Research

ERP may fall short of evolving business process agility goals

Business-process agility is top-of-mind for many business and technology executives these days. But just what is it? Why do companies need it? How do they get it? And what role does technology play? Once heralded as revolutionary, the bulky Enterprise Resource Planning (ERP) software packages that enabled companies to better manage internal functions are at the center of a debate over the best way to achieve agility. Whether firms retrofit their ERP systems or commit to the new on-demand model, it's certain that success in the global markets will be hooked to agility.

2006-01-18

In the business buzzword universe, flexibility and agility are often tossed around interchangeably. But the two are vastly different concepts when it comes to business processes and information technology systems. Agility, not flexibility, is key to business's ability to survive and thrive in today's competitive global marketplace, according to Julie Smith David, associate professor of information systems at the W. P. Carey School of Business.

"Agility is the ability to quickly change your processes in order to take advantage of options. How agile businesses are is how easy it is for them to change their default processes," David explains. "To be faster in effectively adding and/or changing capabilities is one dimension of how businesses compete."

Flexibility, which David defines as the number of capabilities on hand, is also important. But, David says, forward-thinking businesses are embracing agility — the ability to quickly reconfigure their capabilities, as a better measure of their ability to customize products or services to gain competitive edge and customer faith.

In order to adapt in an environment where markets are constantly morphing, technology always evolving, and customers continually making new requests, competitive advantage is all about having the ability to respond quickly to change.

Two levels of agility

In her research, David defines two subgroups within business-processes agility: process-level agility, which is the speed with which an organization can add new capabilities into its standard processes; and transaction-level agility, which measures how well companies can customize capabilities for individual customer transactions.

A company that can quickly accommodate a new customer requiring XML ordering capability, for example, has process-level agility.

Transaction-level agility is a little different.

 "A company that has many ways to complete a process and encourages their customers to specify their preferences — and can deliver that customized experience — has transaction-level agility. For example, customer who specifies they want to place their orders using XML, wants a bar-code label put on the box, an RFID tag on a certain type of pallet, and wants a paper invoice once a month with bulk billing" is testing a company's transaction-level agility, explains David.

Companies with low product diversity but strong competition in the market need to excel at process-level agility. Online bookstores, for example, offer largely the same products, so in order to differentiate themselves they need process-level agility to quickly adapt to whatever improvements become available that will help them ship orders faster/better/cheaper than their rivals.

"Now, more than ever, it is important for businesses to have agility at the process level because customers require it. And if they don't [have agility], their competitors will," says Robyn Raschke, a W. P. Carey information systems graduate teaching assistant who has partnered with David on a business-process agility field study.

By contrast, companies competing in the electronics industry, where products are highly customized, are well served by building transaction-level agility to capitalize on new processes or technologies that allow them to offer greater levels of customization.

The technology factor

So what do companies need to be agile? Technology is the key driver.

"Technology is an enabler to business-process agility; it enables us to reconfigure our process capabilities — either by adding new capabilities to the process, or modifying existing capabilities — and do it with ease," says Raschke.

Having the right technology, however, is even more important. What qualifies as the "right" technology to spur business-process agility is the topic of a debate rumbling within the IT community. Some experts question whether enterprise resource planning (ERP) systems, which have been the technological backbone of large organizations for years, are the right tool to help companies achieve agility.

By their nature, ERP systems are large, complex, and efficient at managing a wide range of internal functions when used in a relatively stable environment. They are not as good, however, at managing fast-changing processes and transactions. ERP systems are flexible — offering the ability to take orders in numerous different ways. But because of the size of ERP systems, companies using them may be hard-pressed to meet the need for agility — speed in reconfiguring their processes or adding capabilities.

"Companies get their ERP systems configured so that everything works, but when they want to change [processes or transactions] to accommodate a customer request, or the next best practice, it takes a long time to do it because they have to test everything throughout the whole organization," explains David.

Recognizing this, ERP vendors have started to market process-level capabilities aimed at increasing agility, but "they're way behind," she says.

For some companies, the solution is to add additional layers of software to their existing systems as a way to increase business-process agility without having to dump their ERP and start over. Need customer resource management capability? Plug in a Siebel application. Looking to add an e-procurement option? Hook into Ariba's e-Marketplace. Using middleware offerings to integrate these systems seamlessly into existing ERP solutions can enable companies to increase their agility.

But the other side of the debate says there is a better way — that companies need an entirely new approach to software to sate the demand for agility. That new approach is "on-demand" computing, software solutions that firms can access a la carte via the Internet. Featured in the ubiquitous IBM commercials, on-demand solutions hone in on specific capabilities that businesses need to build value and respond rapidly to change.

"There are relatively new competitors to the software market who are going to start from scratch and make agility easier," says David. One such company is Salesforce.com, which currently has a program in beta testing that aims to offer agile enterprise systems on demand — an application David calls "pretty slick."

The application-sharing program, called AppExchange, is similar to an open-source environment. Salesforce.com has developed standards for all applications, and any developer is able to create and submit various application modules. When tested, Salesforce.com will make the submitted module available to its customers, and all of the modules that the customers select will automatically integrate by design.

If a company needs a travel and entertainment module to track employee expenses, for instance, Salesforce.com will compile modules contributed by numerous developers, and allow users to select one that best fits their needs. Customers can click on different modules to see how they work and also post or read other users' reviews of those modules. The program will charge users a $75 monthly fee, saving companies the large up-front implementation costs of adding modules to their ERP.

"Instead of going to one solution, companies will pick and choose, and do a best-of-breed solution through the Salesforce.com AppExchange," says David. "If Salesforce.com can make it work, it's going to be a dramatic shift in the way technology runs." The company itself has said the AppExchange could become the "eBay of hosted software."

Dave Duffield, former president of PeopleSoft, has been a prophet in the development of this new approach to agile business technology. Duffield's mission is to develop an agile, service-oriented enterprise system that's scalable to large organizations, reports David. Though he's been secretive about the details, Workday, the new application suite his company is developing, is based on open standards and a service-oriented architecture (SOA).

His idea is to enable a more flexible system that will be easier and cheaper to manage, while providing information that a company's line managers need.
 
"Theoretically, Workday will be able to integrate with software developed by others, but the verdict on this is yet to be seen," says David.
 

SOA as S.O.S.?

The major difference between these upstart systems and the established ERPs is the systems' internal architecture — which greatly affects their ability to deliver agility. ERPs were designed to incorporate a wide range of capabilities from the same vendor (high levels of flexibility), but frequently are not designed to be "open," i.e. able to coordinate with other vendor's applications. Unfortunately, "unless the vendors are willing to start from scratch, it will be difficult for them to deliver a low-cost, agile solution," says David.

The Services Oriented Architecture (SOA) at the heart of the new-approach systems is structured better to offer the flexibility and speed companies desire. SOA systems are built on a set of standards that enable different system components to be developed and run on distributed systems. Imagine how easy it is to plug in a new device to your computer's USB port; proponents of SOA envision a day in which adding new software functionality to your enterprise would be just as easy, thus offering integrated functionality to all. Organizations using SOA systems have more flexibility to change out individual components, and can design business rules that govern those components to their liking.

"An SOA-based system makes it easier to deliver transaction and process-level agility, and companies using such systems will be able to do it with less overhead because they don't need to have all the capabilities built into their existing system. Rather, they'll be able to access software solutions on demand," David explains.

Consider when a customer wants a new service that their supplier's existing system doesn't support. Rather than buying an additional module from their software vendor, the supplier will be able to search for the capability from any SOA-compliant software provider. When they find an appropriate solution, all they need to do is access the provider's Web site, activate their software, and pay a fee to deliver the service to their customer.

Sound familiar? This idea of finding expertise outside the shell of the organization closely mirrors the overall trend of business-process outsourcing that has taken over in business.

Rather than develop in-house supply chain expertise, retailers and manufacturers are partnering with logistics providers; similarly, instead of developing every capability a customer could ever need, forward-thinking software vendors are reaching out to the vast, web-connected technology network for solutions.

Indeed, a third wave to this ERP versus new-approach software discussion is how well these systems can deliver agility in the new face of business, where companies continue to outsource functions to far-flung locations around the globe in order to cut costs. Here, the on-demand, SOA systems may win out, says David.

"Traditionally, companies take an order, pick it, pack it, ship it, etc. Now, imagine spreading those capabilities out, breaking them down to individual steps, maybe having 10 companies touch that order. An ERP system is good at tracking internal transactions, but it's not designed to track a transaction that crosses 10 company boundaries," she explains.

It is unlikely, however, that ERP systems will entirely disappear anytime soon: Like Microsoft's Word and Excel applications, while much griped about, they remain business staples. And this is not the first time pundits have tolled the death knell for ERP, David points out. After the rush to implement ERP systems before the Y2K deadline, experts predicted the need for software would dry up and ERP vendors would go out of business.

"But they didn't. They reengineered themselves and started expanding into the B2B sector, got customer focused and supplier focused," she says.

Ultimately, businesses will gauge for themselves which technology model is most beneficial to gaining the much-coveted agility they need. But there is no question business-process agility will be the result they seek when grappling with technology systems decisions.

Managing IT Faculty