1. Chapter 3: ERP System Options & Selection Methods
Alternative ERP project forms
Budgeting methods

2. IS/IT Projects Typically ERP projects Late Over budget
Fail to satisfy design specifications
ERP projects
Are larger than normal
Can be expedited (if you do it vendor’s way)
Cost range $5 million to over $100 million (+)

3. Alternative ERP Options
Method
Advantages
Disadvantages
In-house
Fit organization
Most difficult, expensive, slowest
In-house+vendor supp.
Blend proven features with organizational fit
Difficult to develop
Expensive & slow
Best-of-breed
Theoretically ideal
Hard to link, slow, potentially inefficient
Customize vendor system
Proven features modified to fit organization
Slower, usually more expensive than pure vendor
Select vendor modules
Less risk, fast, inexpensive
If expand, inefficient and higher total cost
Full vendor system
Fast, inexpensive, efficient
Inflexible
ASP
Least risk & cost, fastest
At mercy of ASP

4. Changing Nature of IT Technology is highly dynamic
ERP projects often take years to install
Vendors are responding by expediting
As long as you do it their way
Improved versions may be on market by the time you install your system
This is one advantage of an ASP

5. IT Selection Practice Hinton & Kaye [1996]:
IT tends to be viewed as capital budgeting
Implication is that clear financial return is expected
Sound thinking, but benefits often intangible (yet real)
Some strategic investments require bold judgment
Conversely, companies have gone broke buying IT

6. IS/IT Project Risk Factors Simms [1997]
Project manager ability
Experience with this application type
Experience with programming environment
Experience with language or system
Familiarity with modern programming practices
Availability of equipment, software, language tools
Completeness of project team
Personnel turnover
Project team size
Relative control of project manager over project team

7. Financial techniques for Capital Budgeting
Payback
Discounted cash flow
Cost-benefit analysis
These are the more formal mechanisms implied by Hinton & Kaye as capital budgeting
Anything with as great an impact as ERP needs to have some estimate of cost, benefits
Need to recognize that precise numbers not worth obtaining

8. Bacon [1992] survey of IT project selection methods
Financial Criteria
NPV, IRR, payback
profitability index
budgetary constraint
Management Criteria
Requirements, respond to competition, etc.
Development Criteria
Technical/ learning new technology, probability

9. Bacon findings More formal methods often not used
Why waste effort if know you will do it?
Many numbers used inaccurate anyway
More formal methods reserved for larger project (like ERP)
Management criteria focus on intangible
Technical a matter of maintaining state-of-the-art systems

10. Survey of Manufacturers Mabert et al. (2000); Olhager & Selldin (2003)
FORMAL METHOD
Use in US
Use in Sweden
ROI
53%
30%
Payback
35%
67%
Expected NPV
15%
12%
Other
11%
20%

11. Expected Installation Time Mabert et al
Expected Installation Time Mabert et al. (2000); Olhager & Selldin (2003)
Time to Install ERP US
Sweden
 12 months
34%
38%
13 to 24 months
45%
49%
25 to 36 months
11% 8%
37 to 48 months 6% 4%
> 48 months 2% 1%

12. Estimated Installation Cost Mabert et al
Estimated Installation Cost Mabert et al. (2000); Olhager & Selldin (2003)
Installation Cost US
Sweden
< $5 million
42%
40%
$5 million to $25 million
33%
35%
$26 million to $50 million
10%
18%
$51 million to $100 million 7%
> $100 million
In prior

13. Cost Proportions Mabert et al. (2000); Olhager & Selldin (2003)
Where money spent US
Sweden
Software
30%
24%
Consulting
Hardware
18%
19%
Implementation team
14%
12%
Training
11%
Other 3% 1%

14. Mabert et al. [2000] Survey of 400+ manufacturers
Expected ROI
Reported
< 5%
14%
5% to 15%
18%
16% to 25%
36%
26% to 50%
> 50%
13%

15. Expected ROI Mabert et al. (2000); Olhager & Selldin (2003)US
Sweden
< 5%
14%
17%
5% to 15%
18%
38%
16% to 25%
36%
30%
26% to 50%
11%
> 50%
13% 4%

16. Mabert et al. [2000] Survey of 400+ manufacturers
Even for ERP systems, only 53% used formal methods
For smaller IT projects, payback most popular
Most systems expected to take years to install
Trend is to make much faster
Cost varies widely
You have a choice as to where you spend
Training tends to be underbudgeted
Not all expect big return

17. Points A variety of evaluation techniques available
Pure monetary analysis hard, expensive, inaccurate
Payback a commonly used shortcut
Other methods exist
Value analysis
Multicriteria analysis