A post-implementation analysis of ERP systems in Maltese companies
A brief overview
Enterprise Resource Planning (ERP) systems are generally defined as integrated software packages that control personnel, material, monetary and information flows inside a company. They seek to integrate the complete range of a business’ processes and functions in order to present a holistic view of the business from a single information and IT architecture.
ERP is, at its very core, software designed as a suite of modules which tie in to a database. These modules can easily link back-office operations to front-office operations, as well as internal and external supply chains. These modules could include sales and distribution; materials management; production planning; asset management; quality management; human resources; financial accounting and project system, among many others.
Furthermore, ERP is more than a tool for cost-cutting. It provides a rich source of information that allows firms to support a business strategy that will pursue growth, innovation and possibly even entrepreneurship. It provides access to external data that allows a firm to investigate and evaluate opportunities (or threats) for growth. In order for there to be a successful implementation of an ERP system, business processes are redesigned from an inflexible, mass-transaction orientation to an agile, lean and knowledge-based process.
Why take the leap?
In deciding whether to embark on an ERP project, companies assess their own needs and evaluate to what extent a potential solution can work in their favour. The finance department is usually the sponsor or catalyst for an ERP implementation in this respect; all costs funnel through finance and the department itself would be impacted greatly by the project. Due to this relationship, the CFO’s input is highly valued, and he is often the first in-house “consultant” to be assigned onto the project.
Even though the finance department is heavily impacted by the ERP system, in many companies it is ultimately still regarded as a support function. End-users tend to feel that the impact of ERP on finance is secondary, when compared to the underlying business operations which initially led to the project.
Studies have shown that companies are motivated to invest in ERP systems to improve organisational efficiency, effectiveness, and ultimately the firm’s bottom-line. Perceived benefits achieved through ERP systems relate to increased flexibility in information generation, increased integration of accounts applications as well as improved quality of reports and financial statements.
Business requirements driving ERP investment are vast in their scope. For instance, pharmaceutical companies are required by regulations to have complete traceability of all materials used in the production of the drugs, while also allowing for individual batch numbers of the products to be included on customer invoices. Modern production facilities can rely on the ERP’s real-time information sharing capabilities to allow accurate activity-based costing techniques to be used, resulting in better product-mix decisions as a result of more accurate revised costs.
An increasingly common driver for implementing a large-scale ERP system in Malta is the requirement from parent companies overseas. Operating on the same platform gives numerous operational advantages, particularly in the area of group consolidation and reporting. The group as a whole benefits from more integrated reporting and standardised work practices and procedures across all territories involved. From a high-level management accounting perspective, data pulled in from hundreds of subsidiaries across the world can be collected and compared across different firms in the same region, in order to identify trends, weaknesses and opportunities. On a local level, the group functionality provided by an ERP system allows for consolidated accounts to be prepared with relative ease; since all inter-company transactions are posted automatically, human error is reduced, making the reconciliation of inter-company current accounts a less mundane task.
A critical success factor underpinning successful ERP roll-outs are business processes. Data production processes are key to reduce the complexity surrounding an ERP implementation. This often has major transformation impact on the entire organisation. The up-side is that ERP systems record transactions will provide a state-of-the-art platform, thus forcing changes to improve the physical flow of activities. This creates far richer and deeper data in a timely and accurate manner than before.
Aside from a driving business requirement, some companies choose to embark on an ERP project due to regulatory or compliance issues (e.g. BASEL III in banking and Solvency II in insurance), the need to replace an accounting package which is either outdated or can no longer meet the requirements of the growing business. In smaller-scale businesses, oftentimes new opportunities are identified when new people join the finance department, or as a result of a statutory audit which notes specific deficiencies in an existing system.
The implementation team
The composition of the implementation team and steering committee that is ultimately responsible for the implementation is critical to the success of the project. It is generally accepted that involvement and complete backing of top management will go a long way towards pushing the project towards success. This role is both symbolic as well as substantive. Support would only be real when it is backed by specific and sustained actions, such as the allocation of full-time resources to the project, as well as empowering the project leader.
As for the role of project leader, studies show that a senior manager (at the very least at CXO level) would be much better suited. The CFO’s functional area would be impacted the most by the new system, and the individual would often therefore have a personal stake in the project’s success. The situation in Malta is no different, with CFOs and in some cases, depending on the size of the company, CEOs taking the project leadership role. My research revealed that in Malta there is a mentality that an ERP project would fall primarily under the scope of the finance department, even when there have been other key business drivers requiring the implementation of the ERP system.
Post-implementation reviews and measuring success
Measuring the success of such projects is not a straightforward affair. There are two general paths: (1) objective financial measures, such as business cost and profit figures, and (2) subjective (qualitative), self-reported success measures. Needless to say, financial measures are often significantly harder to quantify, due to the existence of a large amount of intangible benefits that are brought about.
ERP systems could have a direct impact on financial performance. They affect formal management control systems, which are positively related to non-financial performance, which in turn positively affect financial performance. However, while operational benefits may be seen and felt throughout the business over time, the ERP adopter is generally unable to make quantitative assessments of the impact on financial performance. Non-financial performance, measured through metrics such as manufacturing lead time, number of customer complaints, product reliability and customer service is more easily measured when compared to return on investment benchmarks. During my research, I came across a number of Maltese companies who will not undertake thorough investment analyses on the initial capital outlay. Even though they confirm that an ERP system helps in reducing unnecessary costs, they are unable to quantify such cost reductions – both actual and potential. In fact, post-implementation reviews are generally not done unless issues begin to crop up. Formalised quantitative analyses are not carried out, however informal feedback is gathered. One company interviewed commented that:
“[their] investment appraisal team took into account the increased efficiency: more work could be done with the same staff. Data was cleaner, work processes were more streamlined; profit reports became infinitely more detailed.”
It appears that when the ERP system being installed is far-reaching and has an impact on many aspects of the business, it becomes increasingly more difficult to measure quantifiable results which can be shown in numbers, tables and graphs. Instead, top management rely on the qualitative benefits that can be visibly seen in practice. A recurring theme is the benefit that staff is relocated from repetitive manual work to value-adding activities. The ERP will be able to contribute to long-term financial growth in the company – not through reducing a specific cost or increasing a particular revenue stream, but through optimising the operations throughout the business. However certain economies of scale – which could be easily measured through large quantitative returns on investment – will not be felt very strongly in Malta, purely due to a lack of scale when compared to a similar company operating in a different country.
Changes to the finance department
Numerous studies have been made on how the actual end-users of the ERP system are affected, and how they react to its implementation. In general, high expectations tended to negatively impact ERP success (the literature supports the notion that when the system is perceived by the users to be easy to use or learn, those users will also project the system as being useful). A number of external factors were also found to further influence ERP usage by the users, such as business process fit; social influence; data quality; system performance; user manuals and computer anxiety.
One of the bigger results to emerge from studies on ERP systems is that in many cases, the management accounting function has not changed very significantly. As a by-product of the CFO (or equivalent) always being heavily involved during the project’s implementation, the accounting team would be in a better place to plan changes in accounting techniques. There is greater room for analysis, and accounts operations take up less time since the ERP gives more transparency in the accounting process:
“The accountant’s work is now more focused on analysis since the compilation of data is mostly done at the click of a button. […] Accounting techniques have more or less remained the same.”
One can conclude therefore that accounting methodologies used at a high level are perfectly adequate, and at a good standard. The accountant’s job does change: professionals are now left with more time for analysis instead of routine tasks. By allowing front-end staff to carry out routine tasks, accountants could carry out more value-adding activities and contribute to the decision-making process. Therefore what changes is the way the job is done – as opposed to what is done.
The impact on the external auditor’s work will, in many cases be quite significant, particularly as the shift towards audit of IT controls in Malta strengthens. While this subject was beyond the scope of the dissertation, it would be a worthy area for further academic research. A new dimension is also brought to light following the ERP implementation in some companies, in that the software ties together the finance department with the rest of the firm. Teams are better equipped to work towards the same common goal, as communication is facilitated instead of hindered by technology:
“The finance staff is no longer closed off in their own department. They need to communicate with other departments: the supply chain, business department, consumer department. Where the previous system was very rigid just for accounting purposes, with [the new ERP system] we could identify other business processes to bridge the gap between Finance and, for instance, SCM. […] When something is actioned on [the ERP software], all relevant parties are alerted.”
“The relationship [between finance staff and] other managers has changed in a positive way since finance employees are now in more contact with people from other departments, as they now have more time to explain to them the financial results which interest their areas.”
One of the main reasons for introducing an ERP system into a company is, as discussed earlier, the need for change, and to overhaul the operations of the business. Many local companies, when upgrading from a small-scale accounting software package to an ERP system, find that when functionality that was not previously present in the business becomes available, it would make sense for the business to change its operations in such a way that it takes advantage of the new functions.
“Software packages typically implement best practice [for established processes and routine functions]. Today, a firm would be better off changing itself to the way the software works.”
For instance, if a system offers detailed variance analysis based on raw material inputs, adequate inputs would be required. This may entail training staff (or purchasing hardware) to properly identify and count output, so that the variances can be calculated. If a company has never recorded certain metrics before, then this may be a tougher change to swallow, particularly by the staff whose day-to-day job responsibilities are directly impacted. However, it follows that by capturing information at particular points of the operation which were previously ignored, a much more detailed and accurate product cost can be computed.
Businesses found that activity-based costing now becomes possible – costs can be identified, tracked and assigned to cost drivers, allowing for service industries to determine loss-making clients. Even seemingly commonplace matters such as provisions for doubtful debts can stand to gain, as provision calculations can take a statistical twist. Through analysing past clients and records, the ERP system will be able to determine to what extent a particular type of client is likely to default on payments. In addition, postings of provisions to the finance module can be broken down by category or client type, instead of having one entry. While the end result remains the same, it allows senior accountants to draw up valuable information regarding the creditworthiness of particular clients or of particular services lines over time.
The overriding theme that is brought forward is that of time-saving. By reducing manual intervention for routine operations, and increasing automation as much as possible, companies benefit from not having staff tied up in non-value-adding activities. Some businesses also choose to make a shift to a paperless office, whereby all documents received will be barcoded, scanned and subsequently catalogued into the ERP system for immediate retrieval. As physical invoices, orders and documents received are tagged and properly indexed after being scanned in, accounting clerks can cut down on a lot of time which may otherwise be spent on manual filing and sorting.
A standalone software solution
In the case of businesses which operate in markets requiring highly customised and industry-specific software, it is no so common for an ERP package to replace all existing systems in a company Instead, the ERP package would add to what is already in place and aggregate information from all the different existing sources into one common interface.
Customisations to the base ERP package are commonplace. Specific requirements relating to internal- and outward-facing company procedures would mean that the standard software lacks functionality that is critical to that particular business. For instance, when a company requires its ERP to interface with ERP of its parent company, this will need to be handled by a purpose-built module. However, it emerged that dashboard-style reporting tools in ERP packages are generally lacking in flexibility. While the ERP software is able to effectively collect, manage and sort through all kinds of financial and non-financial information, companies continue to use specialised third-party dashboard-reporting tools. These allow the data to be completely manipulated and presented in a way that shows off KPIs and other relevant metrics. Whether the reports are done via a third-party application or through the ERP, the end result is well received: “better decisions could be taken on the basis of this real-time information”. My findings revealed that CFOs and their controlling departments tend to rely heavily on excel spreadsheets to circumvent the rigidity surrounding ERP reporting. While this is a quick workaround it poses a series of issues which are not in-scope of this article, such as lack of version control or extended report analysis process, when changes are made at quarter end by a stock-listed company.
An ideal situation would have every aspect of the business’ IT, operations and finance requirements handled through one integrated system. This is the premise of the ERP system. However in reality different companies have widely different needs which need to be catered for individually. When software is already in place, the ERP would either replace it completely or be configured alongside it. Finance-related functionality is easily replaced by the ERP, and provides a lot more flexibility and power to the accounts departments.
A new system will first and foremost have an impact on the people who directly need to use it:
“Some [businesses] have a departmentalised system, so the ERP framework goes against their culture. The ERP concept is built around the idea that if you do something in Operations, it is immediately reflected in Finance. But in a departmentalised situation, a department may collect all information and pass it on in a batch whenever it wants. Suddenly, they would lose control of the information, and the Finance department may need to deal with data which might not be of good enough quality.”
It is immediately apparent that having information flow through the business in such a way is a distinct paradigm shift for many companies who implement ERPs. Different people working in different areas of the business will have different reactions to this change. Some welcome it, seeing it as a much needed revamp of the entire operation; something which could not be accomplished through the legacy system. Others may have a harder time accepting the transition, as they are sceptical about IT and the changes it necessarily brings with it. Implementation teams are all too aware that change resistance by staff is an issue which needs to be handled with care. The project leader would need to be proactive in this respect, through open and direct two-way communication between the implementation team and all the individuals who are ultimately going to be involved as end-users.
Change resistance from staff could place unnecessary pressure on the project’s time frame, particularly if this is not addressed at an early stage. For instance, since different levels of staff are all connected to each other via the ERP, authorisations for purchase orders are easier to implement and enforce, and not everyone would be comfortable with the transparency. However it is uncommon for change resistance to come out from the finance department, as the department is a lot more in touch with the impact and benefits that the project will have on the work.
Training plays a vital role in minimising change resistance. This is done not only done to cover the mechanical procedures and ins and outs of the new system. Training is educating people as to the use of the system: what it means in the big picture for the company. When the entire staff understand the benefits it will bring, and how they can help to be a part of that change, they are more easily able to embrace it and get on board with the project.
The growing ERP market marks a paradigm shift as accounting is not just done for its own sake, but instead to add value to the business, and to be an integral part of the decision-making process. The finance function will be seen in a different light: it now becomes relevant not only for analysing the past, but for improving the future. As new generations of businesspeople reach senior management ranks, this potential for change will be embraced even further, and companies will be in a better position to harness advances in IT to get an edge over their competition or, more importantly, to not fall behind. Despite the many advantages an ERP system can bring to the table, the size and scale of companies in Malta seems to be a major factor as to why local businesses are slow and hesitant to adopt ERP-style products. With more than 99% of companies registered in Malta being classified as SMEs, and only 44 “large” companies on the island, ERP systems may be considered as overkill for the average business. From an accounting perspective, it is clear that methodologies for financial and cost accounting that were being used prior to implementation were already at a high standard. These fundamental techniques remain largely the same, but the way they are carried out changes. The shift from ‘basic’ standalone accounting packages to larger ERP-style packages is one which, if handled properly, can bring people in a company closer together as they work towards the common goals of the business.
All references used in this article are available upon request at the Department of Accountancy, University of Malta.
ERP systems present a huge potential for businesses to obtain more value-added information that can improve their decision-making. However this potential may end up not being fully realised as businesses fail to follow the complex implementation process with a robust post-implementation evaluation that should allow them to determine whether the ERP system is really delivering what it was expected to deliver. Estevez (2009) sees implementation and post-implementation as two fundamental processes along one continuum and according to Grabski et al (2009) management accountants are in the best position to carry out the post-implementation evaluation.
Mr Caruana’s dissertation provides some interesting and practical insights with regards to the attitudes towards post-implementation evaluation of ERP systems within Maltese businesses. His in-depth analysis of a number of case companies shows that, whilst businesses are generally satisfied with the ERP systems, there is still a reluctance to carry out a formal assessment of the benefits that are being gained. Although this may be very difficult to quantify it may mean that businesses are missing out on opportunities for improved information or investing in systems which, whilst useful, do not provide an adequate return. Hopefully Mr Caruana’s study will drive further research in this area, in particular with regards to role of accountants in enabling the post-implementation process.
Grabski S.V., Leech S.A., Sangster A., 2009: Management Accounting in Enterprise Resource Planning Systems; Elsevier, Oxford, U.K.
Esteves J., 2009: A benefits realization road-map framework for ERP usage in small and medium-sized enterprises; Journal of Enterprise Information Management 22(1/2), pp.25-35.