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ERP Guide : Signiicance of the functional it analysis

Tutorial by:      Date: 2016-05-05 05:45:39

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ERP systems have two important characteristics: data integration and support for best practices. The objective of the functional it analysis is to determine how these characteristics can be applied to improve the processes and management of organizations by implementing an ERP system.

The functional it analysis has a strong link with organizational mission and strategy. The mission of every organization is to add value. In companies the added value is mostly synonymous with profit.

Profit is the difference between revenues and costs. Other organizations measure their added value on other bases, such as the number of students that graduate, the costs per permit issued, or the number of visitors for a special exhibition. In order to relate added value to business processes and ERP in a way that is not too complex, this chapter will focus on financial added value only.

Several strategies for value creation exist. Treacy & Wiersema [1993] have made an important contribution to value creation in the 1990s. In their study, they monitored forty companies during a longer period of time. On the basis of their study, they made a distinction between three strategies, which they call value propositions. Their study shows that companies that dominate their industry excel in one of these three value propositions, while they perform on an average level for the other two propositions.

The first value proposition that Treacy & Wiersema distinguish is operational excellence, offering reliable products or services that customers can acquire with limited effort or inconvenience against competing prices. Key words for operational excellence are efficiency and cost containment.

The second value proposition is customer intimacy, the diligent segmentation of markets and the specific targeting of products and services towards these market segments. Terms that belongs to customer intimacy are customer satisfaction, repeat orders and customer profitability. Organizations that select this value proposition focus on the marketing and sales processes when determining functional it for

ERP [Tallon, 2007].

The last value proposition that Treacy & Wiersema distinguish is product leadership: the continuous development of the portfolio of products and services, to give customers a continuously improving experience and make competition lag behind. Creativity, innovation and time-to-market are important key words for product leadership, and organizations that select this value proposition are constantly looking for optimal product and service development processes.

Whatever strategy for value creation an organization follows, the business management and processes will have to be developed in such a way that they strongly support the strategy. ERP can support the business processes and management with data integration and best practices. There are however two pitfalls that need to be avoided when connecting an ERP implementation to a value proposition.

The first pitfall is the implementation of an ERP best practice in such a way that value is destroyed rather than created. A best practice is a generally accepted way of working that has been adopted by many organizations and has proven its practical value. Best practices lead to standardization of business processes, and through standardization organizations will work in the same way. Best practices, however, are not necessarily optimal. It is well possible that a specific organization has a competitive advantage just because it does not apply a generally accepted way of working.

A small example can clarify this. A company has customer intimacy as its value proposition. At the go live of the ERP system the following best practice for dunning customers who are falling behind on their payments becomes operational: customers who are behind thirty or more days get a letter that is clear rather than friendly, and announces the visit of a collection agency. It is well possible that this best practice is not the most suitable process for the company in this example, because it may lead to decreasing customer satisfaction or even the loss of customers. The best practice for dunning customers in this example may not match the strategy of the company, and it is potentially better to implement the dunning process in a different way.

The second pitfall is underutilizing the best practices that the ERP system has on offer and hanging on to existing ways of working. Again a small example to explain this pitfall. The finance department in an organization that strives for operational excellence creates a monthly reporting pack, a set of financial overviews. The pack is used by the company’s management to monitor the financial performance and make adjustments where needed. At the go live of the ERP system, it turns out that the information of the reporting pack can be created automatically from the ERP system, though with a layout that is slightly different from the layout of the reporting pack that was used before the ERP introduction. The finance department finds the new layout unacceptable and hires a programmer who works a couple of weeks to make the layout of the reporting pack identical to what was used before. The employees of the finance department test the new layout, which also takes a couple of weeks. As the reporting pack now is an ERP adaptation, and no longer part of the ERP system itself, it will have to be rebuilt and tested for every new version of the ERP system. It is clear that this approach adds costs and decreases efficiency.

The question is whether the programmed layout of the reporting pack contributes to the added value of the organization to such an extent that it justifies the extra costs and loss of efficiency.

The objective of the functional it analysis is to determine the optimal combination of best practices of the ERP system and tailor-made adaptations, given the value proposition the organization has selected.

A thorough functional it analysis can also avoid the two pitfalls described above.

Chronological overview of ERP used by the province of North Brabant in The Netherlands. Source: Zwager et al. [2007]

An example of an organization that applies both ERP best practices and adaptations for required support

of the business is the Dutch province of North Brabant [Zwager et al., 2007]. This province has already

used the ERP system SAP for many years. The value proposition of a province is operational excellence.

In Table 6.1, an overview is presented of regulatory and managerial trends with which the province has

to comply, and the combination of standard SAP and tailor-made adaptations that are used to optimally

support the province’s business processes and management.

The table clearly shows how ERP systems have developed after the 1990s. Regulatory requirements have

increased, and the province uses ERP for more and more processes. However, the number of required

tailor-made adaptations decreases, and the province expects that in the future they will no longer

need adaptations.

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