Critical Success Factors of ERP Implementation

INTRODUCTION

An enterprise resource planning (ERP) system is an integrated set of programs that provides support for core organizational activities, such as manufacturing and logistics, finance and accounting, sales and marketing, and human resources. An ERP system helps the different parts of an organization share data and knowledge, reduce costs, and improve management of business processes. In spite of their benefits, many ERP systems fail (Stratman & Roth, 1999). Implementing an ERP system is a major undertaking. About 90% of ERP implementations are late or over budget (Martin, 1998), and the success rate of ERP systems implementation is only about 33% (Zhang et al.,2003).
Over the past few years, limited research has been conducted about ERP implementation issues: mainly, case studies in individual organizations have been reported. A major problem with such ERP case studies is that very few implementation failures have been recorded in the literature, and thus, the reasons why implementations fail are not known to practitioners and researchers. That is a motivation toward conducting empirical studies to explore critical factors that affect ERP systems implementation. A recent summary of ERP literature stated that research of critical success factors (CSFs) in ERP implementation is rare and fragmented (Nah, Lau, & Kuang, 2001). The idea of identifying CSFs as a basis for determining the information needs of managers was popularized by Rockart (1979). CSFs are those factors that are critical to the success of any organization, in the sense that, if objectives associated with the factors are not achieved, the organization will fail—perhaps catastrophically (Rockart, 1979). In the context ofERP project implementation, CSFs represent the essential ingredients, without which a project stands little chance of success. This study examines the CSFs for implementing ERP systems in Venezuela. Managers from seven corporations, who were identified as having key roles in ERP systems implementation, were surveyed in order to assess empirically which CSFs are critical in leading a successful implementation of ERP systems in Venezuela. This article is organized into four sections. First, ERP-related literature is reviewed.
The next section introduces the research methodology, followed by presentation of the results. The article ends with the conclusions and implications for future research and practice.


BACKGROUND

Implementing an ERP system is not an easy task. It can cause dramatic changes that need to be carefully administered if the potential advantages of an ERP solution (Al-Mudimigh, Zairi, & Al-Mashari, 2001) are to be gained. In some well-documented cases, spectacular results have been achieved (Johnston, 2002). There is, on the other hand, a relatively high failure rate: it was reported that three-quarters of ERP projects were judged to be unsuccessful by the ERP implementing firms (Kyung & Young, 2002). Also, failures are much less extensively documented. As a result, pitfalls to be avoided tend to be less well known. Venezuelan companies are just starting to use ERP systems. They started applying ERP concepts late in the 1990s. Because of the complex and integrated nature of ERP, and the large investment involved, it is imperative for organizations to study the experiences of others and to learn from their practices and success factors (Zairi et al., 2000). Identifying CSFs relevant to local companies is one way to increase the chances of a successful local implementation (Sum, Ang, & Yeo, 1997).
A literature review was conducted to understand the CSFs in successful ERP implementations. The review covered numerous articles (Bingi, Sharma, & Godla, 1999; Esteves & Pastor, 2001; Falkowski et al., 1998; Holland & Light, 1999; Nah, Lau, & Kuang, 2001; Rosario, 2000; Stefanou, 1999; Sumner, 1999; Wee, 2000). The literature varies according to the variables required for implementation success, so there is no general consensus as to the factors that are key to success in ERP implementation. It is probably a combination of factors that is important in explaining ERP implementation success (Zhang et al., 2003). From the review, 20 factors emerged as critical to the successful implementation of ERP systems. They were obtained after careful analysis and grouping of related subfactors:
1. Top management support
2. User training
3. Use of consultants
4. User participation
5. Vendor package selection
6. Use of steering committee
7. Discipline and standardization
8. Minimal customization
9. Use of vendor’s development tools
10. Best people full time
11. Technical and business knowledge
12. Implementation approach
13. Clear goals, focus, and scope
14. Business process reengineering
15. Project management
16. Effective communications
17. Presence of a champion
18. Interdepartmental cooperation and communication
19. Management of expectations
20. Vendor/customer partnership

RESEARCH METHODOLOGY

The choice of an appropriate research methodology is critical in guiding researchers on how best to meet research objectives. In this study, the purpose was to discover the perceptions and experiences of companies using ERP systems in Venezuela, and to use that information as the basis of data collection. The analysis has enabled the identification CSFs of ERP systems implementation in Venezuelan companies.
The targets of the study were the organizations that implemented ERP systems successfully. The key informant method was used for collecting information in a social setting by surveying (or interviewing) a selected number of participants. Seven firms were identified from the list provided by ERP vendors. We contacted the ERP project managers in charge of ERP implementation of each company. About 100 questionnaires were sent to the ERP project managers of each firm, who forwarded the questionnaires to the project team members in charge of individual processes. A total of 72 questionnaires were returned, of which 69 were valid.
The questionnaire consisted of two main parts: the company background and the CSFs. The first part was designed to determine characteristics such as size of the company, type of industry, location of company, etc. The second part consisted of 20 statements about the success factors of ERP systems implementation derived from the literature review. The language used in the survey was Spanish. Translation was easy, because Venezuelans used original English terms for many technical and management concepts and especially for information systems and computing concepts.
Participants were requested to rate the importance of each CSF using a five-point Likert scale, where a score of 5 indicated “extremely critical,” and a score of 1 indicated “not critical.” This method was employed on the grounds that a rating method avoids the problem of having to consider 20 CSFs simultaneously in order to rank them. The data collected were then analyzed by using SPSS. Based on the responses, descriptive statistics, factor analysis (FA), and reliability tests were carried out to identify the CSFs for the successful implementation of ERP systems and data validity, respectively.


RESULTS

Ranking

The importance rating of the 20 CSFs is listed in Table I. The individual mean value of the Likert rating scale is the popular usage indicator for measuring an item’s importance, without regard to the other items; therefore, the higher the value, the more important the factor. Most items are rated above the 3.0 scale (midpoint). The three most important factors, in order of declining importance, are top management support, presence of a champion, and project management, with a mean value ranging from 4.804.64. Just as the literature argues, these are key items for ERP implementation management (Johnston, 2002). Conversely, use of steering committee, business process reengineering, and use of vendor’s development tools, are the three items lowest in the list, with a mean value ranging from 2.95-2.06.

Factor Analysis

In an attempt to reduce the number of items (CSFs), and to understand their underlying structure, a factor analysis (FA) was performed. FA is a data reduction technique that uses correlations between data variables. The underlying assumption of FA is that a number of factors exist to explain the correlations or interrelationships among observed variables (Chatfield & Collins, 1992). For the present study, FA was performed on all 20 variables using principal components extraction (Tabachnick & Fidell, 1989). The goal of this method is to extract maximum variance from the data set within each factor. It is basically used to reduce a large number of variables to a smaller number of components. The measure of sampling adequacy for the 20 items was 0.87, indicating that the items were suitable for factoring (Kaiser, 1974).

Table 1.Ranking of CSFs

Rank CSF Mean Standard
Deviation
1 Top management support 4.80 0.62
2 Presence of a champion 4.75 0.85
3 Project management 4.64 0.92
4 Best people full time 4.58 0.60
5 Effective communications 4.51 0.85
6 Interdepartmental cooperation and communication 4.40 0.91
7 Management of expectations 4.36 1.02
8 Technical and business knowledge 4.33 1.21
9 User participation 4.22 0.82
10 Discipline and standardization 4.09 0.85
11 Vendor package selection 4.02 0.61
12 User training 4.01 1.12
13 Implementation approach 4.00 1.20
14 Clear goals, focus, and scope 3.89 1.14
15 Use of consultants 3.75 0.85
16 Minimal customization 3.68 1.52
17 Vendor/customer partnership 3.15 0.52
18 Use of steering committee 2.95 0.63
19 Business process reengineering 2.84 0.55
20 Use of vendor’s development tools 2.06 0.42

Notes: N: 69; Scale: 1-5 (5: “extremely critical,” 1: “not critical”)
A three-stage factor analysis was conducted with an orthogonal (varimax) rotation to obtain a stable factor structure (Rai et al., 1996), resulting in easily interpretable factors. Under this three-round factor analysis, items were omitted according to the following two criteria: (1) no loading greater than 0.35, or (2) loading greater than 0.35 on two or more factors (Kim & Mueller, 1978).
Table 2 shows the results of this analysis. A first-factor analysis was conducted and produced five factors. According to the two criteria, three items were dropped. A second factor analysis on the remaining 17 items resulted in four factors and the dropping of three items. Finally, a three-factor structure was derived that kept a total of 14 items after three iterations. The minimum eigenvalue from a varimax rotation for which a factor was to be retained was set at 1.0 in order to satisfy the minimum eigenvalue criterion (Nunnally, 1978). The three factors are as follows:
1. Factor 1, named “ERP implementation management,” comprises six items relating to implementation management: top management support, presence of a champion, project management, management of expectations, implementation approach, and clear goals, focus, and scope.
2. Factor 2, named “user aptitudes and communication,” comprises four items relating to user participation: effective communication, interdepartmental cooperation and communication, user participation, and user training.
3. Factor 3, named “technical knowledge,” comprises four items relating to knowledge of business and ERP: best people full time, technical and business knowledge, use of consultants, and discipline and standardization.
Cronbach alpha coefficients were calculated to test the reliability of these CSFs, as shown in the last row of Table 2. The reliability of coefficients obtained ranges from 0.56 (Factor 3) to 0.88 (Factor 1). Srinivasan (1985) proposed that a coefficient of 0.7 or higher is acceptable, while a coefficient of 0.5 or higher is considered sufficient when dealing with exploratory research combined with unvalidated data. Thus, the reliability coefficients in this study are deemed acceptable. The strength of factor analysis is that it provides a basis for data reduction. Rather than look at all 20 items, only three factors need be examined. That simplifies the rankings and clarifies the most important items. Rather than focus on individual items, practitioners and researchers can focus on the broad set of items represented by the essential factors.

FUTURE TRENDS

Many companies around the world are following the trend toward making large investments in implementing ERP systems. Several approaches and methodologies of ERP project implementation recognise a series of critical factors that must be carefully considered to ensure successful implementation of an ERP system project. In essence, there are dominant critical factors hypothesised to play an overriding role in the implementation of an ERP project, and they should be ongoing throughout all implementation levels. Clearly, the dominant factors are those that will shape the overall project culture and, subsequently, the organisational cultura, as ERP is far reaching in nature.
Post-ERP activity seems to follow a clear path. A Deloitte Consulting study of 62 companies segments post-ERP activity into three stages. The first stage entails a three- to nine-month productivity decline that is overcome by redefining jobs, establishing new procedures, fine-tuning ERP software, and taking charge of the new streams of information created by the platform. The second stage, which lasts from six to 18 months, involves skills development, structural changes, process integration, and add-on technologies that expand ERP functionality. The third stage, of one to two years in duration, is one of transformation, where the synergies of people, processes, and technology reach a peak. Perhaps most important, ERP forces discipline and organization around processes, making the alignment of IT and business goals more likely in the post-ERP era.

CONCLUSION

Despite the benefits that can be achieved, there is already evidence of failure in projects related to ERP systems implementation (Davenport, 1998). It is, therefore, important to find out what the CSFs are that drive ERP project success.

Table 2. Results of factor analysis

Factor Loading (Final Factor Structure 3rd FA)
CSF Mean F1 F2 F3
Top management support 4.80 0.608
Presence of a champion 4.75 0.541
Project management 4.64 0.586
Best people full time 4.58 0.741
Effective communications 4.51 0.565
Management of expectations 4.40 0.420
Interdepartmental cooperation and communication 4.36 0.452
Technical and business knowledge 4.33 0.584
User participation 4.22 0.562
Discipline and standardization 4.09 0.387
Vendor package selection 4.02
User training 4.01 0.510
Implementation approach 4.00 0.478
Clear goals, focus, and scope 3.89 0.411
Use of consultants 3.75 0.573
Minimal customization 3.68
Vendor/customer partnership 3.15
Use of steering committee 2.95
Business process reengineering 2.84
Use of vendor’s development tools 2.06
Eigenvalue 7.56 2.54 1.20
Percentage of variance 58.50 14.36 8.65
Cumulative percentage of variance 58.50 72.86 81.51
Cronbach alpha coefficient 0.88 0.74 0.56

According to the respondents in this study, the six top CSFs for ERP systems implementation in Venezuelans firms are top management support, presence of a champion, project management, best people full time, effective communications, and management of expectations.
This research has derived three composite CSFs in ERP systems implementation in Venezuela:
1. ERP implementation management
2. User’s aptitudes and communication
3. Technical knowledge
Four of the six top individual items contribute to the composite factor of ERP implementation management, which is, by far, the most important. It is made up of items that are concerned with the management of ERP systems implementation projects.
The results of ranking ERP CSFs in this study are largely consistent with the literature review, though the relative ranking of some factors varied. In the literature, top management support, change management, presence of a champion, and management of expectations are the four most often cited critical factors.
A majority of factors, 12, were rated as critical (rating >4). Only one factor, business process reengineering, which is rated as critical in most articles reviewed, was not rated as critical in this study (rating <3). Hence, the perceptions on CSFs of Venezuelan managers involved in ERP systems implementation projects are largely consistent with the findings reported in the literature.
There are a number of questions still to be determined. For example, although this article establishes the relative importance of CSFs in seven firms, it has not established the reasons. Future studies could look at differences by size of firms, by industry type, by number of locations, by number of customers, etc.
Finally, it should be noted that all CSFs are based on previous research; the success items can be modified when further research is conducted. For instance, discovery-oriented research through comprehensive interviews with several top-level managers in an attempt to identify new CSFs is an option.

KEY TERMS

Business Process Reengineering (BPR): Any radical change in the way in which an organisation performs its business activities; BPR involves a fundamental rethink of the business processes followed by a redesign of business activities to enhance all or most of its critical measures—costs, quality of service, staff dynamics, etc.
Critical Success Factors (CSFs): CSFs indicate the few key areas of activity in which favorable results are absolutely necessary for the manager to succeed.
Enterprise Resource Planning (ERP) System: Business software package for running every aspect of a company, including managing orders, inventory, accounting, and logistics. Well-known ERP software providers include BAAN, Oracle, PeopleSoft, and SAP, collectively known to industry insiders as the “BOPS.”
Factor Analysis: Any of several methods for reducing correlational data to a smaller number of dimensions or factors; beginning with a correlation matrix, a small number of components or factors are extracted that are regarded as the basic variables that account for the interrelations observed in the data.
Project Management: This is the ensemble of activities concerned with successfully achieving a set of goals. This includes planning, scheduling, and maintaining progress of the activities that comprise the project.
Software Package: Written programs or procedures or rules and associated documentation that pertain to the operation of a computer system and that are stored in read/write memory.
Systems Implementation: Customisation or parameterization and adaptation of the software application according to the needs of the organisation.

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