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ERP EVOLUTION AND SME CONSTRAINTS

                                                       Abayomi Baiyere
                        International Masters in Management of Information Technology IMMIT
                                   IAE, Aix Graduate School of Management, France.




ABS TRACT
Small and M edium-size Enterprises (SM Es) are in contrast to larger organizations in possession of limited resources.
ERP Implementation, however, is a process that requires and is dependent hugely on the use of resources - from tangible
to tacit resources. This apparent situation prompts two logical questions: Would SM Es have to wait till they have enough
resources? Or would ERP’s evolve to accommodate the constraints of SM Es? This paper examines the evolving
innovation trend of ERP systems and the future tendencies, in light of the constraint posed by the SM E market.


KEYWORDS
Small and Medium-size Enterprises (SMEs), Enterprise Resource Planning (ERP), ERP Evolution, SM E
resources.


1. INTRODUCTION
Due to the increasing tough nature of modern day business competition, both large and small & med iu m-
sized businesses are continuously in search of better ways to imp rove their processes and achieve competitive
advantage in their domain. With the advent of Enterprise Resource Planning (ERP) system, both businesses
have turned to this integrated informat ion system as a means of acquiring this adv antage (Koh et al. 2009).
     The general environment for ERP adoption and implementation has prior to now been more focused on
large companies (Everdingen et al. 2000). Ho wever, there is an increasing awareness and positive perception
by small and mediu m sized enterprises (SMEs) on the potential benefits accruable fro m the adoption of ERP
systems. This has subsequently translated into an increase in the nu mber of SM E businesses interested and
even adopting ERP systems. Despite this emerg ing trend, there also exists a major section of SM Es with
concerns about the relative cost of resources and associated challenges involved in the successful
implementation of ERP systems. (Equey & Fragnière 2008).
     This paper therefore observes the interplay of the evolution of ERP systems and the impending
constraints on the adoption of these systems by SMEs. The paper is further structured to present an emerging
possibility for the evolution path of ERP technology in the future by examin ing two driv ing questions:
Would SMEs have to wait till they have enough resources? Or would ERP’s evolve to accommodate this
underserved sector?
     An observation from several academic literatures on ERP shows that there has been more focus on large
organizations and this observation can easily be correlated with the fact that the development of ERP systems
targeted large organizat ions fro m the onset. Existing literatures on ERP and SM Es have generally reflected
the urge and will of SM Es to emb race ERP systems into their operations in order to gain competitive
advantage (Metaxiotis 2009). Ho wever, research has also pointed out that SMEs are faced with the daunting
challenge of the necessary financial, material, human, and infrastructural resource and skill requirements that
are essential for a successful adoption and implementation of an ERP system.
     Furthermore, it is of particular interest to note the choice of ERP vendors from which SM Es obtain their
ERP systems from. Several factors have been identified as propelling reasons for the choice of ERP vendors
opted for by SMEs. Some factors that mostly affect these decisions are price, depth of organizational
change/fit and type of ERP vendors (Federici, T. 2009).
     Consequently, the traditional large vendor co mpanies of ERP – Oracle and SAP whose products are
targeted to large mult inationals are increasingly recognizing the growing demand in the SME markets. This




                            Accepted for publication in IADIS Information Systems conference – Ger many, 2012
emerging market dynamics is changing the face of ERP systems with the introduction of SME-specific ERP
systems by new vendors, offering less complex ERP systems at reduced costs (Koh et al. 2009).
     This research paper is a result of a literature review of case studies, professional journals, news articles,
and industry web sites concerning SME’s ERP adoption challenges, ERP evolution tendencies in cluding
market and information technology drivers. The purview of this paper is focused on the effect of the
increasing demand of ERP systems by SMEs. The paper however does not focus on large businesses and
other value adding Information systems. Our research is therefore informed by prior research that provides a
framework for the analysis as well as our analysis of several perceptions of the research question of SME
constraints and ERP evolution being evaluated.


2. ERP VS SME

2.1        Enterprise Resource Planning (ERP) Systems
According to Watson and Schneider (1999) and Klaus, Rosemann and Gable (2000), an Enterprise Resource
Planning (ERP) system can be easily described as a generic term used to for an integrated enterprise
computing system. It basically integrates the complete range of a business's processes and functions so as to
present a holistic view of the business from a single informat ion and IT architecture. ERP systems are
comprehensive packaged software system which handles the majority of an enterpris e's informat ion systems
requirements. It facilitates the efficient flow of info rmation among all functions within an organisation.
     ERP software is majorly offered by a range of vendors that specialise in this particular segment of the
software market. Currently, The major ERP vendors are SAP, Oracle, and Microsoft (Panorama 2010). ERP
software is highly configurable to accommodate the diverse needs of users across most sectors of the
business world (Klaus et al. 2000). Identifiable attributes that characterizes an ERP system includes the
following:
Technical Perspective
    1. Packaged Software: A co mmercial product provided by specialized vendors.
    2. Co mprehensive: It is generic, able to support variety of organizational functions and must be
        suitable for a wide range of business organizations.
    3. Configurat ion: needs to be configured before it can be used. (Klaus et al. 2000)
    4. Modular: Functionalities are logically built into different business processes in modules .
    5. Real time: Allow access to data in “real time”
Organisation Perspective:
   6. Best business practices: Has a collect ion of the best business processes.
   7. Integration: Integrates majo rity of a business’s processes
   8. Co mplexity : Tedious imp lementation process
   9. Cost: Expensive to adopt
   10. Skills: Requires high knowledge skills
    With these selected characteristics, ERP systems have proven to be easily targeted to and easily adopted
by large organizations. This is primarily due to the fact that these organization require the strategic and
competitive advantage offered by ERP and they have the resources to overcome the characteristics on its
negative axis. These same advantages are also the propelling force and reasons why SMEs are craving to
adopt and imp lement this system, however crossing over the negative axis has been a dete rrent to many such
SMEs.

2.2        The World of Small & Medium Sized Enterprises (SME)
There is no globally accepted definition of an SME, however for the purpose of clarity in this paper, we will
consider SM Es to be organizations having most (but not necessary all) of the fo llo wing characteristics:
      1.   Size: Dependent on a limited nu mber of personnel ( less than or equal to 250).
      2.   Turnover: Less than or equal to Fifty million Eu ro (50,000,000 Eu ros)
(European Co mmision 2005)
      3.  Leadership: The Owner and the Manager/CEO are often the same person. (Sh iau et al. 2009)
      4.  Customer Relations: Close relat ionship with customers and partners
      5.  Flexib ility: High flexibility and agile adaptability
      6.  Specialist: Usually specialized with niche strategies
      7.  Funds: Limited funds to solely finance expensive investments
      8.  Co mpetitors: The business is usually small in co mparison to larger co mpetitors in the sector.
          (Recklies 2001 and Kets de Vries 1993)
      9. ERP Users: less than a 100 ERP (potential) users.
      10. Operation Sites: Usually have one or a few sites.
     An important feature of SMEs that will be useful in this foregoing analysis is the perceived importance
attached to SMEs on a national level. By extension this imp lies that governments will be logically willing to
support its growth and this could be an important factor that can be essential in the forthcoming evolution of
ERP systems. (Deep et al. 2007)

2.3        Constraints to SME’s Adoption of ERP
Fro m the foregoing list of characteristics drawn above for ERP systems and SMEs, it becomes apparent that
for most SMEs, a major constraint to adopting ERP solutions, is primarily the lack of necessary resources
(Metaxiotis 2009). The different types of resources that could be lacking in an SM E - ranging fro m soft
resources like skills to physical resources like cash (Vilpola et al. 2005) - as mentioned above, can be easily
observed by looking side by side at the attributes of SMEs and ERP (as listed in the previous section).
     Furthermore, if we take a step beyond the obvious resources barrier, another observable constra int that
can be identified is the issue of “Fit”. SM Es are characterized by flexibility and agile adaptability unlike large
corporations with rigid and fo rmalized structures. Most SME firms depend on their id iosyncratic processes,
which enables them to serve customer demands in a flexib le manner but the rigid structure imposed by an
ERP could be a threat to such flexible methods of functioning. (Sia 2008). Present ERP systems therefore
find a better and easier fit in larger organizations than in SM Es (Deep et al. 2007).
     Consequently SMEs have to go through either a process of thorough customization or in most cases
change their processes and systems to align with the fitness requirement of the ERP system. Th is can in some
cases mean losing the inherent strategic advantage accruable to their flexibility and agile processes (Dieng
2005). A lso due to the unpredictable nature of most SMEs’ strategic future, their strategic plan is usually an
“emerging vision” or “strategic awareness”, neither of which fits easily to the explicit definitions necessary
for a successful imp lementation of ERP (Metaxiotis 2009).
     However, despite the inundating nature of these constraints, some SME organizations have matured to a
level that they have enough resources and a good enough fit to want to proceed with the adoption of an ERP




                              Figure 1: Factor of likely risks during ERP implementation
system like vanilla imp lementations. A challenge that however surfaces at this point is that of implementation
success. As highlighted in the characteristics of ERP above, ERP implementation takes time and there is a
history of SMEs that have implemented ERP systems without success. In fact research shows that larger
organizations have a higher success rate than SMEs (Federici 2009 & Metaxiotis 20 09).
     Implementing an ERP system can be very valuable and beneficial to an SME but the price of a failed
implementation could be really grave and even catastrophic in some SM E cases (Suna et al. 2005). Hence,
another constraint to the adoption of these system by SM Es can be simply identified as the risk of a failed
ERP implementation (Vilpola et al. 2005).
     As an instance, a survey of 1,600 organizat ions that have selected or imp lemented ERP systems over the
past four years was conducted by Panorama consulting group and they analyzed the risk factors that are
likely to occur during an ERP imp lementation (Panorama 2010) – see figure 1.
     With the apparent high percentage of these unfavorable risk factors, and fro m the risk co mponent of
SME constraints identified earlier, it becomes obvious that the risk factor of imp lementing an ERP will be an
important consideration for SM Es (Deep et al. 2007). This is particularly so due to the fact that a failu re in
implementation could spell doom for such an SME. Fro m figure 1 there is a very high probability that one or
more of the risks will occur. Also based on the probability analysis of the whole samp le, the chance that at
least one negative result will occur is about three out of four (72.4%) and it is close to one in three chance
(31%) that two or more unfavorable outcome will occur in any particular imp lementation. (Panorama 2010).


3. DISCUSSION
ERP has evolved fro m 40 years of trial and erro r. It’s evolution has been to become a strategic tool due to
continued improvement of the techniques used to manage business and the rapid growth of informat ion
technology. ERP systems evolution can be seen as a reflection of improved layers of functionality to existing
germ-cells of materials requirements planning (MRP) of the 1970s and manufacturing resource planning
(MRPII) of the 1980s. (Metaxiotis 2009).

3.1      The ERP Market
There are several ERP vendors in the market, but three major vendors dominate the ERP software sector. The
ERP market has been subdivided into four tiers – Tier I to Tier IV. The dominant vendors in the ERP
software sector by market share in 2009 as reported by panorama (2010) are shown in figure 2:




                                 Figure 2: M arket share of major vendor’s in 2009
     As shown in figure 2, Tier II vendors are other vendors other than the major three vendors that
specifically focus on midsize organizat ions that are a little less than the large Tier I organizations majorly
supplied by the other three. Other tiers: Tier III and Tier IV also exist. Tier III is more appropriate for SM Es
while Tier IV are basic accounting systems like Peachtree accounting and Quickbooks.
     It is worth noting that a current problem faced by Tier II vendors presently is that Tier I vendors are
moving into this space (Moeller and Rechnit zer 2008). The ERP market in Tier I is small and getting
saturated, therefore in order to continue to expand their businesses, they are reducing cost, simplify ing
transaction sets, and other incentives to enable mediu m sized co mpanies to have the broad features of their
Tier I pac kage. This tendency and move by the major Tier I vendors to the Tier II and Tier III markets
implies the opening of a new era and new possibilities for SMEs.
3.2      Emerging Vendors
While the major vendors were focusing on large organizations, a new ERP market was emerg ing – the SME
market. This consequently resulted in a natural emergence of ERP vendors focused on serving this market.
This new vendors were creating ERP systems that are SM E specific and aimed solely at capturing this new
market.
     The emergence of these new vendors has introduced new dynamics into the competition model of the
ERP software segment. Co mpetition is usually a platform that promotes new innovations (Aghion, Bloo m,
Blundell, Griffith and Howitt 2005). Due to fierce co mpetition fro m emerging vendors, prices of ERP
systems are dropping (Deng 2005). It thus suffices to say that it is expected that the current market structure
and vendor mix will ult imately usher in innovations in the ERP industry. Technological innovations in turn
eventually impact costs and this could have fostered SMEs to a point where the main constraints are lifted
and the full benefit o f ERP becomes readily accessible (Aghion et al. 2005).
     It can be perceived that, as the major vendors try to compete with SM E specific vendors, the tendency to
compete based on better quality will imp ly bringing functionalities fro m their existing ERP fo r large
organizations to the SMEs (Sia 2008), wh ile the SME specific vendors will tend to adjust their ERP products
to meet up with the quality co mpetition of the majo r vendors. Thereby creating a movement or merg ing
tendencies of functionalities and processes of ERP systems for SM E and large corporations. This imp lies an
ERP system evolv ing towards having standardized functional features that fits both markets.
     Furthermore, the specificity of the ERP systems developed by the new vendors to SMEs gives them a
relative advantage in the market despite the increasing presence of the major vendors in this market. An
illustration of the importance of SM E specific vendors is presented in the next section.

3.3      The China ERP Case
An examp le of growing tendencies in the SME's market for ERP that have potential to change the evolution
of ERP systems is the prevailing situation of ERP adoption in Ch ina. Ch ina’s ERP market keeps growing and
most of the market share belongs to Chinese local vendors (Liang and Xue 2005). By 2007, the top three
Chinese domestic ERP vendors were UFIDA, Inspur and Kingdee (Srivastava and Gips 2008). What makes
this interesting to note is the fact that in China, SM Es constitute about 98% of China’s total industrial sector
(World IT Report 2003 and Liu 2009). Th is therefore imp lies that the vendors serving the Chinese market are
basically serving SM Es.
     Consequently, a trend that is emerging in Ch ina’s ERP market is that most of the major ERP vendors
have taken actions that strategically target the SME segment (Liang and Xue 2005). This becomes apparent
when we consider the unfolding of SM E targeted ERP applications by leading Intern ational vendors like SAP
and Oracle for both the Chinese market and the global SME market. It therefore becomes noticeable from
observable cases like this that ERP applications are evolving to accommodate SM Es and large organizations
as well.

3.4      Trend drivers
3.4.1    Information Technology (History and Innovation)
The evolution of Information Technology products like the personal computer and the internet has seen
trends that are similar to the observable trend in ERP applications. ERP systems began as high cost
applications reserved solely for very large organizations. The current trend now reveals a reduction in ERP
costs and a wider adoption of ERP’s even by SMEs.
     Taking the mainframe to personal computer as an instance, the early years of the computer was
characterized by similar attributes as the ERP, that is: high cost mainframes and targeted use solely for large
organizations. However, the trend today is that the cost of computers have plummeted so much that they can
now be afforded by any SME. The use of computers has also moved away from being a device meant for the
operations of large corporations to include everyday SME operations.
     Another trend driver fro m the IT perspective is the fast pace of innovation in the IT world. ERP systems
are built and dependent on the evolution of information technology innovations. Therefore, impact ing shifts
in IT could imp ly a shift also in the view of ERP (Hu in 2004). Presently, with emerg ing internet of things
technologies and the development of concepts like cloud comput ing, a new definition of ERP may also be
      emerging in light of the existing constraints posed by the SME markets. (Conner 2010, Baiyere 2010, Van
      der Zee 2010, Sanchez 2010 and Turban et al. 2009). Taking Moores Law, Metaclfe’s Law and Gilder’s Law
      into consideration, these innovations will not only impact ERP functionalit ies, but also tend to reduce the
      cost of adopting ERP systems which further strengthens the presence of SMEs in ERP utility. (Baiyere 2010
      and Deng 2005).
      3.4.2         Market Drivers
      On another axis, a view of the ERP market shows that there are two main market d ivisions - the gradually
      saturating large organizations market and the emerging SME market. Fro m economics, supply tends to move
      towards where there is demand. It will be unwise fo r the major v endors to ignore this emerging market due to
      its enormous potentials. This does imply that the ERP evolution will likely be driven by market demands
      with a focus on the emerging SME sector.
           With the evolution of ERP tending towards vendors serving SMEs as analysed above, another important
      factor that will impact the evolution route of ERP systems would be the customizat ion requirements. From a
      vendors view, the lesser the customization required for each market segment the more advantageous it is to
      their costs. Attempts to reduce this will lead to standardization. Thus paving a way for a standardized set of
      ERP solutions that fits both market seg ments.
           As an example, we can consider business and technology models like open source ERP solutions and
      Software as a service (SaaS). While open source strives to become an alternative to proprietary ERP, Saa S
      tends to offer ERP functionalities over the Internet. Both models are considered preferred model for SM Es
      and are current trends with increasing potentials to impact the evolution path of ERP systems (OSS ERPGuru
      2009 and Hestermann, Pang & Montgomery 2010).


      4. A SCENARIO ON ERP EVOLUTION WITH SME CONSTRAINTS
      Fro m the foregoing literature review and analysis, let’s re-examine our foundational questions. Would SMEs
      have to wait till they have enough resources, or would ERP’s evolve to accommodate this underserved
      sector? The obvious answer deduced from our analysis will be – No and Yes. Considering the analysis of the
      various components that hinder and determine the ad option of ERP systems by SMEs plus the evolution
      trends examined above, ERP vendors are driven by both environmental and economic factors to take the
      initiat ive of serving the SM E market segment and meet ing the allev iating constraints faced by SMEs.
            To further consolidate the foregoing analysis, we will create a scenario model of the possible evolution
      routes of ERP with respect to the constraints of SM Es (see Figure 3).

                                                    New Vendors Lead Innovation




                  Different costs/Specific ERP                                       Reduced Costs/Uniform ERP




                                                   Major Vendors Lead Innovation
Status Quo axis                                                                                             P aradigm Shift axis
                                                 Figure 3: ERP evolution scenarios
Fro m Figure 3, the two deciding parameters are: Innovation and Cost/ERP Standardization. Firstly, Who
leads innovation? The major vendors or emerging vendors? This will determine to what extent the ERP
industry can experience creat ive destruction and in which market direction it will end up inclin ing towards.
    The second parameter considers the possibility of the cost of ERP systems reducing and becoming
uniform with the advent of a uniform ERP system or a scenario where t here are different cost structures for
specific ERP systems in different markets.
Scenario 1 - Market S pecific ERP: Th is is a situation that occurs when the new/emerg ing vendors create
high niche ERP systems targeting the SMEs and the major vendors still maintain their markets in the large
companies and yet still take part in the SM E co mpetition, thereby imply ing differentiated ERP systems for
different markets.
Scenario 2 - New Vendors Struggle: This is a scenario in wh ich the major vendors create cheaper ERP
systems and more value added specific SM E applications while still maintain ing their dominance in the large
organizations, leaving little roo m in the market for emerging vendors.
Scenario 3 - S ME Friendl y ERP: In this scenario, new vendors are able to innovate and create ERP
applications that effectively meet the resource constraint of SMEs and can also serve both SME and large
organizations processes, thereby threatening the dominance of the major vendors from the angle of
functionality and cost.
Scenario 4 ERP as a commodi ty: This scenario occurs when ERP systems becomes so standardized that
there is no differentiation in the strategic and competitive advantage that it offe rs any specific user
(SM E/large). According to Carr (2003), IT systems in this state become just a necessity like electricity or a
word processing application (MS Word) and hence it loses the esteemed strategic edge it offers.


5. CONCLUSION
With the strategic and competitive advantage offered by ERP systems and the fierce co mpetit ive en viron ment
of SMEs, adopting ERP systems is logically a step towards getting an edge amidst competition. However,
SMEs are constrained by their limited resources in adopting ERP’s but rather than SMEs wait ing till they get
enough resources, it has been demonstrated that ERP systems will gradually tend to evolve to accommodate
the constraints of SM Es.
     Looking at the evolution possibilities or ERP systems with respect to the challenges posed by SMEs,
introduces a different view to the evolutional tendencies o f ERP systems. Additionally, the SME market for
ERP vendors is emerging and growing fast and the vendor competition for this market segment is on the
increase. All this tendencies are factors that drive a change in the market dynamics, the cost of
implementation and a move towards ERP standardization.
     The question of the direction in which ERP will eventually evolves still remains. Will the status quo be
maintained? Or will SM Es be a platform for the paradig m shift that will drive the new face of ERP? When
this will occur (not if), is a function of time.


ACKNOWLEDGEMENT
Special thanks to Prof.dr.ing W.J.H. (Willem) van Groenendaal, Yu Han, Xianchao Jiang of Tilburg
University, The Netherlands and Stuart Short of SAP Labs, France; for their contribution in the concept,
writing, reviewing, proofing and presentation of this paper.


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Iadispaper erpevolutionandsmeconstraints-120215113510-phpapp02

  • 1. ERP EVOLUTION AND SME CONSTRAINTS Abayomi Baiyere International Masters in Management of Information Technology IMMIT IAE, Aix Graduate School of Management, France. ABS TRACT Small and M edium-size Enterprises (SM Es) are in contrast to larger organizations in possession of limited resources. ERP Implementation, however, is a process that requires and is dependent hugely on the use of resources - from tangible to tacit resources. This apparent situation prompts two logical questions: Would SM Es have to wait till they have enough resources? Or would ERP’s evolve to accommodate the constraints of SM Es? This paper examines the evolving innovation trend of ERP systems and the future tendencies, in light of the constraint posed by the SM E market. KEYWORDS Small and Medium-size Enterprises (SMEs), Enterprise Resource Planning (ERP), ERP Evolution, SM E resources. 1. INTRODUCTION Due to the increasing tough nature of modern day business competition, both large and small & med iu m- sized businesses are continuously in search of better ways to imp rove their processes and achieve competitive advantage in their domain. With the advent of Enterprise Resource Planning (ERP) system, both businesses have turned to this integrated informat ion system as a means of acquiring this adv antage (Koh et al. 2009). The general environment for ERP adoption and implementation has prior to now been more focused on large companies (Everdingen et al. 2000). Ho wever, there is an increasing awareness and positive perception by small and mediu m sized enterprises (SMEs) on the potential benefits accruable fro m the adoption of ERP systems. This has subsequently translated into an increase in the nu mber of SM E businesses interested and even adopting ERP systems. Despite this emerg ing trend, there also exists a major section of SM Es with concerns about the relative cost of resources and associated challenges involved in the successful implementation of ERP systems. (Equey & Fragnière 2008). This paper therefore observes the interplay of the evolution of ERP systems and the impending constraints on the adoption of these systems by SMEs. The paper is further structured to present an emerging possibility for the evolution path of ERP technology in the future by examin ing two driv ing questions: Would SMEs have to wait till they have enough resources? Or would ERP’s evolve to accommodate this underserved sector? An observation from several academic literatures on ERP shows that there has been more focus on large organizations and this observation can easily be correlated with the fact that the development of ERP systems targeted large organizat ions fro m the onset. Existing literatures on ERP and SM Es have generally reflected the urge and will of SM Es to emb race ERP systems into their operations in order to gain competitive advantage (Metaxiotis 2009). Ho wever, research has also pointed out that SMEs are faced with the daunting challenge of the necessary financial, material, human, and infrastructural resource and skill requirements that are essential for a successful adoption and implementation of an ERP system. Furthermore, it is of particular interest to note the choice of ERP vendors from which SM Es obtain their ERP systems from. Several factors have been identified as propelling reasons for the choice of ERP vendors opted for by SMEs. Some factors that mostly affect these decisions are price, depth of organizational change/fit and type of ERP vendors (Federici, T. 2009). Consequently, the traditional large vendor co mpanies of ERP – Oracle and SAP whose products are targeted to large mult inationals are increasingly recognizing the growing demand in the SME markets. This Accepted for publication in IADIS Information Systems conference – Ger many, 2012
  • 2. emerging market dynamics is changing the face of ERP systems with the introduction of SME-specific ERP systems by new vendors, offering less complex ERP systems at reduced costs (Koh et al. 2009). This research paper is a result of a literature review of case studies, professional journals, news articles, and industry web sites concerning SME’s ERP adoption challenges, ERP evolution tendencies in cluding market and information technology drivers. The purview of this paper is focused on the effect of the increasing demand of ERP systems by SMEs. The paper however does not focus on large businesses and other value adding Information systems. Our research is therefore informed by prior research that provides a framework for the analysis as well as our analysis of several perceptions of the research question of SME constraints and ERP evolution being evaluated. 2. ERP VS SME 2.1 Enterprise Resource Planning (ERP) Systems According to Watson and Schneider (1999) and Klaus, Rosemann and Gable (2000), an Enterprise Resource Planning (ERP) system can be easily described as a generic term used to for an integrated enterprise computing system. It basically integrates the complete range of a business's processes and functions so as to present a holistic view of the business from a single informat ion and IT architecture. ERP systems are comprehensive packaged software system which handles the majority of an enterpris e's informat ion systems requirements. It facilitates the efficient flow of info rmation among all functions within an organisation. ERP software is majorly offered by a range of vendors that specialise in this particular segment of the software market. Currently, The major ERP vendors are SAP, Oracle, and Microsoft (Panorama 2010). ERP software is highly configurable to accommodate the diverse needs of users across most sectors of the business world (Klaus et al. 2000). Identifiable attributes that characterizes an ERP system includes the following: Technical Perspective 1. Packaged Software: A co mmercial product provided by specialized vendors. 2. Co mprehensive: It is generic, able to support variety of organizational functions and must be suitable for a wide range of business organizations. 3. Configurat ion: needs to be configured before it can be used. (Klaus et al. 2000) 4. Modular: Functionalities are logically built into different business processes in modules . 5. Real time: Allow access to data in “real time” Organisation Perspective: 6. Best business practices: Has a collect ion of the best business processes. 7. Integration: Integrates majo rity of a business’s processes 8. Co mplexity : Tedious imp lementation process 9. Cost: Expensive to adopt 10. Skills: Requires high knowledge skills With these selected characteristics, ERP systems have proven to be easily targeted to and easily adopted by large organizations. This is primarily due to the fact that these organization require the strategic and competitive advantage offered by ERP and they have the resources to overcome the characteristics on its negative axis. These same advantages are also the propelling force and reasons why SMEs are craving to adopt and imp lement this system, however crossing over the negative axis has been a dete rrent to many such SMEs. 2.2 The World of Small & Medium Sized Enterprises (SME) There is no globally accepted definition of an SME, however for the purpose of clarity in this paper, we will consider SM Es to be organizations having most (but not necessary all) of the fo llo wing characteristics: 1. Size: Dependent on a limited nu mber of personnel ( less than or equal to 250). 2. Turnover: Less than or equal to Fifty million Eu ro (50,000,000 Eu ros)
  • 3. (European Co mmision 2005) 3. Leadership: The Owner and the Manager/CEO are often the same person. (Sh iau et al. 2009) 4. Customer Relations: Close relat ionship with customers and partners 5. Flexib ility: High flexibility and agile adaptability 6. Specialist: Usually specialized with niche strategies 7. Funds: Limited funds to solely finance expensive investments 8. Co mpetitors: The business is usually small in co mparison to larger co mpetitors in the sector. (Recklies 2001 and Kets de Vries 1993) 9. ERP Users: less than a 100 ERP (potential) users. 10. Operation Sites: Usually have one or a few sites. An important feature of SMEs that will be useful in this foregoing analysis is the perceived importance attached to SMEs on a national level. By extension this imp lies that governments will be logically willing to support its growth and this could be an important factor that can be essential in the forthcoming evolution of ERP systems. (Deep et al. 2007) 2.3 Constraints to SME’s Adoption of ERP Fro m the foregoing list of characteristics drawn above for ERP systems and SMEs, it becomes apparent that for most SMEs, a major constraint to adopting ERP solutions, is primarily the lack of necessary resources (Metaxiotis 2009). The different types of resources that could be lacking in an SM E - ranging fro m soft resources like skills to physical resources like cash (Vilpola et al. 2005) - as mentioned above, can be easily observed by looking side by side at the attributes of SMEs and ERP (as listed in the previous section). Furthermore, if we take a step beyond the obvious resources barrier, another observable constra int that can be identified is the issue of “Fit”. SM Es are characterized by flexibility and agile adaptability unlike large corporations with rigid and fo rmalized structures. Most SME firms depend on their id iosyncratic processes, which enables them to serve customer demands in a flexib le manner but the rigid structure imposed by an ERP could be a threat to such flexible methods of functioning. (Sia 2008). Present ERP systems therefore find a better and easier fit in larger organizations than in SM Es (Deep et al. 2007). Consequently SMEs have to go through either a process of thorough customization or in most cases change their processes and systems to align with the fitness requirement of the ERP system. Th is can in some cases mean losing the inherent strategic advantage accruable to their flexibility and agile processes (Dieng 2005). A lso due to the unpredictable nature of most SMEs’ strategic future, their strategic plan is usually an “emerging vision” or “strategic awareness”, neither of which fits easily to the explicit definitions necessary for a successful imp lementation of ERP (Metaxiotis 2009). However, despite the inundating nature of these constraints, some SME organizations have matured to a level that they have enough resources and a good enough fit to want to proceed with the adoption of an ERP Figure 1: Factor of likely risks during ERP implementation system like vanilla imp lementations. A challenge that however surfaces at this point is that of implementation success. As highlighted in the characteristics of ERP above, ERP implementation takes time and there is a
  • 4. history of SMEs that have implemented ERP systems without success. In fact research shows that larger organizations have a higher success rate than SMEs (Federici 2009 & Metaxiotis 20 09). Implementing an ERP system can be very valuable and beneficial to an SME but the price of a failed implementation could be really grave and even catastrophic in some SM E cases (Suna et al. 2005). Hence, another constraint to the adoption of these system by SM Es can be simply identified as the risk of a failed ERP implementation (Vilpola et al. 2005). As an instance, a survey of 1,600 organizat ions that have selected or imp lemented ERP systems over the past four years was conducted by Panorama consulting group and they analyzed the risk factors that are likely to occur during an ERP imp lementation (Panorama 2010) – see figure 1. With the apparent high percentage of these unfavorable risk factors, and fro m the risk co mponent of SME constraints identified earlier, it becomes obvious that the risk factor of imp lementing an ERP will be an important consideration for SM Es (Deep et al. 2007). This is particularly so due to the fact that a failu re in implementation could spell doom for such an SME. Fro m figure 1 there is a very high probability that one or more of the risks will occur. Also based on the probability analysis of the whole samp le, the chance that at least one negative result will occur is about three out of four (72.4%) and it is close to one in three chance (31%) that two or more unfavorable outcome will occur in any particular imp lementation. (Panorama 2010). 3. DISCUSSION ERP has evolved fro m 40 years of trial and erro r. It’s evolution has been to become a strategic tool due to continued improvement of the techniques used to manage business and the rapid growth of informat ion technology. ERP systems evolution can be seen as a reflection of improved layers of functionality to existing germ-cells of materials requirements planning (MRP) of the 1970s and manufacturing resource planning (MRPII) of the 1980s. (Metaxiotis 2009). 3.1 The ERP Market There are several ERP vendors in the market, but three major vendors dominate the ERP software sector. The ERP market has been subdivided into four tiers – Tier I to Tier IV. The dominant vendors in the ERP software sector by market share in 2009 as reported by panorama (2010) are shown in figure 2: Figure 2: M arket share of major vendor’s in 2009 As shown in figure 2, Tier II vendors are other vendors other than the major three vendors that specifically focus on midsize organizat ions that are a little less than the large Tier I organizations majorly supplied by the other three. Other tiers: Tier III and Tier IV also exist. Tier III is more appropriate for SM Es while Tier IV are basic accounting systems like Peachtree accounting and Quickbooks. It is worth noting that a current problem faced by Tier II vendors presently is that Tier I vendors are moving into this space (Moeller and Rechnit zer 2008). The ERP market in Tier I is small and getting saturated, therefore in order to continue to expand their businesses, they are reducing cost, simplify ing transaction sets, and other incentives to enable mediu m sized co mpanies to have the broad features of their Tier I pac kage. This tendency and move by the major Tier I vendors to the Tier II and Tier III markets implies the opening of a new era and new possibilities for SMEs.
  • 5. 3.2 Emerging Vendors While the major vendors were focusing on large organizations, a new ERP market was emerg ing – the SME market. This consequently resulted in a natural emergence of ERP vendors focused on serving this market. This new vendors were creating ERP systems that are SM E specific and aimed solely at capturing this new market. The emergence of these new vendors has introduced new dynamics into the competition model of the ERP software segment. Co mpetition is usually a platform that promotes new innovations (Aghion, Bloo m, Blundell, Griffith and Howitt 2005). Due to fierce co mpetition fro m emerging vendors, prices of ERP systems are dropping (Deng 2005). It thus suffices to say that it is expected that the current market structure and vendor mix will ult imately usher in innovations in the ERP industry. Technological innovations in turn eventually impact costs and this could have fostered SMEs to a point where the main constraints are lifted and the full benefit o f ERP becomes readily accessible (Aghion et al. 2005). It can be perceived that, as the major vendors try to compete with SM E specific vendors, the tendency to compete based on better quality will imp ly bringing functionalities fro m their existing ERP fo r large organizations to the SMEs (Sia 2008), wh ile the SME specific vendors will tend to adjust their ERP products to meet up with the quality co mpetition of the majo r vendors. Thereby creating a movement or merg ing tendencies of functionalities and processes of ERP systems for SM E and large corporations. This imp lies an ERP system evolv ing towards having standardized functional features that fits both markets. Furthermore, the specificity of the ERP systems developed by the new vendors to SMEs gives them a relative advantage in the market despite the increasing presence of the major vendors in this market. An illustration of the importance of SM E specific vendors is presented in the next section. 3.3 The China ERP Case An examp le of growing tendencies in the SME's market for ERP that have potential to change the evolution of ERP systems is the prevailing situation of ERP adoption in Ch ina. Ch ina’s ERP market keeps growing and most of the market share belongs to Chinese local vendors (Liang and Xue 2005). By 2007, the top three Chinese domestic ERP vendors were UFIDA, Inspur and Kingdee (Srivastava and Gips 2008). What makes this interesting to note is the fact that in China, SM Es constitute about 98% of China’s total industrial sector (World IT Report 2003 and Liu 2009). Th is therefore imp lies that the vendors serving the Chinese market are basically serving SM Es. Consequently, a trend that is emerging in Ch ina’s ERP market is that most of the major ERP vendors have taken actions that strategically target the SME segment (Liang and Xue 2005). This becomes apparent when we consider the unfolding of SM E targeted ERP applications by leading Intern ational vendors like SAP and Oracle for both the Chinese market and the global SME market. It therefore becomes noticeable from observable cases like this that ERP applications are evolving to accommodate SM Es and large organizations as well. 3.4 Trend drivers 3.4.1 Information Technology (History and Innovation) The evolution of Information Technology products like the personal computer and the internet has seen trends that are similar to the observable trend in ERP applications. ERP systems began as high cost applications reserved solely for very large organizations. The current trend now reveals a reduction in ERP costs and a wider adoption of ERP’s even by SMEs. Taking the mainframe to personal computer as an instance, the early years of the computer was characterized by similar attributes as the ERP, that is: high cost mainframes and targeted use solely for large organizations. However, the trend today is that the cost of computers have plummeted so much that they can now be afforded by any SME. The use of computers has also moved away from being a device meant for the operations of large corporations to include everyday SME operations. Another trend driver fro m the IT perspective is the fast pace of innovation in the IT world. ERP systems are built and dependent on the evolution of information technology innovations. Therefore, impact ing shifts in IT could imp ly a shift also in the view of ERP (Hu in 2004). Presently, with emerg ing internet of things
  • 6. technologies and the development of concepts like cloud comput ing, a new definition of ERP may also be emerging in light of the existing constraints posed by the SME markets. (Conner 2010, Baiyere 2010, Van der Zee 2010, Sanchez 2010 and Turban et al. 2009). Taking Moores Law, Metaclfe’s Law and Gilder’s Law into consideration, these innovations will not only impact ERP functionalit ies, but also tend to reduce the cost of adopting ERP systems which further strengthens the presence of SMEs in ERP utility. (Baiyere 2010 and Deng 2005). 3.4.2 Market Drivers On another axis, a view of the ERP market shows that there are two main market d ivisions - the gradually saturating large organizations market and the emerging SME market. Fro m economics, supply tends to move towards where there is demand. It will be unwise fo r the major v endors to ignore this emerging market due to its enormous potentials. This does imply that the ERP evolution will likely be driven by market demands with a focus on the emerging SME sector. With the evolution of ERP tending towards vendors serving SMEs as analysed above, another important factor that will impact the evolution route of ERP systems would be the customizat ion requirements. From a vendors view, the lesser the customization required for each market segment the more advantageous it is to their costs. Attempts to reduce this will lead to standardization. Thus paving a way for a standardized set of ERP solutions that fits both market seg ments. As an example, we can consider business and technology models like open source ERP solutions and Software as a service (SaaS). While open source strives to become an alternative to proprietary ERP, Saa S tends to offer ERP functionalities over the Internet. Both models are considered preferred model for SM Es and are current trends with increasing potentials to impact the evolution path of ERP systems (OSS ERPGuru 2009 and Hestermann, Pang & Montgomery 2010). 4. A SCENARIO ON ERP EVOLUTION WITH SME CONSTRAINTS Fro m the foregoing literature review and analysis, let’s re-examine our foundational questions. Would SMEs have to wait till they have enough resources, or would ERP’s evolve to accommodate this underserved sector? The obvious answer deduced from our analysis will be – No and Yes. Considering the analysis of the various components that hinder and determine the ad option of ERP systems by SMEs plus the evolution trends examined above, ERP vendors are driven by both environmental and economic factors to take the initiat ive of serving the SM E market segment and meet ing the allev iating constraints faced by SMEs. To further consolidate the foregoing analysis, we will create a scenario model of the possible evolution routes of ERP with respect to the constraints of SM Es (see Figure 3). New Vendors Lead Innovation Different costs/Specific ERP Reduced Costs/Uniform ERP Major Vendors Lead Innovation Status Quo axis P aradigm Shift axis Figure 3: ERP evolution scenarios
  • 7. Fro m Figure 3, the two deciding parameters are: Innovation and Cost/ERP Standardization. Firstly, Who leads innovation? The major vendors or emerging vendors? This will determine to what extent the ERP industry can experience creat ive destruction and in which market direction it will end up inclin ing towards. The second parameter considers the possibility of the cost of ERP systems reducing and becoming uniform with the advent of a uniform ERP system or a scenario where t here are different cost structures for specific ERP systems in different markets. Scenario 1 - Market S pecific ERP: Th is is a situation that occurs when the new/emerg ing vendors create high niche ERP systems targeting the SMEs and the major vendors still maintain their markets in the large companies and yet still take part in the SM E co mpetition, thereby imply ing differentiated ERP systems for different markets. Scenario 2 - New Vendors Struggle: This is a scenario in wh ich the major vendors create cheaper ERP systems and more value added specific SM E applications while still maintain ing their dominance in the large organizations, leaving little roo m in the market for emerging vendors. Scenario 3 - S ME Friendl y ERP: In this scenario, new vendors are able to innovate and create ERP applications that effectively meet the resource constraint of SMEs and can also serve both SME and large organizations processes, thereby threatening the dominance of the major vendors from the angle of functionality and cost. Scenario 4 ERP as a commodi ty: This scenario occurs when ERP systems becomes so standardized that there is no differentiation in the strategic and competitive advantage that it offe rs any specific user (SM E/large). According to Carr (2003), IT systems in this state become just a necessity like electricity or a word processing application (MS Word) and hence it loses the esteemed strategic edge it offers. 5. CONCLUSION With the strategic and competitive advantage offered by ERP systems and the fierce co mpetit ive en viron ment of SMEs, adopting ERP systems is logically a step towards getting an edge amidst competition. However, SMEs are constrained by their limited resources in adopting ERP’s but rather than SMEs wait ing till they get enough resources, it has been demonstrated that ERP systems will gradually tend to evolve to accommodate the constraints of SM Es. Looking at the evolution possibilities or ERP systems with respect to the challenges posed by SMEs, introduces a different view to the evolutional tendencies o f ERP systems. Additionally, the SME market for ERP vendors is emerging and growing fast and the vendor competition for this market segment is on the increase. All this tendencies are factors that drive a change in the market dynamics, the cost of implementation and a move towards ERP standardization. The question of the direction in which ERP will eventually evolves still remains. Will the status quo be maintained? Or will SM Es be a platform for the paradig m shift that will drive the new face of ERP? When this will occur (not if), is a function of time. ACKNOWLEDGEMENT Special thanks to Prof.dr.ing W.J.H. (Willem) van Groenendaal, Yu Han, Xianchao Jiang of Tilburg University, The Netherlands and Stuart Short of SAP Labs, France; for their contribution in the concept, writing, reviewing, proofing and presentation of this paper. REFERENCES Aghion, P. et al, 2005. Competition and innovation: An inverted-U relationship. The Quarterly Journal of Economics, Vol. 120, No. 2, pp. 701-728
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