The Impact of Enterprise Resource Planning Systems on Management

The Impact of Enterprise Resource Planning

Systems on Management

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Abstract: Information technology is significantly changing the operating practices of an increasing number of companies globally. These developments have important implications for the accounting profession and in particular accounting practices in the twenty-first century. This study examines the development of enterprise resource planning (ERP) systems as a means of illustrating how changes in information technology allows all systems in a company to be linked to manage operations holistically. The study investigates the change in accounting systems using a sample of Australian companies with emphasis on the adoption of ERP systems including the potential impact of ERP on capital budgeting processes. The results show that ERP systems are changing management accounting practices, although at this stage, the impact on capital budgeting techniques appears to be limited.

Key words: Management accounting, capital budgeting, enterprise resource planning systems, information technology

1. Introduction

During the past decade an increasing number of companies have been impacted by information technology in terms of computerized transaction processing and electronic telecommunications such as that done with the Internet, intranet, and extranet. For competitive reasons, companies have had to change from manual and then mainframe systems to what has been called enterprise resource planning (ERP) systems. An ERP system has a common database or data warehouse that links together all systems in all parts of a company including, for example, capital budgeting with financial, control, manufacturing, sales, fixed assets, inventory, human resources modules, etc. An ERP system, by linking all systems through a data warehouse, allows a company to manage its operations holistically.

A second impact of ERP systems has been a general shift to manage at the activity level rather than at the more abstract level of financial transactions. This means that management accounting, with its focus on activities, can be most effective when it is used with ERP systems to incorporate the activity level for costing and performance measurement. To be effective an ERP system will contain an extensive chart of accounts or codes for activities such as accurate recording and tracking of activities, revenues and costs. The coding incorporates stable entities of a business, such as divisions, plants, stores, and warehouses. At a detailed level there are codes for functions such as finance, production, sales, marketing, and materials management. There are also the traditional financial account codes such as assets, liabilities, revenues, and expenses, and the

central ERP feature of coding processes, activities, and sub-activities. There must be consistent coding among all parts of a company in order for them to relate to one another.

As the ERP system incorporates activities in terms of quantities of resources, including labor, a record of resource use is maintained. Therefore, performance can be measured in physical terms and compared to standards, which allows for the calculation of variances. This performance measurement at the activity level serves as a feedback system on efficiency and effectiveness. The confusion from abstract monetary measures is erased, and what is actually happening with the conversion of resources into goods and services can be seen. ERP systems have the potential to change management accounting systems with more detailed, more integrated, and faster produced information. 2. Literature Review

2.1 The integration of ERP systems into management accounting

Expectations for ERP systems to change management accounting were introduced by Kaplan and Cooper (1998, pp. 11-24), especially with the fourth of their four-stage model for cost and performance measurement systems. When a company had first stage systems, those systems were basically inadequate for all purposes, even for financial reporting. When they make improvements, the first stage companies tend to add financial systems to meet regulatory requirements. As a result, they evolve into second stage systems where financial reporting systems dominate; these companies are financial reporting driven. The companies with third stage systems have customized, managerially relevant cost management, financial reporting, and performance measurement systems, however, these systems are standalone. ERP systems only occur with the fourth stage systems where the ERP systems integrate cost management, financial reporting, and performance measurement (Kaplan and Cooper, 1998, p. 299).

2.2 ERP and its impact on the work of management accountants

In a field study of a single company, Burns and Baldvinsdottir (1999) observed that SAP centralized the accounting function and decentralized control to many people in the company who became “hybrid accountants”. The traditional core activity of management accountants, posting the books, was delegated to others in the company. They cite the director of finance saying: “They may post the odd correctional entry. In fact some analysts aren‟t allowed to post. They generally are analytical people rather than analytical accountants.” Management accountants have become analysts. 3. Research Method

3.1 Background to the research approach

This preliminary study will be guided by the literature, which contains substantial ambiguity about the impact of ERP systems on management accounting. Although the focus of this study relates to the process of management accounting, special attention is devoted to the impact of ERP systems on capital budgeting as a specific and important management accounting technique.

In committing to investments with returns that come later, capital budgeting has the inherent challenge of dealing with uncertain future events. In addition, the economic effects of capital projects are difficult to track to future revenues, expenses and costs

because the spreadsheets that have been used for analysis are not typically connected to the company‟s accounting and operating systems, past, present, or future. This has resulted in the sometime approval of the wrong projects, and more importantly the inability to ascertain what the implemented projects will accomplish in terms of revenues, costs, expenses, and resulting profits. According to Cook et al. (2000), these shortcomings in capital budgeting techniques can potentially be reduced or eliminated with the increasingly prevalent ERP systems.

3.2 Benefits of ERP for capital budgeting decisions

Potentially, capital budgeting can be done significantly differently with a functioning ERP system because of the integration of accounting and other systems. The common unified data warehouse is able to integrate, for example, financial transactions, activities in activity-based costing (ABC) and activity-based management (ABM) sub-systems, budgets and plans, and performance measures such as customer satisfaction or an entire balanced scorecard. Of course for these expectations to be realized, companies would need to have a full range of ERP modules, which may be presently uncommon. 3.3 Research Design

Most of the earlier research on the impact of ERP systems on management accounting have been field studies. Additionally, given the lack of conclusive findings in the literature about the impact of ERP this research will employ a survey of large corporations incorporating open-ended questions about changes in capital budgeting and other management accounting practices. However, it is proposed that this will be an exploratory study given that there is uncertainty as to whether there have been any significant changes to management accounting with greater use of ERP systems. 3.3.1 The sample

This exploratory study of the impact of ERP on management accounting was tested with Australian companies of sufficient size to have acquired ERP systems in the past 10 years. The sample consisted of 105 companies among the ASX-listed companies with sales of more than $400 million according to Data Analysis The companies represented classified industry groups including: automobiles and components; capital goods; chemicals; commercial services and supplies; construction materials; consumer durables and apparel; container and packaging; energy; food, beverage and tobacco; food and staples; hotels, restaurants and leisure; media; metals and mining; paper and forest products; retailing; software and services; telecommunication services; transportation; and utilities.

3.3.2 The Survey Instrument and its Administration

As there has been a lack of conclusive findings in the literature, it was decided that open-ended questions about the changes that are occurring with capital budgeting and other management accounting practices would be a feature of the survey sent to participating companies. This approach recognizes Scapens and Jazayeri‟s (2003, p. 226) concern that the changes occurring with management accounting may be caused by non-ERP factors. The survey asked various demographic questions about the role of the respondent within the organization, the type of industry represented by the firm and the

gender of the respondent. In terms of the questions specifically related to management accounting practices and capital budgeting, there were a range of yes/no questions as well as questions inviting respondents to describe practices and changes in practices over the past 10 years within organizations. A copy of the survey is provided in Appendix 1.

The survey was sent to the 90 CFOs in May 2005, with follow up requests being made in June and August. Respondents were given a choice of responding either by mail or through a web response. Telephones contacts were made to non respondents together with a second and third mailing of the survey. There was a great willingness among most telephone-contacted CFOs to respond, but they often admitted to pressing priorities. 4. Results

4.1 Demographics of Respondents

Of the 90 CFOs sampled, 35 responded giving an overall response rate of 38.9 percent. Table 1 shows the demographics of respondents. Two respondents self identified as female and 33 as male. The median size of the sampled companies was $1.1 billion (based on information from Data Analysis) and respondents were representative of a range of industry types with Industrial (17 per cent), Consumer Staples and Materials (both 20 per cent) being the most highly represented industry groups. 4.2 Impact of information technology on Capital Budgeting

The first five questions in the second section of the questionnaire related to the impact of information technology on capital budgeting techniques. Table 2 provides a summary of the responses to the summary questions, while the open-ended responses are summarized in each category of discussion below. 4.2.1 Changes in Capital Budgeting Techniques

In the first instance respondents were asked to indicate whether or not the firm‟s capital budgeting techniques had changed in the past 10 years. Twenty-nine (83 per cent) of respondents stated there had been changes to capital budgeting techniques, while six indicated that there had been no changes.

4.2.2 ERP and its impact on Capital Budgeting Techniques

Seventy-seven per cent (26) of respondents indicated that their companies had ERP systems such as SAP, Oracle or PeopleSoft. In addressing the possible impact of ERP systems on capital budgeting techniques, only nine respondents stated that this was the case. Respondents who stated that their ERP system affected capital budgeting, noted that ERP systems provide capital budgeting with better information. Recognizing that the ERP system provided better information, one respondent said,

The amount and quality of information available with which to make capital budgeting decisions has vastly increased. The system essentially is a database of information that can be mined. Higher levels of system integration feeding into the core accounting systems have also increased the sophistication of the process. 4.3 Changes to Management Accounting Systems

The second part of the questionnaire addressed the impact of information technology more generally on management accounting systems. For example, respondents were

asked to describe how their companies‟ management accounting systems changed in the past 10 years using five headings: budgeting, operating statements, forecasting operating performance, performance measurement and costing. 4.3.1 Budgeting

Thirty-one respondents reported changes to budgeting in the past 10 years. The change to budgeting identified by respondents in order of frequency was: more rigorous, aimed at maximizing shareholder value, more accurate, more automated, more comprehensive, more integrated among financial statements, for more periods of time, revised more frequently, more sophisticated, more structured, more disciplined, simultaneously “top-down” and “bottom-up,” more detailed, more transparent, easier to review, and more strategic. Many companies were replacing spreadsheets with integrated budget modeling software. The budgeting process was the same, but information technology made budgeting more functional. One respondent stated: 4.3.2 Operating statements

There were 29 responses; outlining changes to operating statements in the past 10 years. These changes included in declining frequency: more automated; more focus on KPIs; more refined; more transparency; more comprehensive; more focus on non-financial performance measures; more detailed; more focus on cash flows; more focus on marginal returns and ROC; more standardization; more segmented reporting; more analysis of costs; more in line with accounting standards and best practices; operating statements now available online in real-time or next day. Several respondents summed up the changes to operating statements as follows: 4.3.3 Forecasting

There were 31 responses related to changes to forecasting in the past 10 years. The responses in declining frequency were: more frequent forecasting or re-forecasting; rolling forecasts; more detailed; moved from spreadsheets to Hyperion or other management support system; better integration; longer forecasts; more accurate; more use of spreadsheets; and more consistency among organizational units. One respondent, with an ERP system, summarized the changes:

Forecasting was completed on Excel spreadsheets and consolidated. Now forecasting is made easier as the actual data can be copied and forecast out within the one database, producing standard reports and consolidated within a much shorter timeframe. The focus is more on accuracy and analysis 4.3.4 Performance measurement

Responses were received from 32 of the 35 respondents in relation to performance measurement with only three respondents reporting no changes during the past 10 years. The changes in declining order of prevalence were: more KPIs; more non-financial performance measures; more financial performance measures: more analysis focused on leading indicators; greater emphasis on balance sheet and cash flow; greater depth and more targeting; more timely or real time; performance based incentives; extensive analytical support from the data warehouse; greater use of information technology; online goals and objectives; and performance measures provided to board.

4.3.5 Costing.

There were only 27 of a possible 35 responses related to changes in costing over the past 10 years. The changes to costing in declining frequency were: improved modeling; ABC introduced; more rigor and accuracy; refinements; more frequently updated; more summarization; more detail; better tracking; improved with centralization of plant costing; greater use of information technology; internal charging introduced; and absorption base used more widely.

4.4 Impact of computerization on management accounting

All respondents indicated that computerization had an impact on the company‟s management accounting system in the past ten years. From question 3, it was learned that 27 of the companies had ERP systems, thus eight companies must have used non-ERP computerization to respond positively to this question. A further open-ended question sought to gain feedback on the specific types of computerization that had changed the firm‟s management accounting and control system. This question provides a different perspective on understanding management accounting change. Respondents from 30 of the companies explained how computerization, which includes ERP systems, affected their management accounting. The most common response was similar to the following quote:

Another respondent basically said the same, but added that this was all done while work volumes increased and staff levels remained stable. Other descriptions of the changes included in order of declining frequency: more integrated; more computerized; more automated; streamlined and faster consolidations; faster production of information; greater transparency; more data integrity; real-time control; better understanding of fixed and variable costs; able to calculate profitability at lower organizational levels; more accuracy; year-end results can be more readily forecasted; increasing use of ABC and its derivatives; and more emphasis on value added activities. One respondent, at a company with an ERP system stated: 5. Conclusion

ERP systems and computerization are changing the practices of capital budgeting and management accounting. Based on this sample of Australian companies, the impact is important but, probably, preliminary. Computerization is affecting management accounting, but it is difficult to sort out the impact of each. ERP systems lead to highly standardized and highly computerized information. Without fundamentally changing them, ERP systems are allowing capital budgeting, budgeting, operating statements, forecasting, performance measurement, and costing to be more detailed, more accurate, and reported more quickly.

The results of this study suggest that there have been no major changes to management accounting in the Australian context in the last ten years. The predictions of Cook et al. (2000) were not able to be substantiated from the findings of this study. There was no mention in responses of cap capital budgeting being done at the activity level. Actually, the findings were without any discussion of activity level management accounting, other than a few mentions that ABC had been implemented. In addition, there

were no indications from the respondents that budgeting was being abandoned nor was there consideration being given to eliminate budgeting.

From this preliminary research a number of suggestions for future research and teaching have been inferred along three themes. The first is for a detailed examination of exactly how computerization and ERP systems can improve capital budgeting and management accounting. There is need for more understanding of ERP systems, and how they relate to the existing management accounting techniques and more importantly identification of the common functionalities. There is also a need to understand how ERP systems are implemented, the time required and the costs and benefits from the various modules and various management accounting techniques. The strategic importance of ERP needs to be established. Is it necessary or an alternative to other forms of computerization? The answer to this question requires detailed, longitudinal field work. The research to date on ERP has largely been done without detailed understanding of the system processes. In the past ERP systems were considered “black boxes” that would have some impact on management accounting. The initial step in further research would be to carefully examine the functionality of ERP systems, particularly, in regard to management accounting. This should be done with colleagues in the information technology department/school, ERP vendors, and vendors offering management support systems such as Hyperion. Then there is the requirement to track the computerization and ERP use at a group of companies longitudinally to understand how computerization, including ERP systems, impacts management accounting and creates competitive advantage. Public information would be available, but also there would be the need to contact persons from the CFO area as well as persons in the IT area of the sampled companies.

The second theme for future research is an advocacy role for researchers, which may be a problem. However, if we consider management accounting to be an applied science like medicine, then like medical researchers we need to advocate. James McKinsey (1922) advocated budgeting, and founded the consulting company that has his name, McKinsey and Associates. Similarly, it was Cooper and Kaplan (1988) and Kaplan and Norton (1992) who, respectively, established activity-based costing and the balanced scorecard as management accounting techniques.

Third, there is an opportunity to instruct students on capital budgeting and management accounting in an ERP environment. It is likely that the simulation of a company and its ERP system would be needed to adequately prepare students for this change in environment. The pre-ERP approach to management accounting as paper and pencil or Excel calculations would need to be replaced with the ERP approach to management accounting recognizing ERP as a process within a set of systems.

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