Kale, 2000] An integrated single comprehensive

database ameliorates many of these problems In an ERP system, functional subsystems are linked, standards are common and consistent, upgrade paths are integrated and

relatively easy to execute, system maintenance and operating costs are lessened, and documentation is consistent throughout the system

2) real-time dissemination of data - A characteristic of an ERP system is the immediate updating and posting to relevant master and transaction data files [Kale, 2000]

A true ERP system provides for the immediate dissemination of data, at the time the actual transaction or process is taking place, by the persons who are actually responsible for it

3) availability of relevant information to top management - Once data has entered

the ERP system, it is correct, up-to-date, and accessible via the computer at the executive

level of the organization to all authorized personnel

4) information made available to the operational level of the firm - An important improvement in information systems brought by ERP is that it ensures that the real-time, accurate data is made available to the people who actually need it The objective is to get

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the data to the operational level of the firm where many of the firm’s day-to-day tactical decisions are actually made

In a study of the use and efficacy of ERP systems, the degree of perceived use of ERP is important The proponents of ERP systems make bold claims about several

benefits that ERP systems supposedly engender These benefits may or may not be

occurring in organizations This study explores whether, in those companies where

changes in the efficacy of the management information system is evolving, improvement is associated with use of an ERP system

Benefits Variables - Management accountants’ perceptions of MIS effectiveness

are operationalized by the following dependent variables that measure the degree to which the MIS facilitates:

1) reconciliation/optimization of conflicting goals - In the firm where business functions are not connected via an integrated information system, conflicting goals may occur For example, purchasing may desire and plan to build safety-stocks while

accounting/finance may desire to hold inventory levels to a minimum Similarly, marketing may have the goal of offering as much product mix variety as possible whereas

manufacturing would like to hold product variety to a minimum [Kale, 2000] A good MIS will enable reconciliation of such conflicting goals within the organization An ERP system, by virtue of its single, comprehensive, enterprise-wide database will tend to do a better job of enabling the reconciliation and optimization of conflicting goals within the

organization

2) standardization of business processes - A “process” in a business context can

be defined as the set of resources and activities necessary and sufficient to convert some

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form of input into some form of output [Kale, 2000] The modern business organization must deal with internal processes, external processes, and a combination of both

Furthermore, the processes cross functional boundaries and exist at all levels of the

organization For the data of the organization to be managed by one comprehensive

enterprise-wide database in an efficient manner, the processes from which the data is

derived should be as standardized as possible

3) reduction of cost of product —- Because ERP promotes, if not necessitates, a much leaner and more efficient supply chain, costs within the product creation and

delivery system should be lower It follows that, on a per unit basis, costs should be lower ERP should enable the organization to make the same product mix, but at lower

cost

4) reduction of cost of maintaining systems - Since data is pushed to the

operational level of the firm where actual work and decision-making is done, this tends to prevent the problems and the cost associated with collection of voluminous data,

preparation, entry, correction of inaccuracies, back-ups, etc [Kale, 2000]

5) good decision-making — A potential outcome of ERP systems is that better decision-making, at least on routine matters, by the front-line operators should result

[Kale, 2000]

6) quick decision-making — A fundamental element of ERP systems is that they are real-time Data is entered into one single, comprehensive data-base, and relevant

information is virtually simultaneously disseminated to interested parties within the

organization for decision-making [Kale, 2000] It follows that with an ERP system,

decision-making for the organization, as a whole, should be quicker

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