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Factors that determine and control the Total Cost of Ownership of an ERP solution - A maturity model that increases reliable ERP cost estimation

Hest, Thijs van (2013) Factors that determine and control the Total Cost of Ownership of an ERP solution - A maturity model that increases reliable ERP cost estimation.

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Abstract:The implementation of an ERP system, and especially its cost management, is often described to be a project with a high degree of risk. This is likely to be partially caused by the magnitude of change the effective implementation of an ERP system often demands of an organization. ERP implementing firms are not always aware of the necessary changes to effectively implement and use ERP, to reap the benefits of these expensive solutions. Phelan (2006) found that 40% of all ERP implementations exceed budgets and time with at least 50%. Considering the magnitude of investments in ERP projects, which often concerns investments of over a million euro’s, such budget overruns are of a major impact on an organization. This was more than enough reason for KPMG ERP Advisory, to request further research on this topic from a university. The main question of this research is: Which factors determine and control the Total Cost of Ownership of an ERP solution? After extensive literature reviews on the costs, risks, and cost drivers of ERP, and the conduction of a questionnaire within KPMG IT Advisory, a maturity model that rates an organization’s maturity on the aspect of future ERP cost estimation was developed. This model shows the level of ERP cost-estimation maturity of an organization on four perspectives and on 4 levels of each perspective. An organization with a higher level of maturity in this aspect is expected to estimate the TCO of ERP more accurately than an organization with a lower maturity. The higher the level of ERP cost-estimation maturity of a firm, the less the realized TCO of ERP is expected to deviate from the pre-estimated budget. Such a maturity model or similar tool that describes action for more reliable ERP cost management has until now been inexistent. The Total Cost of Ownership (TCO) concerns all costs of an investment throughout its entire life cycle. Ignoring the significant costs that occur after the implementation of an ERP solution, such as licensing, maintenance, and support costs, might negatively influence decision-making. The life cycle of ERP was distinguished in the acquisition-, the implementation, and usage phase. First, all costs that are applicable to these phases were identified from literature. Acquisition was divided in consultancy and other acquisition costs. Implementation costs were divided in consultancy, software & licenses, hardware, business process redesign, training and other costs. Usage costs were divided in software & licenses, hardware, training, usage, maintenance, support and personnel costs. These divisions in costs were maintained throughout the entire design process. Cost-misestimation risks and cost drivers of ERP were identified in an extensive literature review and added to these divided cost categories. The maturity model of ERP cost estimation is divided in four perspectives: Management, IT, Process, and People. All cost drivers, critical success factors and cost-misestimation risks of ERP were plotted on these four perspectives. The extent to which these cost drivers and risks are controlled, controls the extent to which the TCO of ERP can reliably be estimated. The amount of risk that is involved in all cost drivers was identified in an internal survey at KPMG ERP Advisory, determining the order of cost drivers. The required investment to control each cost driver, and the risk in terms of probability and potential impact were identified. A remarkable finding was that Management was not indicated as containing high risks, contradicting literature. This can possibly be explained by the high maturity and there perceived self-evident cost drivers of the respondents. Especially process standardization and harmonization, under the Process perspective was found to require high investments and contained high risks. Based on critical success factors, risks and cost drivers of ERP implementation and usage from an extensive literature review and their weights as collected in a questionnaire, an organization that is rated with a level four maturity on all four perspectives is characterized by: Management: high prioritization of ERP and sustained top management support, a perfectly defined project scope, project plan, implementation approach, and the management of these aspects, the presence of a highly sophisticated cost management system and a careful selection of both consultants and project team. IT: SaaS contracts and possible leasing of equipment, an extensive and formal ERP testing plan and execution, a perfect match between the ERP system and the demands and characteristics of the organization and the awareness of possible future demands, with adequate response possibilities. Process: an excellent fit between the ERP system and the organization, a minimum amount of customization and a high degree of vanilla ERP, and therefore a perfect amount of Business Process Redesign and a minimization of the frequency with which processes change. People: a high degree of user involvement and participation, also in decision-making that concerns ERP, a high amount of employee support of ERP and extensive and formal training procedures for existing and new employees to use ERP. A point of rationality could be found on the extent to which it is necessary for an organization to always score the highest possible rating on each perspective. The acceptance of a certain degree of risk to avoid a certain investment can be seen as a rational decision as long as both are certain. An overall finding is that an ERP project can no longer be seen as an IT project. The required investment of an ERP project was indicated the highest at Process, and not at the IT perspective. The IT component of an ERP project has always been significantly present, which is only logical, but the other aspects of Management, Process, and People can no longer be left uncovered. Only if an organization scores a high maturity on all four perspectives, a high organizational readiness for ERP is developed, which leads to a higher reliability of the estimation of the TCO of ERP.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
Link to this item:http://purl.utwente.nl/essays/63410
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