Benefit/Threat Analysis for selection of ERP in Cloud for SMEs

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Research Article ISSN 2229 – 3795

ASIAN JOURNAL OF MANAGEMENT RESEARCH 365 Volume 3 Issue 2, 2013

PEST- Benefit/Threat Analysis for selection of ERP in Cloud for SMEs Tripti Mahara

International School of Business and Media, Nande, Pune [email protected]

ABSTRACT

Enterprise Resource Planning (ERP) packages are used to integrate business processes of an organization through shared information flow. Majority of the large organizations within India have either implemented or are implementing ERP software. With the increasing market competition and globalization, small and medium enterprise (sme) are keen to deploy them, but the high cost involved in implementation of these packages is a major hurdle to go ahead with this decision. The solution is to go for cost effective ERP solution. ERP on Cloud is one of the viable options, as there is no initial hardware or software infrastructure investment needed making it a cost effective solution. A framework called PEST-Benefit/Threat is presented in this paper to analyze the factors that should be addressed by sme to select ERP in cloud environment. This framework categorizes a factor in the PEST framework as political, economical, social or technological. A factor can either be benefit or a threat to sme. If a factor is a benefit, it will create a positive influence on the sme to go for this solution. But if a factor is a threat, a sme can take appropriate measure to mitigate the threat. Thus this framework will assist sme to assess the ERP on cloud as a viable option for their organization.

Keywords: ERP, SME, Cloud Computing, PEST, Benefit, Threat.

1. Introduction

1. Introduction

ERP system is a result of efforts in the field of computer science and business management to produce a single IT platform, incorporating all the essential business logic. It is a comprehensive packaged software solution that integrates organizational processes through shared information and data flows (Rosemann, 2001). An ERP system optimizes a company’s day-to-day business, whereby optimization is a process of reducing the space of potential problems and enhancement of business by utilizing the integration between business units. Current industry demand to implement ERP system is fast growing (Ho et al., 2004) despite the fact that ERP projects are the largest information technology projects in terms of project investment worldwide (Gattiker, 2005). Mostly all large organization in India has invested huge in ERP implementation. For instance, ONGC, invested around 95 crore Indian rupees for SAP R/3 installation and around 30 months of time. Similarly, Goodlass Nerolac Paints implemented SAP R/3 in around 18 months with approximate investment of 18 crore rupees. Other organizations that have successfully implemented ERP packages are BPCL, Apollo tyres, Siemens, Samsung, Cadbury India, Times of India, Sony India, Kirloskar Oil Engines, GE India, Bharati Cellular, Dr. Reddys Lab, Hyundai Motors and the list is exhaustive.

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With the saturation in ERP market for large organizations (Deep, 2008), and with the fact that around 95% of industrial units in India are smes (Sharma, 2010), the focus of leading ERP vendors like SAP, Oracle and Ramco has shifted to capture the sme market in India (Saini, 2012). The ERP market for SME is projected to be Rs. 728 crore ($160 million), 47% of the overall market (Munjal, 2006) of Rs. 1,550 crore ($341 million) as per the study conducted by IDC. Even the smes have started to show deep interest in ERP implementation due to following reasons (Sharma 2010, Kale 2010).

1. Providing competitive advantage over the competitors by standardizing processes. 2. Tighter integration of data across organizations that helps in taking timely decisions,

reducing the turnaround time. 3. Liberalization and opening of Indian markets to foreign investments and MNCs, smes

in India are forced to adopt standardized business practices and strategies.

Even though smes want to aggressively adopt ERP to efficiently manage their business, high software and license fees, and implementation complexity has created some resistance for traditional ERP packages (Davenport, 1996; Haddara, 2011). To add to this, lack of IT infrastructure and people to support implementation along with reduced IT spending by organizations due to slowing down of economies (Hofmann, 2008) has further strengthened their view of not opting for traditional ERP packages. With all these limitations, they still need to find a solution to implement ERP to keep them sustained in the global market and to provide them with a competitive advantage. The alternate solution under consideration for smes, should be cost effective as compared to the traditional ERP solutions. Cloud based ERP is one such technology that allows organizations, users or individuals to access and use ERP software installed on vendors site through internet access on demand (Saini, 2012). The main reasons to consider this option are the low entry cost, as no initial investment is required to set up IT infrastructure and pay-per-use model as no license fees needs to be payed upfront. This paper explores the option of selecting ERP in the Cloud as compared to traditional ERP package. The factors that need to be considered while selecting ERP in cloud are discussed in this paper. A PEST (Political, Economic, Social and Technological)- Benefit/Risk framework is presented to evaluate these factors as benefits or risks to an organization while selecting ERP. The outline of the paper is as follows. Section 2 gives an overview of cloud computing and ERP, followed by section 3 that presents PEST- Benefit/Threat framework to analyze various factors that are important for considering ERP solution in cloud followed by conclusion in section 4.

2. Cloud Computing and ERP – An overview

The term Cloud Computing (CC) was coined in 2006 and it is a technological platform that allows users, organizations or individuals, to access and use computer resources via the internet on demand. AJAX, Multitenancy and Virtualization are the three technologies that lead to emergence and development of cloud computing (Schubert, 2011). AJAX enables the client to communicate with the server dynamically; multitenancy describes shared use of single software by multiple clients through their private and individual data space whereas virtualization allows for sharing of physical resources. Three services namely Saas (Software as a Service), Iaas (Infrastructure as a Service) and Paas (Platform as a Service) are provided




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by different clouds for different service models as depicted in figure 1 (Schubert, 2011). In the Saas model, the cloud provides software to the users. Many customers use the same software in their own private data space. Users are not required to install any application on their PCs to access the software services provided by the cloud. They can use the software utility but have no rights to control or manage the infrastructure. The minimum requirement to access cloud services are internet connection with a PC. For IaaS model the cloud provides capability to the users to use various computing resources, instead of buying them. The users have right to control the storage, operating system and deployed applications. The services are billed for their usage. In case of PaaS, cloud provides platform to build user applications and software. Deployed application can be accessed from anywhere and the space for these applications can be increased and decreased based on the usage. The users have rights to control their deployed application and several application hosting environment configurations. Private, Community, Public and Hybrid clouds are the deployment models that are supported in the cloud computing environment. In case of Private cloud, the cloud infrastructure is operated solely for one organization whereas infrastructure is shared by multiple customers/ organizations in public cloud. For Community cloud, infrastructure is shared by several organizations that has common concerns and are managed either by one of the participating organization or a cloud vendor. Hybrid cloud is a composition of two or more clouds (public, private) that remain unique entities, but are bound together by standardized or proprietary technology. Each deployment model instance has one of two types: internal or external. Internal clouds reside within an organization infrastructure and an external cloud resides outside the organization and is provided by a cloud provider. More than 20 definitions to describe and focus on certain aspects of cloud technology (Geelan, 2011) exists, but the following definition best suits for the area of ERP systems that is the major focus of the study here. “Cloud Computing is an information technology service model where computing services (software) are delivered on demand to customers over a network in a self-service fashion, independent of device and location” (Marston, 2011).

Figure 1: Cloud Computing Model (Source- Schubert, 2011)

Software as a

service -SaaS

Platform as a Service - PaaS

Infrastructure as a Service - IaaS

Cloud can be. 1. Private Cloud 2. Public Cloud 3. Community Cloud 4. Hybrid Cloud




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SaaS service model is best suited for selection of ERP software on cloud platform. In this model the ERP software is be deployed on the vendor’s server. This will not involve upfront IT hardware and software investment. No hefty licence fees needs to be paid as the main advantage of SaaS is pay-per-use. The Paas model is not applicable as the organization is not involved in coding and testing of the ERP software. Regarding the Iaas model the only infrastructure required by sme to use this software would be the internet connection with good bandwidth and hence this model is also not evaluated for the study. In the next section, various factors that affect the selection of ERP software in cloud are compiled and a PEST analysis is done. PEST – (Political, Economic, Social, Technological) analysis of these factors will provide valuable information to analyze the selection of ERP for sme (Neves, 2011) from four important perspectives namely political, economical, social and technological in an organization. For example, if the PEST analysis highlights that politically, many people perceive lack of control while ERP selection, it needs to be addressed. Once the PEST analysis is done, the factors that fall in the one of the PEST category will be grouped as either benefit or threat to an organization for ERP selection in cloud. All threat factors need to be addressed by proper mitigation strategies. This will highlight how prepared the business is for the required change. Some mitigation strategies will be mentioned for the risk factors.

3. PEST- Benefit / Threat Analysis

In this section, PEST analysis( Neves, 2011) for factors that contribute to selection of ERP in Cloud by sme is given in table 1 (Makkar, 2012; Saini, 2012; Marston, 2011; Motalab, 2011; Hadidi, 2010, 2011; Hosseini, 2011; Sohag, 2011; Djohnson, 2010; Koehler, 2010; Hofmann, 2010; Clarke, 2010; Mozafari, 2012; Rassule, 2010). These factors of PEST analysis can either be a benefit or a threat to an organization that wants to go for ERP in Cloud. The table 2 presents the PEST analysis in two categories namely: Benefit- Threat. For the factors that are considered as threat for an organization, a possible mitigation approach has been mentioned.

Table 1: PEST Analysis for ERP selection in Cloud

PEST Views Factors/Evaluation Criteria

Political Resistance by leading ERP vendors. They try to influence the organizations decision to consider an ERP solution on Cloud.

Service Survival. It is the situation when the vendor might collapse or stop providing CC services.

Non Compliance Issues. It can be for unauthorized access of data by cloud providers.

Vendor Credentials and Market existence.

Economical Flexible Payment- Pay per use.

Low Entry Cost. There is no need to purchase software and its licenses.

Low Operational Cost. No IT infrastructure is needed other than internet connection with good speed is needed.

Low IT manpower requirement.

Low Implementation time.

Social Reaching the extended user community. This will provide




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opportunity to collaborate between various stakeholders.

Loss of key staff members. The people in an organization might not be clear about their position and roles when ERP selection and deployment is done and hence might decide to quit the organization.

Resistance to change by people. There is change in work methodology and structure and people might resist these changes.

Perceived lack of control. The people in an organization might feel that they have lost authority to manage the processes. Also there is a perception that they have no control over the various resources that are on cloud.

Technological Elasticity. It is the ability to scale IT resources both up and down as per the need.

Ubiquitous access. It is the ability to access the cloud services over a network.

Service quality. The service should be provided without interruption and loss of data.

Data Lock in. There should be policies that easily allow data to be retrieved and migrated to other vendor.

Customization. The ERP on Cloud provides certain level of customization

User friendliness. The software is user friendly.

Availability. Uninterrupted services should be available 24X7.

BackUp and Storage. It mainly deals with issues of how and where the organization data is stored.

Security. The data should be not be accessed by unauthorized persons on the network and within an organization. The public perception of lack of security is a major threat to adoption of ERP in cloud.

Interoperability. It is the issues that arise when services of one cloud are to be moved to another other cloud.

Performance. The performance keeps on fluctuating depending upon the network and server load.

Table 2: PEST-Benefit/Threat Analysis for ERP selection in Cloud

PEST Views Factors Category

Benefit Threat Threat Mitigation Approach

Political Resistance by leading ERP vendors.

Ignore and do not let them influence the ERP adoption process.

Service Survival Issues related to services to be clearly mentioned in SLA (Service Level




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Agreement).

Non Compliance Issues

To be mentioned in SLA.

Vendor Credentials and Market existence.

Market study to know about the vendor and the products.

Economical Flexible Payment- Pay per use

Low Entry Cost.

Low Operational Cost.

Low IT manpower requirement.

Low Implementation time.

Social Reaching the extended user community.

Loss of key staff members.

Change Management to be adopted within an organization. Get users involved, motivated and focused on the project. Define roles and responsibilities.

Resistance to change by people.

Perceived lack of control.

Clearly define roles and responsibilities for users. List resources needed and their usage before ERP adoption.

Technological Elasticity Ubiquitous access High internet speed connection to be taken by organization and study of network issues to be done.

Customization Service quality To be discussed and finalized with vendor and included in SLA.

User friendliness Data Lock in Policies to be framed for retrieving and migrating data to other vendors cloud.

Availability To be discussed and finalized with vendor and included in SLA.

Backup and Storage It can be improved by using redundant sites.




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Security The study of security policies, encryption and decryption algorithms supported by vendor to be done to know security measures provided by vendor.

Interoperability It is an ongoing issue and to be handled with a specific clause in SLA.

Performance Benchmarking tools can be used measure performance claims of the vendor. After Deploying ERP on cloud performance analysis tools can be used.

PEST-Benefit/Threat Analysis indicates that there are economical benefits involved when a sme decides to go for ERP software in cloud. The cost incurred to go for such a solution is much lower than implementing the traditional ERP solution for sme as there is no investment in IT infrastructure required. The cost related to IT personnel’s also reduces. There is a need to pay a hefty license fees to traditional ERP vendors whether or not the organization consistently uses the ERP software, but in cloud platform there is flexible payment depending upon the usage of the software service. It is termed as pay-per-use. As the number of users and processes on cloud scale the payment needs to be done. Thus there is a huge amount of cost saving, if an organization specially a sme goes for ERP solution in cloud. Social and Political are the two major threats that an organization faces for ERP selection. Social threats are mainly related to people’s perception within an organization and political threats are those that an organization faces from outside. Effective change management strategies are needed to overcome the social threats within a sme. For instance, resistance that an organization faces when deciding to move for ERP system can be handled by providing them training to make them realize the benefits of ERP, how to use the software. Incentives can also be a part of this so that the persons who are involved get rewarded. Some of the political as well as technological threats need to be addressed before the final selection of ERP on cloud and a possible mitigation solution to be given in the Service Level Agreement (SLA) with the vendor (Hadidi, 2011). Technologically the ERP on cloud will support high elasticity and medium customization. The technology threats with respect to security, availability of data, performance and other issues can be handled by specific mitigation approaches duly addressed in SLA. 4. Conclusion

The main focus of this study is to provide a theoretical framework called PEST/Benefit-Threat Analysis, to decide the factors for selection of ERP in Cloud by sme. The framework categorizes the factors as benefits or threat to a sme who is considering an option of ERP in Cloud on four organization perspectives namely political, economical, social and




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technological. The main benefit areas for an organization are economic and technology benefits. There are more of political and social threats, but they can be dealt with suitable mitigation approach. Further study includes collecting data from smes in India to find out the most relevant factors for selection of ERP in cloud.

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