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The impact of Enterprise Resource Planning (ERP) systems on the
management control systems of medium-sized companies
Universiteit Maastricht
School of Business and Economics (SBE)
Business Administration
International Business Studies
Master Thesis
Controlling
Submitted: October 15, 2010
Jenny Technow
ID Number: i6010616
Thesis Coordinator:
Dr. Mark Vluggen
Second coordinator:
Dr. Alexander Brüggen
2
Acknowledgements
I wish to thank my supervisor, Dr. Mark Vluggen, for periodically reviewing my
thesis and providing clear advices in case of problems.
I want to thank the interviewees for supporting my research. I know that your day-
to-day business is very stressful and I appreciate that you made this thesis possible.
I wish to thank my partner, Richard Tenhagen, for his vital guidance, support and
encouragement throughout the research project. I am grateful for your inspirational thoughts,
your help with the formatting and your perpetual understanding.
Special thanks go to my family and my friends for sending me love and support.
3
Abstract
This thesis aims to investigate the effects of Enterprise Resource Planning (ERP)
systems on the Management Control System (MCS) of medium-sized companies. In order to
study these effects, semi-structured interviews with managers from fifteen medium-sized
entities implementing the same ERP package were conducted and the results compared to
prior research by Chapman and Kihn (2009). Using the “enabling approach to management
control” framework by Ahrens and Chapman (2004), the effects were evaluated by studying
the impact of ERP on the following design characteristics: “Repair“, “Internal Transparency“,
“Global Transparency“ and “Flexibility“. The results show that the enabling approach to
management control by Ahrens and Chapman (2004) also holds for medium-sized companies.
Furthermore, I find that ERP systems show many indirect effects on the planning function and
the managerial information provision. ERP users tend to create more detailed plans and have
shorter and more frequent reporting cycles. However, I only find weak support for the
expectation that ERP usage leads to the inclusion of further ratios in the management reports.
Keywords: Management Control Systems (MCS), Enterprise Resource Planning (ERP), Microsoft Dynamics NAV®, Management Information Systems (MIS),
Small and Medium-sized Entities (SME)
4
Content 1 Introduction 6
2 Theoretical Underpinnings 9
2.1 The relationship between organizational size and Information Technology (IT) 9
2.2 ERP and organizational size 10
2.3 Limitations of the studies about organizational size and IT 11
2.4 The impact of ERP systems on Management Accounting and the firm’s MCS 12
2.6 Limitations of prior research about the impact of ERP on the MCS 15
2.7 Management Control System’s (MCS) design 15
3 Proposition Development 17
3.1 The underlying concept 17
3.2 Propositions 18
4 Research Methodology 23
4.1 Microsoft Dynamics NAV® 23
4.2 Data collection 23
4.3 The Research documents 27
4.4 Measurement of variables 28
5 Data analysis 29
5.1 Quantitative data analysis 29
5.2 Qualitative data analysis 31
5.2.1 Information System Integration (ISI) 31
5.2.2 The enabling effects of the ERP system 32
5.2.3 The effects of the ERP system on the budgeting/planning process 34
5.2.4 The effects of the ERP system on the management reporting process 36
6 Conclusion 42
6.1 Limitations 43
6.2 Recommendations for future research 43
7 References 45
8 Appendix 56
Research documents (in English) 56
Original research documents (in German) 62
5
List of figures
Figure 1: Theoretical model 22
Figure 2: Summary of results 41
List of tables
Table 1: Results of the data collection procedure 24
Table 2: Number of respondents per industry 25
Table 3: Information about the interviewees 26
Table 4: Descriptive statistics for variables (n=15) 29
Table 5: Pearson’s correlation coefficients (n=15) 30
6
1 Introduction
This paper aims to investigate the effects of Enterprise Resource Planning
(hereafter: ERP) system usage on the management control system (hereafter: MCS) of
medium-sized companies. ERP systems stem from an evolutionary process starting from
standard-inventory control (IC) packages via material requirements planning (MRP) and
manufacturing resource planning (MRP II) up to the inclusion of various enterprise processes
(Kumar et al., 2000). ERP systems unify and centralize the firm’s information systems into
one single database via a module-based infrastructure and therefore provide organizational
actors with a common language and pool of data (Rowe, 1999). Additionally, they are
supposed to eliminate unreliable end-user applications, to enhance the standardization of
operating and reporting procedures and show flexibility in adapting to the requirements of
special organizations. Modern ERP systems further include analytical tools (e.g. Internal
Control Exceptions Reports, Turner (2009)) for interpreting and evaluating data out of the
system which could have an effect on the management accounting and the MCS. A MCS can
be understood as a system in which managers organize resources and direct activities in order
to achieve the organizational goals (Merchant and Van der Stede, 2006).
ERP projects are also accompanied by huge risks since human and financial
resources are bound for a longer period of time (Davenport, 1998). In the case of FoxMeyer,
one of the largest drug distributors in the U.S. in 1996, the company went bankrupt after a
three year period of unsuccessful ERP software implementation (Kalakota and Robinson,
1996; Scott, 1999). According to Bancroft (1996) ERP projects are often complex and
demand diverse types of expertise, which only can be sourced outside. Furthermore,
consultants advise managers to re-engineer their key processes in order to simplify the
implementation of the standardized ERP software. Consequently, the project becomes more
complex and it is difficult to stop a project out of the firm’s control. With regard to the limited
resources of medium-sized companies, ERP implementation can become a critical project for
a firm.
My topic covers two areas of research – the effects of ERP on the MCS and
differences in ERP usage between medium-sized and large organizations.
First, I analyze the effects of the ERP system on the MCS. In the academic
literature, there are two contrasting views on this subject. Some researchers argue that ERP
systems have a direct impact on the design of management accounting and the MCS due to
the increased availability of real-time data and its process-orientated structure (Booth et al.,
7
2000; Caglio, 2003; Davis and Albright, 2000; Granlund and Malmi, 2002; Hyvönen, 2003;
Scapens et al., 1998; Scapens and Jazayeri, 2003). In a study by KPMG (1998, quoted by
Terrand), 95% of the respondents stated that ERP technology helps them to reduce the
planning cycle time which shortens the budgeting process and improves management control.
The second stream of literature promotes that ERP systems are not a direct cause
of behaviour but act as a formative tool that enables change (Ciborra and Lanzara (1994),
Dechow and Mouristen (2005), Chapman and Kihn (2009)). In their paper, Dechow and
Mouritsen study the impact of ERP software on the MCS of two large Scandinavian firms.
They argue that ERP technology helps to implement standardized information architectures
which leads to a better knowledge about organizational priorities and procedures (“Techno-
logic“). This is supported by Chapman and Kihn (2009) who analyze the impact of ERP
systems on the MCS of large Finnish companies and promote the “enabling approach to
management control”.
My study builds on the paper by Chapman and Kihn (2009) and hence, on the
second stream of literature. My study will focus on mature ERP users. This will overcome
some of the time lag issues that have plagued earlier research in the field.
The second aspect of my thesis deals with the effects of ERP systems on medium-
sized companies. During the 1990s, many large companies invested in Enterprise Resource
Planning (ERP) software packages in order to benefit from various advantages claimed by
researchers (Rowe et al., 1999; Davenport, 2000; O’Leary, 2000; Bendoly, 2000; Scapens and
Jazayeri, 2003) and the major software suppliers. According to a survey by Van Everdingen
(2000) the ERP market for larger companies becomes more and more saturated whereas
above 40% of the responding mid-size companies intended to invest in ERP software by the
mid of the 2000s. As a consequence, major software suppliers (like SAP, Baan, Oracle,
Peoplesoft, JD Edwards) tried to conquer the new market segment by offering adapted
versions of their ERP software, customized to the needs of the SME market. Although these
packages should fit medium-sized companies, Laukkanen et al. (2005) and Mabert et al.
(2003) find that medium-sized companies experience more knowledge constraints during ERP
adoption and benefit from less ERP advantages than large corporations. Academic research
on the impact of these ERP packages is, however, relatively limited. My study makes a
contribution to this field of research by studying medium-sized companies using the same
ERP system.
My thesis contributes to the following areas of academic literature. First, my
paper provides empirical evidence on the impact of ERP on MCS design. Secondly, the paper
8
contributes to the research on the relationship of organizational size and the effects of ERP
systems by focusing on the special software demands of mid-size companies. Finally, the
study gives practical insights about ERP effects on MCS in the long run. Data for my research
was collected in form of interviews and an online survey. The quantitative analysis shows that
the model variables “Information System Integration” and “Perceived System Success”,
“Information System Integration” and the four design characteristics - “Repair”, “Internal
Transparency”, “Global Transparency” and “Flexibility”- and the four design characteristics
and “Perceived System Success” are positively correlated. Thus, I provide empirical evidence
for the validity of the enabling model by Ahrens and Chapman (2004), in the context of
medium-sized enterprises.
According to the results of my qualitative data analysis, ERP systems have
indirect effects on the planning function and the managerial information provision. Typical
indirect effects were the increased availability and transparency of data, a fastened process of
data collection and an improved traceability of bookings. Due to these effects, the majority of
participants are able to create plans at a higher level of detail with more accurate planning
estimates. Similarly, the indirect effects help management accountants to shorten the
reporting cycles, to reduce manual data updates and to establish more profound management
reports in a shorter time frame. Plans and reports were not often analyzed directly in the ERP
system but with Excel because Excel offers more flexibility regarding the representation and
the analysis of data. Although more transparent information is available in management
reports, only few companies include new financial or non-financial ratios in them.
Furthermore, I assess a trend towards more communication and coordination with Microsoft
Dynamics NAV® which also supports the enabling approach to management control by
Ahrens and Chapman (2004). Most of these effects appeared directly or briefly after the ERP
implementation which could be influenced by the Big Bang implementation approach.
The remainder of this paper is organized as follows. The next section deals with a
review of prior literature on the relationship of organizational size and IT and on the effects of
ERP systems on the management accounting function and the MCS design. The following
parts present the proposition development, the research design and the results of this study.
The thesis finishes with a conclusion and a discussion of the limitation of this study, along
with suggestions for further research.
9
2 Theoretical Underpinnings
2.1 The relationship between organizational size and Information Technology (IT)
There have been two main streams of prior academic literature on firm size and IT
adoption and usage. The first stream argues that growing organizational size leads to more
complexity which creates a need for better IT support (Kimberley, 1976; Yap, 1990; Caplow,
1957; Ein-Dor and Segev, 1982). Caplow explains that complexity increases due to more
organizational members. To enhance communication and coordination, organizations adopt
internal mechanisms like Information Systems (IS). In the paper by Yap (1990), the author
identifies characteristics that distinguish IT adopters from non-adopters based on a survey of
service companies in the U.K.. The results indicate that large companies and firms in the
financial sector tend to use IT more often than smaller entities. Furthermore, organizations
using IT are more likely to have advanced formalization in communications and procedures,
higher growth-rates and more secretarial and clerical workers. Ein-Dor and Segev (1982)
contribute to this reasoning by analyzing 53 companies during 1978 and 1979 with regard to
the structure of the Management Information System (MIS) and its degree of centralization.
They find that larger firms tend to be associated with less centralized and larger MIS
structures. They justify their results by arguing that MIS facilitates information
democratization in a decentralized company.
The second stream stems from the reasoning that larger firms create more
“economies of scale” through an IS implementation which facilitates the adoption. Thus,
firms below a certain size cannot benefit from these investments and have more difficulties
justifying IT investments due to limited financial and human resources. These results are
supported by various empirical studies (Moch and Mors, 1977; Kimberly and Evanisko, 1981;
Mahajan and Schoeman, 1977; DeLone, 1981; Yap, 1990). However, Adam et al. (2000)
contrast this view by studying the ERP implementation process in fourteen Irish companies.
First, firms implementing ERP technology were much smaller than expected. Second, the
duration of implementation projects was shorter than predicted by prior literature. On the one
hand, this could be due to the smaller average size of Irish firms or on the other hand an
indication that ERP software has already established itself in the SME market. But Adam and
O’Doherty argue that the duration of a project depends heavily on the complexity and size of
10
the customer relations and external software implementers can help to correct the firm’s
perceptions and expectations of ERP systems.
2.2 ERP and organizational size
In this section, the impact of organizational size on ERP adoption is illustrated.
The paper by Van Everdingen et al. (2000) examines the development of ERP adoption in the
European mid-size market with help of a large-scale multi-country survey conducted in 1998.
In their paper, Van Everdingen et al. study the investment criteria used for ERP adoption and
the selection of the software supplier are analyzed. According to Van Everdingen et al.
(2000), only 13% of medium-sized companies used ERP software in only one functional area.
But in 70% of the cases, ERP was used in more than three functional areas suggesting that
mid-size companies try to reap the integration benefits of ERP systems. Furthermore, most
companies used the software of only one vendor reducing conflicts between different software
systems. Furthermore, Van Everdingen examines the criteria for ERP software selection. For
most respondents the organizational fit was the crucial factor for ERP implementation. Other
important factors were flexibility, costs, and user friendliness of the system, scalability and
supplier support. Additionally, medium-sized companies tend to focus on the software
functionality and quality rather than the reputation of the supplier when they decide on system
adoption. The speed of the implementation, the possibilities of the software to interface with
other applications and the price of the product play an important role as well.
The paper by Mabert et al. (2003) examines the implementation process and the
benefits of ERP systems in differently sized U.S. manufacturing companies. They argue that a
successful ERP implementation involves more than just purchasing a software package. Since
ERP software often tends to be generic, companies can either re-engineer their processes or
customize the software to fit the organization. However, both approaches include high costs
for the company which can strongly influence the outcome of an ERP implementation in
organizations of different sizes. As a compromise, Jeanne (1999) suggests the application
supplier provider (ASP) model in which firms do not purchase the entire software package but
access ERP functionality online. In their study, Mabert et al. discover that companies from
various sizes show differences in the implementation process and in ERP outcomes. Smaller
companies tend to change their internal processes in order to fit the software whereas larger
entities do the opposite. With regard to the implementation costs, Mabert et al. explain that
smaller companies spent a higher proportion of their budget on the cost of software. In
11
contrast, larger companies invested more money for the implementation teams. This is not
surprising because the software needs to be customized by the implementation team to fit the
organization. In addition, large firms employed more ERP functionalities as small companies.
The decision for ERP implementation was primarily driven by strategic thinking in large
companies and tactical considerations in smaller ones. Whereas larger companies used a
phased-approach to implement the software, smaller companies often introduced ERP
systems with a “Big Bang“- approach. Moreover, Mabert et al. declare that benefits of ERP
varied according to organizational size. Smaller firms reported benefits in the manufacturing
and logistics departments and larger enterprises stated greater benefits in the financial area.
2.3 Limitations of the studies about organizational size and IT
Prior literature about the impact of ERP suffers from several limitations. In this
section, I will discuss three of them: (a) extensiveness of system usage, (b) timing problems
and (c) different definitions of size.
First, many papers examined the usage of ERP in different companies. However,
they did not address the issue of extensiveness of usage (Gremillion, 1984). Two companies
that implemented the same software product in the same period can show significantly
varying degrees of usage. Moreover, due to the modular structure of ERP products,
companies that implement several modules probably use the system more often than
enterprises with ERP systems of only one module. Thus, studies on the impact of ERP
systems should take the extent of ERP usage into account.
Second, prior literature mainly focused on the adoption and implementation of
ERP systems (Gattiker and Goodhue, 2005). Post-implementation effects were rarely studied,
because most studies were done during or just after the ERP implementation. This thesis tries
to overcome the problems by interviewing managers of medium-sized companies (clustered
by number of employees) that implemented the same ERP system in the last ten years.
Hence, this paper will be able to shed more light on the long-term impact of ERP technology.
Third according to Kimberly (1976) there is no common definition of
organizational size in the academic literature. Furthermore, there were differences in the
sizing of categories or counting of employees (equivalents versus heads). However, the
majority of research notes used the number of employees as the main measure of size.
Differences in administrative overhead or the degree of human resources used during the
production process are not included in this measure (Gremillion, 1984). Some researchers
12
therefore implemented further variables of size to make their model more precise (like sales
volume, net assets, physical capacity and the number of clients served). As a consequence,
“organizational size” as the sum of varying independent variables does not need to correlate
completely with IT adoption and the results in different research papers are not comparable to
each other.
2.4 The impact of ERP systems on Management Accounting and the firm’s MCS
In the academic literature several definitions of Management Control are
developed. My thesis refers to the definition by Anthony and Govindarajan (1998):
“Management control is a process by which managers influence other members
of the organization to implement the organization’s strategies”.
Typical activities in the Management Control function are (1) planning and (2)
coordinating of the organization’s activities, (3) communicating and (4) evaluating
information, (5) decision making and (6) influencing people’s behavior. In order to avoid
control problems like lack of direction, motivational problems or personal limitations,
Merchant and Van der Stede (2006) suggest three strategies. Besides risk-sharing and
centralization of decision making, the automation of processes in expert systems and ERP
systems play an important control role because information about business processes is less
manipulable by the employee.
Although the relationship between ERP technology and management practices is
very complex in nature (Chapman et al., 2009; Granlund et al., 2003), several studies
investigated this subject (Scapens and Jazayeri, 2003; Caglio, 2003; Lodh and Gaffikin, 2001;
Davis and Albright, 2000; Davenport, 2000; Granlund and Malmi, 2002; Hyvönen, 2003;
Dechow and Mouritsen, 2005; Chapman and Kihn, 2009). I identified two dominant streams
of prior research in this field, which explore the effects of ERP systems on 1. the management
accountant function and 2. the Management Control System (MCS).
The literature about changes in the work of management accountants after the
implementation of ERP system shows various, partly conflicting, results. The paper by
Scapens and Jazayeri (2003) explores the nature of changes accompanying the
implementation of an SAP R/3® ERP system on the management accounting function within a
firm. They conclude that ERP was not a standalone driver for change but enabled an internal
13
evolution towards “more process orientation“, meaning that employees rethink existing
processes in order to become more efficient. However, the change was path-dependent and
could vary among different companies. With regard to the management accounting function,
Scapens and Jazayeri argue that routine jobs of cost clerks and management accountants will
be eliminated and accounting knowledge transferred to the line managers who will be
responsible for the management accounting in their areas of activity. Thus, accountants are
responsible for the accurate functioning of the system but not for the content of the financial
reports. At the same time, the role of management accountants is widened towards more
interpretational and advisory tasks. Since ERP systems provide real-time data and therefore
more forward looking information, Scapens and Jazayeri explain that management
accountants will place more emphasis on forecasting and adapt a stronger strategic view.
Furthermore, ERP can facilitate team-work and cross-functional integration due to a single
information platform and the process-oriented structure. Caglio (2003) follows this reasoning
by examining the ways in which ERP systems challenge the definition of expertise and the
roles of accountants within organizations. She observes that the function of accountants
evolves towards “hybridization“, i.e. accountants take on tasks beyond traditional job
distinctions and IT staff and line managers use accounting data due to the accessibility in the
ERP system. Further, Caglio points out that the enlargement of the accountant’s practices is
accompanied by an increase in competencies which is supposed to lead to a better “internal
service “through an improved support of all other functions of the firm. Newman and Westrup
(2005) support Caglio’s results by arguing that the relationship of accountants and ERP
systems becomes increasingly intertwined. However, they observe that accountants use their
position to reshape their professional expertise.
Other researchers find no or only little impact of ERP on the management
accounting function. The empirical study by Granlund and Malmi (2002) declares that the
impact of ERP systems on the management accounting methods and controls is smaller than
expected by prior literature. This could be influenced by the fact that advanced and
conventional management accounting techniques (e.g. annual budgeting) are operated in
separate systems. Concerning the impact of ERP on management accounting, they observe
that managers tend to have more time for tasks beyond routine jobs. However, these effects
stay rather modest and inconsistent across organizations. Granlund and Malmi justify their
results with the reasoning that the long-term implementation process and the complexity of an
ERP system inhibit the introduction of value-adding but sophisticated features in the first
place. Additionally, they argue that management accounting tools in ERP systems do not
14
offer the same user friendliness as advanced accounting software offer which hinders ERP
adoption.
The second stream of literature covers studies about the impact of ERP
technology on the Management Control System (MCS). I identified two main lines of
research. The first line of research assumes that the effects of ERP systems on the MCS
depend strongly on the firm’s specific characteristics. This proposition is supported by
Quattrone and Hopper (2005). In their paper, Quattrone and Hopper (2005) studies the
contrasting effects of an ERP implementation on the MCS in two multinational organizations.
Each firm adopted different strategies, which resulted in different configurations and usage of
the ERP system. Whereas in one entity ERP was used to incrementally improve existing
accounting controls, the other firm made data available at every hierarchical level and
eliminated existing control centers and reports. The second development created a flatter
organizational structure with constantly changing control centers but also provided minimalist
control for managers.
The second line of research argues that ERP technology itself is not the driver of
change but it can increase the process transparency and efficiency (e.g. through business
process re-engineering). Dechow and Mouritsen (2005) draw this conclusion by analyzing
two large Scandinavian companies which implemented a SAP ERP system. They find that the
SAP ERP system improves financial accounting, enhances inventory control and increases
clarity and assurance about data. Moreover, manual data reconciliation was eliminated and
upstream visibility of information in the supply chain was reached. However, the positive
effects were restricted due to path dependencies and the SAP architectural configuration.
Moreover, the study by Davis and Albright (2000) provides support for the
increased process transparency and efficiency through ERP systems. In their case study, they
discover that the levels of management within the accounting function were reduced from
four to two over five years and the accountants started to report globally. Additionally, they
find that firms centralizing shared-service activities can reduce the costs of the accounting
function and are able to provide better support in strategic decision making through the
elimination of routine tasks.
Davenport (2000) provides empirical evidence for the proposition that ERP
technology itself does not lead to change in a MCS. He points out that most companies do not
increase the quality of their management reports or the correspondence between the
information reported by the management accounting and the information needs of most
15
readers. The only improvements concern already existing reports that are generated in less
time and with lower costs. Davenport further questions the ERP systems usage because the
effects of the mostly cost-intensive implementation process are rather small. This is supported
by Granlund and Malmi (2002). They do not find any changes in the control methods and
only minor effects on the existing control systems. According to them ERP systems may have
some positive effects on the efficiency of management accounting but it does not necessarily
change the logic behind management controls.
2.6 Limitations of prior research about the impact of ERP on the MCS
Prior research about the impact of ERP on the MCS shows some weaknesses
which are briefly discussed in this paragraph.
Similar to the problems faced in the extant research on ERP and organizational size, timing
problems play a role. Many researchers conducted their surveys or interviews between 1999
and 2000 or before (Granlund and Malmi, 2002; Hyvöen, 2003; Newman, 2005; Scapens and
Jazayeri, 2003) and thus were not able to explore long-term effects. Due to the complex
system’s structure and the long-lasting implementation process of ERP systems, sophisticated
accounting features are often postponed to a post-implementation stage (Granlund and Malmi,
2002; Scapens and Jazayeri, 2003). Furthermore, prior research results are influenced by
exaggerated expectations towards the impact of ERP on the MCS. The ERP technology does
not change the logic behind the control processes. It may encourage rethinking of existing
procedures through business process re-engineering but it may not have any immediate effects
only through the adoption of the technology. This study tries to avoid the problem by using
the “enabling approach to management control” by Ahrens and Chapman (2004) which is
explained in the research design section of this paper.
2.7 Management Control System’s (MCS) design
With regard to MCS design, two main schools of accounting research can be
found – the contingency research (Bruns and Waterhouse, 1975; Merchant 1981; Chow, 1983;
Merchant, 1985; Chenhall and Morris, 1993; Dunk, 1993; Smith, 1993; Dunk and Nouri,
1998; Chow et al., 1999; Emsley, 2000; Van der Stede, 2000; Cadez et al., 2008) and the
research with a more sociologic orientation (Chenhall and Morris, 1986; Abernethy and
16
Brownell, 1999; Kalagnanam and Lindsay, 1999; Chenhall, 2003; Ahrens and Chapman,
2004).
The traditional contingency-based research assumes that managers adapt their
organizations to changes in contingencies in order to attain organizational fit and improved
firm performance. Therefore, researchers explain the effectiveness of MCS design by
analyzing its fit to the company’s environment, organizational size and structure, national
culture and the business strategy. Furthermore, the research was broadened to contemporary
variables like Activity Based Costing (Gosselin, 1997; Krumwiede, 1998; Anderson and
Young, 1999), non-financial performance measures (Ittner and Larcker, 1997) and economic
value analysis (Biddle et al., 1998). Despite its popularity some researchers argue that the
contingency view tends to define the MCS as a “passive tool designed to assist managers’
decision making” (Chenhall, 2003; Ahrens and Chapman, 2004). However in today’s
changing business environments the management control system needs to play an active role
with increased communication and coordination efforts (Ahrens and Chapman, 2004). Further
criticism is related to imperfections in research methods, underspecification due to the
studying of specific MCS elements out of the system’s context and limited replication of
measurement methods and research areas (Chenhall, 2003). Some researchers therefore
applied a more sociologically orientated approach in which management control follows a
more active role in order to support flexibility (Simons, 1995; Chenhall and Morris, 1986;
Abernethy and Brownell, 1999; Kalagnanam and Lindsay, 1999; Ahrens and Chapman, 2004;
Chapman and Kihn, 2009). Simons (1995) developed a framework for understanding the
functioning of MCS in structuring the day-to-day operations. Therein, he distinguishes
between different types of control activities - routine issues, well-understood and strategic
uncertainties. Whereas routine issues are handled by traditional diagnostic controls (e.g.
reporting), strategic uncertainties are managed interactively (e.g. in face-to-face discussions
between senior and operational managers). Chapman and Kihn (2009) discuss in their paper
the “enabling approach to management control” which represents the basis for my research
and is discussed in the following section.
17
3 Proposition Development
3.1 The underlying concept
My study is based on the “enabling approach to management control” by Ahrens
and Chapman (2004), which builds on the distinction between coercive and enabling
bureaucracies by Borys and Adler (1996). The study by Ahrens and Chapman illustrates that
business environments supporting joint learning, understanding of the firm’s bounds and
developing of flexible objectives help to create management competence which is difficult to
imitate. In contrast to a coercive bureaucracy that leaves only limited freedom for an
individual to interact and is characterized by the top-down control approach, the enabling
approach to management control is supposed to reduce resistance and other disruptive
activities. Ahrens and Chapman provide empirical evidence for the relevance of this approach
by examining a restaurant chain in a longitudinal case study. They further develop a
framework for future questionnaire-based research in the field of MCS and find out that
coercive bureaucracies co-exist with enabling factors.
The enabling approach to management control by Ahrens and Chapman (2004)
consists of four design characteristics that are supposed to assess the usability of management
control systems – “Repair”, “Internal Transparency”, “Global Transparency” and
“Flexibility”. Information systems like ERP which foster these design characteristics will
contribute to the building of the management competence and hence, the qualities of the
management control system.
“Repair” refers to the capability of an employee to reconfigure the system in case
of a problem in the control process or a system’s breakdown. Thus, ERP should be designed
so that user-driven changes to the format and make-up should be possible in order to facilitate
what-if analysis rather than routine reports (Ahrens and Chapman, 2004).
The second design characteristic “Internal Transparency” covers the
understanding of local processes. Since ERP systems demand the integration of several
information systems in one single data repository, firms are forced to analyze their technical
processes. By comparing their processes to the “best practices” in an ERP system, companies
can identify weaknesses and strengths of their inner workings. According to Ahrens and
Chapman (2004), the system provides an excellent platform for the development of a control
system that informs its users in detail about local processes.
18
The third design characteristic “Global Transparency” demands an understanding
of how these local processes affect the organization as a whole. According to Ahrens and
Chapman (2004) ERP might increase global transparency in two ways. First, due to extensive
efforts to standardize accounting structures to fit the system individuals might understand
linkages between units within the larger organization. Secondly, the interaction between
previously distant individuals is enforced because of the availability of real-time data and the
integrational structure of ERP. Thus, communication can be improved which leads to more
transparency and a better support.
Finally, “Flexibility” is about the discretion of organizational members to react to
emerging events. ERP offers a variety of options to adapt the system to the user’s needs. For
instance, it is possible to block specific actions or to use automatic reporting options like
exceptions reports which are defined by the company itself.
The follow-up paper by Chapman and Kihn (2009) uses the “enabling approach to
management control” to examine in how far Information system integration (ISI) influences
the four design characteristics and potentially affect the perceived system success and firm
performance. Data was collected from 169 managers of large Finnish companies via
questionnaires. Their results show a significant positive relationship between information
system integration (ISI) and the three design variables “Repair”, “Internal Transparency” and
“Global transparency”. The relationship between ISI and “Flexibility” is slightly negative
which suggests difficulties in the flexible use of budgets within an Information system.
Chapman and Kihn (2009) conclude that “Flexibility” probably needs a “supporting
structure” in order to facilitate budgeting. Furthermore, they find a positive relationship
between ISI and perceived system success which is measured in terms of cost efficiency and
appropriateness for managing the business unit. However, Chapman and Kihn (2009) were
not able to declare a direct association between ISI and financial performance, market
performance and social responsibility.
3.2 Propositions
Similarly to the study by Chapman and Kihn (2009) my thesis examines the
degree to which the budgeting process reflects the four design characteristics of enabling
control and, hence, affects perceived system success in medium-sized companies. However,
the relationship between the four design characteristics and business unit performance will not
19
be addressed by this study. I refer to the definition of “budgeting” and “planning” to Merchant
and Van der Stede (2007, p.329):
“Planning and budgeting systems essentially produce written plans that clarify
where the organization wishes to go (goals), how it intends to get there (strategies), and what
results should be expected (performance targets).”
Since these terms can be used simultaneously, my thesis does not make a
distinction neither. I analyze the degree in which the ERP system changes the provision of
information for management decision-making in medium-sized enterprises. In addressing
Management Control I chose the planning and reporting process because they belong to the
most common instruments of MC (Luft and Shields, 2003; Hansen, Otley and Stede, 2003;
Umapathy, 1987).
In my analysis of the ERP system I concentrate, in conformity with Chapman
and Kihn (2009), on the single database concept of ISI, i.e. data is integrated and drawn from
one common database and the ERP system seeks to:
“systematize and co-ordinate record keeping, the design and implementation of
structures of categorization and aggregation of transactions, ultimately allowing for the
generation and manipulation of comprehensive virtual perspectives on the nature and flow of
operations and resources” (Chapman and Kihn, 2009, p.151).
The main advantage of one single database can be found in the fact that data
does not need to be stored and updated multiple times in various independently working
information systems (reduces redundancy of data). Thus, it attributes to more accurate data
and facilitates the process of data-retrieval which instead can lead to faster information
provision and an improved cost-efficiency. Cost efficiency is achieved if the synergy effects
of centralizing all fragmented information systems into one single database exceed the costs
of the centralization. According to a study by Nelson, Todd, and Wixom (2005) data accuracy
and completeness of information are significant drivers for perceived system success which
leads me to expect:
20
P1: Information system integration is positively related to perceived system success.
According to Ahrens and Chapman (2004), ERP systems integrate information
systems which foster the four enabling characteristics to management control - “Repair”,
“Internal Transparency”, “Global Transparency” and “Flexibility”. Due to the integration of
data into one single repository the transparency of internal processes (“Internal Transpareny”)
and of the linkages between employees’ actions and the firm’s strategy (“Global
Transparency”) can be improved. Thus, it is not necessary to collect data from several
independent information systems. Moreover, ERP systems provide several features to adapt
the system to the user’s needs (“Flexibility) and to react in case of problems (“Repair”). Thus,
I propose the following association:
P2: Information system integration is positively related to an enabling approach to
management control as seen in its four design characteristics of (a) repair, (b) internal
transparency, (c) global transparency and (d) flexibility.
Since enabling management control systems are developed to support the
employees’ actions while controlling their congruence with organizational goals, I expect that
the four design characteristics offer several advantages to users which are perceived as
supportive. Moreover, according to the paper by Zuboff (1988), enabling approaches to
management control causes less resistance among the staff members than in coercive
approaches. Thus, the employees’ perception towards enabling approaches to control should
be rather positive.
P3: An enabling approach to management control as seen in its four design characteristics of
(a) repair, (b) internal transparency, (c) global transparency and (d) flexibility, is positively
related to perceived systems success.
With regard to the budgeting and planning process, the ERP system provides,
with its integrational nature, the basis for increased transparency of data and flexibility of the
system. Management accountants are able to compare the planning numbers of every
department with previous years (internal transparency) and prepare deviation analysis which
enhances management control. Many ERP solutions also offer the possibility to trace back
data down to the initial voucher. This functionality helps employees to understand the
21
components of their budgets/plans and the drivers of the firm’s success (global transparency)
which can lead to budget breakdowns/plans at a higher level of detail. Consequently, I expect
the following relationship:
P4: An enabling approach to management control as seen in its four design characteristics of
(a) repair, (b) internal transparency, (c) global transparency and (d) flexibility leads to a
planning procedure at a higher level of detail.
Besides the integrational aspect of an ERP system, it also provides
management accountants with actual data that can be accessed at any time. This can make
accountants more flexibile (e.g. in case of ad-hoc requests) because they can supply the
management with actual and standardized information in a shorter time frame. A faster and
more accurate information provision can improve management decision-making and, hence,
have a positive effect on management control. In case of a system breakdown, ERP systems
can be recovered more easily due to its centralized structure and several which supports the
“Repair” characteristic and a faster provision of data.
P5: An enabling approach to management control as seen in its four design characteristics of
(a) repair, (b) internal transparency, (c) global transparency and (d) flexibility leads to a
faster provision of data for the management.
Similarly to the budgeting and planning process, ERP can create internal and
global transparency in the area of management reporting. Management accountants are able to
understand the linkages between financial ratios and firm performance and can develop new
indicators. This leads me to the following proposition:
P6: An enabling approach to management control as seen in its four design characteristics of
(a) repair, (b) internal transparency, (c) global transparency and (d) flexibility leads to the
inclusion of further performance indicators in management reports.
The quality of management reports might increase due to the advantages of
ERP systems already mentioned in the previous section. This can cause managers to request
more reports in order to stay up-to-date and to react faster to emerging contingencies. With
22
ERP, data is available in a greater level of detail and managers might use the data to get a
closer picture of the situation. Thus, I expect the following relationships:
P7: An enabling approach to management control as seen in its four design characteristics of
(a) repair, (b) internal transparency, (c) global transparency and (d) flexibility leads to an
increased number of management reports.
P8: An enabling approach to management control as seen in its four design characteristics of
(a) repair, (b) internal transparency, (c) global transparency and (d) flexibility leads to more
frequent reporting cycles.
Figure 1: Theoretical model
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4 Research Methodology
4.1 Microsoft Dynamics NAV®
Microsoft Dynamics NAV® belongs to the product line Microsoft Dynamics®
and is a full-scale ERP solution especially designed for medium-sized companies. The actual
version of Microsoft Dynamics NAV® provides modules for several processes (Appendix)
which can be purchased in different license packages (e.g. Business Essentials, Advanced
Management). Microsoft Dynamics NAV® is especially interesting for medium-sized
companies because it offers industry-specific software solutions for diverse branches.
According to Microsoft®, Microsoft Dynamics NAV® represents a flexible and cost-effective
ERP solution that is “fast to implement, easy to configure, and simple to use”.
4.2 Data collection
To investigate the effects of ERP systems on the MCS of medium-sized
companies, 15 semi-structured interviews were conducted via telephone and one
questionnaire was filled out manually. Data for the study were collected from 15/06/2010 to
09/08/2010. The average length of the interviews was 35 minutes.
The original sample covered 43 companies from diverse industries with 50 to 2200 employees
which were selected on the German homepage of Microsoft Dynamics NAV®
(http://www.microsoft.com/germany/dynamics/produkte/nav/ueberblick/ default.aspx). I
therefore went through the customer list, checked if the companies are located in Germany
and if their address is still available on the Internet.
24
Table 1: Results of the data collection procedure
The original sample was reduced to 39 companies because three companies went
bankrupt and one company did not reside in Germany at the time of the research. Table 1
summarizes the results of the data collection procedure. In total, 33% of the contacted
enterprises agreed to participate in the research whereas 26% denied giving an interview.
The study is partly explorative and partly explanatory. It is explorative because it
attempts to examine the unknown effects of ERP systems on the MCS of medium-sized
companies (e.g. “Which negative effects of the ERP system appeared during the budgeting
process?”). Furthermore, the thesis tries to explain certain developments in the MCS which
were influenced by the ERP system (e.g. “Has the content of reports changed after the ERP
implementation? If so, why?”).
I approached the companies either through telephone calls or email and made
appointments if an employee decided to participate in the research project. If a company was
not willing to participate in an interview, they were given the chance to fill out an online
questionnaire. Upfront, every participant received three documents: the first document
contained information about the purpose and scope of the study, contact information and data
security. The second and third document included the questionnaire which was translated
from English to German before. There are two main reasons for sending these documents
around. First, participants were able to get to know with the study and be sure that they do not
Original Sample: 43 % Bankrupt companies: 3 % Not residing in Germany: 1 = New Sample: 39
No reply on the phone or via email: 10 Denials: 14 Appointments: 13 Direct interview (without questionnaire): 1 Manual online-survey: 1
+ Added companies: 7 = Extended Sample: 46
Total no reply: 16 Total denials: 14 Total interviews: 15 Total manual online-surveys: 1
25
participate in a commercial survey. Second, they had the possibility to prepare the interviews
in advance. Finally, fifteen individuals agreed to participate in the interviews. One participant
decided to do the survey manually. Table 2 gives an overview of the respondents by industry.
Table 3 presents participating individuals according to their function in the company, their
employment period and their gender.
Table 2: Number of respondents per industry
Industries: % to total: Number of companies:
Automobile, Services 13,33% 2
Buildings, Construction 6,67% 1 Electronic industry, Hightech
6,67% 1
Energy Industry 6,67% 1
Law Society 6,67% 1
Non-Profit Organization 6,67% 1
Pharma industry 13,33% 2
Public Sector 6,67% 1
Services 6,67% 1
Trade, Distribution 13,33% 2
Waste Management 13,33% 2 Total: 100,00% 15
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Table 3: Information about the interviewees
In order to test the questionnaire and the open-ended questions and to enhance
my interviewing skills, five pilots were carried out. As a consequence, I added questions 1, 2,
3, 5, 6 and 13 (in the open-ended questions part) because I got more insights in the
functionality of Microsoft Dynamics NAV® and set the focus on the situation before and after
ERP implementation.
At the beginning of each interview, I briefly presented myself and the objective
of the research and I reminded each participant to give true answers. Instead of recording
every interview, I made notes during the discussion which were summarized in a protocol and
sent back to the participant. The protocols were prepared directly after the interview and
interviews were only included in the thesis if the protocols were confirmed by the participant.
One participant neither reacted to my phone calls nor to my emails and I therefore excluded
his answers from the study. I decided for this method of data collection because interviewees
might feel more comfortable and give more extensive answers during the interview if they are
Number of interviewee Function Employed since Gender
1
Manager Controlling/internal
accounting 2004 Female 2 Controller 2000 Male 3 Manager IT 1998 Male
4 Manager ERP, Controlling 1996 Male 5 Controller 2005 Male
6
Manager Controlling/internal
accounting 2006 Male 7 Controller 2008 Male
8 Manager Purchasing 1990 Male
9 Manager
Controlling/Administration 2001 Male 10 Controller 2006 Male
11 Manager ERP, Controlling 2007 Male
12 Controller (Coordination
of Sales) 2000 Male
13 Manager Controlling (Planning/Allocation) 1997 Male
14 Controller 1991 Male 15 Controller 1994 Male
27
not recorded. In case of misunderstandings, participants were able to ask questions which
could be solved directly in the discussion. Similarly, I included additional questions if
something was unclear to me or I needed an example to make the interview more concrete.
During the interviews, some problems emerged which are discussed in the following section.
First, in order to evaluate the effects of an ERP system on the MCS,
interviewees needed to know the former system and Microsoft Dynamics NAV®. Apart from
one exception, I therefore excluded all employees from the interview who were not employed
before the implementation date. However, in one company Microsoft Dynamics NAV® was
not actively used before the interviewee was employed. As a consequence, the employee was
able to evaluate both systems and their effects on the MCS and I included his answers in my
research.
Second, the majority of the respondents does not use the budgeting function of
the ERP system or create formal budgets in general. Some employees justified the decision by
saying that the business is “too small” and budgeting would not be efficient from a cost-
benefit point-of-view. Others told me that their sales volume is very volatile and cannot be
covered in budgets. During the interviews, I experienced that these companies do some short
term planning instead of budgeting. I therefore asked them to evaluate the effects of Microsoft
Dynamics NAV® on their planning process.
4.3 The Research documents
The interviews were structured as follows. The first part consisted of twenty
open-ended questions about the effects of ERP on the budgeting/planning and the reporting
process of medium-sized entities (Appendix). I decided for open-ended questions in order to
get a deeper understanding of the relationship between ERP systems and Management
Control of medium-sized companies. According to Yin (2003) this methodology can be
applied if “a “how“ and “why“ question is being asked about a contemporary set of events,
over which the investigator has little or no control”. The second part formed the questionnaire
containing 31 statements. For reasons of comparison, 20 statements were adopted from the
questionnaire by Chapman and Kihn (2009) and translated into German. I further added
questions 5, 6 and 11 (in the open-ended questions part) as well as 8 additional statements (in
the questionnaire) about the reporting process (Appendix) for the following three reasons.
First, the research field was expanded towards the reporting process because it is a very
common instrument of Management Control in Germany and the effects of ERP systems on
28
the MCS of medium-sized companies can be examined more closely. Second, in order to
ensure the trustworthiness of the study statements against positivism (e.g. Question 5) and
consistency checks (e.g. Question 25 checks the answer of Question 18 in the open-ended
questions part) were included in the questionnaire. Finally, I added statements in the
questionnaire to further explore the validity of the marketing statements given on the
homepage by Microsoft Dynamics NAV®.
4.4 Measurement of variables
The thesis refers to the model by Ahrens and Chapman (2009) and defines the model
variables accordingly. Respondents are asked to use the 5-point Likert-type scale, i.e. the
interviewee needed to evaluate each statement from “totally disagree” to “totally agree”.
Information System Integration (ISI)
In the questionnaire, ISI is measured by two components. First, I discover if information in
reports is based on a common database and second, if the existing information systems are
fully integrated in the ERP system.
Budgeting process
The Budgeting process encompasses “the whole range of activities-including meetings,
relating to the preparation, monitoring, and updating of formal business unit quantitative plans
within the business unit” (Ahrens and Chapman, 2009, p.159).
Managerial information provision
Since the reporting process was not covered by the research of Ahrens and Chapman (2009), I
refer to the definition by Vaassen, Meuwissen and Schelleman (2009, Index) which defines it
as the “systematic gathering, recording and processing of data aimed at the provision of
information for management decision-making, for operating the entity and controlling it,
including accountability.”
System’s success
In order to determine the success of the ERP system, participants were asked to evaluate the
system from a cost-benefit point-of-view and if it is the right tool to manage the business unit.
29
5 Data analysis
In this study, data analysis consists of two distinct parts.
First, I use a quantitative approach to compare my results with those of Chapman
and Kihn (2009). As a consequence, three propositions of their paper (P1 – P3) and the same
measures/questions for “information system integration” (ISI), the four design characteristics
of enabling control and “perceived system success” were included in my thesis.
Second, the results from the interviews were analyzed. I test the propositions P4
to P8 by analyzing the answers to one thematic field in the interviews.The following section
presents the results of the data analysis ordered by analysis technique and thematic fields.
5.1 Quantitative data analysis
Table 4 shows the descriptive statistics for the variables of my research. It can be
determined that “Flexibility” has the highest standard deviation (1,07) and the smallest mean
value (3,00). This is particularly relevant because many ERP distributors (e.g. Microsoft
Dynamics, SAP) affirm that ERP systems increase flexibility in the planning function. The
high standard deviation can be influenced by the fact that participating companies show
different levels of planning processes. Some medium-sized enterprise did not even use (tight)
plans/budgets in order to estimate future developments. In contrast to “Flexibility”,
“Perceived System Success” shows one of the highest mean values and a relatively small
standard deviation. As a consequence, many participating companies seem to reap benefits
from their ERP system.
Mean SD Theoretical range Actual range 1. IS Integration 4,30 0,89 1.00 - 5.00 1.00 - 5.00 2. Repair 3,97 0,85 1.00 - 5.00 1.00 - 5.00 3. Internal transparency 4,03 0,90 1.00 - 5.00 1.00 - 5.00 4. Global transparency 3,66 0,85 1.00 - 5.00 1.00 - 5.00 5. Flexibility 3,00 1,07 1.00 - 5.00 1.00 - 5.00 6. Success 4,25 0,68 1.00 - 5.00 1.00 - 5.00
Table 4: Descriptive statistics for variables (n=15)
Table 5 shows the results of a correlation analysis. It shows that the associations
between the variables are all positive which supports the enabling approach to management
control by Ahrens and Chapman (2004). However, I get a statistically insignificant correlation
30
between ISI and “Repair” (0,051). This could be due to the fact that accountants are not
familiar with technical applications of the ERP system and need to ask an IT manager or
external partner to modify the system in case of a problem.
In comparison with Chapman and Kihn (2009), this study shows a stronger
association between “Flexibility” and the other design variables. In Chapman & Kihn, the
association between “Flexibility” and ISI was slightly negative. This is interesting because the
correlation coefficient in this study is relatively high. In my opinion, Microsoft Dynamics
NAV® can offer more flexibility to medium-sized companies than SAP systems because of its
industry specific software solutions. However, the correlation coefficient for “Flexibility” and
“Perceived System Success” (0,051) is still rather weak. As a consequence, I argue that ERP
systems enable flexibility which cannot be used (to a full extent) to create a successful
planning function.
1 2 3 4 5 6 1. IS Integration 1,000 2. Repair 0,051* 1,000 3. Internal
transparency 0,598*** 0,137* 1,000 4. Global
transparency 0,378*** 0,242** 0,466*** 1,000 5. Flexibility 0,604*** 0,299** 0,276** 0,539*** 1,000 6. Success 0,478*** 0,383*** 0,526*** 0,221** 0,051* 1,000
Table 5: Pearson’s correlation coefficients (n=15)
* P < 0.05
** P < 0.01
*** P < 0.00
Thus, I find support for the proposition P1:
P1: Information system integration is positively related to perceived system success.
Although the relationship between ISI and “Repair” is insignificant, all other
design variables are positively correlated with ISI which gives partial support for the
proposition P2:
31
P2: Information system integration is positively related to an enabling approach to
management control as seen in its four design characteristics of (a) repair, (b) internal
transparency, (c) global transparency and (d) flexibility.
With regard to the relationship between the four enabling variables and
“Perceived System Success”, I find positive correlation coefficients. However, the association
between “Flexibility” and “Perceived System Success” and “Global Transparency” and
“Perceived System Success” are rather weak (0,051 and 0,221). Thus, I can only partially
support proposition P3:
P3: An enabling approach to management control as seen in its four design characteristics of
(a) repair, (b) internal transparency, (c) global transparency and (d) flexibility, is positively
related to perceived systems success.
5.2 Qualitative data analysis
5.2.1 Information System Integration (ISI)
With regard to Information System Integration, 73 % of the respondents declared
that they make use of the ERP system in every department. However, some interviewees
stated that they only use Microsoft Dynamics NAV® for the financial management.
Employees from other departments send their data to internal accountants which periodically
update the ERP system. Other departments do not have direct access to the system. On the
one hand, this procedure disables many potential advantages of the ERP system (e.g. updated
data is available at every department which increases transparency of processes, less routine
jobs for accountants, faster information provision) and on the other hand, it implies the risk of
error because of manual updates and hence, less reliable data for management control.
Furthermore, I asked participants about the adaptation of internal processes after
the ERP implementation and the information system integration (business process re-
engineering). This means that existing internal processes are compared to the standard
business processes as embedded in the ERP system. Remarkably, 53% of the respondents
declared that the existing business processes were reflected by the ERP system and no major
system adaptations needed to be performed. Most of them revealed that they first defined their
32
business processes and then customized the ERP system to their processes. One company
assigned an external partner to execute the customization tasks. Although customization often
has positive effects on the fit between the organization and the ERP system, I was informed
about negative effects by respondents. Besides huge costs, customization bears the risk that
medium-sized companies ask their external partners to fulfill many individual wishes of
employees which can lead to an “inflated” internal reporting system. Consequently,
management reports become very complex and less transparent which can cause worse
management decisions. Moreover, it can be very costly because of permanent updates of the
reports.
“[Translated] After the implementation of Microsoft Dynamics NAV®, our IT department
adapted the system to our needs. They created around 400 individual reports because every
employee needed his own report. The problem is that our reporting system is very complex
now and a structured presentation of data is not possible. It will be our future challenge to
reduce the amount of reports to achieve a better strategic decision-making.”
One third of the participants declared that they performed business process re-
engineering after the ERP implementation. Typically, the business process re-engineering
concerned the recording of working hours. For instance, the following changes were observed
in one company. Before the implementation of Microsoft Dynamics NAV®, working hours
were logged in individual information systems. These numbers were forwarded to a central
collection point and inserted in an Excel-based tool. Then, these Excel tables were forwarded
to the Human Resources Department which evaluated the data and printed and sent the pay
slips to every employee. After the ERP implementation, every employee was able to insert
their working hours directly into the system. This was beneficial because pay slips were
automatically created and the process chain was shortened in order to reduce manual sources
of error. With regard to management control, the shortening increase the accuracy and
reliability of data and thus management control.
5.2.2 The enabling effects of the ERP system
The enabling effects of the ERP system stated in the interviews covered several
aspects. 40% of the interviewees declared that it is easier to get access to data after the ERP
33
implementation and the process of data collection could be fastened. Additionally,
respondents named an increase of data transparency (27%) and a higher traceability of
bookings (20%). A participant added that his company changed the number of accounts from
40 to 180. Thus, it is possible to allocate costs and profits more accurately and to get more
concrete planning numbers. Further effects of ERP were the possibilities to make more
profound and complex analysis (13%) which were partly not feasible before and to improve
management control through more explicit demands on employees (13%). Due to these
developments, it is easier for accountants to detect Plan/Actual deviations in a shorter time
frame which can help management to react more flexible to upcoming problems.
The enabling approach to management control by Ahrens and Chapman (2004) is
based on the distinction between coercive and enabling bureaucracies by Borys and Adler
(1996). In an enabling work environment communication and coordination is supported in
order to achieve better performance. 73% of the interviewees declared that communication
and /or coordination between departments and in teams have increased since ERP
implementation. Respondents stated the following aspects as potential reasons for this
development.
First, there were more discussions concerning data validity due to diverging
numbers in the system. In order to present the firm’s performance in a consistent way, teams
needed to understand the individual components of accounting numbers and to partially adapt
definitions of financial ratios. The increased communication was followed by enhanced data
transparency and a better understanding of the performance drivers.
“[Translated] After the implementation, we did not know if the numbers in the system were
correct. We needed to ask the Management Accountant to explain the components of each
number in order to understand the results. The advantage of the ERP system is that you can
trace down the data to the smallest component. And you don’t have to print paper files which
is better for the environment.”
Second, the ERP implementation supported business process re-engineering
which led to business processes with a stronger teamwork orientation. Staff members with
more ERP experiences were able to help employees with less experience. Thus, the exchange
of information could be facilitated through joint learning.
34
5.2.3 The effects of the ERP system on the budgeting/planning process
In this paragraph, I focus on the effects of the ERP system on the
budgeting/planning process. Remarkably, 40% of the respondents stated that they did not use
the budgeting/planning function of the ERP system. They developed plans with Excel instead
and then transferred these numbers into the ERP system. Moreover, 20% of the interviewees
explained that their companies have troubles to make plans because of their field of business
(e.g. large volatility in client orders regarding frequency and volume). The companies that use
the budgeting/planning function of Microsoft Dynamics NAV® experienced the following
effects. The collection of data for the planning cycle could be fastened, simplified and
improved due to actual data. Furthermore, the plans were developed in more detail. In order to
get a better understanding of the ERP effects on the planning process, I asked the respondents
about the planning situation before and after the ERP implementation. One third of all
answers stated that the planning numbers were very rough before ERP, i.e. the numbers were
settled at company level with a one year planning horizon. Only one respondent indicated that
the planning was done at project level and there were no plans at company level. One
interviewee indicated that the planning was unknown to the whole company except the
accounting manager who developed it. Generally, many plans were developed in Excel (40%)
and adjusted in case of management decisions.
“[Translated] Before the ERP implementation, we used a self-developed program on the
basis of Access to create the reports. This was always very time-consuming and demanded
lots of effort. Now, we can produce reports on a weekly basis with a higher level of detail.”
The interview results indicate that the planning process changed after the ERP
implementation. Almost half of all respondents argued that the plans are presented in more
detail with ERP. Three interviewees stated that the planning process can be performed at
account level now. Similarly, the company that planned at project level was able to shift it to
company level. Thus, I find partial support for my proposition P4:
P4: An enabling approach to management control as seen in its four design characteristics of
(a) repair, (b) internal transparency, (c) global transparency and (d) flexibility leads to a
planning procedure at a higher level of detail.
35
In order to understand the drivers for this development, I asked the interviewees if
they could name certain functions of the ERP system that improved the budgeting/planning
process in their company. Interestingly, more than 25% of all respondents told me that they
were not able to determine any functions of Microsoft Dynamics NAV®. The rest of the
sample (60%) stated the following functions as beneficial for the planning process. Besides a
better traceability of data and a fastened process of data collection, participants mentioned the
linkages in the system which help to distribute the right data to the responsible employees
(especially the connection between the SharePoint Server and Microsoft Office® tools like
Excel, Outlook and Word). For instance, the linkage to the SharePoint Server can help
employees to exchange ideas for improvements about the ERP system. Due to this feature,
companies are able to faster detect potential flaws of the system and to reduce the period of
adjustments which saves costs.
In contrast to the strengths of the ERP system, I was interested in discovering
potential weaknesses of Microsoft Dynamics NAV®. Besides problems occurring at the
beginning of the implementation (e.g. resistance on behalf of the employees, the need for
adjustments to the system), 40% of the respondents declared that there were no negative
effects of the ERP system. However, typical problems were associated with the allocation of
user rights per table, the updating of inventories and purchasing prices and the less user-
friendly applications in the ERP system. Participants especially focused on formatting issues
(like the presentation in graphs and not in tables).
With regard to the point of time when the ERP system shows its effects on the
budgeting/ planning process, interviewees indicated that they perceived effects quickly. 33%
of the respondents declared that the effects were observed directly after the implementation
because they used a Big Bang approach. The rest estimated a period of half a year to two
years.
Moreover, since ERP systems can enable developments in the company (e.g.
through business process re-engineering) which lead to a rethinking of business structures, I
asked the respondents if the effects of the ERP system changed over time. I also had in mind
that employees could go back to their old’ work habits after some time. The majority of
respondents did not perceive any changes in the effects of the ERP system over time. Some
employees mentioned that it was not possible to go back to former work habits because of
instructions of their superiors and that the benefits of the ERP system became visible very
fast.
36
I also asked the respondents if budgeting/planning estimates had been improved
since the ERP implementation. 53% of all respondents answered that planning estimates
became more accurate and were presented in more detail. However, one third of the
respondents declared no improvements because planning estimates are developed by the
management and independent from the ERP system.
In summary, I get mixed results with respect to the impact of the ERP system on
the planning process. This is influenced by the fact that the majority of participating entities
either create plans externally to the ERP system (e.g. with Excel) or do not develop long term
plans because of their business environment. However, the acceleration and simplification of
the data collection procedure as well as the higher traceability of data were named as major
effects of the system. The planning process before the ERP implementation was generally
characterized by rough numbers with a short or middle term horizon whereas the planning
process with support of the ERP system creates plans at a higher level of detail and with more
accurate planning estimates. The effects of the ERP system often appeared directly or briefly
after the ERP implementation and did not change over time.
5.2.4 The effects of the ERP system on the management reporting process
Microsoft Dynamics NAV® offers several pre-defined standard reports (like pre-
calculations, liquidity analysis) which are said to be adapted to the industry in which the
company is operating (according to Microsoft Dynamics NAV®,
http://www.microsoft.com/germany/dynamics/produkte/nav/eigenschaften/business-
analytics.aspx). Moreover, the system provides a tool to develop new reports according to the
company’s needs. During the interviews I got to know that many companies started to use the
standard reports but after a while they decided to develop new reports that fit the company
more. This step demanded lots of programming effort. In order to avoid this, many
participating companies either purchased additional reporting (Jet Reports®, Crystal Reports®)
and/or evaluation tools (Cubeware®, target Software®).
“[Translated] We don’t use the standard reports in Microsoft Dynamics NAV®
because they were too complex for our business and faulty. The ERP system knows a lot but it
does not know we are looking for.”
37
Additionally, the majority of the sample indicated that the process of data collection
for reports could be accelerated. The ERP system further changed work of some respondents
towards more summarizing tasks. In the past, evaluations were developed in high detail
(including a lot of “paperwork”). With ERP, reports contain more aggregated numbers which,
in case of a special request, can be broken down into its components.
Consequently, I conclude that I get partial support for proposition P5:
P5: An enabling approach to management control as seen in its four design characteristics of
(a) repair, (b) internal transparency, (c) global transparency and (d) flexibility leads to a
faster provision of data for the management.
Additionally, interviewees were asked to describe the former process of
managerial information provision in order to know the reasons behind the acceleration of the
reporting cycle. The majority indicated that they created reports with Excel and inserted
numbers manually. For example, one respondent described the difficulties of the reporting
process before the ERP system was used. First, the accountant made screenshots of every
account out of the database and transferred the data manually into the Excel document.
Second, he added further numbers into the Excel sheets which were not present in the
database and printed these Excel documents in order to file them again. On the one hand, this
process is very time-consuming and often depends on the person who is responsible for the
task). On the other hand, the process is very complex and contains several sources of error
(e.g. manual typing of data, blurred screenshots). This argument is supported by several
respondents. They further added that they used different sources of data which are inserted
both automatically and manually into the Excel files or suffered performance problems with
regard to data requests and filtering. As a consequence, accountants had huge problems to
provide the right data to the management. With Microsoft Dynamics NAV® this process could
be fastened, simplified and more data on a higher level of detail was available.
“[Translated] Before we used rough standard reports to manage our business. Now,
with ERP, we have a differentiated reporting system and can perform difficult request in 5-8
minutes which demanded lots of individual effort or were not possible before.”
38
Moreover, I asked the interviewees if they could name a particular feature of the
ERP system that made the reporting process more difficult in their company. 53% of
respondents did not mention any complicating factors. However, five participants named the
time-consuming development of new reports and the confusing representation of data as
major weaknesses of the system. Furthermore, the development of new reports demands a
deeper understanding of the ERP system which causes that employees sometimes feel “out of
their depth” when it comes to solving technical problems. Another accountant added that they
cannot use the reports out of the ERP system because their content is faulty. Finally, the fact
that Microsoft Dynamics NAV® is not able to create a history of actual data (e.g. purchase
prices) induces accountant to insert data manually.
Since I found effects of the ERP system on the timing issue of the reporting
process, I asked the respondents about an impact of Microsoft Dynamics NAV® on the
content of reports. The majority answered that the reports show higher levels of detail (e.g.
presentation of data according to booking accounts) and are more transparent at the same time
(e.g. view of data in categories). Nevertheless, only the minority of the sample stated an
inclusion of further ratios in the management reports. Out of this group, one employee
mentioned that this development was independent from the ERP implementation and based on
a management decision. Respondents justified the absence of further ratios in the reports by
two major reasons. First, some interviewees told me that their reporting system is already
elaborate and no changes need to be made. Second, instructions by the financial committee
prohibit any changes to the performance measurement system in order to stay comparable
with other institutions of the same branch.
With regard to the proposition P6, I only get weak support for the integration of
further performance indicators in the management reports.
P6: An enabling approach to management control as seen in its four design characteristics of
(a) repair, (b) internal transparency, (c) global transparency and (d) flexibility leads to the
inclusion of further ratios in management reports.
Furthermore, employees were asked about the effects of the ERP system on the
number of reports. The majority of respondents indicated that they create more reports with
ERP. For instance, reports about the payment habits of debtors and creditors or about the
progress of orders and budget developments were established. However, some interviewees
criticized that reports exist which are not used by the management. Since Microsoft Dynamics
39
NAV® offers extensive reporting capabilities, it is vital that companies evaluate the usefulness
of extra management reporting requests.
Thus, I can partially support the proposition P7:
P7: An enabling approach to management control as seen in its four design characteristics of
(a) repair, (b) internal transparency, (c) global transparency and (d) flexibility leads to an
increased number of management reports.
I assessed that the ERP system has an impact on the reporting process, the
content and the number of reports in medium-sized companies. Now, the effects of the ERP
system on the reporting cycles are examined. Interestingly, more than half of the respondents
stated shorter reporting cycles. Some accountants even pointed out that these changes were
significant. For instance, six interviewees indicated that they create management reports on a
weekly basis which were established on a monthly basis before. Additionally, one participant
explained that before the ERP implementation, numbers needed to be verified by an external
tax consultant. It took 1.5 months to prepare the numbers for this external consultant. With
ERP, the company is able to request actual data on a daily basis.
Accordingly, I find a partial support for proposition P8 with regard to the
frequency of reporting cycles.
P8: An enabling approach to management control as seen in its four design characteristics of
(a) repair, (b) internal transparency, (c) global transparency and (d) flexibility leads to more
frequent reporting cycles.
I discovered during the interviews that Microsoft Dynamics NAV® shows some
weaknesses with respect to data analysis. I therefore asked the respondents about the usage of
additional tools to analyze data. Almost 75% of the respondents stated Excel as their major
evaluation tool. They justified their decision by the flexibility and user-friendliness of the
tool. Furthermore, Excel is widely known in companies and its functionality is proven over
years. Interestingly, some interviewees declared that they use an additional reporting tool
(JetReports®, CrystalReports®) and another two companies think of purchasing a reporting
tool in the near future. Similar results can be found with regard to data analysis tools.
40
With regard to the reasons for additional tools, 47% of the participants mentioned
that the ERP system provides relatively limited analysis skills. One employee argued that it
would take him a long time to find the function in Microsoft Dynamics NAV® whereas the
Excel formula is clear to him. Moreover, 40% of the respondents criticized the uncomfortable
representation of data (e.g. in tables, in black and white) in the ERP system. According to
them, the ERP system should include further graphs like traffic lights or progress rates.
Furthermore, Microsoft Dynamics NAV® does not offer data warehouse operations like
“slice” and “dice” in order to view data from different perspectives. Finally, one third of all
answers concluded that the ERP system is relatively inflexible (e.g. in summarizing numbers
in categories).
Finally, I asked the interviewees about their plans with respect to the future usage
of the ERP system. 80% stated that they will continue using the system. Besides regular
updates, only two respondents indicated that they will expand the ERP system (e.g. to
Microsoft Dynamics NAV® Classic). In contrast, some participating enterprises think of
purchasing additional tools. Two entities even stated that they will gradually abandon
Microsoft Dynamics NAV® because they look for a more user-friendly system environment
which allows more profound analysis and a clear data representation.
In short, I find several trends with respect to the impact of the ERP system on the
managerial information provision. For instance, the majority of enterprises was able to
shorten the reporting cycles down to a weekly basis and to increase the number of available
management reports. Whereas most of the respondents created reports with Excel before the
ERP implementation, they were able to fasten the reporting process, reduce manual updating
of data and thus, improve managerial information provision after the ERP implementation.
However, the minority of companies included further ratios in the reports. Moreover, many
participating companies did not use the standard reports of the ERP system but developed
their own reports or used an additional reporting tool. They justified their decision by the few
analysis functionalities in the system and the less user-friendly representation of data (e.g. in
tables). However, the majority of companies is going to stay with Microsoft Dynamics NAV®
and thinks of expanding the ERP solution by purchasing an additional analysis and/or
reporting tools.
41
Figure 2: Summary of results
P6: weak support
42
6 Conclusion
The aim of this thesis was to study the effects of an ERP system on the MCS
design, especially the planning function and the managerial information provision, of
medium-sized enterprises. The quantitative analysis shows that the model variables
“Information System Integration” and “Perceived System Success”, “Information System
Integration” and the four design characteristics - “Repair”, “Internal Transparency”, “Global
Transparency” and “Flexibility”- and the four design characteristics and “Perceived System
Success” are positively correlated. Thus, I provide empirical evidence for the validity of the
enabling model by Ahrens and Chapman (2004), in the context of medium-sized enterprises.
According to the results of my qualitative data analysis, ERP systems do not have
direct but indirect effects on the planning function and the managerial information provision.
Typical indirect effects were the increased availability and transparency of data, an
accelerated process of data collection and an improved traceability of data entries. Due to
these effects, the majority of participants are able to create plans at a higher level of detail
with more accurate planning estimates. Similarly, ERP systems help management accountants
to shorten the reporting cycles, to reduce the need for manual data updates and to establish
more profound management reports within a shorter time frame. Although more transparent
information is available in the management reports, only few companies include new
financial or non-financial ratios in their reports. Furthermore, I assess a trend towards
improved communication and coordination with Microsoft Dynamics NAV® which also
supports the enabling approach to management control by Ahrens and Chapman (2004). Most
of these effects appeared directly or briefly after the ERP implementation, perhaps as a
consequence of the use of a Big Bang implementation approach.
With regard to the marketing statements by Microsoft, participating companies
criticized the lack of flexibility of the system to adapt to the user’s needs, the uncomfortable
representation of data and the difficult allocation of user rights. Especially, the development
of new reports (besides the standard reports) demands a lot of programming efforts. The
majority of the participants in my study therefore create plans and reports with Excel or with
an alternative planning and reporting tool. According to the respondents, these tools provide
them with more flexibility regarding the representation as well as the analysis of data.
To conclude, the full scale ERP solutions designed for medium-sized companies
provide several advantages with regard to the planning and reporting function. However, I
experienced that many medium-sized companies still have poor management control systems
43
and show knowledge constraints with regard to the ERP technology. Therefore, it is essential
to clearly define the system’s requirements before the ERP implementation in order to avoid
usage problems and to cut costs.
6.1 Limitations
The study has several limitations which should be taken in consideration when
interpreting the results.
A first limitation concerns the sample selection. Companies were selected on the
German homepage of Microsoft Dynamics NAV®. Enterprises using Microsoft Dynamics
NAV® in another country are not included in the sample.
A second limitation can be found in the examination of only one ERP system –
Microsoft Dynamics NAV®. Thus, the external validity of my results is restricted to this
product. However, major software distributors (such as SAP®, Baan®, Oracle®, PeopleSoft®,
JD Edwards®) offer similar solutions for medium-sized companies which are all based on the
same “one single database” concept.
Third, my study focuses on the “budgeting/ planning” and “information
provision” aspect of management control systems. Other areas of management control could
not be covered by this thesis. However, budgeting/ planning and management reporting
belong to the most common tools of management control which allows comparing the
answers of different interviewees.
Fourth, the small sample size of 15 respondents limits the external validity of my
research results. Therefore, it is difficult to compare my results with those of Chapman and
Kihn (2009). Especially the results of the quantitative analysis can be biased due to the small
sample size.
Finally, the study results could be biased because respondents had to recall the
MCS design before and after the ERP implementation. Besides the interview data, no further
data to verify the correctness of the respondents’ statements was used.
6.2 Recommendations for future research
My study reveals interesting effects of the ERP system on the MCS of medium-
sized companies. Further research could address the same issues again but use a bigger
sample to enhance the external validity of the findings. Moreover, other software suppliers
44
such as SAP have developed similar products like Microsoft Dynamics NAV® for medium-
sized companies (e.g. SAP Business-all-in-one, Avista.ERP). It would be interesting to
explore the effects across multiple ERP software packages.
Since my study focuses on the budgeting/planning and the reporting process of
management control systems, it would be interesting to determine the effects of an ERP
system on internal control structures. For instance, ERP systems provide exception reports
which monitor internal controls (Turner, 2003). According to Lightle and Waller Vallario
(2003), ERP systems can have an impact on the segregation of duties because every employee
has access to data and can perform every task individually which may challenge the internal
control system.
45
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Microsoft Deutschland GmbH, Produkte: Microsoft Dynamics NAV,
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8 Appendix
Research documents (in English)
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58
59
60
61
62
Original research documents (in German)
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64
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Der Einfluss von ERP Systemen auf das Controlling von mittelständischen Unternehmen
Teil: Offene Fragen
1. Für welche Bereiche setzen Sie Microsoft Dynamics Navision ein?
2. Haben Sie bei der Implementierung von Microsoft Dynamics Navision die
Unternehmensprozesse an das System angepasst?
3. Welche generellen Veränderungen auf die Tätigkeiten des Controllers durch Navision
haben Sie bemerkt?
4. Wie hat das ERP System den Budgetierungsprozess beeinflusst (z.B. inhaltlich,
zeitlich)?
5. Wie wurde vor der ERP Implementierung geplant?
6. Können Sie bestimmte Funktionen des ERP Systems nennen, die den
Planungsprozess des Unternehmens verbessert haben. Falls ja, welche?
7. Welche negativen Effekte des ERP Systems tauchen während des
Budgetierungsprozess auf?
8. Wann wurden diese Effekte nach der ERP Implementierung realisiert?
9. Haben sich diese Effekte über die Zeit verändert?
10. Wie hat sich die Arbeitsatmosphäre seit der ERP Implementierung verändert (z.B.
mehr Teamarbeit, mehr Kommunikation)?
11. Haben sich Budgetschätzungen seit der ERP Einführung verbessert? Fall ja, wie?
12. Wie hat das ERP System den Reporting-Prozess beeinflusst?
13. Wie wurden vor der ERP Implementierung Berichte erstellt?
14. Können Sie bestimmte Funktionen des ERP-Systems nennen, die den Reporting-
Prozess im Unternehmen erschwert haben. Falls ja, welche?
68
15. Wie haben sich die Berichtszyklen mit dem ERP System verändert?
16. Haben Sie einen Einfluss des ERP Systems auf die Anzahl der Berichte
wahrgenommen? Fall ja, welchen?
17. Hat sich der Inhalt der Berichte nach der ERP Implementierung verändert? Falls ja,
wie?
18. Nutzen Sie zusätzliche Hilfsmittel neben dem ERP System, um Zahlen zu analysieren?
Falls ja, welche?
19. Warum nutzen Sie diese zusätzlichen Hilfsmittel?
20. Welche Veränderungen planen Sie für den zukünftigen Gebrauch von Navision im
Controlling (z.B. Beibehaltung von Navision, Nutzung von zusätzlichen Tools)?
Vielen Dank für Ihre Unterstützung!