SM_Ch11.docx

Chapter 11 Enterprise Resource Planning Systems Review Questions

1. Define ERP. Response: ERP systems are multiple multiple module software packages that that evolved primarily from traditional manufacturing resource planning (MRP) systems. The objective of ERP is to integrate key processes of the organization such as order entry, manufacturing, procurement and accounts payable, payroll, and human resources. By doing so, a single computer system can serve the unique needs of each functional area. 2. What is the closed database architecture? architecture? Response: The closed database architecture architecture is similar in concept to to the basic flat-file model. Under this approach, a database management system is used to provide minimal technological advantage over flat-file systems. The DBMS is little more than a private, but  powerful, file system. Each function function has a private database. 3. Define core applications applications and give give some examples. Response: Core applications are those those applications that that operationally support support the day-today activities of the business. If these applications fail, so does the business. Typical core applications would include, but are not limited to, sales and distribution, business business planning,  production planning, planning, shop floor control, and logistics. logistics. 4. Define OLAP and give some examples. examples. Response: Online analytical processing (OLAP) can be characterized as online transactions that: • Access very large amounts of data (e.g., several years of sales data). • Analyze the relationships among many t ypes of business elements such as sales, products, geographic regions, and marketing channels. • Involve aggregated data such as sales volumes, budgeted dollars, and dollars spent. • Compare aggregated data over hierarchical time periods (e.g., monthly, qu arterly, yearly). • Present data in different perspectives such as sales by region, by distribution channel, or by product. • Involve complex calculations among data elements such as expected profit as a function of sales revenue for each type of sales channel in a particular region. • Respond quickly to user requests so they can pursue an analytical thought process without being stymied by system delays. An example of an OLAP transaction is the aggregation of sales data by region, product type, and sales channel. The OLAP query may need to access vast amounts of sales data over a multiyear  period to find sales for each product product type within each region. 5. What is the client-server client-server model? Response: The client-server model is a form of network topology in which the user’s computer or terminal (the client) accesses the ERPs programs and data, via a host computer called the server. While the servers may be centralized, the clients are usually located at multiple locations throughout the enterprise.

6. Describe the two-tier client-server client-server model. Response: In a two-tier architecture, the server server handles both application application and database duties. Some ERP vendors use this approach for local area network (LAN) applications. a pplications. Client computers are responsible for presenting data to the user and passing user input back to the server. 7. Describe the three-tier client-server client-server model. Response: The database and application application functions are separated in in the three-tier model. This architecture is typical of large production ERP systems which use wide area networks (WANs) for connectivity. Satisfying a client request requires two or more network connections. Initially, the client establishes communications with the application server. The application server then initiates a second connection to the database server. 8. What is bolt-on software? Response: Bolt-on software refers to special special purpose software provided provided by third party vendors. These packages are used for purposes the ERP software alone does not address. 9. What is is SCM software? Response: Supply Chain Management Management systems are a class of application application software that support supply chain management. The supply chain is the set of activities associated with moving goods from the raw-materials stage on to the consumer. This includes procurement,  production scheduling, scheduling, order processing, processing, inventory management, transportation, transportation, warehousing, warehousing, customer service and forecasting the demand for goods. SCM systems are a class of application software that supports this task. Successful SCM coordinates and integrates these activities into a seamless process. In addition to the key functional areas within the organization, SCM links all of the partners in the chain, including vendors, carriers, third-party logistics companies, and information systems providers. Organizations can achieve competitive advantage by linking the activities in its supply chain more efficiently and effectively than its competitors. 10. What is changed data data capture? Response: Changed data capture is a technique technique that can dramatically reduce reduce the extraction time needed to extract data from operational databases by capturing only newly modified data. The extraction software compares a current operational database with an image of the data taken at the last transfer of data to the warehouse. Only the data that have changed in the interim are captured. 11. What is a data warehouse? Response: A data warehouse is a relational relational or multi-dimensional multi-dimensional database that may consume hundreds of gigabytes, or even terabytes, of disk storage. The warehouse consists of historic data that is used for business analysis. A data warehouse is a database constructed for quick searching, retrieval, ad hoc queries, and ease of use. The data are normally extracted  periodically from an operational operational database or from a public public information service 12. What is data mining? mining? Response: Data mining is the  process of selecting, exploring, exploring, and modeling large amounts amounts of data to uncover relationships relationships and global patterns that exist in large databases but are hidden among the vast number of facts. f acts. This involves sophisticated techniques that use database queries and artificial intelligence to model real-world phenomena from data collected from the ware house.

13. What does data cleansing mean? Response: Data cleansing involves filtering out or repairing invalid data prior to being stored in the warehouse. Operational data are dirty for many reasons. Clerical, data entry, and computer program error can create illogical data such as negative inventory quantities, misspelled names and blank fields. Data cleansing also involves transforming data into standard business terms with standard data values. 14. Why are denormalized tables used in data warehouses? Response: Because of the vast size of a data warehouse, inefficiency caused by joining normalized data can be very detrimental to the performance of the system. A three-way join  between tables in a large data warehouse may take an unacceptably long time to complete and may be unnecessary. Because historical data are static in nature, nothing is gained by constructing normalized tables with dynamic links. 15. What is the drill-down approach? Response: Drill down analysis begins with the summary views of data described above. When anomalies or interesting trends are observed, the user drills down to lower level views and ultimately into the underlying detail data. 16. What is the big bang approach? Response: The big bang is an ambitious method of implementing an ERP system. Organizations taking this approach in an attempt to switch operations from their old legacy systems to the new system in a single event which implements the ERP system across the entire company. While this method has certain advantages, it has been associated with numerous system failures. 17. What is scalability? Response: Scalability is the system’s ability to grow smoothly and economically as user requirements increase. The term system in this context refers to the technology platform, application software, network configuration, or database. Smooth and economical growth is the ability to increase system capacity at an acceptable, incremental cost per unit of capacity without encountering limits that would demand a system upgrade or replacement. User requirements  pertain to volume-related activities such as transaction processing volume, data entry volume, data output volume, data storage volume, or increases in the user population. 18. What is a role? Response: A role is a formal technique for grouping together users according to the system resources they need to perform their assigned tasks. 19. What is an access control list? Response: An sccess control list (or access token) is used to achieve access control within the user’s application.6 The access control list specifies the user ID, the resources available to the user, and the level of permission granted such as read-only, edit, or create. 20. How is the access control list approach different from RBAC? Response: The access control list approach assigns access directly to the individual. RBAC assigns permissions to a role and then the individual is assigned to the role. It is a way of dealing efficiently with the many-to-many relationship between individuals and permissions.

21. Search the Web: How is the Oracle database different from relational databases? Response: Responses may vary.

22. What is the OLAP operation called consolidation? Response: Consolidation is the aggregation or roll-up of data. For example, sales offices data can be rolled-up to districts and districts rolled-up to regions. 23. What is the OLAP operation of drill-down? Response: Drill-down allows the user to display the detail that underlies consolidated data. 24. What is meant by the term slicing and dicing ? Response: Slicing and dicing enables the user to examine data from different viewpoints. One slice of data might show sales within each region. Another slice presents sales by product across regions. Slicing and dicing is often performed along a time axis to depict trends and  patterns.

Discussion Questions

1. How are OLTP and OLAP different? Provide some examples. Response: On-line Transaction Processing (OLTP) applications support mission-critical tasks through simple queries of operational databases. Online Analytical Processing (OLAP) applications support management-critical tasks through analytical investigation of complex data associations that are captured in data warehouses. 2. Distinguish between the two-tier and three-tier client-server models. Describe when each would be used. Response: In a two-tier architecture, the server handles both application and database duties. Some ERP vendors use this approach for local area network (LAN) applications. Client computers are responsible for presenting data to the user and passing user input back to the server. In the three-tier model the database and application functions are separated. This architecture is typical of large production ERP systems, which use wide area networks (WANs) for connectivity. Satisfying a client request requires two or more network connections. Initially, the client establishes communications with the application server. The application server then initiates a second connection to the database server. 3. Why do ERP systems need bolt-on software? Give an example of bolt-on software. Response: Many organizations have found that ERP software alone cannot drive all the  processes of the company. These firms use a variety of bolt-on software provided by third party vendors. At present, most electronic commerce supported ERP systems use bolt-on packages that upload product information files from the ERP database and present them on the web page for customers. The bolt-on system collects the Internet orders and creates a transaction batch file, which is periodically downloaded to the ERP system for processing. This situation is changing rapidly. With increased demand from customers for real-time commitments f rom their manufacturers regarding price, manufacturing schedule, and delivery date, leading ERP suppliers are being forced to make their systems web-enabled. 4. Your organization is considering acquiring bolt-on software for your ERP system. What approaches are open to you?

Response: The decision to use bolt-on software requires careful consideration. Most of the leading ERP vendors have entered into partnership arrangements with third party vendors to  provide specialized functionality. The least risky approach is to choose the bolt-on that is endorsed by the ERP vendor. Some organizations, however, take a more independent approach. This sometime requires changing the core function code to interface with the bolt-on software. 5. Explain why the data warehouse needs to be separate from the operational database. Response: One reason for a separate data warehouse is that the structural and operational requirements of transaction processing and data mining systems are fundamentally different, making it impractical to keep both operational (current) and ar chive data in the same database. Transaction processing systems need a data structure that supports performance, whereas data mining systems need data organized in a manner that permits broad examination and the detection of underlying trends. 6. Data in a data warehouse are in a stable state. Explain how this can hamper data mining analysis. What can an organization do to alleviate this problem? Response: Typically transaction data are loaded into the warehouse only when the activity on them has been completed e.g., they are stable. Potentially important relationships  between entities may, however, be absent from data that are captured in its stable state. For example, information about cancelled sales orders probably will not be reflected among the sales orders that have been shipped and paid for, before they are placed in the warehouse. One way to reflect these dynamics is to extract the operations data in slices of time. These slices provide snapshots of business activity. 7. This chapter stressed the importance of data normalization when constructing a relational database. Why, then, is it important to denormalize data in a data warehouse? Response: Wherever possible, normalized tables pertaining to selected events should be consolidated into denormalized tables. Because of the vast size of a data warehouse, inefficiency caused by joining normalized data can be very detrimental to the performance of the system. A three-way join between tables in a large data warehouse may take an unacceptably long time to complete and may be unnecessary. Since historical data are static in nature, nothing is gained by constructing normalized tables with dynamic links. 8. What problems does the data cleansing step attempt to resolve? Response: Clerical, data entry, and computer program error can create illogical data values such as negative inventory quantities, misspelled names, and blank fields. Also, data in the data warehouse are often comprised of output from multiple systems that use slightly different spellings to represent common terms such as “cust,” “cust_id,” or “cust_no.” Data cleansing involves correcting errors and transforming data into standard business terms with standard data values. 9. How are the summary views in a data warehouse different from views in an operational database? Response: To improve operational efficiency, certain data are transformed into summary views before they are loaded into the warehouse. For example, a decision maker may need to see  product sales figures summarized for a week, a month, a quarter, or annually. It may not be  practical to summarize information from detail data every time the user needs it. A data warehouse can contain the most frequently requested summary views of data and reduce the amount of processing time during analysis. These are typically created around business entities such as Customers, Products, and Suppliers. Unlike views in an operational database, which are

virtual in nature with underlying base tables, data warehouse views are denormalized physical tables. 10. Would drill-down be an effective audit tool for identifying an unusual business relationship  between a purchasing agent and suppliers in a large organization with several hundred suppliers? Explain. Respones: Yes. The auditor may use drill-down techniques to identify unusually high levels of business activity for a particular supplier. Excessive purchases from a single supplier could represent an abnormal business dependency that may prove harmful to the firm if the supplier raises prices or cannot deliver on schedule. It may also signify a fraudulent relationship involving kickbacks to purchasing agents or other management. 11. Disruptions to operations are a common side effect of implanting an ERP. Explain the  primary reason for this. Response: The reengineering of business processes that often accompanies ERP implementation is the most commonly attributed cause of performance problems. Operationally speaking, when business begins under the ERP system, everything looks and works differently from the way it did with the legacy system. An adjustment period is needed for everyone to reach a comfortable point on the learning curve. Depending on the culture of the organization and attitudes towards change within the firm, adjustment may take longer in some firms than in others. 12. ERP systems use the best-practices approach in designing their applications, yet goodness of fit is considered to be an important issue when selecting an ERP. Shouldn’t the client just  be able to use whatever applications the ERP system provides? Response: When a business’ processes are truly unique, the ERP system must be modified to accommodate industry specific (bolt-on) software or to work with custom-built legacy systems. Some organizations, such as telecommunications service providers, have unique  billing operations that cannot be satisfied by off-the-shelf ERP systems. Before embarking on the ERP journey, organization management needs to assess whether they can and should reengineer their business practices around a standardized model. 13. Explain the issues of size, speed, workload, and transaction as they relate to scalability. Response: Size. With no other changes to the system, if database size increases by a factor of x, then query response time will increase by no more than a factor of x in a scalable system. For example, if business growth causes the database to increase from 100GB to 500GB, then transactions and queries that previously took one second will now take no more than five seconds. Speed. An increase in hardware capacity by a factor of x will decrease query response time by no less than a factor of x in a scalable system. For example, by increasing the number of input terminals (nodes) from one to twenty, transaction processing time will decrease proportionately. Transactions that previously took twenty seconds will, because of more terminals, now take no more than one second in a system with linear scaling. Workload. If workload in a scalable system is increased by a factor of x, then response time or throughput can be maintained by increasing hardware capacity by a factor of no more than x. For example, if transaction volume increased from 400 per hour to 4000 per hour, the previous response time can be achieved time by increasing the number of processors by a factor of ten in a system that is linearly scalable. Transaction cost. In a scalable system, increases in workload do not increase transaction cost. Therefore, an organization should not need to increase system capacity faster than demand. For example, if the cost of processing a transaction in a system with one processor is ten cents, then it

should still cost no more that ten cents when the number of processors is increased to handle larger volumes of transactions. 14. Explain how SAP uses roles as a way to improve internal control. Response: Roles support the objectives of segregation of duties. Each role is associated with a specific set of activities, which are assigned to an authorized user of the ERP System. SAP currently provides over 150 predefined user roles, which limit a user’s access to only certain functions and associated data. The system administrator assigns roles to users of the system when it is configured. These can be customized as needed. When the user logs on to the system, a role based menu appears, which limits the user to the specified tasks. Auditors should ensure that roles are assigned in accordance with job responsibilities on a “need -to-know” basis. 15. How would you deal with the problem of file-server backup in a highly centralized organization? Response: Centralized organizations with highly integrated business units may need a single global ERP system that is accessed via the Internet or private lines from around the world, to consolidate data from subsidiary systems. A server failure under this model could leave the entire organization unable to process transactions. To control against this, two linked servers can  be connected in redundant backup mode. All production processing is done on one server. If it fails, processing is automatically transferred to the other. Organizations that want more security and resilience may arrange servers in a cluster of three or more that dynamically share the workload. Processing can be redistributed if one or more of the servers in the cluster fail. 16. How would you deal with the problem of file-server backup in a decentralized organization with autonomous divisions that do not share common operational data? Response: Companies whose organizational units are autonomous and do not share common customers, suppliers, or product lines often choose to install regional servers. This approach permits independent processing and spreads the risk associated with server failure. For example, BP Amoco implemented SAP’s R/3 into 17 separate business groups. 17. Distinguish between the OLAP operations of consolidation and drill-down. Response: Consolidation is the aggregation or roll-up of data. For example, sales offices data can be rolled-up to districts and districts rolled-up to regions. Drill-down allows the user to go in the other direction and display the detail that underlies consolidated data. 18. When would slicing and dicing be an appropriate OLAP tool? Give an example. Response: Slicing and dicing enables the user to examine data from different viewpoints. One slice of data might show sales within each region. Another slice presents sales by product across regions. Slicing and dicing is often performed along a time axis to depict trends and  patterns. 19. Explain the risks associated with the creation of unnecessary roles and why it can happen. Response: Managers in ERP environments have significant discretion in creating new roles for individuals. This may be done for employees who need access to resources for special and/or one-time projects. Such access granting authority needs to be tempered with judgment to  prevent the number of roles from multiplying to the point of becoming dysfunctional and thus creating a control risk. Indeed, an oft cited problem in ERP environments is that roles tend to  proliferate to a point where their numbers actually exceed the number of employees in the organization. Policies need to be in place to prevent the creation of unnecessary new roles and to ensure that temporary role assignments are deleted when the reason for them terminates.

20. What is the fundamental concept behind the rule of least access? Explain why this is a  potential problem in an ERP environment. Response: The fundamental concept behind the rule of least access is that access  privileges (permissions) should be granted on a need to know basis only. Nevertheless, ERP users tend to accumulate unneeded permissions over time. This is often due to two problems: Managers fail to exercise adequate care in assigning permissions as part of their role granting authority. Since, managers are not always experts in internal controls they may not recognize when excessive permissions are awarded to an individual. Managers tend to be better at issuing privileges than removing them. As a result, an individual may retain unneeded access privileges from a previous job assignment that creates a segregation of duties violation when combined with a newly assigned role 21. What is the purpose of role-based governance software? Response: Role-based governance software monitors role creation and permission granting to ensure compliance with internal control objectives. It verifies role compliance across all applications and users in an ERP environment.

Multiple Choice

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

B E D E E C C B C E

Problems

1. Data Warehouse Access Control You are the CEO of a large organization that implemented a data warehouse for internal analysis of corporate data. The operations manager has written you a memo advocating opening the data warehouse to your suppliers and customers. Explain any merit to this proposal. What are the control issues, if any? Response: Merit: The primary reason for a data warehousing is to optimize the business. Many organizations’ management personnel feel that more strategic benefit can be gained by sharing data externally. By providing customers and suppliers with the information they need when they need it, the company can improve its relationships and provide better service. The potential gain to the giving organization is seen in a more responsive and efficient supply chain. Using Internet technologies and OLAP applications, an organization can share its data warehouse with its trading partners and, in effect, treat them like divisions of the firm. Control: Access control is a vital feature of a data warehouse that is shared with customers and suppliers. The following control issues need to be considered: The organization should establish procedures to oversee the authorization of individuals 

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at customer and supplier sites which will be granted access to their data warehouses. Access privileges should be specified for each outside user and controlled by the use of  passwords. User views need to be created that will limit outsider access to only approved data. Internet sessions should be managed by means of a firewall and use encryption and digital signatures to maintain confidentiality. Firewalls, which are a combination of hardware and software that protect resources of a  private network, help to secure data from unauthorized internal and external users. Auditing tools for intrusion detection are available to assist in mitigating security risks. Periodic audits should include a risk assessment and review of access levels granted to  both internal and external users, based on their job descriptions.

2. Project Implementation Your organization is planning to implement an ERP system. Some managers in the organization favor the big bang approach. Others are advocating a phased-in approach. The CEO has asked you, as project leader, to write a memo summarizing the advantages and disadvantages of each approach and to make a recommendation. This is a traditional organization with a strong internal hierarchy. The company was acquired in a merger 2 years ago, and the ERP project is an effort on the part of the parent company to standardize business processes and reporting across the organization. Prior to this, the organization had been using a general ledger package that it acquired in 1979. Most of the transaction processing is a combination of manual and batch  processing. Most employees think that the legacy system works well. At this point, the implementation project is behind schedule. Response: While the big bang method has certain advantages, it has been associated with numerous system failures. Since the new ERP system means new ways of conducting business, getting the entire organization on-board and in sync can be a problem. On day one of the implementation, no one within the organization will have had any experience with the new system. In a sense, everyone in the company is a trainee learning a new job. The new ERP will initially meet with opposition,  because using it involves compromise. The legacy systems, with which everyone in the organization was familiar, had been honed over the years to meet exact needs. In most cases, ERP systems have neither the range of functionality, nor the familiarity of the legacy systems which they replace. Also, because a single system is now serving the entire organization, individuals at data input points often find themselves entering considerably more data than they did previously with the more narrowly focused legacy system. As a result, the speed of the new system often suffers, causing disruptions to daily operations. These problems are typically experienced whenever any new system is implemented. The magnitude of the problem is the issue under the  big-bang approach where everyone in the company is affected. Once the initial adjustment period has passed and the new culture emerges, however, the ERP system becomes an effective operational and strategic tool that provides competitive advantage to the firm. Because of the disruptions associated with the big bang, the phased-in approach has emerged as a  popular alternative. It is particularly suited to diversified organizations with units that do not share common processes and data. In these types of companies, independent ERP systems can be installed in each business unit over time, to accommodate the adjustment periods needed for assimilation. Common processes and data (such as the general ledger function) can be integrated across the organization without disrupting operations throughout the firm. To be successful, all functional areas of the organization need to be involved in determining the culture of the firm and in defining the new system’s requirements. The firm’s willingness and

ability to undertake a change of the magnitude of an ERP implementation is an important consideration. If the corporate culture is such that change is not tolerated or desired, then an ERP implementation will not be successful. The technological culture must also be assessed. Organizations that lack technical support staff for the new system, or have a user base that is unfamiliar with computer technology, face a steeper learning curve and a potentially greater barrier to acceptance of the system by its employees. All things considered, a phased-in approach is more likely to be successful with this organization culture. 3. OLTP versus OLAP Servers For each of the following processes, state whether OLTP or OLAP is appropriate and why. a. An order entry system that retrieves customer information, invoice information, and inventory information for local sales.  b. An order entry system that retrieves customer information, invoice information, inventory information, and several years of sales information about both the customer and the inventory items. c. An order entry system that retrieves customer information, invoice information, inventory information, and information to compare the current sale to sales across several geographic regions. d. An order entry system that retrieves customer information, invoice information, inventory information, and accounts receivable information for sales within one marketing region. e. An insurance company requires a system that will allow it to determine total claims by region, determine whether a relationship exists between claims and meteorological phenomenon, and why one region seems to be more profitable than another. f. A manufacturing company has only one factory, but that factory employs several thousand people and has nearly $1 billion in revenue each year. The company has seen no reason to make comparisons about its operations from year to year or from process to process. Its information needs focus primarily on operations, but it has maintained backup of prior -year operations activities. Examination of prior-year financial reports have shown that the company, while profitable, is not growing and return on investment is decreasing. The owners are not satisfied with this situation. Response: a.

On-line transaction (OLTP) processing is appropriate because the amount of data accessed is limited, few business elements are analyzed, the data is not aggregated, and the time frame is finite.  b. On-line analytical processing (OLAP) is appropriate because analysis of data over several years is required. c. OLAP because that data being analyzed spans several regions. d. OLAP. While this system will analyze simple transactions, the volume of activity and the analytical procedures may require greater resources than OLTP can provide. e.. OLAP. OLAP supports consolidation of data, drill-down analysis, and slicing and dicing. f. OLAP. While OLTP has been sufficient to provide the information requirements to date, the company is not meeting its goals, and an understanding of the business processes, related phenomena, and comparisons among processes is indicated. Analyses in these areas may help the company determine better business practices. OLAP will provide the company with the analytic tools that may help management find better ways to operate.

4. Selecting a Consultant You are the chief information officer for a midsized organization that has decided to implement an ERP system. The CEO has met with a consulting ERP firm based on a recommendation from a  personal friend at his club. At the interview, the president of the consulting firm introduced the chief consultant, who was charming, personable, and seemed very knowledgeable. The CEO’s first instinct was to sign a contract with the consultant, but he decided to hold off until he had received your input. Required:

Write a memo to the CEO presenting the issues and the risks associated with consultants. Also, outline a set of procedures that could be used as a guide in selecting a consultant. Response: Consulting firms, particularly the big four with large ERP practices, are desperately short of human resources at times. We saw this in the mid-to-late 1990s when thousands of clients were rushing to implement ERP systems before the new millennium, and thus avoid Y2K problems. As demand for ERP implementations grew beyond the supply of qualified consultants, more and more stories of botched projects materialized. A common complaint is that consulting firms promise experienced professionals but deliver incompetent trainees. They have been accused of employing a bait-and-switch maneuver to get contracts. At the initial engagement interview, the consulting firm introduces their top consultants who are sophisticated, talented, and persuasive. The client agrees to the deal, incorrectly assuming that these individuals, or others with similar qualifications, will actually implement the system. The problem has been equated to the airline industry’s common practice of overbooking flights. Consulting firms, not wanting to turn away business, are perhaps guilty of overbooking their consulting staff. However, the consequences are far graver than the inconvenience of missing a flight. Currently a number of lawsuits have been filed against the consultants of failed ERP  projects. We can avoid these pitfalls by selecting the right consultant. Therefore, before turning the problem over to just any outside consultant, we need to do the following: Interview the staff proposed for the project and draft a detailed contract specifying which members of the consulting team will be assigned to which tasks. Obtain an agreement in writing as to how staff changes will be handled. Conduct reference checks of the proposed staff members. Align the consultants’ interests with those of the organization by negotiating a pay -for performance scheme, based on achieving certain milestones in the project. For example, the actual amount paid to the consultant may be between 85 to 115 percent of the contracted fee,  based on whether a successful project implementation comes in under, or over, schedule. Set a firm termination date for the consultant. There is a lot of evidence that consulting arrangements can become interminable, resulting in dependency and an endless stream of fees. 5. Auditing ERP Databases You are an independent auditor attending an engagement interview with the client. The client’s organization has recently implemented a data warehouse. Management is concerned that the audit tests that you perform will disrupt operations. Management suggests that instead of r unning tests against the live operational database, you draw the data for your analytical reviews and substantive tests of details from the data warehouse. Management points out that operational data are copied weekly into the warehouse and everything you need will be contained there. This will enable you to perform your tests without disrupting routine operations. You agree to give this some thought and get back to the client with your answer.

Required:

Draft a memo to the client outlining your response to their proposal. Mention any concerns you might have. Response: While organization’s data warehouse is an excellent resource for performing analytical reviews, I will need to gain an understanding of the procedures used to populate the warehouse. I a m concerned that your data cleansing procedures may be sanitizing the warehouse, which could create a false picture of your financial position. To be useful as an OLAP tool, the data warehouse needs to be free of contamination. Erroneous data (such as negative inventory values, missing fields, and other clerical errors) that are a natural part of operational databases are identified and repaired (or rejected) in the cleansing process prior to their entering the data warehouse. Since the data warehouse exists in an artificially pristine state, it may not be a suitable substitute for the operational database when assessing tests of process controls and performing substantive tests. I must, therefore, perform tests of your cleansing procedures before I can place reliance on the data warehouse as a resource for substantive testing. 6. Big Bang versus Phased-In Approach The Nevada Department of Motor Vehicles (DVM) is the agency responsible for licensing both drivers and vehicles in the state of Nevada. Until recently, legacy systems were used for both licensing needs. The legacy system for driver’s licenses maintained the following information about each licensed driver: name, age, address, violation, license classification, organ donation, and restrictions. The vehicle licensing system maintained information about each vehicle, including cost, taxes, VIN, weight, insurance, and ownership. In the summer of 1999, over a 3day weekend, information from the two legacy systems was transferred to a new ERP. The ERP and all new hardware were installed in every DMV across the state, and when employees returned from their long weekend, an entirely new system was in place. The DMV employees were not well trained on the new system, and the system itself  presented a few bugs. As a result of these obstacles, customers at the DMV faced excessively long lines and extended waiting times, and several of the employees simply quit their jobs  because of frustrations with the system and difficulty dealing with irate customers. Knowing that the waiting times were so long, many drivers simply refused to renew licenses or obtain new licenses. Assume that the ERP the DMV management selected was correctly configured and was capable of meeting all requirements of the DMV; consider data warehousing implications,  business culture implications, and disruption to operations; and discuss the advantages and disadvantages associated with the decision to implement the new system using the big bang approach versus the phased-in approach. Response: Either approach would require transformation of data from the legacy systems to a common data warehouse. A phased-in approach has an advantage of uncovering discrepancies among data at a single site. Once the discrepancies are found, the resulting bugs can be corrected, so relatively error-free systems can be placed in other sites. Presuming the goals of a DMV are to correctly tax and license drivers and vehicles, and to do so expediently, the fact that customers were waiting too long and that many chose not to comply with the law requiring they become properly licensed, organizational goals were not met with the big bang approach. Again, a phased-in approach might have uncovered these problems and found corrections on a local rather than state-wide basis.

The employees seemed to lack adequate training and seemed not to support the new system. Phasing-in a new system does not require as many technicians, as the instruction process can take place over time and across geography. With an increased number of required technicians, there is a decreased the chance that all technicians will be familiar with the system and the requirements. Therefore, a phased-in approach might have supplied the DMV with better instruction. The big bang approach also seemed to catch the employees off guard. It is possible that if a phased-in approach had been used, the process might have gone more smoothly, and word-of-mouth about the system (and its probable improvement over the legacy systems) might have lessened the resistance to change on the part of employees anticipating their own phasing-in. If customers were satisfied with the service they received, and if employees were adequately trained and accepting of the new system, (probable consequences of a phase-in), the DMV could have avoided loss of revenue resulting from customer reluctance to register vehicles and obtain licenses. 7. ERP Failure When an ERP implementation fails, who is to blame? Is it the software manufacturer, the client firm, or the implementation strategy? Response: Who is to blame for ERP failure? By Barry Calogero, “Who is to blame for ERP failure?”, Serverworld Magazine, http://www.serverworldmagazine.com/sunserver/2000/06/erp_fail.shtml Enterprise Resource Planning (ERP) tools, or enterprise-wide client/server applications for managing accounting, manufacturing, distribution and human resources have become the de facto backbone of business intelligence. As more and more organizations across the globe have chosen to build their corporate knowledge-base around this class of complex infrastructure tools, the implementation challenges have become evident. These challenges have been well publicized in the leading business periodicals, underscoring organizational frustrations and even total meltdowns. Whirlpool and Gore -Tex recently blasted SAP and PeopleSoft in separate front page articles in “The Wall Street Journal” articles, highlighting serious business consequences and blaming these leading ERP vendors and implementing consultants for botched deployments. What’s more, the nation’s leading chocolate manufacturer, Hershey Food Corp., recently noted that it has lost its taste for SAP, holding the vendor accountable for order processing problems that hampered its ability to ship candy a nd other products to retailers around the peak Halloween season. In reality, however, the software giants are not to blame for these high-profile failures. The customers are not to blame either. The real culprit is the process. Revising implementation management strategies can put ERP solutions back on a successful path. At the root of many ERP problems lies one overlooked but critical step: new business processes must be established, thought through, and implemented before software tools are selected,  purchased, and rolled out. As showcased in the recent media articles, business evolution to ERP is about more than software tools. Herein lies the greatest challenge for end-user organizations and consultants working to implement solutions. To an even greater degree, the success of an ERP implementation is gauged  by its ability to align IT and business management objectives, supply demanding program management skills and provide a refined process for success. To add to the complexity, the software world today is undergoing a significant transformation, with many vendors adapting the popular Web-enabled Application Service Provider (ASP) model. ASPs lease software to organizations via the Web. Although some will try to apply this model to ERP implementations, it may well serve to add additional complexity and remove much of the critical business process planning that can make or break the

implementation. In addition, it will likely encourage “square -pegs-in-round-holes” ERP implementations, in which organizations spend significant dollars to buy a technology — and are then forced to squeeze their business processes to fit the mold of the purchased tec hnology. There may be opportunities to marry ERP with the Web through front-end technologies, giving users access to the system through browser-based alternatives to the traditional client-server paradigm. Whatever model they choose to roll out, an organiz ation’s success will depend on redesigning the  process and customizing the technology to fit that process — rather than the other way around. A roadmap for success There are three basic building blocks to a successful ERP implementation: define the requirements; develop a plan; and implement. The marriage of these three components, coupled with technology integration and user training comprises the total effort. If an or ganization does not make conscious decisions regarding what to architect and what benefits must be received, the organization cannot hope to realize the maximum value creation from implementation. The first step, requirements definition, is often given the most superfluous attention. There are a number of different types of requirements, each of which should be addressed and discussed with key stakeholders. Technical requirements will define expectations in terms of  processing time, reliability, maintainability, and technical support. Functional requirements should be derived from the overall business process and gaps in ERP software. Functionality that must be included based on the business requirements should be identified and catalogued. Finally,  programmatic requirements take into account all of the implementation’s end goals and the team’s actions from a value perspective. The development and implementation plans should grow from these requirements and form a lifecycle implementation plan for the technology. Adopting a structured approach to managing this lifecycle implementation plan will help the team understand the decisions that are  being made and, importantly, reduce the risk of failure. Common barriers to success There are three process barriers that are the real culprits for ERP failure. These barriers cause an elongated development cycle with poorly defined requirements and, as a result, poorly defined measures of success. The implementation team often is tasked with chasing a series of floating requirements, no optimizing process, and a false belief that technology alone will provide a silver bullet. These teams are, without fail, disappointed with the results. Specifically, the three most common mistakes of ERP implementations are the following: 1. Focusing on technology. The technology “silver bullet” approach is one that is sometimes sold by vendors. However, there is no evidence anywhere in the history of IT that software alone will solve a business problem. 2. Ignoring the importance of requirements definition. Organizations too often ignore the need to define an optimal process and then use the technology as an enabler for the process. In too many instances, organizations either try to adopt a process that is inherent in the ERP solution, even if it does not fit their business requirements, or they try to shoehorn their legacy  processes into a software package that is not designed to support their processes. In both cases, they sub-optimize the capabilities in t he technology and don’t take advantage of the opportunity to streamline their business process — the entire point of technology implementations. 3. Jumping from the requirements definition to the development phase. Pressed to deliver systems against pre-d efined timelines that don’t take into account all of the necessary implementation steps, organizations often rush the process, neglecting to build a solid implementation plan and neglecting to establish solid agreement across the organization as to what it will take to develop and implement the solution prior to implementing the technology. ERP program remediation is required when an organization has a significant investment in an ERP implementation that has not delivered the anticipated ROI. In some cases, these

 programs are abandoned entirely, costing organizations much more than dollars. Ancillary effects include the erosion of corporate confidence in the IT function, as well as erosion in IT staff morale. An independent third party, skilled in program management, c an preempt these negative consequences by providing a clear and honest evaluation of the current situation. This third party, however, cannot be a software vendor or a consulting implementer, and must have no stake in the  process other than delivering business value. Looking at the current cost and schedule overruns associated with ERP implementations, as well as the number of implementations that are abandoned mid-stream, it is obvious that the  business world is missing an enormous opportunity to harness technology as the business evolves and a golden opportunity for IT to deliver business value. Failure is not a given. A November 11 “Computerworld” article recounts the question that haunted Lockheed Martin Corp.’s aeronautics group, involv ed in an ERP project similar to that of Hershey. Anxious about its future, Lockheed Martin recently contacted SAP to investigate whether or not they needed to brace themselves for the sticky issues that afflicted Hershey. The Response: a resounding no. Their success was attributed to the way that they were planning and managing the  project, rather than to the software itself. This view was “seconded by several other R/3 users...in the aftermath of Hershey’s problems and similar snafus at Whirlpool Corp.,” w rote Craig Stedman in Computerworld. At Lockheed, business users from its three aircraft manufacturing companies have been working since 1998 to design common ways to enter orders and process other transactions — first defining processes, then working with SAP to use R/3 to implement its ERP solution. Similarly, Elf Autochem North America Inc., a chemical supplier, assigned a team of 24 workers to work for four months on business process redesign before even selecting R/3. There is a clear and pressing requirement for improved program management for these implementations. The fact that such planning contributes significantly to corporate competitiveness cannot be ignored and presents an enormous opportunity for those working to architect business change. Barry Calogero is executive vice president for Robbins-Gioia, Inc. He has had extensive experience in program control, financial management and cost management. 8. ERP Market Growth Because many large corporations implemented ERP systems prior to 2000, what direction will growth of the ERP market take? Required:  Research this issue and write a brief paper outlining the key issues.

Response: By Jon Surmacz June 5, 2002 The overall enterprise resource management (ERP) market grew 4 percent in 2001, even as traditional ERP investments (financials, human resources, production management) dropped 3  percent, according to a recent report by Boston-based AMR Research. AMR predicts that ERP vendors will soon derive most of their revenues from adding customer relationship management (CRM), supply chain management (SCM) and product lifecycle management (PLM) capabilities. These extensions produced $4 billion of the $20 billion of total vendor revenue in 2001, according to the report. By 2006, they will make up half of vendor revenues. “Where we see the growth opportunity is in the strategic extensions, big things like CRM and supply chain capabilities,” says Colleen Nevis, vice president of research, enterprise applications, at AMR. “The growth is not going to be based on core ERP.” Nevis says companies that made ERP investments during the boom of the mid-90s are now interested in adding small modules and tying their front-office systems to their back-office systems. Although AMR estimates that the

total ERP market will grow from $19.8 billion to $31.4 billion in 2006 at a compound annual growth rate of 10 percent, most of this will not be the result of core ERP software sales. Most companies have not budgeted for such upgrades, nor will they f or a long time. Nevis says upgrade cycles that formerly ran 5 to 7 years are now growing to 10 to 15 years. “People who bought ERP systems in the ERP goldrush of the mid- 90s aren’t going to be replacing those until at least 2006,” Niven says; “more likely 2010.” Companies that didn’t invest during the boom— namely government organizations and service industries —may be ready to do so now. “Industries and trends where people didn’t invest are where the opportunities are now,” Niven says. “Service industries made ERP investments in the late 80s and early 90s. They didn’t participate in the  boom of the mid-90s.” AMR predicts that core ERP will make gains in the mid -markets, however. Most activity to date has come from the high mid-market segment ($250 million to $1  billion in revenue), says Niven, but the lower segment ($10 million to $50 million in revenue) is now showing significant growth. Overall, the mid-market ERP segment will show 10 percent to 15 percent growth over the next four years. “In 1999, we all thought that mid -market ERP was an untapped market,” Niven says. “But at the same time there were hundreds of vendors in the market. Since then, that market has consolidated quite a bit. It’s become much more mature as far as vendors.” SOURCE: CXO Media We welcome your comments and suggestions. Please send all inquiries to Jon Surmacz. 9. ERP Consultants Do an Internet search of complaints about ERP consultants. Write a report about the most common complaints and cite examples. Response: Beware ERP Consultants Since 1998, K2 Enterprises has documented dozens, if not hundreds, of complaints from the attendees of our accounting software and enterprise software courses concerning the practices of enterprise consultants. We do not need to name names, we all know who they are. Over time we were able to determine that the complaints that we receive generally fall into one of the five categories. List below are the complaints we hear most often: 1. When you pick a consultant, you’ve already picked your product. Here is the way this scenario usually plays out. You call an enterprise class-consulting firm — one that works with all the Tier 1 products such as J. D. Edwards, Oracle Financials, SAP, etc. You fully expect this organization to come out and evaluate your needs and recommend the  product that best meets your needs. With your permission, the consulting company sends out a team of consultants to the rescue. Here’s the kicker— they may send out the J. D. Edwards consulting team, the SAP consulting team or the Oracle Financials consulting team. It depends largely on the industry you are in and on the availability of the various consultants within the organization. Based on the feedback we’ve been privy to, it appears that ten times out of ten, the consultants will recommend the product that they consult on. For example, the J. D. Edwards will always recommend J. D. Edwards, the SAP consultants from the same consulting firm will always recommend SAP, and the Oracle Financial Consultants from the same consulting firm will always recommend an Oracle Financials solution. To make matters worse, the consultants will not recommend the product right away —  they will first undergo a 6 month to 18 month evaluation of your needs in which they assemble committees, ask questions, and document various processes, etc. — all the while charging you at a  billing rate of approximately $395 per hour. The recommendation you receive is not delivered to

you until $750,000 to $3,000,000 in fees have been churned in WIP. And then they recommend the same solution that everybody knew — wink, wink   — that they were going to deliver all along. As an example, one of our instructors related this particular information in a course and the CFO of a Fortune 500 company stood up and confirmed this action with his own rendition as follows: “We currently use J. D. Edwards and we wanted to purchase the J. D. Edwards Project Costing Module and we just wanted to see it in action before we made the final decision. E called a world class consulting firm and they have taken the last 18 months and charged us $3,000,000 so far, and we still have not seen the first feature of the J.D. Edwards Project Costing module. So far they established enormous committees of up to 150 people with lots of their folks on those committees. What you have just described is exactly what has happened to us.” Obviously this CFO was rather furious with this revelation. He seemed to be mostly upset that he let it go as far as it had. Of course it does not always happen like this. Of course these consulting firms provide value —  sometimes a little value, sometimes immense value. Of course, there are probably dozens of satisfied customers for every unhappy customer. Let’s not blow anything out of proportion here. Still, there seems to be a definite pattern here that you will want to watch out for in the future —  don’t let this happen to you. 2. The information is simply not available to allow you to properly evaluate the enterprise class  products. Based on the previous complaint, you would probably save yourself a great deal of time and money and arrive at a better decision by performing the needs analysis yourself. Unfortunately the “system” does not always work that way. Often the vendors won’t provide you with the information you need to properly evaluate the product and the high-priced consultants won’t provide this information either without the “big bucks”. Amazingly, some of the enterprise vendors have a built in incentive not to share this information with you for example — in J. D. Edwards case, we understand that the vendor pockets 15% of the consulting fees collected by all of the “approved” J. D. Edwards consultants. You can tell by evaluating the J. D. Edwards web site in particular that the details about the product are kept secret. On this web site you will find no screen shots, no detailed feature lists, no Citrix access to the product, no pricing information, and very little helpful data. The J. D. Edwards web site was obviously written by marketing people who are more interested in “s elling the dream” as opposed to technical writings that “sell the reality”. Your best option may be to work with the enterprise vendors directly to obtain the data a nd product demonstrations you need. As proof, consider the screen shot below captured on May 29, 2001: This is the entire description of the J. D. Edwards Financial Reporting capabilities according to the J. D. Edwards web site: Surely this powerful product offers more features than the scant description above reveals. In this day and age, what explanation would there be for not providing in-depth information about their  products? You may think that they prefer to keep details of their product a secret so that they don’t fall into hands of their competitors. This is a rather silly notion as their  competitors already have access to J. D. Edwards system, as well as one another’s systems. We’ve seen this problem first hand. In early 2000, K2 Enterprise instructors invited J. D. Edwards personnel to accompany us on a consulting engagement in which a $200 million customer was considering the purchase of J. D. Edwards One World. The 8-hour meeting was held in Denver just a few miles from J.D. Edwards headquarters. Our main goal was to introduce our customer to the folks at J. D. Edwards and have them sit in and help answer questions about their product, or at least to ensure that the answers we gave were accurate. The engagement came and passed — five K2 instructors delivered an 8-hour presentation to 80 financial professionals within this organization. Amazingly the folks at J. D. Edwards never even bothered to respond to our repeated request. It appears that you can more advice from the sales clerk at the fish store

about choosing guppies than you can from a J. D. Edwards representative about choosing J. D. Edwards software. For a potential purchase that would most certainly exceed $1 million, you would expect to receive some assistance —wouldn’t you? It might be understandable that there was no one in the organization with the available time and budget to attend this meeting —   but this meeting took place only a few blocks for the J. D. Edwards world-wide headquarters — surly someone could have come down the road and shaken hands for a few minutes, or something? To be fair, some of the other web sites are very well done. For example, the SAP web site contains an enormous amount of information about its product, and they even provide web access to their live product through their web site. There is no doubt that SAP is not afraid to provide customers with the information they need to make informed decisions. 3. Enterprise consulting firms champion customization as a way to increase their fees. Many attendees have complained to us that consulting firms are often too eager to customize the enterprise product to the moon in back  — all in the name of tailoring the solution to your exact needs. However our feedback suggests that it is over zealous customization recommendations, which cause most enterprise installations to break the budget and drag on forever. For example, in 1998 Eastman Kodak reported that after 3 years and $500 million, they were scrapping their implementation of SAP software. A contact at SAP blamed the consultants for trying to customize all of the user screens — and sure enough, SAP walked in a was able to get the product up and running within 6 months and now Eastman Kodak is a key reference site for SAP. Our advice to you is to implement the product and use it for 6 months before you begin any customization work (other than obvious customization needs). After 6 months you will be in a much better position to identify what needs fixing and what doesn’t— thereby reducing your fees and shorting your implementation time frame dramatically. To be fair, we freely acknowledge that customization capabilities are one of the most important factors to consider when selecting an accounting software package. It would be hypocritical of us to recommend customization capabilities on one hand, and on the other hand criticize enterprise class consultants for embracing customization tools and recommending customizations. You can see the problem we have here. However, the caliber of complaints that we’ve heard seem to indicate that these enterprise class consultants are “customization happy”  just for the sake of churning WIP, not for the sake of solving a company’s needs. In the example above, SAP folks told us that their product worked fine right out of the box once they replaced the customized mangled mess that the enterprise consultants had installed. They pointed out that Kodak was happy with their out-of-the box solution months after the installation was completed, and that in their opinion, the vast majority of the previous customizations undertook by the enterprise consultants were unnecessary. 4. Enterprise consulting firms staff engagements with inexperienced college graduates. One of the most frequent complaints we hear is that the guys who are actually out doing most of the work are very in-experienced. Sure, they are typically sharp, well-dressed, tall, and impressively bright people —   but they seem to have very little practical experience with the  products they are implementing. In many cases the supervisors were experienced enough —   but they seemed content to allow the newbie consultants to remain on the job for weeks and months, allowing them to train themselves at the expense of the customer. The problem is easy to understand — once a person is experienced with one of these high-powered, tier 1 products, they are very marketable and they fly the coup at the first opportunity to double or triple their salaries. Our advice is that you should ask your consulting firm to specifically name the personnel that will be assigned to your engagement and set standards for minimum work experience for each of the assigned staff. If newbies are to be assigned to your engagement, then perhaps you should suggest that their billing rates should be dramatically reduced.

Hey, we all got our start somewhere and this problem is not much different than the staff accountant who prepar es their first tax return or participates in their first audit. Let’s give the newbies and break here. However, if you notice that a staff assigned to you job seems to lack the  proper experience, bring it up with the consulting organization, inquire about specific product experience, and if necessary, negotiate a lower billing rate that would be fair to both your company and the enterprise consultant. 5. Enterprise class consultants sometimes overprice the software. We have heard many attendees complain that the enterprise consultants who sold them the software dramatically overpriced the product. For example we know that SAP software now sells for $4,500 per user   — which includes all of the modules (of course you only implement the ones you need). However one attendee told us that they were charged $30,000 per user for the software — an amount, which did not include implementation or training. Our advice —   buyer  beware. Important Caveats: OK, we’ve thoroughly trashed the enterprise consultants. Our apologies  to anybody who is offended. We are aware that we have concentrated only on the ugliness, and it is probably warranted that we take time to tell you about some of thousands of happy companies out there who swear by their enterprise class consultants rather than swear at them. Hey, you will find these types of testimonials sprinkled all over their web sites and we are sure that these testimonials are accurate. For this reason we won’t repeat any of that flowery verbiage here. We’ve presented a one-sided story here and admit that. We all understand that this section of materials was designed to warn you of possible problems that customers will want to avoid.  Now let’s take this conversation another way. In many cases the actual consultants we have dealt with have been both knowledgeable and a pleasure to work with. It appears that it is the bureaucratic organization, as opposed to the individual consultants, cause the most problems. Many enterprise consultants agree with the observations we have made above —   but discount these problems as a necessary part of a large consulting organization. In particular here are two very strong arguments for retaining the services of an enterprise class consulting firm that you should keep in mind: Caveat # 1. Please be aware that the evaluation process does involve a great deal of sophisticated understanding of your current needs. You may or may not possess that talent or have that talent on board in your organization. If you do not possess this talent, then hiring an enterprise class consultant may be absolutely necessary. Of course then you are back to the  problem of the possibility that they will only recommend to you the product that they know  best — regardless of what the evaluation reveals. Caveat # 2. Perhaps the most important issue you need to consider here is that implementation of an enterprise class product is often far more involved than simple installation and training. In many cases, the act of migrating to a new enterprise system is an opportunity to re-define your business processes, your lines of communication, your internal procedures, and your organizational structure. Accordingly, an enterprise class consulting firm has better skills to help you identify and implement such measures. If the results eventually allow your organization to operate in a far more streamlined environment, then the consulting firm will probably be worth the big bucks you pay. However if you are looking for a simple selection and implementation and training engagement — you will probably pay way more than you need to. Caveat # 3. Large organizations have a tremendous task on their hands c oordinating and orchestrating a sophisticated implementation across multiple countries and oceans. The man power needs alone make it almost a necessity to employee the services of a large enterprise consulting firm. Hey, K2 Enterprise instructors could maybe install SAP in a Fortune 500 organizations, it would only take us about thirty years or so.

You are visitor number to this page since January 10, 2000 This page was last updated on Saturday, July 13, 2002 This web site is published and maintained by K2 Enterprises — a company that delivers technology based seminars. Reminder  — You should confirm the information contained in this web site with another source before relying on that data. Products change, prices change, everyday. Read our Disclosure Statement Copyright © 1996 — 2002 Accounting Software World, K2 Enterprises. All rights reserved. No part of this information can be re-printed without express written consent of the editor. 10. ERP Bolt-On Software Go to ten Web sites of companies that supply bolt-on software. Write a report containing URLs that briefly describe the software features and its compatibility with specific ERP systems. Response: Responses may vary.