The ERP paradox

“…strategic alignment flounders in never-ending tactics and compromises…”  Ole Hanseth et. al.  in The Control Devolution: ERP and the Side-effects of Globalization (The Database for advances in information systems, Vol. 32, pp. 34-36)

Introduction

Organisations implement Enterprise Resource Planning (ERP) systems for a number of reasons.  Some of the more  common ones are:

• To gain control over processes within the organisation.
• To make these processes more efficient.
• To reduce the portfolio of applications that the IS department has to manage.

Yet, the end result of ERP implementations is often the opposite: less control, and efficiency; and even though the number of applications may be reduced, this advantage is often offset by the cost and effort of maintaining ERP systems. In this post I explore this paradox, drawing from the paper from which the quote at the start of this post was taken. In essence, the paper discusses- via a case study – how the implementation of an ERP system can actually increase organisational drift and reduce efficiency.

Globalisation and its effect on IT strategy

Those who have lived through an ERP implementation would be well aware of the some of the difficulties associated with these. This is no longer news: there is a fair bit of research done on the problems and pitfalls of ERP system implementations (see this paper, for example). The question, however, is why ERP implementations run into problems. To answer this, the authors of the paper turn to the notion of globalisation and how ERP systems can be seen as a reaction to it.

Globalisation is essentially the interaction and integration between people of different cultures across geographical boundaries, facilitated by communication, trade and technology.  The increasing number of corporations with a global presence is one of the manifestations of globalisation. For such organisations, ERP systems are seen as a means to facilitate globalisation and control it.

There are four strategies that an organisation can choose from when establishing a global presence. These are:

• Multinational: Where individual subsidiaries are operated autonomously.  
• International: Where work practices from the parent company diffuse through the subsidiaries (in a non-formal way).  
• Global: Where local business activities are closely controlled by the parent corporation.  
• Transnational: This (ideal) model balances central control and local autonomy in a way that meets the needs of the corporation while taking into account the uniqueness of local conditions.

These four business strategies map to two corporate IT strategies:

•  Autonomous: where individual subsidiaries have their own IT strategies, loosely governed by corporate.
•   Headquarters-driven: where IT operations are tightly controlled by the parent corporation.

Neither is perfect – both have downsides that start to become evident only after a particular strategy is implemented. Given this, it is no surprise that organisations tend to cycle between the two strategies, with cycle times varying from five to ten years; a trend that corporate IT minions are all too familiar with.  Typically, though,  executive management tends to favour the centrally-driven approach since it holds the promise of higher control and reduced costs.

Another consequence of globalisation is the trend towards outsourcing IT infrastructure and services. This is particularly popular for operational IT – things like infrastructure and support. In view of this, it is no surprise that the organisation discussed in the paper chose to outsource their ERP operations to an external vendor.  Equally unsurprising, perhaps, is that the quality of service did not match expectations.

The effect of modernity

The phenomenon of modernity forms an essential part of the backdrop against which ERP systems are implemented. According to a sociological definition due to Anthony Giddens,  modernity  is “associated with (1) a certain set of attitudes towards the world, the idea of the world as open to transformation, by human intervention; (2) a complex of economic institutions, especially industrial production and a market economy; (3) a certain range of political institutions, including the nation-state and mass democracy”  

Modernity is characterised by the following three “forces” that have a direct impact on our lives:

• The separation of space and time: This refers to the ability to coordinate activities across the world – be they global supply chains or virtual project teams. The ability to coordinate work across space and time is made possible by technology. The important consequence of this ability, relevant to ERP systems,  is that it makes it possible for organisations to increase their level of surveillance and control of key business processes. 
• The development of disembedding mechanisms: As I have discussed at length in this post, organisations often “import” procedures that have worked well in organisations. The assumption underlying this practice is that the procedures can be lifted out of their original context and implemented in another one without change. This, in turn, tacitly assumes that those responsible for implementing the procedure in the new context understand the underlying cause-effect relationships completely. This world-view, where organisational processes and procedures are elevated to the status of universal “best practices”  is  an example of a disembedding mechanism at work. Disembedding mechanisms are essentially processes via which certain facts are abstracted from their context and ascribed a universal meaning. 
• The reflexivity of knowledge and practice: Reflexive phenomena are those for which cause-effect relationships are bi-directional – i.e. causes determine effects which in turn modify the causes. Such phenomena are unstable in the sense that they are continually evolving – in potentially unpredictable ways. Organisational practices (which are based on organisational knowledge) are reflexive in the sense that they are continually modified in the light of their results or effects.  This conflicts with the main rationale for ERP systems, which is to rationalise and automate organisational processes and procedures (most often in a completely inflexible manner) .

Implications for organisations

One of the main implications of globalisation and modernity is that the world is now more interconnected than ever before. This is illustrated by the global repercussions of the financial crises that have occurred in recent times. For globalised organisations this manifests itself in not-so-obvious dependencies – both on events internal to the organisation and those that take place in its business, political and social environment. The important thing to note is that these events are outside of the organisation’s control. At best they can be managed as risks –i.e. events that cannot be foreseen with certainty.

A standard response to risk is to increase control. Arguably, this may well be the single most common executive-level rationale behind many ERP implementations. Yet, paradoxically, the imposition of stringent controls can lead to less control. One of the main reasons for this is that strict controls can give rise to unanticipated side effects. A good example of this is when employees learn how to game performance metrics and service level agreements.

The gap between plan and reality

The authors use a case study to illustrate how ERP implementations can be subverted by the side effects of globalisation and modernity.  The organisation they studied was Norsk Hydro a Norwegian multinational which, at that time, was undergoing an organisation-wide consolidation of its IT infrastructure and services.  Up until then, the IT landscape within the organisation was heterogeneous, with individual business units and subsidiaries free to implement whatever systems they saw fit. The decision to implement a global ERP system (SAP R/3) was a direct consequence the drive to consolidate the IT portfolio.

To reduce risk, it was decided to develop and validate a pilot project in one site and manufacturing plant.  Problems started to emerge during the pilot validation. As the authors state:

When the pilot was installed, it took three months of extensive support to make it work properly. …The validation effort identified more than 1000 “issues,” each of them requiring changes in the system.

Understandably, business managers were not impressed:

Some managers also argued that the “final” version should be based on a complete redesign of the pilot, as the latter was not structured as well as the more complex “final” version would require.

Yet, this redesign never happened. One can only speculate why – but it is a pretty good guess that cost had something to do with it.

The SAP implementation unfolded against a backdrop of a large-scale business restructuring. One of the other sub-projects in this restructuring was a business re-engineering initiative. Quite logically, this was subsumed within the SAP project. One of the main outcomes of this was the establishment of “common” organisation-wide processes to replace myriad local processes.  These common processes were to be modelled on “best practices.” Although this made sense from a management perspective, implementation was difficult because just about every local procedure had quirks that could not be shoe-horned into standardised global processes.

Side effects

The authors list a number of unintended “side effects” of the implementation. I will describe just a couple of these, referring the reader to the original paper for others.

Homogeneity to heterogeneity

Ideally, an SAP implementation is intended to provide a single “harmonised” solution across an organisation.  In practice, however, local differences and the existence of legacy systems guarantees that this ideal will be compromised. This is exactly what happened at Norsk Hydro. In the authors’ words:

…differences in business cultures and market structures in nations and regions [had to be accounted for]. In this process locals played a key role. They, in fact, took over the design process and turned SAP into an ally helping them get control over the overall change process…the SAP solution was customised for each individual site. Slowly, but irreversibly, the SAP solution had changed from one coherent common system to a complex, heterogeneous infrastructure.

Those who have lived through an ERP implementation may recognise echoes of this in their own experiences.

Side effects of integration

Although the above example illustrates the integration was perhaps not as complete as was intended, the implementation was largely successful in rationalising the organisation’s IT landscape. For one, it  replaced several legacy systems, thus (in theory) reducing costs. However, as the authors’ point out, integration means interdependence, which can create significant maintenance problems. ERP systems are notoriously hard and expensive to maintain. Norsk Hydro’s experience was no different: SAP upgrades were horrendously expensive and time consuming. As the authors state:

Typically, SAP is subject to rapid change because the huge customer base generates lots of new requirements all the time. Moreover, as its integrated nature implies, when any module is changed, the whole system has to be modified. Thus, in spite of the fact that the number of interfaces to be maintained decreases when an organization installs SAP, their complexity and change rate increase so much that the overall maintenance costs reach very high levels.

In spite of the standard solutions applied, the upgrades of the SAP code itself are also very complex and time consuming. The last upgrade (at the time of writing) enforced the SAP application to be down for 9 days! Also here there are many explanations.

For example, when all the work processes are integrated it creates a complex production lattices. Because of many errors in the software all work processes have to be tested extensively, etc.

This side effect is, in fact, an unavoidable consequence of the complexity and interconnectedness of ERP systems

Conclusion

In closing, it is appropriate to return to the themes mentioned at the start of this post. The case study discussed by the authors highlights the fact that ERP systems can have effects that are exactly opposite to the ones intended. Specifically, they can lead to less rather than more control, less efficiency and addition of complexity to the IT portfolio. Moreover, seen in a broader context, ERP systems are a microcosm of modernity: they attempt to coordinate activities at a global scale, implement disembedding mechanisms in the form of best practices,  and  are reflexive in the sense that they change organisational practices but are also changed by them.  The  interconnectedness and uncertain cause-effect relationships lead to unanticipated side effects that can completely subvert the original intent of these systems.

The authors summarise this well in the last few lines of the paper:

ERP installations in global organizations conform pretty well to the image of the modern world as a juggernaut, i.e. a runaway engine of enormous power that, collectively as human beings, we can drive to some extent but that also threatens to rush out of our control in directions we cannot foresee, crushing those who resist it

In my opinion, those thinking of committing their organisations to implementing ERP systems would do well to read this paper in addition to vendor propaganda literature.