INFORMATION SYSTEM (TDMM32)

The Importance of Change Management In ERP Implementation

Alice Hain (aliha881) Chakkaphan Athapornmongkon (chaat971)

Chutchapol Youngwiriyakul (chuyo489) Steven Schwartz (stesc786 )

Linköping, November 2003

Table of Content Introduction ................................................................................................................................ 3 ERP and Change Management................................................................................................... 3

What is ERP? ......................................................................................................................... 3 Problem in ERP implementation............................................................................................ 4 Change Management.............................................................................................................. 4

What is change management? ............................................................................................ 4 Change management model ............................................................................................... 5 Steps for change management............................................................................................ 5 Components of a change management plan....................................................................... 6

How change management can help in ERP implementation?................................................ 6 Analysis...................................................................................................................................... 7

Case 1 - Company B (Footwear Manufacturer) ..................................................................... 7 Situation ............................................................................................................................. 7 Solution Selection .............................................................................................................. 7 Implementation Strategy .................................................................................................... 8 Results and Conclusions..................................................................................................... 9

Case 2 – Manco ...................................................................................................................... 9 Situation ............................................................................................................................. 9 Structural changes .............................................................................................................. 9 Cultural change ................................................................................................................ 10 Implementation team........................................................................................................ 10 Communication and participation .................................................................................... 10 Results and Conclusion .................................................................................................... 11

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Introduction An Enterprise Resource Planning (ERP) system is considered to be the price of entry in today’s competitive business environment. ERP allows organizations to gain competitive advantages by saving resources and responding to the ever-changing business environment. Not only large companies who conquered most of the market implement ERP but both medium and small companies are implementing it too. However the rate of success in implementing ERP is not as high as expected. The explanation of this can be classified as human or organizational an example of this is the lack of strong and committed leadership, technical an example of this is problems in software customization and testing, and lack of technically knowledgeable staff, and economic an example of this is lack of economic planning and justification.

This is why changes are needed in those companies that implement ERP. Changes such as the way things are being done, people managed or operations are structured and etc is made in order to improve business. This process can also be called as organizational change. Hence this critical business issues is named Change Management. These changes are a good preparation before ERP implementation is preceded.

According to our topic, the purpose of this report is to show the readers that Change Management is one of the key factors for a successful implementation of Enterprise Resource Planning (ERP). Companies that have modified its functions are usually gained the most profit out of the ERP implementation. This is proved in this report through using case study.

ERP and Change Management What is ERP? ERP is an amalgamation of a company's information systems designed to bind more closely a variety of company functions including human resources, inventories and financials while simultaneously linking the company to customers and vendors. ERP is actually information technology (IT) which is a key component for managing organizations. Many companies have embraced a new class of planning and resource management software systems to integrate processes, enforce data integrity, and better manage resources over the past few years. ERP is package that capable to do all processes mentioned later. ERP evolved with Materials Requirements Planning (MRP) and Manufacturing Resource Planning (MRP II) systems that are expected to improve integration of processes across functions or department across the company or factory. The buyer also expected that ERP should also improve workflow and order management. It should also be able to standardize various business practices, account accurate inventory and manage supply chain better. ERP software should include integrated modules for accounting, finance, sales and distribution, human resources, material management and other business functions that link the enterprise to customers and suppliers.

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Problem in ERP implementation A recent Standish Group report on enterprise resource planning (ERP) implementation projects reveals that these projects were, on average, 178% over budget, took 2.5 times as long as intended and delivered only 30% of promised benefit, while another recent survey of 12 recent projects revealed that adapting the implementation to the prevailing cultural style was one important cause of this project underperformance1. The implementation of ERP software is not an easy task to be precise it is actually a complicated task. This is due to the different parts of the business, from production to management through sales, research and etc are involved and mixed. When a system involves many different functions of the organization, it becomes more difficult to manage, coordinate and plan for. The degree of complexity that can be reached when trying to implement the ERP system is something that can rarely be forecasted.

The implementation of ERP is carried out in several phases. These phases are the implementation process itself. It is only done when all the strategic planning, information requirement analysis, resource allocation and project planning have already done. Three phases will be mentioned here. They are:

1. Project phases: organization’s objectives are already set and the ERP software is

configured and rolled out to them 2. Shake down phases: the company makes the transition from “go live” to “normal

operations”. 3. Onward and Upward phases: the company takes the real business advantages

provided by the ERP system.

ERP implementation, according to the three phases, contains problems in each and every phase. Some of the problems are lower efficiency due to software modification, harmonizing of the chain is a difficult task, data quality problem, and etc. Further details of the problem will be discussed in “How change management can help in ERP implementation”

Change Management

What is change management? From our search, there are many ways to define “change management”, and this is one general definition for it.

“Change management is a systematic approach to dealing with change, both from the perspective of an organization and on the individual level.”2

However, for this paper where change management is used to increase potential of successful ERP implementation we can say that change management is a systematic approach to dealing with change that affects the success of ERP project.

1 M. KRUMBHOLZ, J. GALLIERS, N. COULIANOS AND N.A.M. MAIDEN, Implementing enterprise resource planning packages in different corporate and national cultures, Journal of Information Technology, volume 15 (2000), pp. 267–279.

42 http://whatis.techtarget.com/definition/0,,sid9_gci799426,00.html (Nov. 17th. 2003)

Change management model Organizations do not exist in isolation. They exist in interactive society. Hence, change management model takes different parts of organization or even external environment into consideration.

Figure 1 The Burke-Litwin Model The Model3 designed by W. Warner Burke and George Litwin, shown in Figure 1, provides a framework for understanding organizational structure.

Steps for change management Most organization changes occur unconsciously or sometimes by trial and error. These unplanned changes consume money and time and usually result less than expected. Planned change gives more solid idea what will happen when and what should be expected. In order to accomplish successful change, Kurt Lewin provided a useful three-stage model4 for introducing a planned change.

1. Unfreezing In this phase, company starts not only recognizing the need of change, but also creating a vision for the future.

2. Changing Actual changes which included teaching new skills and behaviors are made at this stage. Changes can be made in organizational modules such as tasks, individuals, or formal groups.

3. Refreezing After changes are made, reinforcing is essential step to freeze the new state. To accomplish this stage, commitment until prior behaviors are replaced is required.5

3 David K. Carr and Henry J. Johansson, Best Practices in Reengineering (New York: McGraw-Hill, 1995) p.36 4 Kae H. Chung, Management Critical Success Factors (Massachusetts: Allyn and Bacon, 1987) p.639-640

55 Robert E. Levasseur. People Skills: Change Management Tools-Lewin’s Change Model

Components of a change management plan After company decides to go for change management, plan should be made. To construct a good plan, four main components6 should be included.

1. Assessment of change management environment First, company should evaluate both current cultural climate and any barriers to change in the firm. This will give management team a current overview before change.

2. Training By begin with identify skills, gaps, and training needs, then company develop training materials and classes. These steps prepare both knowledge and required skills for company staff ready for the change.

3. Communications Communication is the most important tool in obtaining buy-in from employees at every level of the company for the changes that will be necessary to reengineering process (David and Herry, 1995).

4. Development of objectives and milestones In order to have continuous improvement, development of objectives and milestones are essential. And after that, the whole change process should start all over again.

How change management can help in ERP implementation? Because lots of problems will rise up during the implementation phase, in fact 70 % of all ERP implementation projects are failure7, Factors that help deceasing failure rate were searched and came up with one factor: Change management. It can help in ERP implementation right from the beginning to the end of implementation project. The problems of ERP implementation can be divided into 3 phases: Project phase, Shake down phase, and Onward and Upward phases. In Project phase, one of the problems is Software Modification. Most of industries usually modify ERP software to compatible with its organization. The process of modifying the software will reduce the software efficiency. Not only that there will also be high risk of getting insufficiency tested packages or big time delays in sufficiently tested packages. The proper way is to adapting the organization to be compatible to the software itself. Change Management will help to change the business processes in which ERP software can be implemented without any reduction of its efficiency. The implementation of change management required involvement of everyone from manager to user. Therefore the process changed will be acknowledged to all member of the company. From then training can be planned and conducted to all users and hence less modification of the software will be done. The second phase of the ERP implementation is called shakedown phase. One of the obvious problems in this phase is cutting end-user training. Although it is the last things in the implementation schedule it is still important. It has been reduced dramatically whenever time is lacked. Sometime training is not even included in the ERP implementation budget. This will make user unable to utilize the software efficiently. This can be prevented through using of Change Management since training is required by the procedure. Training is one of the

6 David K. Carr, Henry J. Johansson, Best Practices in Reengineering (New York: McGraw-Hill, 1995) p.50 7 Lewis Bob, The 70-percent failure, InfoWorld, 10/29/2001, Vol. 23 Issue 44, p50

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main processes that needed to be implemented. This also means that training is unavoidable if change management is hired. Even after ERP implementation period; Onward and Upward phases, companies with change management still have better control on problems that might occur. Most of Big-Bang approach firms may find themselves wondering whether they have improved anything with the new system. Because they see ERP system only as technology replacement, and did not set business goals to achieve with the new software, while change management prepare them through different training program and more clear communication inside the firm. Another potential problem for this phase is knowledge dependency. Any new changes or upgrade in unprepared company can cost money because they are very dependent on outside help. Again, change management will provide enough employees training and save this unnecessary cost.

Analysis The analysis section will demonstrate the points introduced in the Introduction and Theory sections of this paper. Two different cases were used in the analysis. The cases will show that change management is not a cookie cutter solution, but rather a set of guidelines, which should implemented as needed.

Case 1 - Company B (Footwear Manufacturer)

Situation In this case8, Company B is a leading provider of footwear with over 6600 employees. It has successfully implemented an ERP system. This case will explore the decisions and actions that were pivotal to the success of this project. In particular, this analysis will focus on the effect that change management had on this successful ERP implementation. Prior to the implementation of an ERP system, Company B ran on an AS/400. The main driving forces that led to the ERP implementation were: to decrease customer order delivery lead-time and provide real-time customer order information.9

Solution Selection First, Company B needed to determine a solution that would help improve both customer order delivery time and customer order information. Company B used a team approach to analyse possible solutions to the aforementioned driving forces. A consensus decision was made to implement an ERP solution. The positive results of using a bureaucratic team approach can best be explained through the words of one manager at company B. “A strategic thinking team was assembled to assess the benefits and drawbacks of the ERP software. The crew attended seminars and spent countless hours discussing alternative systems. At least one representative from each function of the business was included in the group and at least one individual from each division. The group decided to implement the ERP solution.”10

8 Motwani, Mirchandai, Madan, and Gunasekaran, Successful implementation of ERP projects: Evidence from two case studies, International Journal of Production Economics Volume 75 (10 January 2002) pp. 83-96. 9 Motwani, Mirchandai, Madan and , Gunasekaran, pp. 83-96.

710 Motwani, Mirchandai, Madan and , Gunasekaran, pp. 83-96.

By involving individuals, from throughout the organization, in the project creation phase, the change was positively received because the employees felt that this was their solution. The earlier change management can occur on a project, the more positive the effect will be on the overall IT implementation. In stark contrast many projects fail because top management makes the initial decisions with no involvement from the user community. Change from upper management can cause resentment from the employees. This resentment is compounded when the vision and reason for the change are not adequately articulated to the employees, which can decrease user acceptance and ultimately negatively impact the success of the project.

�Implementation Strategy Once the decision was made to implement an ERP system, Company B decided to employ a phased implementation strategy. Initially, it would implement the marketing and financial functions, which it would stabilize and optimise prior to the implementation of the logistics and manufacturing functions. A phased implementation has many positive effects. This strategy allows a company to see tangible benefits sooner with decreased risk. Often companies will target the low hanging fruit for the first phase of the implementation. Because results are seen sooner, the implementation team can place more focus on each phase. The positive effects of a successful go live can often recharge the batteries of a tired implementation team. Also, by implementing a small segment of the functionality, the user community can adopt more slowly to the new system. This can have a very positive affect on end user acceptance, which is a positive result of effective change management. On the other hand, implementation teams must coordinate each go live within the framework of the overall plan to ensure that early implementations integrate seamlessly with future functionality. As a result more emphasis must be placed on planning and communication, both of which are critical aspects of change management. “While less risky, the phased approach is generally slower and more expensive than the big bang.”11 This is often the result of temporary interfaces that need to be created to allow the company to function with the existing legacy system. The reasons behind the phased approach are not explicitly stated in the case, but there is evidence that the implementation had resource constraints. As one manager pointed out: “Time constraints were evaluated and considered when this project began. Any disruption in daily operations was unacceptable.”12 In many ERP implementations, this is a major inhibiter to success. Often, this is addressed by management only after schedule and budget overruns. Company B was able suppress this obstacle because of the willingness of its employees to spend extra time learning the system. This is emphasized in the statement of one manager who stated: “The training was designed to be very efficient. The trainers were responsible for walking the groups through the system and providing handouts. Each user had ERP training access at his or her desktop computer. Much of the learning process was left up to the individual!”13

11 Sabine Gabriele Hirt and E. Burton Swanson, Adoping SAP at Siemens Power Corporation, Journal of Information Technology (1999) pp. 243-251. 12 Motwani, Mirchandai, Madan and , Gunasekaran, pp. 83-96.

813 Motwani, Mirchandai, Madan and , Gunasekaran, pp. 83-96.

Success was achieved because the employees were very positive toward the project and felt that it was important to learn the system for the overall success of the project, which they felt was important to the company’s future. This conclusion is logical because there is no evidence that management placed any pressure on the employees to work above and beyond their current working hours.

Results and Conclusions Following the decision and selection of the ERP solution, Company B created a strategic plan that would ensure that the ERP and Business Process Change (BPC) efforts were focussed on incremental improvements. Stebel describes change management as: “Effectively balancing the forces in favor of change over the forces of resistance.” 14 This case shows that by including and empowering employees from the beginning and throughout the implementation, the employees actively embraced and facilitated the change. This was the key success factor to the implementation. As a result of the implementation, Company was able to improve customer order delivery lead-time and provide real time customer order status information within the planned budget and time schedule.

Case 2 – Manco

Situation This case15 will demonstrate that a successful result can be accomplished by different methods, but the use of change management is still instrumental to the overall success of the ERP implementation. While the implementation of ERP was successful in this case the implementation of an add-on module later was not. This is interesting because there were considerable differences in the way change management was implemented on the two projects. Before the ERP implementation and the organizational changes, MANCO16 was characterised by a “territorial culture” created and encouraged by the Vice Presidents of sales, engineering and operations. Between the functional areas, there was little sharing of information, which led to problems in the coordination of processes. The main reasons for the ineffectiveness of the processes were the dysfunctional structure, incentive system and culture of MANCO.

Structural changes The first aim of MANCO’s CEO was to solve the “territorialism problems” so that the company could benefit from a new system. Therefore he first dismissed the Vice Presidents who showed this territorial behaviour and then modified the structure of the organization. He also changed the business processes. A new position of a senior Vice President was created that would be the owner of the order-process. All functions involved in the order processing were made accountable to this new position. The functional structure was changed more to a process view, but still the functional areas continued to exist. Potential conflicts could arise between functional managers and the new position of an order-process manager due to overlapping decision-making power. Towards the end of the project the functional boundaries were reinforced “due to a lack of trust and communication among functional boundaries”17. In 14 P. Stebel, Breakpoint: How Managers Exploit Radical Change, Harvard Business School Press (1992). 15 S. Sarker and A.S. Lee, Using a case study to test the role of three key social enablers in ERP implementation, Information &Management volume 40 issue 8 (September 2003) pp 813-829. 16 A pseudonym for a company in the air-pollution and dust-collection market 17 S. Sarker and A.S. Lee, pp. 813-829.

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addition the position of the Vice President of operations was abolished after changes in the top management. So the functional view became more dominating again, because the changes were not accompanied the necessary changes to the organisational culture. The problems associated with these functional divisions within the organization were overcome by the overall restructuring of the processes. This factor contributed to the successful ERP implementation

Cultural change But why was there no substantial cultural change towards a cooperative culture? In the beginning the CEO strongly committed to the “vision of creating a cooperative work environment”18 to support the ERP implementation. Therefore he initiated different programmes. Company wide profit-sharing meetings were held to communicate “issues about restructuring and the ERP implementation and their implications”19. Additionally, the Quality manager started a programme to encourage a sense of quality. The culture change programmes were all based on the initiative of the CEO. When he left the company the management support for cultural change was decreased. The general difficulty in changing a corporate culture could be another reason for the cultural change failure of Manco20.

Implementation team As mentioned before the CEO initiated the ERP implementation and the restructuring of the processes. In the beginning he made the decisions and implemented the changes. Later, he involved some managers to help in reorganizing the structure and transforming the culture. But still they “were not working collaboratively (in a team), but rather implementing changes in specific organizational areas”21. An implementation team only existed during the phase that involved information and business process requirements analysis, ERP package selection, IT infrastructure preparation, and the implementation of core modules. In the team each functional area was represented. This is considered to be very important as “ERP implementation success requires the recognition of the existence of multiple stakeholders having different values, levels of power and interest, and hence, different expectations at different points of time”22. For example, the purchasing department has a different demand on the system than the manufacturing department regarding information about the products. The needs of functional areas not represented in the team might not be taken into consideration. Hence it would be difficult to convince them of the system’s benefits. Because the team was fully supported by the leadership, their decisions were respected and realized. During the implementation of the add-on module, the team had already been dissembled. Instead two engineers did this “without regular supervision of a project or a senior manager, or without regular-scheduled interaction with representatives of other functional areas or the implementation team members”23. The lack of leadership support and of a broad representation in a team contributed to the failure of the add-on implementation.

Communication and participation Another aspect in change management is the interaction between communication and the management, the project team, and other employees. During the profit-sharing meeting, issues about the restructuring were addressed to involve the employees in the implementation

18 S. Sarker and A.S. Lee, pp. 813-829. 19 S. Sarker and A.S. Lee, pp. 813-829. 20 G. Morgan, Images of Organization, New York: Sage Publication (1997). 21 S. Sarker and A.S. Lee, pp. 813-829. 22 S. Sarker and A.S. Lee, pp. 813-829. 23 S. Sarker and A.S. Lee, pp. 813-829.

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process. But these meetings were sometimes used to amplify the potential benefits for the employees while omitting any of the expected negative effects. Later during the project, communication to the employees was only passive through announcements on a notice board. Thus, the employees had no participation in the project and no way influencing the decisions. Several researchers24 find that participation and involvement are important to build up acceptance and understanding for the new system. Although there was a lack of participation at MANCO, the users still accepted the system. A reason might be that they felt their interests were well represented during the project by their department managers. That can be called indirect participation. But the communication among the team members and to the top management was open and honest. So the communication pattern can be described as netlike25. The different stakeholders, at least those within the company, communicated directly to each other and this was seen to be the foundation for a working ERP system by the production-planning manager. As mentioned before, the cross-functional communication, as well as the communication between the different management levels worsened after the CEO left the company. This communication problem continued through the add-on project. As a result of the bad cross-functional communication, the different functional areas did not contribute their knowledge to the implementation of the add-on module, which contributed to the failure.

Results and Conclusion This case shows that both strong leadership and leadership support were important to the implementation success. But later on in the implementation, a functionally representative team is better equipped to handle the growing complexity of a project. Although participation from all levels of the organization is typically very important, it was less critical at Manco because middle management was able to represent the interests of all the employees.

Conclusion These two cases demonstrate that change management is integral to the success of an ERP project. While both projects were successful, the implementation of change management was vastly different. This further demonstrates that change management cannot be thought of as a end all be all solution, but must be adapted to meet the dynamic needs of today’s complex projects. For example, in Case 1 a bureaucratic method was used in the project creation phase. In contrast, Case 2 had a strong leader who dictated the project creation. Even though, Case 2 was successful, a consensus decision is the preferred method. Again this shows that change management is not a bunch of rules and laws set in stone, but rather a set of malleable guidelines that should be implemented as needed. Often the company culture has a direct impact on the way change management should be implemented. The question is not whether change management should be implemented, but rather how change management can be used to complement an ERP implementation.

24 J.C. Taylor, Participative design: linking BPR and SAP with an STS approach, Journal of Organizational Change Management, volume 11 issue 3 (1998), pp. 233-245. 25 A. Westelius, Perspectives Management: an Essential Task in Projects, IRNOP (1998).