You are on page 1of 6

Feature

Creating the Business Case for ERP System
Gregory Zoughbi, CISM,
CGEIT, PMP, TOGAF9, ITIL
Expert, COBIT 4.1 (F),
is currently an advisor to
chief information officers,
Acquisitions Using GEIT
promoting the education Many organizations choose to acquire an prior to and after initiating an investment. It is
and adoption of governance enterprise resource planning (ERP) system to often captured as a document or presentation,
of enterprise IT (GEIT). He serve as a common system for their wide range of and it is heavily promoted in Val IT®,2 COBIT® 53
previously worked at the daily operations. and the Certified in the Governance of Enterprise
headquarters of CAE Inc., Various business benefits can be realized IT® (CGEIT®)4 certification.
General Dynamics Canada, from ERP investments due to operational For example, Val IT’s Investment Management
and BMW Financial Services. performance improvements. For instance, ERP domain and processes require an enterprise to
He is a recipient of the systems embed industry best practice processes, develop and evaluate the initial program concept
ISACA CGEIT Geographic which enterprises can leverage to achieve a business case (practice IM1) and to update the
Achievement award. discontinuous improvement in performance. business case (practice IM8).5, 6 Furthermore,
However, many ERP investments fail to COBIT 5 continues to promote business cases
deliver on their promised benefits due to deficient to ensure benefits delivery (process EDM02), to
ERP investment appraisals caused by inflated manage enterprise architecture (process APO03)
expected benefits and underestimated cost and to manage portfolio of investments (process
and risk. Therefore, improved governance of APO05).7 Finally, domain three of CGEIT confirms
enterprise IT (GEIT) in general, and governance that business cases are part of the GEIT practice.8
of ERP system acquisitions in particular, are What is important to include in a business
crucial for success. One of GEIT’s key practices case? One answer is offered in ISACA’s eight-step
is the development, maintenance and utilization approach for business case development
of a proper business case throughout an (figure 1).9 In particular, steps three, four
investment’s economic life cycle.1 and five require the analysis of an investment’s
What are the key elements of an ERP expected benefits, resource and cost requirements,
investment business case, and which GEIT best and associated risk. While nonfinancial benefits
practices are relevant? Furthermore, do such might be difficult to quantify, better developed
practices resonate with management and finance business cases include well-quantified benefits,
best practices, which are expected by executive costs and risk, hence enabling superior ERP
Do you have business leaders who control access to funds? investment appraisals.
something Therefore, the key elements of a business
to say about
The Business Case case are the benefits, costs and risk. Once
this article?
The business case is a core concept in successful established, the investment can be appraised
Visit the Journal GEIT practices. It is intended as a tool for (figure 2).
pages of the ISACA
decision making on investment matters, both
web site (www.isaca.
org/journal), find the
article, and choose Figure 1—Steps of Business Case Development
the Comments tab to
2. Alignment
share your thoughts.
3. Financial Benefits 6. Optimising Risk
Go directly to the article: 1. Fact Sheet 7. Documentation 8. Maintenance
and Return
4. Non-financial Benefits

5. Risk

Source: ISACA, Enterprise Value: Governance of IT Investments, The Business Case, USA, 2006

©2012 ISACA. All rights reserved. www.isaca.org ISACA JOURNAL VOLUME 1, 2013 1

The promised business benefit on future software upgrades. the Many organizations that do not have a proper ERP corresponding ERP acquisition project includes many diverse system are structured functionally. Figure 2—Key Elements of a Business Case and Thomas H.isaca. thus removing manual the ERP system. except those that The Benefits provide it with a competitive advantage. In the latter. as inconsistency of data models across these systems increases. which leads to the activities. and ERP system deployment by itself is costly due to proliferation of functional and silo IT systems. Various benefits can be expected from a successful investment in an ERP system. larger and more complex McKinsey Global Institute report pronounced analytics as “the organizations are also more likely to have a larger number of next frontier for innovation. Ultimately. For due to the proliferation of silo-functional systems. an ERP system’s database integrates and at a cost.org . is one of the last remaining ways for organizations to achieve differentiation and competitive advantage. ERP system licenses objectives.16 Furthermore. the standardized processes can be provided by the ERP system out of the box. A acquire an ERP system. competition and productivity. more effort will be required to cleanse the data and then This integration and unification of information allows an migrate it to the new ERP system. a master list of vendor names would be created. All rights reserved. logistics and finance. Others the large user base and likely resistance to change. is optimized enterprise performance. As the example. follow an organizational design10 that focuses on end-to-end A consequence of adopting best practice processes business processes spanning across functions. They are designed with an end-to-end can disrupt operations and. 2013 ©2012 ISACA. in ERP systems is that ERP investments almost always ERP systems can improve information exchange across require existing business processes to be reengineered. Process standardization is a prerequisite for continuously improving process performance Costs and organizational efficiency. Risk Another common business benefit of ERP systems is the Benefits enforcement of standard processes across the organization and its geographically dispersed sites. emphasized that applying analytics on business processes. The organization acquiring an ERP system should adopt such best practices through business process reengineering (BPR) for all of its processes.14 IT Infrastructure Library (ITIL)15 and Capability Maturity Model Integration (CMMI). Migration from multiple functional systems also comes Consequently. however. which is the that the larger the organization. these standardized processes are designed based on best practices obtained from many successful Appraisal organizations. as advocated by Shewhart’s Plan-Do-Check-Act cycle13 and frameworks such as COBIT 5. such as those provided by an ERP system. Davenport. www. it is the investing The Costs organization that must determine which business benefits it can Despite the many potential benefits that ERP systems promise.12 a BI and analytics pioneer. is coordination requirements for exchanging information also a costly activity due to the system complexity and impact across functional systems. the more likely it is to foundation for business intelligence (BI) and analytics. on both IT and the business sides. are generally more expensive relative to other systems. customizing silo-functional applications.”11 ERP systems and higher data fragmentation across them due 2 ISACA JOURNAL VOLUME 1. opposed to duplicate lists in purchasing. requires effective perspective to significantly increase efficiency over organizational change management. realize from such investments based on its own strategy and they come at a significant acquisition cost. therefore. The paradox here is organization to have a single source of truth. Conversely. This functional systems. However. It is likely that information duplication will exist unifies information from various functional capabilities. The following is a summary of common benefits. instead of performing organizational BPR.

Integration of ERP and other systems. BPR can result in is also emphasized by other frameworks and models such resistance to change. Resistance to as the Committee of Sponsoring Organizations (COSO) change continues to introduce risk areas for ERP acquisitions. There is risk help better mitigate risk due to improved root-cause analysis. Proper organizational change management. Furthermore. and to quantify the required return operations.g. customization and data migration These are important for root-cause analysis of risk. Empowering team members. Software release management. of these life cycle stages is relevant and should be considered Fortunately. transition to required for residual risk. Testing quality. Performance measures for the system. Team strength and composition. Vendor evaluations. project closure. Enterprise Risk Management—Integrated Framework23 and Risk must be appropriately identified and managed. investors must demand higher investment returns by examining actual ERP acquisition cases. as finance theory19 ERP acquisition cases. Proper job design. Project work environment. ©2012 ISACA. Team size estimates. and CMMI’s24 Causal Analysis and Resolution (CAR) process a business case should not be completed until there is a area. Project monitoring and control. for example. Such supporting hardware and software www. Schedule estimates. Business process mapping (as-is and to-be). as discussed previously. Balance of BPR vs. Training of team members. • Learn more about.org ISACA JOURNAL VOLUME 1. User training on new processes. Furthermore. Risk associated with all or discount rate for projected cash flows.to decentralization and localization needs and to maintain specific competitive advantages by seeking a best-of-breed approach. Fitness of the ERP system and its processes. an organization looking to acquire an ERP system of the top 10 risk factors for ERP investments. ERP deployments may require newer and value delivery in the Knowledge Center.22 Activities such as BPR. 2 BPR and change management Focus of requirements (making it business-driven. www. User and project readiness for reengineered processes. for increased investment risk. which are The Risk drivers of the frequency and magnitude of risk events. not only does understanding risk factors proper understanding of the investment’s risk. which can be complex and risky. retirement). Project manager’s capability.18 In essence. For example. Strategic alignment. 21 studies27 and expert opinions. should define the specific risk relevant to it. and it increases architecture work and acquisition cost. Detailed project plan. and/or more capable IT assets. User involvement in BPR. Data robustness across processes. acquisitions. the cost of ERP system acquisition increases at a nonlinear rate.isaca.4 requires the identification of risk contributing factors.25 These risk factors were identified advocates.26 qualitative case Risk must always be defined from a business perspective. associated with different IT service and system life cycle stages but it also helps quantify any necessary contingency funds (e.17 Therefore. Team commitment. as determined by examining successful and failed adjusted required return. not technology-driven). planning. ERP software’s fitness for purpose. Defining deadlines and milestones. as reported in quantitative case studies. Data accuracy across processes.org/knowledgecenter infrastructure can be expensive. operations.isaca. Requirements-functionality mapping analysis. 3 ERP evaluation and selection Business requirements definition. Incremental implementation. Budget estimates. Business process standardization. Risk IT’s Risk Evaluation (RE) process activity 1.. risk factors are common across ERP system when preparing the business case and determining the risk. implementation.20. All rights reserved. Timely implementation. tool customization. such as new servers and software. 2013 3 . Figure 3—ERP Investment Risk Factors and Corresponding Concerns # Risk Factor Corresponding Areas of Concern 1 Project management Implementation plan. discuss and collaborate on GEIT Additionally.28 Figure 3 provides a summary Thus.

Their value-added expertise in relation to in-house experts. Refraining from using the ERP system to reduce employee headcounts. Establishing key postimplementation performance measurement) performance indicators (KPIs). the payback period is biased against long-term investments. which are (6) Healthy returns used in the book rate of return and payback period methods. incremental cash flows should of relevant business cases. costs and risk are quantified and analyzed. quantifying benefits and costs is required Once benefits. Proper IT infrastructure with a proper budget.. including the allocation of be those incurred during the investment’s full economic life cycle. Proper user awareness and training on ERP system. contingencies for residual risk. 10 IT infrastructure Consideration of existing IT infrastructure. Calculation of return. Consideration of all project risk factors. IT staff training on ERP system maintenance and support. 2013 ©2012 ISACA. 9 Managing expectations Establishing realistic expectations. for (2) BPR and change management instance. Their managerial support. associated risk and possible complications.g. including benefits realization KPIs. Resolution of political problems. Close tracking of implementation costs.org . 6 Healthy returns (including cost control and Validating the business case throughout the ERP life cycle. Their technical support.30 ING. 5 Independent consultants Involvement of external experts. 4 ISACA JOURNAL VOLUME 1. thus including system acquisition. Their ERP and BPR project experience. It is advocated by 0 20 40 60 80 100 corporate finance gurus29 and is illustrated in step three of the (1) Project management business case development approach from ISACA. (7) Level of customization Discounted incremental cash flows are more realistic because (8) HR development forecast profits are dependent on the company’s accounting (9) Managing expectations (10) IT infrastructure methods. Therefore. 7 Level of customization Limiting customization to must-have advantages. Integrity of existing databases. 8 Human resources (HR) development (IT staff and users) User training and documentation on ERP system. ERP investment can then be appraised.) # Risk Factor Corresponding Areas of Concern 4 Top management support Involvement and commitment of business executives. such as IM4 (Develop governance of ERP system acquisitions and the development full life-cycle costs and benefits). All rights reserved. www. investment and rejecting it. communication. Alerting top management to ERP system complexity. Cooperation between IT and business managers. an to perform an appraisal using NPV. In accordance with Val IT’s principles Understanding these risk factors should significantly aid the and its investment management processes. Leveraging best practices from standard processes in the ERP system. Figure 3—ERP Investment Risk Factors and Corresponding Concerns (cont. Identifying incremental cash flows is about identifying the Figure 4 illustrates the relative importance of these difference in cash flows for the organization when accepting the risk factors.32 Furthermore. operation and retirement costs. Managing stakeholder expectations. Their involvement throughout the life cycle. Allocation of sufficient financial and human resources. Their soft skills. e.31 (3) ERP evaluation and selection (4) Top management support NPV’s advantages are a result of utilizing discounted (5) Independent consultants incremental cash flows rather than forecast profits. professionalism. Including all employees in ERP implementation. has used NPV in appraising IT-enabled investments. Early establishment of an ERP vision. Communication with employees.isaca. Costs correspond to cash outflows whereas benefits correspond to The Appraisal cash inflows. Figure 4—Relative Importance of Various ERP Risk Factors The net present value (NPV) is considered by many as the most appropriate investment appraisal method.

the differences must be accounted for in the cash flows. the company may be able to sell the software secondhand to another firm or department. be careful not to ignore opportunity costs because assets from a previous failed investment might be utilized for other investments if not used in the restarted investment. year zero or today). All rights reserved.g. Do not forget working capital Working capital is the difference between current assets and current liabilities. accepting or rejecting an investment does not change overhead costs. method is used.org ISACA JOURNAL VOLUME 1. However. This can be for accepting investments that do not deliver on promised ©2012 ISACA. In practice. has an opportunity cost if used on a particular investment. therefore. an IT organization may already have IT operations staff members who can operate and maintain the ERP system. such as server capacity.34 flows when applying the NPV investment appraisal method. if an investment failed once and is restarted. Cash flows must include the full scope of activities required viewed from the perspective that higher returns are required from to achieve business value. an recognize after-sales cash flows IT department may sell ERP services to the business and follow it with a pay-per-use support model. Only the difference in overhead costs should be costs. Just because they are currently available does not mean do not tell a complete story. In It is a reality. Finally. past costs are considered sunk and are not included in the investment appraisal the second time. Sunk costs are any costs already spent by the organization. Step four in Each cash flow is then discounted from the future period in ISACA’s business case development method clearly states that which it will be realized back to the present date of the decision nonfinancial benefits must be identified and considered as part of (e. flows are divided to achieve present value is a function of the “discount rate. Nevertheless. Many investments are related. between cash flows if the firm accepts or rejects the investment Include all incidental effects. For example.36 Management is running out of excuses because contingency is built into the discount rate. such as maintenance costs. IT must be run and. This equals the difference incremental payoffs.” It reflects the cost of capital and uncertainty Conclusion in future cash flows as reflected in the investment’s risks.. is consistent with the concept Figure 5 identifies and explains rules33 for identifying cash described as risk-adjusted return in the CGEIT Review Manual. Remember salvage value. and these may come in many forms. therefore. assigned to the investment. a IT operations staff that will be utilized to operate an ERP system firm should accept an investment if it has a positive NPV and will have an opportunity cost. it is equal to the NPV that they provide if they were put to their other best alternative use. 2013 5 . Include opportunity costs. when the ERP system is retired. however. www. an unused server capacity or idle With other strategic and nonfinancial factors being constant. accepting an investment may increase or decrease cash flows for other investments. necessary for the firm to prepay its bills until it actually receives revenue for the services it provides. Forget sunk costs. If this is indeed a possibility. For instance. and the NPV value is not the sole that they should be ignored. the discounted cash flows (DCFs) in present values These rules should be used as a checklist whenever the NPV at year zero are then summed to arrive at the investment’s NPV. thus contributing to a cash inflow by reducing cash outflows. determinant of decision making over investments. such as HR support to IT. The factor by which those future cash an investment’s appraisal. For example. For example. The decision to accept or reject the investment does not change sunk costs. which must be reflected as a cash reject it if it has a negative NPV. In such a case. This is particularly important as an ERP investment often aims to retire several fragmented legacy systems. Salvage value is the terminal value once the system terminates. riskier investments and.isaca. Cash flows to come later. which means that they should not be assigned to the investment.35 Managerial judgment is necessary. In other words. Beware of allocated overhead Carefully consider overhead costs. therefore. As a second example. for the legacy systems. their cost is not free. unutilized IT infrastructure. Figure 5—NPV Investment Appraisal Rules Rule Comment Do not confuse average with Any cash flows assigned to the investment should be calculated on an incremental basis. a higher discount rate is used for riskier investments managed as a business. it equals the cash requirements. and An organization should recognize that it normally would sell items and later provide paid support. the salvage value would equal this value. Sometimes an organization may already have resources that can be used for the investment. The opportunity cost relates to the cost of utilizing it at its best alternative use. resulting from both should be included in the analysis. governed and essence. Often. numbers outflow. For example. Forecast sales today.

isaca. 2009. includes improved communication. 2006 The Business Case. strategies for ERP system acquisitions. including an understanding of 19 Brealey. thus considering expected Model Integration version 1. International Edition. Series. which often controls access to funds. www. 2008. no. 2012 14 In particular. 2012 risk.. costs and risk. 2006 Davenport. www. business benefits.org business-IT alignment and benefits realization. A. 9th Edition.org no. ISACA. Op cit. CGEIT Review Manual 2013. 1939 of GEIT best practices can help. p.isaca. which also included risk management 4 ISACA. Elsevier. ERP Systems Across Your Organization. COBIT 5. T. USA. 2012 Consulting. 20 ISACA.org . COBIT 5. Information Risks: Whose Business Are They? and finance community. UK.. ISACA. 2004 1 ISACA. 329-344 32 Op cit. F. www. and there exist common risk factors. Software Engineering Institute www. Design?. 2012 6 ISACA JOURNAL VOLUME 1. 2012. 2005. 34 Op cit.org/valit 25 The author identified these risk factors as part of his 2 Ibid. A. M. P. E.org/riskit but it will also help them better communicate with the business 21 ISACA. CGEIT Review Manual 2013. Statistical Method From the Viewpoint multiple unplanned risk incidents. 2012. 2005 www. The Case for and Against Using Multiple and costs are understood. 24 Op cit. and Productivity. 2008 11 McKinsey Global Institute (MGI). January 2006 Capability Maturity Framework (IT-CMF). Nightmare Continues. R. 2008 Enterprise Resource Planning (ERP) Implementation. S..isaca. 2007. 2010 8 Op cit.. Information Technology Infrastructure appraising investments and managing them throughout their Library (ITIL). costs and risk. N. USA. p. E. ISACA. Brealey. Fortunately. ISACA. www. Big Data: The Next 33 Ibid. Information Technology 36 Business Review. H. the abundance of Quality Control. R. 4. Endnotes Enterprise Risk Management—Integrated Framework. 28 Kimberling. The Val IT Framework 2. Madsen. IT Governance Domain Practices and Competencies The end result.0. 2012 29  Op cit.. Panorama Understanding these common risk factors can guide an Consulting. H.” Harvard 12 Innovation Value Institute (IVI).isaca. W. Panorama 7  Op cit. USA 2012.3. 2012 organization to better understand and manage ERP investment  18 Op cit. is a common practice in Finance. ISACA. Competition. 2005. 2010 benefits. 2006. 36. All rights reserved. Capability Maturity NPV investment appraisal method. COBIT 5. vol. Chau.  30 Op cit.isaca. “Competing on Analytics. www. CGEIT Review Manual 2013.org/bookstore Ehie.org 31 ISACA. USA. Op cit. McGraw-Hill the business and finance community. 10 Anand. Scarbrough. 545-557 referenced in this article to COBIT 5 practices in: ISACA. Principles of Corporate the expected benefits. Myers. “Identifying Critical Issues in 26 5 Op cit. Applying the NPV method. Dover. www. wider practical case study research on GEIT and ERP 3 ISACA..org/cobit5. Not only can this approach Inc. USA.isaca. R. “What Is the Right Organization IT Governance Domain Practices and Competencies.isaca. require costs and require reactions to 13 Shewhart. Frontier for Innovation. Allen. Brealey. ISACA. Critical Failure Factors in ERP Implementation. Optimising Value Creation From IT Investments.” 6 Please see the mapping of Val IT and Risk IT practices Computers in Industry.. An effective business case may be based on the 16 Software Engineering Institute (SEI). 2005. K. therefore. Daft. Y. ISACA. Davison. 2013 ©2012 ISACA. the business case is an instrumental tool for 15 UK Cabinet Office. 2008 9 ISACA. Risk IT. I. 2012 2011 35 ISACA. 2008 aid IT professionals in performing better informed appraisals.. general benefits 17 Kimberling. 2009 22 23 Committee of Sponsoring Organizations (COSO). For ERP investments. COBIT® 5: Enabling Processes. C. Elsevier. 222-224.. 27 Wong. USA.isaca.” Organizational Dynamics. USA.isaca. www. Enterprise Value: Governance of IT Investments. 56. CGEIT Review Manual 2013. 2011 life cycles.org/cobit5 system acquisitions. p.