Costing model choice in ERP implementation: an exploratory investigation.

• Author: Nair S., Uma
• Position: Enterprise Resource Planning - Report

1. INTRODUCTION

   Enterprise Resource Planning (ERP) systems can well be counted as one of the most significant developments happened in the last decade of the 20th century (Davenport, 1998; Velcu, 2010). ERP implementations are usually large complex projects, involving large groups of people and other resources. Many organizations adopting ERP had experienced serious conflicts with their business strategies and the majority of ERP projects are often characterized by time and cost overruns (Akkermans and Helden, 2002; Upadhyay et al, 2011). Furthermore, it has also been observed that a high percentage of ERP benefits are intangible and therefore enhances difficulties of financial evaluation (Akkermans and Helden, 2002). The increasing realization of the gravity of such a situation by both academia as well as the business practitioners has resulted in a series of exploratory and empirical researches. The present study is basically exploratory in nature, which started off with a focused literature survey and culminated in the identification of prominent costing models adopted by business practitioners for ERP implementation in India.

2. BACKGROUND OF THE STUDY

   ERP is a tool that helps to stay integrated in an organization with competitiveness and customer orientation. According to an estimate by the the International Data Corporation, India will make significant gains from ERP systems implementation among the small and medium enterprises (Saji, 2001). Typically, the total time required for an ERP implementation would be 12 to 24 months (Bancroft et al, 1998). The overall cost involved in an ERP implementation is typically dependent on several cost components that are linked to software, hardware, consulting, implementation, and training. Al-Muddimigh (2001) found these cost components at the following proportions: software cost at 30.2 per cent, consulting cost at 24.1 per cent, hardware cost at 17.8 per cent, implementation team cost at 13.5 per cent, and training cost at 10.9 per cent.

   Many authors concur that 70 to 80 per cent of a product cost is committed during the concept phase (Stewart et al, 1995; NASA, 2002; Taylor, 1997; and Mileham et al, 1993). Making a wrong decision at this stage is extremely costly. Further down the development process, the product modifications and process alterations are more expensive as they occur in the development cycle. Thus, cost estimators need to approximate the true cost of producing a product based on empirical data, with the purpose of satisfying both the customer and the company. The difficulties of estimating cost at the conceptual design phase are well recognized by many researchers (Pugh, 1992; Buxton et al, 1994). The major obstacles that the cost estimators need to address include: (i) working with a limited amount of available data concerning the new developments, (ii) accounting for step changes within technology over the life span of a product development (a more pronounced problem within the high technology industries), (iii) the requirements to show how estimated costs were derived, including the assumptions and risks, (iv) cost of outsourcing a part to a supplier, and (v) the accuracy of the estimates.

   One of the most critical factors in today's economy is to understand which projects are profitable to the company, which is not, and which could be useful in the future. Profit is what a firm gets from the delivery of the project--the total revenue minus the actual costs incurred (Gupta and Kohli, 2006). While estimating the cost of a project, the estimate is arrived at based on the actual cost of previous similar projects. Items in the estimate are planned in detail, which contribute to the overall budget. This budget is used to calculate earned value, which in turn is used to evaluate cost variances. Analyzing cost variances becomes very important as it can send alerts about problems before profit is gone (Kale, 2000). It is in this context that the present study has been designed.

3. OBJECTIVES OF THE STUDY

   The broad objective of the present study is to identify the costing models that fit well into the Indian ERP implementation scenario. There are not many effective and validated cost models one could find on this domain. The available ones do try to explain the technical and non-technical facets of ERP implementation. The specific objectives of the study include: (i) to study the costing scenario with relevance to the context of ERP implementation in India; (ii) to identify and report the feasible ERP costing models for potential applications in the Indian context; and (iii) to identify the best feasible costing model for ERP implementation in an emerging economy.

4. LITERATURE SURVEY

   The present study, which is basically exploratory in nature, is organized through a focused literature survey. This had resulted in two significant outcomes, viz. (i) a comprehensive report on the costing models befitting the ERP system implementation domain has been identified; and (ii) a detailed account on the best feasible costing model befitting the ERP system implementation in the Indian context has been arrived at. The present paper carefully reports both these outcomes.

   4.1 Costing Models for ERP Systems

   Traditional costing models put an overall price tag on the mix of software, hardware, and personnel resources that constitute an infrastructure. However, they are not that useful when it comes to estimating the resources required to support a new application endeavor. At the design stage, evaluation of cost is done by decomposition of functions, for example by using data from accounts department. Another method of evaluating cost is by comparing with existing systems. While...