Factor impacting ERP implementation success in vietnam

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY LE THI KIM THOA FACTORS IMPACT ERP IMPLEMENTATION SUCCESS IN VIETNAM MAJOR: BUSINESS ADMINISTRATION MAJOR C

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY

LE THI KIM THOA

FACTORS IMPACT ERP IMPLEMENTATION SUCCESS IN VIETNAM

MAJOR: BUSINESS ADMINISTRATION

MAJOR CODE: 60.34.05

MASTER OF BUSINESS ADMINISTRATION THESIS

SUPERVISOR: DR DINH CONG KHAI

HO CHI MINH CITY- 2011

ACKNOWLEDGEMENT

I would like to thank my thesis advisor Dr Dinh Cong Khai for all his intensive support, valuable suggestions and encouragement during the writing process

I would like to show our gratitude to the respondents for taking time to participate in

my survey Without your answers, this thesis would not have been possible

I would like to express my sincere gratitude to all of my teachers at Faculty of Business Administration and Graduate Faculty, University of Economics Ho Chi Minh City for their teaching and guidance during my MBA course

I would like to specially express my thanks to all of my classmates, my friends and

Mr Dang Huu Phuc for their support and encouragement

Ho Chi Minh City, 2011-02-05

Le Thi Kim Thoa

Abstract

Master Thesis in Business Administration, Summer 2011

Economics University Ho Chi Minh City

The enterprise resource planning (ERP) system provides support for core organizational activities such as manufacturing and logistics, finance and accounting, sales and distribution, and human resources An ERP system helps different parts of

an organization share data and knowledge, reduce costs, and improve business management A large number of Vietnamese enterprises would like to apply ERP system, but many are not successful in their ERP implementation projects There are quite a number of the factors that affect the success of ERP implementation project The aim of this research is to explore factors that influence ERP implementation success in the Vietnamese context, which will help both implementing companies and consulting companies get success for ERP implementation in Vietnam

Both qualitative and quantitative approaches were considered in this research First, the qualitative research is conducted through making in-depth interview with five managers in ERP implementing companies to check the content and meanings of words using in the measurements scales Then the main research is quantitative with

200 key users who use ERP system in their daily activities via email and phone to get results The Cronbach‟s alpha is used to measure reliability, the Exploratory Factor Analysis attempts to identify underlying variables and regression analysis is used to test the research model and hypotheses

The result confirms that master data quality, minimal customization, Business Process Reengineering (BPR), management, education and training, consulting factors have positive impacts on ERP implementation success Therefore, the benefit of this study will help consulting companies and implementing companies focus on these critical factors when they want to apply ERP system in Vietnam and reduce as much as possible potential risks

Key words: ERP, project success, resource management, business process

reengineering, management, education and training, consulting, customization, SAP, Oracle

Contents Page

CHAPTER 1: INTRODUCTION 8

1.1 The problem statement 8

1.2 Research questions 11

1.3 Research objectives 11

1.4 Research methodology 11

1.5 Scope of the study 12

1.6 Structure of the study 12

CHAPTER 2: REVIEW OF RELEVANT LITERATURE 13

2.1 Key Concepts 13

2.2 ERP implementation success 14

2.3 Review of Critical Success Factors (CSFs) in ERP implementation 16

2.3.1 Master data quality 16

2.3.2 Minimal customization 17

2.3.3 Business Process Re-engineering (BPR) 17

2.3.4 Consultants 18

2.3.5 Management 18

2.3.6 Education and Training 19

2.4 Research Model 20

2.4.1 Variables and Hypotheses 20

2.4.2 A suggested research model 23

CHAPTER 3: RESEARCH METHODOLOGY 24

3 Research methodology 24

3.1.1 The pilot research 24

3.1.2 The main research 25

3.1.3 The scales 25

3.1.4 The questionnaire 26

3.1.5 Measurement 27

3.1.6 Data collection 27

3.1.7 Population and sampling 28

CHAPTER 4: RESULTS AND DISCUSSION OF THE FINDINGS 29

4.1 Descriptive statistics 29

4.2 Cronbach‟s Alpha Analysis 31

4.3 EFA Analysis 31

4.4 Regression analysis 36

CHAPTER 5: CONCLUSIONS AND IMPLICATIONS 42

5.1 Conclusions of the research 42

5.2 Implications of the research 42

5.3 Limitations and suggestion for further researches 43

REFERENCES 45

APPENDIX 48

LIST OF TABLES & FIGURES

Table 4.1: Demographic statistics of the respondents 29

Table 4.2: Descriptive statistics 30

Table 4.5: KMO and Bartlett‟s Test 31

Table 4.3: Cronbach‟s Alpha of all variables 32

Table 4.4: Cronbach‟s Alpha of business process re-engineering after removing variable V33 33

Table 4.6: Total Variance Explained 34

Table 4.7: Rotated Component Matrix 35

Table 4.8: The final measurement scale 36

Table 4.9: Regression analysis on data of 107 responses 37

Table 4.10: Results 41

CHAPTER 1: INTRODUCTION 1.1 The problem statement

ERP stands for Enterprise Resource Planning Before 1970s, this concept did not

exist At that time, there were only a few software products that handled processing

data in real time and saved it in a central database At the beginning of 2003, the

concept of an ERP system was redefined It is no longer a system with a database;

instead, it is a combination of products covering basic functions such as purchasing,

sales, production, and finance In the areas of human resources, accounting, and basis

technology, it corresponds to enhance solutions of the new dimension products (SAP

overview)

Enterprise resource planning (ERP) is an integrated computer-based system used to

manage internal and external resources including tangible assets, financial resources,

materials, and human resources It is a software architecture of which purpose is to

facilitate the flow of information between all business functions inside the boundaries

of the organization and manage the connections to outside stakeholders Built on a

centralized database and normally utilizing a common computing platform, ERP

systems consolidate all business operations into a uniform and enterprise wide system

environment (Bidgoli et al, 2004) ERP software automates core corporate activities

such as purchasing, inventory, manufacturing, sales and distribution, human resource,

finance, and supply chain management, etc., by incorporating the best practices to

facilitate rapid decision-making, cost reductions, and greater managerial control

After joining WTO (World Trade Organization), Vietnamese enterprises have faced a

lot of challenges and opportunities In order to achieve greater flexibility, ERP has

been introduced to Vietnamese enterprises Implementing ERP helps companies

increase competitiveness by reducing cost, better controlling organization resources,

making timely decision

The use of ERP has also been found to be critical in improving customer satisfaction

For example, NEC Technologies credits its installation of ERP for increasing its

speed of order processing, improving invoicing and drastically reducing its

customer-service response times (Michel, 1997) In addition, ERP has also been credited with

reducing manufacturing lead times (Goodpasture, 1995)

Although ERP is a large and helpful software, it is expensive to implement Thus,

enterprises expect a lot whenever they decide to implement it They hope ERP could

assist them in reducing manual work, making provision easier and timely access to

accurate information, improving reports, fastening system response time, enhancing

procurement, planning, controlling sales cycle and approval functions, providing

relevant tools for managerial accounting control and profitability analysis, and

responding faster to the dynamic market changes Specially, in globalization, ERP is a

key and essential tool in management that supports enterprises to go global

According to VCCI, by the mid-year of 2006, there were only 1.1% Vietnamese

enterprises applying ERP However, the number of Vietnamese enterprises applying

ERP has risen up significantly currently According to FIS-ERP - a consulting

company, to install ERP system, Sino Pacific Construction Consultancy Co spent

more than 1 million USD, Thep Viet paid more than 2 million USD, Nova group paid

1 million USD, Pham Nguyen company paid more than $500.000, Vietin bank paid

4.3 million USD

Since ERP is so expensive, although many enterprises want to apply ERP but they

have some concerns whether they should apply it Some enterprises such as Vietnam

Electricity Corporation, Phong Phu Corporation intended to apply ERP 3 years ago,

but till now they have not applied it There are several reasons why these firms are not

rushing to install the systems Firstly, the ERP implementation efforts of many larger

counterparts have resulted in partial failure, or in some cases total abandonment The

other reason is a lack of financial resources, which restrains them to implement the

typically expensive ERP system It was reported that 40 percent of all ERP

installations were partially implemented and that nearly 20 percent were scrapped

total failures Especially for Vietnamese firms, with their limited resources they are

less likely to survive or quickly overcome a failed ERP implementation Most of the

times, implementation of an ERP system will require more effort than an initial plan

An ERP implementation failure may lead to a big problem to a firm as this will

waste enormous sums of money, labor, and destroy competitive advantage of the

firm

There are many researches about critical factors impacting ERP project‟s success in foreign companies Bingi, et al (1999) found the common critical success factors

(CSFs) of ERP Implementation in ten criteria: top management commitment,

reengineering, integration, ERP consultants, implementation time, implementation

costs, ERP vendors, selecting the right employees and training employees In order to

evaluate impacts of factors on success in ERP implementation in Vietnam, Giang

(2009) identified these factors: ERP package selection, communication, process

management, training and education, project management, legacy system

management, system integration, system testing, cultural and structural changes

However in his research Giang used the case study methodology therefore the

numbers of chosen cases may not be representative or typical This research is also a

study about ERP implementation success factors but using the Exploratory Factor

Analysis (EFA) and regression analysis to get results

1.2 Research questions

This paper attempts to determine “What major factors impact ERP

implementation success in Vietnam?”

1.3 Research objectives

The objective of the research is to identify critical factors that affect ERP

implementation in the Vietnamese context The lessons withdrawn from this study

would be useful for consulting and implementing companies in their efforts to

successfully implement an ERP system in Vietnam

1.4 Research methodology

The purpose of this research is to identify the CSFs for ERP implementation in Vietnam by using the EFA method, hence both pilot research and quantita tive research are considered

The pilot research is conducted by making an in-depth interview with five managers in some ERP implementing companies in Ho Chi Minh city in order to get their ideas about success factors and meaning of words using in the questionnaires The questionnaire is adapted from the literature and the field visits, as well as the comments gathered from the interviews

In the next step, the sample is collected by sending questionnaires to the relevant people who took part in the ERP implementation, such as key-users, end-users, developers and team members of the ERP projects Individuals are asked to indicate the extent of agreement or disagreement with the questionnaire items

concerning ERP systems on a five-point Likert-type scale ranging from 1 (strongly disagree) to 5 (strongly agree)

After collecting data, the measurement scales will be verified by using the Cronbach‟s alpha ratio and the Exploratory Factor Analysis (EFA) is used to refine the measurement scales Finally, the hypotheses are tested by using regression analysis

1.5 Scope of the study

Due to the limit of time and financial budget, the research cannot cover al l the ERP applying companies in Vietnam Based on the list of firms that implemented ERP in Vietnam, there are about one hundred ERP implementing firms and most

of them have head office in Ho Chi Minh City Thus, the sampling covers companies working in different activities and located in Ho Chi Minh City, Vietnam There are a lot of ERP suppliers such as: SAP, Oracle, PeopleSoft, Invensys, ABB Automation, i2, SSA Global Technologies, Intentia International, Epicor But, this paper concentrates on two leading ERP solutions providers which are SAP and Oracle only

1.6 Structure of the study

The structure of this study includes 5 chapters Chapter 1 presents information about the problem statement, research question, research objectives, research methodology and scope of the study Chapter 2 discusses concepts of terms and literature review of ERP success factors Chapter 3 explains research methodology and research model that are used in the study Chapter 4 analyzes the result and discussion of the findings And finally, conclusions and implications are presented in Chapter 5

CHAPTER 2: REVIEW OF RELEVANT LITERATURE

This chapter is to focus on introducing the literature review in order to establish a

research model There are four parts The first one will introduce some key concepts

about ERP; the second one will discuss about ERP implementation success; the next

one will review some critical success factor; and the last one will suggest the research

model and the hypotheses about the impact of major factors on ERP implantation in

the Vietnamese context

2.1 Key Concepts

Since we are dealing with the subject of Enterprise Resource Planning, this is the

key concepts in the study Kumar et al (2000) defined Enterprise Resource Planning

(ERP) systems as configurable information system packages that integrate

information and information-based processes within and across functional areas in an organization O‟Leary (2000) also defined that “ERP systems are computer-based systems designed to process an organization‟s transactions and facilitate integrated and real-time planning, production, and customer response.” According to him, ERP systems have the following characteristics: (i) ERP systems are packaged software

designed for a client server environment, whether traditional or web-based; (ii) ERP

systems integrate the majority of a business processes; (iii) ERP systems process a

large majority of organizational transactions; (iv) ERP systems use an enterprise-wide

database that typically stores each piece data once; (v) ERP systems allow access to

the data in real time; (vi) In some cases, ERP allows an integration of transaction

processing and planning activities (e.g., production planning) Zeng et al (2003)

thought that an ERP system should be: (i) Flexible: An ERP system has to be able to

react to changing needs that an organization can have in future This is facilitated by

the fact that ERP systems are constructed on client/server technology that makes it

possible to run them on various database servers; (ii) Comprehensive: An ERP system

should be able to support a variety of organizational processes Consequently, ERP

systems cover different modules; (iii) Modular and open: An ERP system ought to

allow any module to be interfaced or disconnected whenever needed without

disrupting other modules; (iv) Beyond the company: A good ERP system is not

restricted by the organizational boundaries, it should support connection to entities

outside the organization

2.2 ERP implementation success

Kyung et al (2001) showed that while some firms announced ERP implementation

success, many others reported negative results of ERP implementation An ERP

implementation failure may be fatal to a firm: either wasting enormous sums of

money or destroying the competitive advantage of the firm To manage ERP

implementation successfully, a high level ERP implementation success measure is

required Markus et al (2000) argued that a minimum set of success metrics included

project metrics, early operational metrics, and long-term business results

To answer the question “what makes ERP implementation so unsuccessful?” Swan et

al (1999) argued that the root of such high failure rate is the difference in interest

between customer organizations who desire unique business solutions and ERP

vendors who prefer a generic solution applicable to a broad market He also suggested

that the organizational fit of ERP might be worse in Asia, because the reference

process model underlying most ERP system is influenced by European or US

industry/business practices, which are different from Asian business practices

In this study, the author defines ERP implementation success from ERP

implementation project perspective ERP implementation success, the dependent

variable in the study, is not evaluated by the general users but by ERP project team

members Implementation project success is frequently defined in terms of the

achievement of some predetermined goals, which normally include multiple

parameters such as time, cost, and performance The author measured ERP

implementation success in terms of the perceived deviation from the expected project

goals such as cost overrun, schedule overrun, system performance deficit, and failures

to achieve the expected benefits

According to Roger (2004), in project there are usually three distinct objectives: cost,

schedule, and performance The project cost is the sum of direct and allocated cost assigned to the project The project manager and project team‟s job is to control those costs that are directly controllable by the project organization Normally, the project

will have a project budget, which includes costs assigned to the project

The second objective in managing project is schedule Frequently, a project

completion date and intermediate milestones are established at the outset Just as the

project team/manager must control the project cost within budget, they must also

control the schedule to meet established dates The budget and schedule often conflict

to each other For example, if the project is behind schedule, more time may be

needed to bring it back on But there may be insufficient funds in the budget to

support the overtime costs Therefore, a trade-off decision between time and cost must

be made Management must determine whether the schedule objective is of sufficient

importance to justify and increased cost

The third objective is performance, that is, the performance characteristics of the

product or service being produced by the project Performance for a service project,

such as ERP project, is ordinarily much more difficult to specify than for a

manufactured product

Performance may also require trade-offs with both schedule and cost Performance

requirements may, in turn, cause cost and schedule changes Since it is rarely possible

to predict performance, schedule, and cost requirements accurately before a project

begins, numerous trade-offs may be required while the project is under way

2.3 Review of Critical Success Factors (CSFs) in ERP implementation

There are several researches about critical factors influencing ERP implementation

ERP implementation issues have been caught attention because it is very expensive

but low implementation success The purpose of this paper is to investigate the factors

impact on ERP implementation project in Vietnam This research will review some

researches relevant to the study Understanding such effects may enable not only ERP

implementing companies but also domestic consulting companies to be more

proactive in planning and implementing ERP in the country

2.3.1 Master data quality

Master data quality is crucial for an ERP system‟s success There are different names

of master data quality, but the meaning is rather similar For example, Somers et al

(2001) used data analysis and conversion, Zhang et al (2002) used data accuracy In

this thesis, the author decided to use master data quality, which means data loaded

from existing legacy systems or documents must be of high quality Timely and

accurate data in a single consistent format is thought a fundamental requirement for

the effectiveness of ERP system implementation This factor has been considered

critical by Shanks et al (2000); Somers et al (2001); Umble et al (2003); Zhang et al

(2002); Jiang (2005); Yusuf et al (2006), Yizi (2007)

2.3.2 Minimal customization

Minimal customization which involves using the vendor‟s code as much as possible even if this means sacrificing functionality has been associated with successful ERP

implementations Because customizations are usually associated with increased

information systems costs, longer implementation time, and the inability to benefit

from vendor software maintenance and upgrades, customization should only be

requested when the competitive advantage derived from using non-standard

processing can be clearly demonstrated Customization factor is mentioned by Bingi

et al (1999); Parr et al (2000); Shanks et al (2000); Nah et al (2001); Somers et al

(2001 and 2004); Jiang (2005); Zhang et al (2002); Zhou-Sivunen (2005)

2.3.3 Business Process Re-engineering (BPR)

Business process re-engineering (BPR) is defined by as “the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in

critical, contemporary measures of performance, such as cost, quality, service and speed” Implementing an ERP system involves reengineering the existing business processes to the best business process standard One of the main reasons why ERP

and other large technologically sophisticated systems fail is that organizations simply

underestimate the extent to which they have to change and re-engineering the existing

business processes in order to accommodate their purchase ERP systems are built on

best practices that are followed in the industry All the processes in a company must

conform to the ERP model This factor is reviewed by Bingi et al (1999); Parr et al

(2000); Shanks et al (2000); Nah et al (2001); Somers et al (2001 and 2004); Jiang

(2005); Zhang et al (2002); Zhou-Sivunen (2005)

2.3.4 Consultants

Consultants play an important role in ERP implementation Specially, when ERP is

very new in Vietnam, almost Vietnamese consultants have low experience in ERP

segment Thus, three dimensions of vendor support are classified: (1) Qualified

consultants with knowledge in ERP system; (2) Qualified consultants with knowledge

in enterprises‟ business processes; and (3) Consulting skills in ERP implementation It‟s important for the consultants to be knowledgeable in both business processes and ERP system functions Also, the consultants should possess good interpersonal skills

and be able to work with people They have experiences to help a company

implement the ERP system during the whole ERP implementation process and after

the implementation phase This factor is discussed as one of the factors which impact

the ERP implementation success by researchers Bingi et al (1999); Parr et al (2000);

Zhou-Sivunen (2005); Yusuf et al (2006)

2.3.5 Management

Many studies have emphasized the importance of management as a necessary factor

in successful ERP implementation As ERP is a highly integrated information system,

it requires the complete cooperation of staff members from all segments of the

business Management in project must create an environment for implementing an

ERP system to gain the expected results and must be seen as a participant in the

implementation Management in ERP implementation has two main facets: (1)

providing leadership; and (2) providing the necessary resources To implement an

ERP system smoothly and successfully, companies require a steering committee to

participate team meetings and monitor the implementation efforts, spend time with

people and provide clear directions of the project Willingness to provide the

necessary resources is another indicator of top management commitment to the ERP

project The implementation could be seriously handicapped if some of the critical

resources (e.g., people, funds and equipment) are not available This factor is

discussed by Bingi et al (1999); Holland and Light (1999); Sumner (1999); Gupta

(2000); Sarker and Lee (2000); Rao (2000); Huang and Palvia (2001); Aladwani

(2001); Chen (2001); Dong (2001); Soliman et al (2001); Nah et al (2001);

Krammergaard and Rose (2002)

2.3.6 Education and Training

Education and training refers to the process of providing management and employees

with the logic and overall concepts of ERP system Thus, people can have a better

understanding of how their jobs are related to other functional areas within the

company The user is people who produce results and should be held accountable for

making the system performance meet expectations ERP system was not easy to use,

adequate training and education would help employees to use the ERP system much

easier This factor is presented by researchers Bingi et al (1999); Sumner (1999);

Gupta (2000); Rao (2000); Rao (2000); Zhang et al (2001); Mabert et al (2001);

Aladwani (2001); Al-Mashari (2002); Kuruppuarachchi et al (2002); Gyampah and

Salam (2003); Umble et al (2003); Voordijk et al (2003)

2.4 Research Model

2.4.1 Variables and Hypotheses

2.4.1.1 The dependent variable

In this research, the dependent variable is ERP implementation project‟s success In the literature review, ERP implementation success can be measured by cost, time and

performance If the project is behind schedule, overtime may be needed to bring it

back on But there may be insufficient funds in the budget to support the overtime

costs So a trade-off decision between time and cost must be made And performance

may also require trade-offs with both schedule and cost So, the dependent variable in

this study is frequently defined in terms of the achievement of some predetermined

goals, normally include parameters as mentioned in the literature review: cost,

schedule, performance and trade-off between them However, as cost is sensitive,

confidential and further more users do not know about project cost, so the author

measures ERP implementation success in terms of schedule overrun and system

performance

2.4.1.2 Independent variables and hypotheses

Independent variables represent the treatments or conditions that the researcher has

either direct or indirect control over to test their effects on a particular outcome In

this research, the independent variables include implementation success factors

as mentioned in the literature review which are master data quality, minimal

customization, business process reengineering, consulting, management and education

and training

As mentioned in the literature review, availability and timeliness of accurate data is a

fundamental requirement for the effectiveness of ERP system This leads to our first

hypothesis:

H1: Master data quality has a positive impact on ERP implementation success in Vietnam

Minimal customization is often associated with decreased information system cost,

implementation time, and increased benefit from vendor software maintenance and

upgrades The hypothesis is:

H2: Minimal customization has a positive impact on ERP implementation success in Vietnam

The business processes are aligned with the ERP system which will improve

organization performance Since ERP packages are based on best practices, ERP

implementation will involve adapting the existing business processes to standard

business processes of ERP Therefore, reengineering business process may influence

positively on ERP project‟s success, the hypothesis is:

H3: Business Process Reengineering has a positive impact on ERP implementation success in Vietnam

Consultants have experiences in specific industries; comprehensive knowledge about

certain modules may be better able to lead the project to success We suggest the

following hypothesis:

H4: Consulting vendor has a positive impact on ERP implementation success in Vietnam

Researches show that effective project management is critical to successful

implementation As mentioned by researchers Bingi et al,(1999); Holland and Light

(1999), ), it is no doubt to believe that management has positive impact on ERP

implementation, thus it comes up with the following hypothesis:

H5: Project management has a positive impact on ERP implementation success

in Vietnam

And finally, users‟ education and training helps them understand how enterprise applications change business processes frequently appear to be responsible for ERP

implementation success Thus, the hypothesis is:

H6: Education and training has a positive impact on ERP implementation success in Vietnam

In order to evaluate factors impact on ERP implement project in Vietnam, this study

proposes a research model would be presented as bellow:

2.4.2 A suggested research model

Master Data Quality

Positive

Positive

Positive

Positive Positive

Positive

CHAPTER 3: RESEARCH METHODOLOGY

This part deals with how the research is conducted The chapter includes discussions

of research methodology to examine the measurement scales of concepts and verify research model and hypotheses

The objective of this research is to find out factors impacting ERP implementation projects in Vietnam In order to achieve this, the study used both qualitative and quantitative approaches The survey allows researchers collecting data from wide number of companies First, the survey examines the population of the companies implemented ERP and working in Vietnam The selection is based on the fact that these firms were implemented ERP and located in Ho Chi Minh City Then the sample was drawn from identified population After collecting data, the realibility

of measurement scales will be verified by Cronbach‟s Alpha ratio, Exploratory Factor Analysis (EFA) Finally, the hypotheses are tested by using regression analysis

3 Research methodology

3.1.1 The pilot research

The pilot research is undertaken with in-depth interviews without fixed questions or answers The interviewees are selected with intention to cover a range of possible viewpoints, which include project managers, board of managers, key users in implementing companies and consultants in consulting companies It aims at modifying and refining the scale items

The procedure for qualitative research is: (1) Personal contacts were made firstly

through telephone calls and e-mails (2) After having the acceptance from them, the

interview will be conducted in an open-ended questions, thus the interviewees can

answer as they will (3) After the interview, e-mails or informal meeting were often

used for solving unclear information which was collected during the interview