THE IMPACT OF ENTERPRISE RESOURCE PLANNING SYSTEMS ON FIRM PERFORMANCE
Robin Poston Severin Grabski Eli Broad College of Business Michigan State University U.S.A.
Debate exists regarding the contribution of information technology to firm performance. Prior research has examined technology and firm performance in the aggregate. This study, however, focuses on a specific technology—enterprise resource planning (ERP)—and its impact on firm performance. Economic and industrial organization theories are used to predict how ERP technology should affect firm coordination and transaction costs. ERP is expected to (1) reduce costs by improving efficiencies through computerization and (2) enhance decision making by providing accurate and timely enterprise-wide information. These effects should be associated with improved firm performance. This issue is examined empirically using archival financial data of COMPUSTAT firms that have implemented ERP systems compared to control firm counterparts. Results indicate a significant increase in costs as a percentage of revenue but a decrease in the number of employees as a percentage of revenue the year after ERP implementation. However, control firms experience a greater reduction in employees. Results indicate a paradox where firms having fewer employees supporting more revenue simultaneously experience higher cost to revenue ratios after their ERP implementation. Keywords: ERP, economic impact, coordination costs
Fully 70% of Fortune 1,000 firms have or are in the process of installing enterprise resource planning (ERP) systems (Hoffman 1998). Anecdotal evidence suggests firms expect ERP to deliver improved performance. Specifically, firms expect ERP to provide (Brown 1997; Davenport 2000; Gilbert 2000; Glover et al. 1999; Knorr 1999; Rizzi and Zamboni 1999; Wah 2000): • • • • • • • Reduced asset bases and costs, enhanced decision support, more accurate and timely information, reduced financial cycles, and increased procurement leverage; Increased customer satisfaction through integration and consistency; Conversion to Year 2000 compliant software; Response to pressure from trading partners who have already converted their systems; Globally integrated information access across the enterprise and supply chain; Enabling e-business; or Flexibility to change quickly and configure the business in response to a changing marketplace while making tacit process knowledge explicit.
. implementation. Panel B).
2. others can experience negative financial effects because: • • • • Implementation process can be burdensome in time and money. Finally. Based on multiple answers per respondent (Fryer 1999). for Deloitte Consulting LLC. HYPOTHESES DEVELOPMENT
The literature is ambiguous regarding the impact of information systems on firm performance (see Brynjolfsson and Yang 1996). hardware. Given this equivocal evidence. the technology coordination cost literature suggests that information systems are expected to contribute by (1) increasing scale efficiencies of firm operations (Harris and Katz 1991. (2) processing business transactions effectively (Malone et al. Panel A). (3) collecting and disseminating timely information for decision making (Simon 1955). Johnson and Lawrence 1988).
Many firms have announced negative results attributed to their ERP implementation (Appendix A. ERP imposes a hierarchical command and control perspective.
Survey results of Fortune 500 companies suggest perceived tangible and intangible benefits from ERP of cost reductions and revenue improvements (Table 1). Williamson 1997. 2000). Best practices do not anticipate the needs of evolving organizations and may stifle creativity and innovation (Arnold et al. requiring substantial software. the separate effect cannot be disentangled. which may be inappropriate (Davenport 2000). Mitra and Chaya 1996). many firms announce performance improvements attributed to their ERP system (Appendix A. 2000. the objective of this research is to investigate whether ERP implementations are associated with improved financial performance. Wortmann 1998). ERP vendor best practice models within a given industry (Schragenheim 2000) may introduce rigidity causing delays and failures (Knorr 1999. Percentage of survey respondents reported. and training costs (Davenport 2000. Wortmann 1998).Poston and Grabski
Table 1. improvement 11 Revenue/profit increases 9 Transportation/logistics cost reduction 7 Maintenance reduction 6 On-time delivery improvement Panel B: Intangible Returns – intangible benefits from ERP implementation % of Survey Return Respondents* 55 Information/visibility 24 New/ improved processes 22 Customer responsiveness 14 Cost reduction 13 Integration 12 Standardization 9 Flexibility 9 Globalization 8 Year 2000 7 Business performance 5 Supply/ demand chain
*1998 survey of 62 Fortune 500 companies by Benchmarking Partners Inc. 1998 Survey Results of Returns to ERP Panel A: Hard Returns – tangible benefits from ERP implementation % of Survey Return Respondents* 32 Inventory reduction 27 Personnel reduction 26 Productivity improvement 20 Order mgmt. While some firms announce improvements from ERP adoption. Wortmann 1998). Since ERP implementations are often performed with business process reengineering (Davenport 2000. Grabski et al. 1987. improvement 19 Financial close cycle reduction 14 Technology cost reduction 12 Procurement cost reduction 11 Cash mgmt.
economies of scale (Samuelson 1976). and (5) maintaining records of business functions within the organization or maintaining communication channels with lower cost (Cash and Konsynski 1985). and contractual costs (Coase 1937. General and Administrative Costs COGS = Cost of Goods Sold
. ERP systems are not production automation tools and are not expected to impact production costs. Internal operations are categorized as production and coordination costs (Malone et al. 1987). We next examine how ERP should affect internal firm operations. The organization cost categories defined by Gurbaxani and Whang (1991) are utilized (Table 2).ERP and Firm Performance
(4) monitoring and recording employee performance effectively (Zmud and Apple 1992). Internal coordination costs involve both agency costs (Jensen and Meckling 1973) and decision information costs (Jensen and Meckling 1992). Information System Affects on Economic Performance of the Firm Cost Categories (Gurbaxani and Whang 1991) INTERNAL COORDINATION COSTS Agency Costs • Monitoring Costs Decreases Administrative Monitoring Costs Decreases Cost of Defects and Errors in Product and Information Decreases Administrative Reporting Costs No effect Enhances Decision-making Increasing Revenues and/or Decreasing Costs Enhances Decision-making Increasing Revenues and/or Decreasing Costs Enhances Decision-making Increasing Revenues and/or Decreasing Costs Enhances Decision-making Increasing Revenues and/or Decreasing Costs Decrease in SG&A Decrease in COGS Related Cost Category Found in COMPUSTAT Database
ERP Effects on Firm Costs
• • •
Bonding Costs Residual Loss Information processing costs
Decrease in SG&A Decrease in COGS — Decrease in SG&A Decrease in COGS Increase in Revenue Decrease in SG&A Decrease in COGS Increase in Revenue Decrease in SG&A Decrease in COGS Increase in Revenue Decrease in SG&A Decrease in COGS Increase in Revenue
Decision Information Costs
Opportunity costs due to poor information
EXTERNAL COORDINATION COSTS/MARKET TRANSACTION COSTS Operational • • • • • • Search Costs Transportation Costs Inventory Holding Costs Contractual Costs of Writing Contracts Costs of Enforcing Contracts No effect No effect — — Decreases Administrative Costs Decreases Administrative Costs Decreases Inventory Costs Decreases Administrative Costs Decreases SG&A Decreases SG&A Decreases SG&A Decreases SG&A
NOTE: SG&A = Selling. Table 2. External coordination costs involve costs based on microeconomic production theory. Williamson 1981).
2. improved cost efficiency (Bender 1986). ERP should decrease the costs of monitoring production employees reducing COGS. selling. transporting goods.3 Transaction Cost
Transaction cost economics posits that firms economize on transaction costs. This allows us to test whether ERP adoption by treatment (TRMT) firms results in improved financial performance. and administrative (SG&A) expenses—expenses that result from the general administration of company operations and that are not directly related to the acquisition or production of goods (Kieso and Weygandt 1989)—should be reduced. Residual loss is associated with principal specific welfare losses from dealing with agents (Gurbaxani and Whang 1991). Cost of goods sold (COGS) reflects the direct costs and overhead (including power.TRMT H2: SG&A/RevenuesPOST. To control for macro-economic effects. such as lower growth in operating expenses (Harris and Katz 1991).
2. reducing SG&A costs. a control sample is constructed. Since ERP systems should reduce monitoring costs. general. depreciation of plant assets. although some studies address internal coordination costs in general. transportation. and internal coordination costs (Shin 1999). sales growth. Empirical research has supported technology spending and operational improvements. Because of the difficulties involved in allocating these costs.TRMT – SG&A/RevenuesPRE. Other research found higher technology investment associated with lower production costs and total costs. and supplies) associated with the physical production of products for sale (Kieso and Weygandt 1989). communicating with vendors. and higher return on assets.CTRL – SG&A/RevenuesPRE. Few empirical studies have examined technology’s effect on agency costs. Technology spending is associated with improved intermediate decision variables (Barua et al.TRMT < SG&A/RevenuesPOST. better information should lead to cost minimizing/revenue maximizing actions reflected in reduced SG&A and COGS.Poston and Grabski
2. Bonding costs involve the employee reporting their actions to their employer. and increased revenues. and increases in revenue generation (Venkatraman and Zaheer 1990). either on an inter-temporal basis or relative to that reported by their control (CTRL) firm counterparts. External sourcing of inputs may entail costs in obtaining market information. light. thus these costs are not expected to be influenced directly by an ERP system. inventory holding. reducing COGS. Since ERP is expected to provide more timely and accurate enterprise-wide information for decision-making. While a longer time horizon after implementation analysis is preferred (Knorr 1999. An ERP system is expected to provide an accessible and accurate database of information that reduces administrative search. information processing costs (communication and documentation) and opportunity costs due to poor information should be reduced. but higher overhead costs (Mitra and Chaya 1996). Research has found technology investments associated with a decrease in total costs (Alpar and Kim 1990). Assuming rational decision making. and communications costs. and for production labor and factory supervisory employees. ERP should automate the process and provide easier access to reporting for employees in sales and back office operations. no four or five year postimplementation financial data is publicly available for a meaningful portion of the sample. they are reflected as SG&A costs (Kieso and Weygandt 1989).CTRL
. two. Based on the previous discussion and summarized in Table 2: H1: SG&A/RevenuesPOST.4 Hypotheses
This study examines the changes in firm performance from one year before to one. supervisory labor. 1996). Wah 2000). and non-production labor productivity (Weill 1992).
2.2 Decision Information
Decision rights should be located where the combined decision information and agency costs (called internal coordination costs by Gurbaxani and Whang) are minimized (Jensen and Meckling 1992). and holding inventories (Gurbaxani and Whang 1991). Reductions should be evident in SG&A costs and in COGS overhead. the complexity and uncertainty regarding specific activities (Ragowshy et al.TRMT < SG&A/RevenuesPRE. 1995). and three years after ERP implementation. which is time consuming and effort intensive (Gurbaxani and Whang 1991). ex post.1 Agency Costs
ERP systems should reduce monitoring costs by automating process steps and by providing an electronic trail of employee responsibility (Gurbaxani and Whang 1991).
A 12% cost of capital is assumed for each firm.3 Descriptive Statistics
The majority of firms implemented ERP between 1995 and 1997 (Panel A of Table 3). The specific year the ERP implementation started or ended was identified.ERP and Firm Performance
H3: COGS/RevenuesPOST. The firm remained in the control firm sample as long as it had not implemented ERP or adoption dates were after three years after their treatment firm counterpart’s dates of ERP adoption.TRMT – EMP/RevenuesPRE.TRMT < EMP/RevenuesPOST.1 Treatment Firms
The sample was selected by identifying firms that publicly disclosed ERP adoption from 1980 to 1997 in PR Newswire press releases (see Appendix B).CTRL – COGS/RevenuesPRE. RI is based on each firm’s imputed interest. No conflicting information was found.TRMT – COGS/RevenuesPRE.46 years. during. respectively. 1999). and three years after the ERP implementation.CTRL Measuring return in relation to investment provides another test of profitability.TRMT > RIPOST.TRMT < COGS/RevenuesPOST. PeopleSoft. The distribution of firms implementing the various ERP packages is consistent with reports on ERP vendor market
Firms have been contacted and all responding firms were consistent with the researchers’ classifications. Four firms had undergone exceptional changes during the time period of this study and were removed.CTRL – EMP/RevenuesPRE.
3. ERP adoption is expected to result in improved firm performance: H5: RIPOST. BAAN. The average implementation length was 1. Oracle. These values are generally unavailable.
.TRMT H4: COGS/RevenuesPOST. and the three years after implementation were reviewed for each company to validate announcement information sources. the hypothesis reflecting treatment firms relative to control firms should indicate whether ERP enables maintaining or increasing revenues while reducing the number of employees (EMP): H7: EMP/RevenuesPOST.TRMT < EMP/RevenuesPRE. This can be done using residual income (RI).
The annual reports for the year before. control firm counterparts were selected by matching four-digit SIC codes and similar revenues for treatment firms. the researchers continue to follow up on outstanding control firm confirmation data. Cost and revenue information was available through the COMPUSTAT database. 3.TRMT H6: RIPOST. SAMPLE SELECTION AND VALIDATION
3.TRMT H8: EMP/RevenuesPOST.
3. and ERP implementation must have been completed before December 1997. or J. The data for each control firm was gathered from COMPUSTAT for the identical years of its treatment firm’s dates.CTRL – RIPRE.TRMT – RIPRE. D.2 Control Sample
Using COMPUSTAT. POST represents separate analysis of one.CTRL ERP is predicted to automate clerical tasks resulting in a reduction in employees.
3. 2. While the 1990s were associated with a general downsizing of firms.TRMT < COGS/RevenuesPRE.CTRL PRE and POST refer to costs before and after ERP implementation. The control firms were contacted1 to inquire whether the firm had adopted ERP and the implementation dates. Edwards. defined as net operating income less “imputed” interest (Horngren et al. The sample was limited to firms that implemented SAP.TRMT > RIPRE. its cost of capital. An initial sample was identified through key word searches and was reduced to the final treatment group of 54 firms using the following: 1. two.
Statistics of Sample Firms Panel A: Distribution of 50 sample firms by implementation date: Number of Year(19) Implementations Implementation duration less than or equal to 1 year: 89 0 90 0 91 0 92 0 93 1 94 3 95 3 96 10 97 10 1 Year Total 27 54% Implementation duration equal to 2 years: 93 & 94 2 94 & 95 3 95 & 96 9 96 & 97 9 46% 2 Year Total 23 Total of All Implementations 50 100% Panel B: Distribution of 50 sample firms by SIC code: Number of SIC Sample Companies 10 1 15 1 20 1 21 1 23 1 25 1 28 6 29 2 30 1 33 1 34 1 36 7 37 10 38 3 39 1 48 3 49 3 51 1 60 2 68 1 74 2 Total Sample Companies 50
For 1999. Table 3. electronics (SIC = 36). Similar data are reported for the control firms in Panels A and B of Table 5.
. Edwards at 8%. Table 4 presents the mean (median) revenues and costs for treatment firms. PeopleSoft at 12%. The distribution of cost as a percentage of sales is listed in Panel B of Table 4. J. and chemical and allied products (SIC = 28) (Panel B of Table 3). D. Oracle at 24%.Poston and Grabski
share for 1996. ERP market share breakdown: SAP at 51%.2 The main industries represented by sample firms are motor vehicles and accessories (SIC = 37). and BAAN at 5% (Gilbert 2000).
00 678.89 4.11 1-Year After Implementation (N=50) Cost of Goods Sold 8.464%
18. Dev.700.489.50 Employees 63.894.420.184%
.01 4.16 125.7% Selling. and Admin. 2.50 20. General. 2.52 23.30 1.26 Total Assets 14. and Admin.485.0% Selling.2% 12.0% Employees 0. 23.556% 1-Year After Implementation (N=50) Cost of Goods Sold 60.12 20. General. Dev.77 Revenues 8.8% 0.3% 0.71 17.099. and Admin.393.06 1.71 Employees 62.71 649.53 3-Year After Implementation (N=26) Cost of Goods Sold 7.268.278. General. and Admin.553% 63.18 Selling.01 Selling.15 Selling.665.0% 24.98 1.00 830.447.4% 24.89 Panel B: Distribution of sample data — % of sales Item Mean COST AS A PERCENTAGE OF SALES 1-Year Before Implementation (N=50) Cost of Goods Sold 59.823. 24.45 3.38 1.82 Employees 56. and Admin.073.66 11.00 Median
Std.797. and Admin.67 88.66 4.989.5% 0.447.1% 184.108.40.206% 26.61 22.352. 2.21 1.53 Selling.507.89 107.38 33.529% 3-Year After Implementation (n=26) Cost of Goods Sold 62. General.40 3. ($000) 26.
61. and Admin.700. General.640.ERP and Firm Performance
Table 4.45 Std.041.480%
Median ($000) 2.39 1-Year Before Implementation Cost of Goods Sold 8.48 4.0% 12.66 4. and Admin.90 4.3% 0.55 Revenues 13. 26.131.8% 0. General.70 16.566% 61.71 COSTS 4-Year Average Before Implementation (N=50) Cost of Goods Sold 8.074.1% Employees 0.493% 63.8% Employees 0.561.9220.127.116.11% 12.72 Revenues 12.50 1.605.58 Revenues 8.599.0% Selling. General. General.01 Employees 58.540% 2-Year After Implementation (n=48) Cost of Goods Sold 59.81 20. Descriptive Statistics of Firm Treatment Sample Panel A: Distribution of sample data — reported values Item Mean ($000) Net Sales 11.677.674.260% 14.4% 0.215% 18.10 517.2% 11.87 22.1% Employees 0.313.97 Employees 55.00 18.71 Selling.11 21. General. 2.64 474.30 20.67 18.50 27.71 2-Year After Implementation (N=48) Cost of Goods Sold 8.980.677.233% 19.652.528. 2.283.01 119.116.6% Selling.883.495.37 87. 26.883.70 3.9% 0.5% 0. and Admin.
and Admin. Dev.10 79. 1.31 9.411. and Admin.176.7% 13.223. General.89 3.27 65.473% 64.4% 21.554%
22.12 Revenues 3.604.55 81.4% 0.64 Selling. General.484. General.50 20. and Admin.647.5% 16.75 1.507% 3-Year After Implementation (N=21) Cost of Goods Sold 57.0% 23.356.524.3% 0.975.03 Revenues 9.54 284. Descriptive Statistics of Firm Control Sample Panel A: Distribution of sample data — reported values Item Mean ($000) COSTS 1-Year Before Implementation (N=42) Cost of Goods Sold 7.01 Selling.228%
. and Admin.127. Dev.7% Selling.22 289.672.40 1.93 Std.44 27. General.66 1.
65.5% Employees 0. General.26 1. and Admin.499% 62.691.578.75 1.05 Employees 38.61 901.68 3-Year After Implementation (N=21) Cost of Goods Sold 2.8% 0.74 Selling.783. 1. General.26 25.87 79.873.729% 62.827% 1-Year After Implementation (N=42) Cost of Goods Sold 57. General.287.61 9.7% Selling.364.25 6.6% 0.50 1-Year After Implementation (N=42) Cost of Goods Sold 7.35 5.76 Revenues 10.261.808.43 Median
20.26 1.97 Employees 33.376. 658.50 2-Year After Implementation (N=41) Cost of Goods Sold 6.43 Panel B: Distribution of sample data — % of sales Item Mean COST AS A PERCENTAGE OF SALES 1-Year Before Implementation (N=42) Cost of Goods Sold 60.53 10. ($000)
1.346% 21.513.6% 23.6% 0.5% 0.50 19.05 Revenues 11. and Admin. 1.7% 21.4% Employees 0.6% 0.6% Employees 0.121.561.60 26.7% Selling. and Admin.65 9. 24. 25.638% 20.757. 25.7% 21.52 3.45 208.508%
Std.587.09 Employees 40.65 344. and Admin.553.0% 18.9% Employees 0.082.973.27 4.543% 2-Year After Implementation (N=41) Cost of Goods Sold 58.595.6% Selling. 24.4% 0.335% 19.Poston and Grabski
Table 5. General.357.32 Employees 38.60 Selling.69 1.
Firm performance is defined as the ratio of cost to revenues in order to capture both the cost reduction and revenue enhancing effects of ERP systems on the firm. preliminary project and immediate post-implementation costs of getting the ERP implementation up and running are expensed as incurred. Table 8 provides tests of differences between the treatment and control sample. However. p = 0. As predicted. p = 0. ERP implementation is found to be associated with a significant decrease (t = -1.10 level. two.696 (. interfaces. which clarifies FAS 86. 1-tail. two.44) 1.05)** -3. where costs are expensed as incurred. RESULTS
Paired samples t-tests were performed (Table 6) using pooled data across vendors.470 (.018. NOTE: Sample size varies due to the non-availability of post-implementation data for all sample firms. new hardware and software installation and testing of the system and costs should be capitalized. Financial information of each firm during the year(s) of implementation is disregarded. ERP implementations are found to be associated with a significant increase (t = 1.372.globalfindata.00)** N=44 N=48 N=50 N=45 0. coding. Results indicate that ERP implementation is associated with a significant increase (t = 1.024 (. (2) application development stage. H2 is not supported.312. **T-value significant at .02).
.02)** N=51 N=45 N=49 N=46 1.46) -3. comparing performance ratios after versus before ERP implementation. However.018 (.07)* 1.372 (.10) in COGS/Revenues one year after implementation over the year prior to implementation.25) 0.00)** N=23 N=27 N=26 N=42
1 year after vs. ERP implementation has no significant association with COGS/revenues two years after implementation. which includes software design. year before 3 years after vs.07) in SG&A/revenues one year after implementation over the year prior to implementation.3 The year before ERP implementation is used to capture stable costs before implementation (results are not significantly different when a four year pre-implementation average is used). year before 2 years after vs. two (t = -3. ERP implementation has no significant association with SG&A/revenues two or three years after implementation. year before
* T-value significant at . H5 is not supported. Firms implementing ERP experienced no statistical difference from non-adopters in changes in SG&A/Revenues one. p = 0.12) 0.024.147 (.
Financial values were not adjusted for inflation as the inflation rate for the study period experienced modest to low inflation rates (www. H7 is supported. and three years after ERP adoption.
4. p = 0.00) and three (t = -3.00) years after implementation. or three years after ERP implementation. H3 is partially supported. Pairwise Sample T-Test Results for Difference in Ratio After Versus Year Before Adoption for ERP Adopting (Treatment) Firms t-statistic (p-value) Comparison of ratio after versus before ERP implementation: SG&A/ COGS/ Number Employees/ Residual Income at Revenues Revenues Revenues 12% 0. ERP implementations are associated with a decrease in EMP/revenues for one (t = -2. which including user training where costs are expensed as incurred.535 (30) -1. Control firms were tested for significant changes in their before versus after treatment counterpart ERP adoption period (Table 7). p = 0. p = 0.05 level.113 (.702.05) in COGS/revenues for three years after implementation. This approach also controls for firm size.312 (.48) 0.470. an ERP implementation project covers three phases: (1) preliminary project stage.
Under AICPA Statement of Position 98-1. and (3) post-implementation/operation stage. According to accounting standards.ERP and Firm Performance
Table 6.702 (.10)* -2. the control firms’ performance relative to the ERP adopters over the corresponding time period was examined.195 (. However.com 2000).059 (. ERP implementation is not found to be association with changes in RI one. To examine whether these results are due to macroeconomic events or whether they can be attributed to the ERP system implementation. H1 is not supported. 1-tail.
884 (.445 (.00910 16.0203 2 years after less year before -0.00)** 1.560 (.23)* -2.00328 129.976 (.023 (.0169 -0.0210 66.0115 14. N = number of ERP adopting firms. 21 Panel B: ERP Adopters Means Mean change in ratio after minus before ERP implementation: Change in Change in Change in Number Change in Residual SG&A/ COGS/ Employees/ Revenues Income at 12% Revenues Revenues 1 year after less year before -1.0279 171.07)* N=22 N=24 N=21 N=22
1 year after vs.19) -1.868 -0.02)** before N=46. 36 3 years after less year -0.210 (.07)* 3.03)** N=37 N=42 N=39 N=37 -0.10 level. **T-value significant at .00)** before N=25.00131 Panel C: Non-Adopters Means Mean change in ratio after minus before ERP implementation period of treatment group: Change in Change in Change in Number Change in Residual SG&A/ COGS/ Employees/ Revenues Income at 12% Revenues Revenues 1 year after less year before -0.274 (. 22 N=10.10 level.41) 2. 22 N=9.837 (.05 level.376 -0. 24 N=27.0324 2 years after less year before 0. year before 2 years after vs.991 (. 42 2 years after less year 1.05 level. 1-tail. Pairwise Sample T-Test Results for Difference in Ratio After Versus Year Before Adoption For Non-ERP Adopting (Control) Firms t-statistic (p-value) Comparison of ratio after versus before ERP implementation: SG&A/ COGS/ Number Employees/ Residual Income at Revenues Revenues Revenues 12% -0.784 (.02)** -3. 1-tail.0219 -0.615 0. Independent Sample T-Test Results for Difference between ERP Adopters Versus Non-Adopters t-statistic (p-value) Difference between groups based on change in ratio after minus before treatment group adoption period: Change in Change in COGS/ Change in Number Change in Residual SG&A/ Revenues Revenues Employees/ Revenues Income at 12% 1 year after less year -0.100 -0.736 (.11) -4.33) -0. year before
* T-value significant at .982 0.25) 0. 37 N=51.233 -0.0168 -0.872 (.00)** 1.126 -0.62) 1. 41 N=27. year before 3 years after vs.00)** 1.549 (.52) -0. 37 N=30.00349 3 years after less year before 0.0179 134.077 (.
* T-value significant at .0156 0.502 (. ** T-value significant at .
Panel A: t-test results
. number of Non-adopting firms.874 (.29) -0. NOTE: Sample size varies due to the non-availability of post-implementation data for all sample firms.327 (.86) 1.0194 -0.Poston and Grabski
Table 7.148 (.00039 3 years after less year before 0. 39 N=51.029 (.076 (. 36 N=50.971 (.06)* N=36 N=41 N=36 N=37 0.07)* -3. 37 N=47.571 (.653 (.271 (. NOTE: Sample size varies due to the non-availability of post-implementation data for all sample firms.79) 1.17) -1.06)* before N=8.
pp. the sample may be biased. 2000. J. is (are) responsible for the accuracy of the URL and version information. Brown. t = 1. Barua.” Wall Street Journal.” Harvard Business Review (64:2). Firms implementing ERP experienced no statistical difference from non-adopters in changes in RI one. Arnold. results indicate a significant increase in costs as a percentage of revenue but a decrease in the number of employees as a percentage of revenue the year after ERP implementation. not ICIS. Bender.” Advances in Computers.. 1997. “The Best Software Business Bill Gates Doesn’t Own. but increasing costs from hiring expensive ERP computer engineers. R. “On the Death and Dying of Originality in the Workplace: A Critical View of Enterprise Resource Planning Systems’ Impact on Workers and the Work Environment.653. “A Microeconomic Approach to the Measurement of Information Technology Value. H6 is not supported.
. pp. matching control firms experience a greater reduction in employees. pp. Hunton. S. S.” Fortune.” Journal of Management Information Systems (7:2).02) and two (t = 1. H. 55-69.
5. Another reason that costs as a percentage of revenue increase after implementing an ERP system. The sample only included firms that voluntarily disclosed the announcements. N. not ICIS. 179-214. E.327. Where version information is provided in the References. B.
Alpar. 3-24. The limitations to this study include: • • • Industry experts predict a four to five year return for ERP implementations (Knorr 1999. Hershey. CONCLUSION AND LIMITATIONS
Based on the sample of 50 companies implementing ERP packages from 1993 to 1997. pp.07) years after the treatment firms adopted their ERP package. E. These links existed as of the date of submission but are not guaranteed to be working thereafter. control firms experience significantly greater decreases in EMP/Revenues two and three years after treatment firms adopt ERP (t = 3. This study was not able to control for implementation and organizational characteristics .
This paper and the following reference list contain URLs for World Wide Web pages. February 1996. In addition. Coase. University of South Florida. H8 is not support.00. The author(s) of this article. is (are) responsible for the accuracy of their content.. The author(s) of the Web pages. these firms had significant increases in residual income.” Journal of Management Information Systems (3:2). hence the three year longitudinal window may be insufficient to capture the effects of ERP on firm performance. However. Boudette. 232238. pp. V. 134-142. “Information Technology and Productivity: A Review of the Literature. Brynjolfsson. November 4. “Financial Impact of Information Processing.06).” Economica (4). p = 0.445. p = 0.ERP and Firm Performance
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Medline is suing Andersen Consulting in connection with Andersen’s ERP implementation.sap-ag.de 1997). found after implementing SAP. which will likely result in lost market share (Boudette 1999. Edwards ERP software and reduced month-end closings from 38 to 9 days.5 days. Hershey announced a 19% drop in third-quarter profits because of order-processing problems. leading to a 43% reduction in headcount costs (Wah 2000). found calls to their help desk increased 64% after implementing BAAN’s financial and manufacturing modules (Stedman 1998).de 1997). and reduced annual material and supply costs by $350. Hoechst Marion Roussel implemented SAP and found greater flexibility and accelerated decision-making at all levels of the firm (www. Medline charged that Andersen failed to configure the ERP systems appropriately (Stein 1997). Peak USA Energy Services says ERP has led to additional revenues and costs savings of about $900. decreased invoice processing from 30 to 2. its average materials procurement went from 23 to 12 days and financial month-end closing went from 12 to 6.5 days.ERP and Firm Performance
Appendix A. Examples of Company Performance and ERP
Panel A: Stories by Firms Implementing ERP—Positive Impacts • Arizona Electric Power Corporation implemented J.
Panel B: Stories by Firms Implementing ERP—Negative Impacts • Hershey Foods' $112 million ERP software from SAP fouled up the company's candy shipments for Halloween in October 1999.com 2000).
• • • •
. Westcoast has projected its SAP implementation has saved $2. Westcoast Energy Inc. Stedman 1999). Whirlpool said problems with a new SAP system and a high volume of orders combined to delay shipments of appliances to many distributors and retailers (Boudette 1999).D. A-dec Inc.5 million per year in bottom-line cost savings from the elimination of non-value-added steps in their business processes (www.sap-ag. Hydro Agri’s fertilizer stores experienced an increase from 20 to 90 seconds in order processing time after implementing SAP’s ERP package (Stedman 1998).000 annually (Wah 2000). stated that its ERP led to system consolidation of many business processes at their headquarters.jdedwards. As such. they reduced headcount by eliminating redundant staff in branch offices and in the accounting function. Purina Mills Inc.000 (www.
The Oracle package. an offering designed to deliver fast time-to-benefit for mid-sized companies implementing Oracle Applications. "This fast and effective R/3 implementation illustrates not only that Plaut can manage projects of this size and scope within budget and on time. President of Plaut Consulting. Oracle(R) Manufacturing and Oracle(R) Projects application suites as well as Designer/2000(TM). to support 1. Developer/2000(TM) and Discoverer(TM) tools. 1997. (Nasdaq: ORCL) today announced that Daw Technologies (Nasdaq: DAWK). According to Klaus Schottenhamel. Oracle's FastForward(SM) Approach Enables Rapid Implementation. Month-End Close Cut from Two Weeks to Two Days DATELINE: SALT LAKE CITY. Data Gathered: • Client: Daw Technologies • Implementation window: 6 months ended July 1997 • Years of Implementation: Calendar year 1997 • ERP Vendor: Oracle • Consultant: Oracle Consulting Services
. manufacture and installation of cleanrooms to the semiconductor industry. News Release/Announcement: HEADLINE: Plaut Consulting Leads Accelerated SAP R/3 Implementation at Cabletron Systems DATE: July 21.S. and more cost-effective systems for managing projects. Examples of Press Release of ERP Adoption
1. a global provider of ultraclean environments that specializes in the design. Cabletron completed its first quarter-end close on the new system in June. consistent data integrity. News Release/Announcement: HEADLINE: Daw Technologies Selects Oracle Over Its Competitors for Financial and Manufacturing Applications. enterprisewide R/3 implementation is on time and within budget.Poston and Grabski
Appendix B.100 users utilizing Windows NT applications servers and an Oracle database. announced today that its management consultants led a successful 12-month implementation of SAP's R/3 integrated business application solution for Cabletron Systems. Plaut Consulting Inc. is expected to help Daw Technologies manage its rapid growth through improved data access. a leading manufacturer of computer networking systems and services. Multisite. expects to complete its six-month Enterprise Resource Planning (ERP) implementation of Oracle Applications(TM) in July. including Oracle Financials(R). 1997 Networking leader is one of the first in U. Monday Oracle Corp." Data Gathered: • Client: Cabletron Systems • Implementation window: 12 months ended July 1997 • Years of Implementation: Calendar year 1996 and 1997 • ERP Vendor: SAP • Consultant: Plaut Consulting 2. July 7. but it also showcases our ability to successfully partner with multiple parties to get the job done. The rapid implementation has been made possible by Oracle Consulting Services'(SM) new FastForward(SM) approach.
has gone live with an HP Rapid/3 implementation of SAP's R/3. Data Gathered: • Client: Nabi • Implementation window: 7 months ended August 1997 • Years of Implementation: Calendar year 1997 • ERP Vendor: SAP • Consultant: Hewlett-Packard’s Professional Services Organization
. In 1996. the project would not have been as successful without HP's participation.
News Release/Announcement: HEADLINE: Nabi Goes Live with HP Rapid/3 Implementation OF R/3 DATELINE: ORLANDO. 1997 Hewlett-Packard Company today announced that Nabi. a leading biopharmaceutical company. According to Nabi. was completed in only seven months. Nabi selected R/3 to meet its current and future needs and chose HP's Rapid/3 accelerated-implementation approach. accurate data and that could interface with its plasma-donor management system. Florida.ERP and Firm Performance
3. required a new system that could deliver timely. Nabi. which incorporates SAP's AcceleratedSAP methodology to deliver benefits to the organization quickly. The company urgently needed to integrate its business functions and replace existing systems as a result of its rapid growth. managed by HP's Professional Services Organization. August 25. one of the world's largest independent providers of human plasma products. The fixed-price project.