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Mission critical: realizing the promise of enterprise systems

Authors:
Mission
Critical
Realizing
the Promise of
Enterprise
Systems
THOMAS H. DAVENPORT
HARVARD BUSINESS SCHOOL PRESS
BOSTON,MASSACHUSETTS
Davenport.FM_i-xii 12/9/99 12:56 PM Page iii
Copyright © 2000 President and Fellows of Harvard College
All rights reserved
Printed in the United States of America
04 03 02 01 00 5 4 3 2 1
Library of Congress Cataloging-in-Publication Data
Davenport, Thomas H., 1954–
Mission critical : realizing the promise of enterprise systems /
Thomas H. Davenport.
p. cm.
Includes bibliographical references and index.
ISBN 0-87584-906-7
1. Management information systems. I. Title.
HD30.213.D38 2000
658.4'038'011--dc21
99-051644
The paper used in this publication meets the requirements of the
American National Standard for Permanence of Paper for Publications
and Documents in Libraries and Archives Z39.48-1992.
Davenport.FM_i-xii 12/9/99 12:56 PM Page iv
v
Contents
Preface vii
Acknowledgments ix
1What Are Enterprise Systems and
Why Do They Matter? 1
2The Promise and Perils of Enterprise Systems 29
3Should My Company Implement
an Enterprise System? 55
4Linking Enterprise Systems to
Strategy and Organization 105
5Linking Enterprise Systems to
Business Processes and Information 135
6Achieving Value during
Enterprise System Implementation 169
7Transforming the Practice of
Management with Enterprise Systems 203
8Using Enterprise Systems to
Manage the Supply Chain 237
9The Future of ES-Enabled Organizations 265
Appendix
A Technical Overview of Enterprise Systems 299
Notes 313
Index 321
About the Author 335
Davenport.FM_i-xii 12/9/99 12:56 PM Page v
AROUND THE GLOBE COMPANIES ARE QUIETLY AND STEADILY
becoming more connected—one business function with another,
one business unit with another, one company to another. They
are putting information systems in place that will yield more and
better information more quickly than they have ever known. For
the first time since large businesses were created, managers will
be able to monitor the doings of the company in near real time,
without having to wait for monthly reports that must be cross-
referenced with other monthly reports, all of which may be out
of date—or just plain wrong—by the time managers receive
them. Managers will also be able to sit in front of their worksta-
tions and know what is happening at every point around the
globe.
For the first time ever, information will flow seamlessly
across diverse business functions, business units, and geographic
boundaries. What the Internet is doing for communications be-
tween organizations, these systems are doing within companies.
For better or worse, no business transaction—no customer
1
1
What Are
Enterprise Systems
and Why
Do They Matter?
Davenport.1_1-28 12/9/99 12:44 PM Page 1
2Mission Critical
purchase, no supplier invoice, no product produced—will go
unnoticed by these systems. Ultimately, every bit of computer-
based information used for running a company’s operations can
be supplied by these systems. This situation sounds utopian, but
it’s actually available today if companies can master a relatively
new type of information system.
Let’s call such information systems enterprise systems (ESs).
Also known as enterprise resource planning (ERP) systems,
these are packages of computer applications that support many,
even most, aspects of a company’s (or a nonprofit organiza-
tion’s, university’s, or government agency’s) information needs.
The ERP name reflects the manufacturing roots of these sys-
tems—it’s a modification of “MRP” (manufacturing resource
planning)—but in my view these systems have so transcended
their origins that the somewhat clumsy ERP name is no longer
appropriate.
From accounting to manufacturing, from sales to service, ES
modules support thousands of business activities. Aside from
personal productivity applications such as spreadsheets and
word processors on personal computers, highly specialized pro-
duction systems such as process control, and Internet-based sys-
tems for information and knowledge access, an ES may be the
only business information system an organization requires. This
breadth is one of the key factors that distinguishes enterprise
systems from earlier systems.
Enterprise applications started out as “back-office” systems,
automating the workmanlike business transactions that cus-
tomers never saw or cared about. Sure, ledgers needed to be
updated, suppliers paid, and employee vacation balances deb-
ited, but accuracy and speed in this type of transaction rarely led
to any competitive advantage or increased customer satisfac-
tion. Although back-office systems may not offer competitive
advantage, they do have important implications. Poorly func-
tioning back-office systems can lead to dissatisfied customers,
suppliers, auditors, or regulators. If a company can’t generate an
accurate invoice, meet a promised delivery date, find a missing
Davenport.1_1-28 12/9/99 12:44 PM Page 2
shipment, or properly account for costs and revenues, it can get
in big trouble quickly. Well-implemented enterprise systems can
make well-executed back-office transactions a reality.
More recently, however, ESs have moved into the front
office, supporting supply chain optimization, sales force auto-
mation, and customer service. These new functions have been
achieved either by installing more comprehensive packages from
ES vendors or by installing complementary software applica-
tions—sometimes called bolt-on systems—from third-party soft-
ware companies. Because the goal is to have added capabilities
connect smoothly with the core ES system, I’ll refer to the entire
entity as an ES, even though it may consist of several different
components.
Even more recently, a new technology has largely erased the
distinction between front and back offices. The Internet, and
associated internal networks called intranets, is the ideal tool for
distributing and providing access to information. With just a
browser, employees, suppliers, and customers can all access the
organization’s information. But where will that information
come from? Internet technology itself is not suited for process-
ing business transactions or for storing key data—it’s an infor-
mation access technology. Enterprise systems are, of course, per-
fectly suited for information transactions; they’re the underlying
information factory producing the information for internal and
external Internet consumption. Using the Internet to give
employees and customers access to poor-quality, unintegrated
information is like opening more bank branches when the cur-
rency is worthless. You have to work on both access and high-
quality information simultaneously. The combination of enter-
prise systems as the primary platform for organizational
information and of Internet technology for providing access to it
will be the hallmark of leading organizations in the new century.
Whether front office or back office, by themselves or in com-
bination with other technologies, ESs are distinguished by their
information commonality and integration. It’s great to have the
entire business supported by a single type of information system,
What Are Enterprise Systems and Why Do They Matter? 3
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but what if the information differs from one part of the organi-
zation to another? For the most part, this is prevented in ESs
through the use of a common database for the entire organiza-
tion. Not only can one track customers through marketing,
sales, and service activities, but the customer’s identification
number and address are constant across those different applica-
tions and business functions. The Babel-like information envi-
ronments of most large organizations, in which the same term
might mean different things in different parts of the company,
can be avoided altogether through the use of an ES.
In short, these systems offer just about everything businesses
want from a computer. They serve up information in a format
that anyone—not just technologists—can understand. They
employ client/server technology—the state of the commercial art
in information systems. They even work well with the Internet.
If these systems are so good, why wouldn’t every organization
want one?
In fact, they do. With a few exceptions I’ll discuss later,
large, medium-sized, and increasingly even small organizations
are installing enterprise systems: from Iowa Spring, which has
about $11 million in revenues, to its customer General Motors,
which is more than ten thousand times larger. Public-sector
organizations ranging from the “city” of Round Rock, Texas, to
the Victoria Department of Education in Melbourne, Australia,
have them. In some industries, such as petrochemicals, every
company has an ES. In others, such as the electrical utilities busi-
ness, ESs are being adopted at a rapid rate. Even in financial ser-
vices, one of the industries in which these systems have been less
popular, hundreds of organizations from Bank One to Dai-Ichi
Life Insurance have them in place.
The software and hardware spending alone for ESs is well
over $15 billion per year worldwide, and professional services
fees add another $10 billion. Revenues for ES vendors have
grown between 50 and 100 percent a year. Very large compa-
nies, such as Hewlett-Packard, Procter & Gamble, and Intel,
speculate that their ES expenditures will easily top $1 billion
before they are finished. (As I describe later, they will never be
4Mission Critical
Davenport.1_1-28 12/9/99 12:44 PM Page 4
finished, so their total costs will ultimately be even higher!) In
such firms the cost of implementing an ES is orders of magnitude
higher than, for example, the money spent on the Internet, Web
sites, and electronic commerce.
Of course, with every benefit there is risk. A few companies
have failed at implementing ESs; many more have spent more
than they intended or encountered resistance from managers
and workers who were unprepared for the changes ESs bring.
Companies are willing and correct to take these kinds of risks
because of the impact the systems can have on quality, cost
reduction, and customer satisfaction and loyalty.
Enterprise systems offer the first great opportunity to
achieve true connectivity, a state in which everyone knows what
everyone else is doing in the business all over the world at the
same time. And because they represent the first great opportu-
nity for connectivity, they pose one of the greatest threats to the
status quo that companies have ever faced. Because companies
are made up mostly of people, ESs mean you will have to change
people and the way they do things at the same time that you
change all the computers and the software. That is why ESs may
be more rewarding—and more challenging—than any computer
system a company has ever tried to install.
BIG SYSTEMS,BIG CHANGE
Being successful with enterprise systems is not simply a matter
of writing big checks. What’s really important—and difficult—
about these systems is the dramatic change they bring to a busi-
ness. I’ll argue throughout this book that an enterprise project is
as much about changing the way a business operates as it is
about technology. Successful implementation of an ES does
involve probably the greatest technological change most organi-
zations have ever undergone, not to mention the largest employ-
ing client/server technologies. Even more difficult and impor-
tant, however, are the major changes in business that come with
an ES project.
What Are Enterprise Systems and Why Do They Matter? 5
Davenport.1_1-28 12/9/99 12:44 PM Page 5
Business processes, the way work gets done in an organiza-
tion, change dramatically. Organizational structure and culture,
the behaviors of workers throughout the company, and even
business strategy all have to be restructured. The reengineering
movement of the early 1990s, with all its radical approaches to
reorganizing companies, turned out to be a mere preamble to
the ES era, which has brought even more ambitious (and com-
plex) changes. In fact, the business process reengineering move-
ment has largely been replaced by ES initiatives. Given their
breadth and technical complexity, ES projects are even more dif-
ficult and consuming of time and resources than the largest
reengineering projects. The most ambitious ES projects can take
a decade or more of a company’s time.
Implementing new mission-critical systems, then, is hardly
just a matter of installing an ES. Business processes and infor-
mation must be made common around the world within the
implementing organization. Idiosyncratic ways of doing busi-
ness must be abandoned. Informational linkages between busi-
ness functions and units must be tightened. Employees must be
educated about the broad implications of simple actions like
pressing a key within an ES. Perhaps most difficult of all, senior
managers must be persuaded of the wisdom of changing virtu-
ally everything in a company at once. In short, organizational
change represents a huge part of a successful ES project. Man-
agers at Steelcase, for example, estimate that up to half of the
company’s project resources went for organizational change
issues. A Monsanto manager felt that change management activ-
ities constituted 75 percent of the total project effort there.
Despite these difficulties, ESs are the answer to the Informa-
tion Age’s wildest dreams. The concept of an integrated set of
information technology (IT) applications that could meet all of
an organization’s information needs has been with us since the
beginning of information systems in business, but has been unre-
alizable before the modern ES. We have gotten what we wished
for; now we only need to make the business and organizational
changes necessary to take advantage of our fulfilled dreams.
6Mission Critical
Davenport.1_1-28 12/9/99 12:44 PM Page 6
BUSINESS BENEFITS OF ENTERPRISE SYSTEMS
I’ve already pointed out that ESs are difficult to put in place
from both a technical and business change standpoint. Why go
to all the trouble and expense of implementing an ES? In an
ideal world, ES-enabled organizations would be seamlessly
interconnected both internally and externally. Excess inventory
and waste would be nonexistent. Demand and supply would be
perfectly coordinated. It would be just as easy to transact busi-
ness with suppliers and customers as with another department
of your own company. Customers would have perfect informa-
tion about not only the products and services they’ve ordered
from you, but also about how every aspect of your business
affects theirs. Managers could understand any aspect of a com-
pany’s operations and performance with a few clicks of the
mouse.
These benefits aren’t purely hypothetical. Many companies
have already realized substantial business benefits from their ES
projects, even if they are not completely finished installing them.
Several examples of these benefits are described in the following
paragraphs.
1. Cycle time reduction. Autodesk, a leading manufacturer of
computer-aided design software, has achieved substantial
benefits in terms of cost and time reductions in key business
processes. Whereas the company used to require two weeks
on average to ship to customers, 98 percent of products are
now shipped within twenty-four hours. Financial closing
times were cut in half, from twelve days to six. Autodesk
calculates that it has saved more on reduced inventory alone
than its SAP system cost to install.
2. Faster information transactions. IBM’s System Storage (disk
drive) division achieved a reduction in the time to enter pric-
ing information from five days minimum to five minutes,
replacement part shipping went from twenty-two days to
three, and credit checks that previously took twenty minutes
What Are Enterprise Systems and Why Do They Matter? 7
Davenport.1_1-28 12/9/99 12:44 PM Page 7
are now accomplished in three seconds. Crediting a cus-
tomer for a returned disk drive used to take three weeks; it
now happens immediately. The division once spent thou-
sands of hours reconciling management reporting data; this
now happens automatically. IBM in general has twenty-one
SAP projects underway, covering 80 percent of its core busi-
ness; eight projects are up and running.
3. Better financial management. Microsoft is installing an ES
to bring about common financial and procurement systems
worldwide. The fast-growing software company has already
saved $2 million in equipment depreciation (it previously
took three months to start the depreciation schedule for a
new asset; now it can begin immediately). The company’s
ES has allowed it to receive $14 million per year in early-
payment discounts from vendors. Microsoft’s managers also
report substantial benefits in improved management and
reporting systems, and the financial closing cycle has been
reduced from twelve days to four.
4. Laying the groundwork for electronic commerce. Cisco Sys-
tems put in an ES to structure and rationalize its back-office
business transactions systems, which were previously unable
to support the company’s rapid growth. Without the system,
Cisco also wouldn’t have been able to offer customers Web-
based access to product ordering, tracking, and delivery
processes. Cisco’s system cost it over $15 million, and the
company spent another $100 million connecting it to the
Internet. Today, however, Cisco believes that the combina-
tion of its ES and its Internet applications yields more than
$500 million in annual operating cost savings.
5. Making tacit process knowledge explicit. Monsanto was
concerned that decades of knowledge about plant opera-
tions existed only in the minds of an aging workforce. After
successfully implementing its ES, company managers now
feel that key processes, decision rules, and information
structures are well understood and documented in its sys-
8Mission Critical
Davenport.1_1-28 12/9/99 12:44 PM Page 8
tem. Furthermore, the knowledge is now more common to
the industry, so that new employees are more likely to
understand the work process. Support of the process and the
system can also be outsourced to external suppliers.
The primary lesson from these examples is that key business
processes can be improved dramatically through the implemen-
tation of an ES. Whether the process is financial, managerial, or
operational; whether it involves internal activities or customers
and suppliers; whether the process runs faster or leaner—enter-
prise systems are the primary vehicles for making business
processes better. It’s virtually inconceivable to try to reengineer
today without them.
BUSINESS LIFE BEFORE ENTERPRISE SYSTEMS
In order to better understand the value of ESs, it’s useful to con-
trast them with the way that organizations previously met their
information needs. In 1954, when the first business application
of computers was developed (by what is now Andersen Consult-
ing for General Electric), and for most of the following forty
years, when a business function needed computerized informa-
tion it used a stand-alone application. The first application cre-
ated was for payroll processing; later ones would be created for
general ledger, accounts payable, inventory management, or cus-
tomer billing. Each system had its own application logic, its own
information, and its own user interface. An individual company
might have hundreds of individual applications. Even when soft-
ware vendors began to sell application packages of broader
functionality in the 1980s, they were almost always within indi-
vidual business functions, for example, finance and accounting.
We haven’t totally left this approach behind today. Companies
that don’t have an ES still have a variety of standalone systems.
Chopping up information systems this way makes it impos-
sible to coordinate planning across different business functions.
Say, for example, that a company wants to compare information
from its manufacturing and sales functions so that it doesn’t
What Are Enterprise Systems and Why Do They Matter? 9
Davenport.1_1-28 12/9/99 12:44 PM Page 9
produce more inventory than it can sell. The information is
there within the company, but it’s not accessible or compa-
rable—making things frustrating for those who need it. In most
cases in the past, this coordination simply couldn’t be done
in any automated fashion because companies’ manufacturing
systems were separate from their sales systems. The sales force
didn’t know what manufacturing had produced recently, and
manufacturing didn’t find out until later what the sales force had
sold. The idea of “available to promise” inventory (i.e., stuff a
company has made or could make that isn’t promised to anyone
else, so is available to be sold) just didn’t exist. Connections
between functions—and often between different geographical
areas—were loose and slow. When connections did take place
they involved many middle managers, whose jobs entailed col-
lating and passing this information around the organization.
The most insidious aspect of this problem involved different
interpretations of the same information entities. The term cus-
tomer, for example, might appear in many of these disparate sys-
tems around a firm. In one system it might include distributors,
in another only end customers. In one version it would incorpo-
rate prospects, in another only existing customers. If the CEO
asked for a list of the top 100 customers, it could take weeks to
come to consensus on the list (as happened at one computer
company with diverse systems around the organization). Having
diverse forms of information has some positive attributes as well
(e.g., every part of the organization gets the interpretation of
customer that best suits its needs), but there is no doubt that the
proliferation of information meanings can cause considerable
confusion. One department’s interpretation of how much has
been sold through what channels may differ from another’s.
Every department could have its own interpretation of how
much money was passing through based on what information
they each believed described a customer. Obviously, this dispar-
ity made it difficult to make good decisions about which cus-
tomers to serve, which selling approaches were most effective,
and whether to build the business or hold back.
10 Mission Critical
Davenport.1_1-28 12/9/99 12:44 PM Page 10
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... Organizations must constantly assess if their operations are in sync with the external environment with the aim of maintaining improvements in necessary and, where possible, integrated IS/IT structures [44]. The investments in IS/IT must be handled, efficiently and effortlessly for medium and long-term market sustainability [44]. Just 30% of IS/IT investment projects attain the intended benefits, according to some authors [45], which is one justification for using a reference model of best practices to help mitigate this danger. ...
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Thesis
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The development of the SME sector is a big challenge, and it records a high failure rate. Many scholars highlighted that SMEs do not have sufficient knowledge and information to make rational decisions compared to large firms. Therefore, they suffer the hazard of opportunism and lead to generate Transaction Cost (TC), which discourages firms’ Business Performance. SMEs have the possibility to access sufficient information through ICT, and they can safeguard their transaction to improve business performance. Therefore, this study concerns exploring the effect of ICT strength on TC and the business performance of SMEs in Sri Lanka. The conceptual research model contained independent variable ICT strength and dependent variable business performance of SMEs with a mediator as TC for developing hypotheses and tested on quantitative method. A sample of 400 manufacturing SMEs was selected from 81,531 SMEs in Sri Lanka by applying the Inverse Square Root Method. Pre-tested structural questions were used for data collection. Partial Least Square - Structural Equation Modelling (PLS-SEM) was used to analyse the data using SmartPLS V3. The dimension of ICT strength has a significant negative impact on TC-related determinants and assumptions except for transaction frequency, which showed a positive relationship. These dimensions negatively impacted the TC and made a significant positive impact on the business performance. Uncertainty, asset specificity, bounded rationality, and opportunism negatively impacted on business performance of SMEs, while transaction frequency affected positively. TC did not significantly impact on business performance of SMEs. ICT strength substantially reduces the TC, and TC as a mediating variable makes neither significant effect directly on the business performance nor relationship between ICT Strength and SME business performance. The study strongly recommends that SMEs reinforce their ICT strengths, especially mobile technology, with applications by minimizing the impact of TC and its related factors as a novel perspective. The study obtained a large explanatory ability by examining all the dimensions of ICT strength, TC, and business performance that have not been studied yet. The experiment on mediating effect of TC and related factors also made a unique contribution. Research establishes a new theoretical foundation for Transaction Cost Economics (TCE) by introducing ICT strength as a new governing structure of TC.
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... This study introduces the concept of ES-enabled competence and empirically tests its critical role in translating ES value into innovation performance. This finding provides the key to solve the ES-related rigidity-innovation paradox (Davenport, 2000). Further, the findings of this research uncover the micro-foundation underlying ES-enabled innovation. ...
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