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Risk Management: Institutional Project Life Cycle

The company in question is in the process of implementing ERP system implementation project, which provides for the restructuring and reengineering of business processes, as well as changes in the organizational structure. Such implementation is a complex and multifaceted process that affects almost all areas of the company’ activity. The need to implement the project is due to the fact that the company had problems collecting information in a geographically distributed structure: branches scattered throughout the country kept records in different accounting systems, the number of which at one facility varied from two to two dozen. Along with this, spreadsheets and paperwork were used. In the absence of a unified accounting methodology, the collection of consolidated accounting and tax reporting was a laborious process and took a lot of time.

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ERP systems have become a familiar tool for large and medium-sized businesses. Their main task is to automate the company’s business processes (production, supply, sales), as well as management functions (planning, accounting, control). However, the statistics of ERP systems implementations are quite alarming (Pelphrey, 2015). The ERP system is not quite a “box” program, like, for example, Microsoft Office, which can be installed with equal efficiency on computers of any enterprise. The effectiveness of ERP system largely depends on its configuration for specific tasks of a particular enterprise. Only a properly designed and configured ERP system really helps make the business more manageable and transparent. Accordingly, there are specific risks that need to be identified and managed for the successful implementation of the project.

Project Context and Relationship to the Organization’s Strategic Goals and Objectives

The functionality of a modern ERP solution is based on “three pillars” – management, planning, and control: management is integrated with the processes of control and planning of inventory, procurement, sales, finance, and customer relationships. An equally important characteristic is the viability of the system in real conditions. In other words, the system should not only be multifunctional, but also as practical as possible; the solution’s capabilities should bring a business effect even in a non-ideal environment.

The initial level of automation and the geographically distributed structure of the enterprise influenced the scope of pre-design work. In addition, a significant amount of improvements was required to adequately display such specific business processes in the system as a long multi-stage and cost-testing production cycle, accounting for non-standard objects and retail, complex calculation of production costs, the need to separate and distribute indirect VAT, as well as presence of servicing facilities on the balance sheet of organization. As the goals of the project implementation, the following were set:

  1. Automate 2300 workplaces in the parent organization, as well as in 8 branches.
  2. All accounting and reporting functions should be performed in a single system, with which all participants in business processes work directly – employees of the financial reporting center, accountants, economists, financiers, etc.
  3. Develop a unified methodological support for specific accounting features.
  4. Automate operational accounting, collection of branch reports, and the formation of consolidated enterprise reporting. At the same time, it is necessary to take into account the specifics of production in the industry, multi-level cooperation, and a long production cycle.
  5. Integration with six external systems should be completed.
  6. Already six months after the start of the project, the time frames for collecting consolidated accounting and tax reporting should be significantly reduced.

Risk-Identification Tools

As mentioned above, the introduction of ERP system involves organizational changes. The risk of organizational change program is binary in nature. Organizational changes, on the one hand, are caused by the need to reduce external (and internal) risks for the enterprise, but, on the other hand, entail other internal risks (there is a possibility of failure to achieve the set goal, occurrence of negative side effects from organizational changes, etc.).

The risk of organizational change is characterized by the presence of objective incompleteness of information, the possibility of inadequate perception of organizational changes, the possibility of aggravating the situation due to organizational changes, making the wrong decision on change management, the possibility of unforeseen situations and changes, the inability to foresee all the consequences of changes (Bissonette, 2016). Since the conditions for making changes, the enterprise in which the changes are being made, and the organizational change program are unique, the risk of organizational changes is difficult to assess due to the lack of a full-fledged analysis base (i.e., full-fledged statistics for all program parameters) and approximation of the past period data.

In determining the level of acceptability of the risk of a change program, there is always an assessment carried out, as a rule, by the enterprise specialists (participants in the change program). This means that the risk is subjectively assessed by the enterprise (Fink, 2016). Objective risk assessment remains transcendental for the enterprise. In addition, the risk of organizational change has a complex structure; it includes risks of a probabilistic, interval nature and risks of a fuzzy set nature (Gachie, 2017). This risk is a dynamic indicator that changes its characteristics over time (during the period of organizational change).

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To assess the risk, it is advisable to use the “event-consequences” method. The essence of the method lies in the fact that it provides an approach to identifying and assessing the consequences of certain events at the design stage. Its toolbox is a method of event trees, but without using a graphical representation of chains of events and estimating the likelihood of each event. The main idea of the approach is the division of complex production systems into separate, simpler, and easier to analyze parts. Each part is thoroughly analyzed according to a specific algorithm to identify all the dangers and risks; the algorithm uses groups of keywords. This method divides the risk identification process into four sequential steps, or stages, at each of which a key question should be answered (Blokdyk, 2019):

  1. The purpose of the investigated part of the installation or process;
  2. Possible deviations from normal operation;
  3. Reasons for deviations;
  4. The consequences of deviations.

This method is suitable for the design stage of any system or process. The design team, together with the risk manager, can investigate in detail all possibilities even before the implementation phase of the project begins.

At present, the practice of implementing projects for the ERP systems is a very difficult and risky activity. There are various assessments of the degree of success of completed projects and their real economic efficiency, but they all are similar in that the number of projects that meet the criteria for success and meet the initial expectations is very small. The reasons for the failure or partial failure of most projects for the implementation of ERP systems are very similar, despite the specifics of the subject area in each individual case of implementation. It is possible to note the main potential risks (Salimi, 2016):

  1. The principles of company management (doing business) are partially or completely not formalized or even chaotic.
  2. Internal business processes are not obvious and ambiguous.
  3. Company employees responsible for the course and result of the project or participating in the implementation project do not have sufficient knowledge of the specific business (Pelphrey, 2015). This is an obstacle for the competent adaptation of the software product into the company’s activities and its subsequent use by the company’s employees.
  4. Resistance of the company’s employees participating in the project to the implementation process. In most cases, there is active resistance from local employees, which is a serious (and perhaps the most significant) obstacle, quite capable of disrupting or significantly delaying the implementation project (Pelphrey, 2015). This is caused by several human factors: ordinary fear of innovation, conservatism, fear of losing a job or losing one’s irreplaceability, fear of significantly increasing responsibility for one’s actions, unwillingness to do additional work associated with participation in a project.
  5. Incomplete, inaccurate, or changing system requirements. The requirements of the company represent the basis for the formation of the technical specification – one of the main project documents, on the basis of which the system’s functionality will be implemented. One of the main problems before and during the implementation project is the provision of incomplete, inaccurate, conflicting, or constantly changing system requirements (Thangamani, 2018). The reason is obvious and lies in the fact that before the implementation or pre-project survey, the requirements are formulated based on the concept of the current internal business processes of the company, while directly in the implementation process, the company tends to change requirements or introduce new ones into the overall set of requirements for the system, the implementation of which is already underway.
  6. “Bottom-up” design of requirements for the system. Putting the company’s goals and prospects for its development into the ERP system is possible only when designing “top-down,” and not vice versa. Each level of management has its own needs for information support. The distribution of information flows will be correct if to start building the system with a clarification of the needs for information from the upper levels of management, gradually going down. With this approach, first of all, the indicators necessary for top management are formed and determined, as well as the frequency of their calculation. Then the data required by the next management level in the hierarchy are established, etc. (Thangamani, 2018). This eliminates the risk of creating a system that will generate information that is insufficient for making management decisions by top management.
  7. The control points for the implementation of the system have not been determined. The project is not divided into manageable blocks; control points are not selected.
  8. There are also operational risks associated with uncontrolled growth in operating costs of the system.
  9. Designing without due regard to the company’s development strategy. This is one of the typical mistakes when preparing for system implementation. The projected system is designed to automate the management of the company in its present form, that is, without taking into account its future development. The system needs to be designed to operate for 2-3 years without upgrading (Salimi, 2016). Therefore, when designing, it is important to represent the structure and scale of the business in the future for at least 3 years. Forecasting errors can lead to unreasonably large expenses, in particular, for the purchase of additional network equipment, which make up a significant share of the cost of ERP system owning.
  10. The company’s management incorrectly estimates the potential economic effect from the result of the future implementation of corporate information systems, which may mean that the project is not successful in terms of payback.

In addition, the “cross-cutting” risks include:

  1. Political risks (when the project serves as a lever of political struggle at the enterprise);
  2. Risk associated with consultants: the proportion of work performed by a consultant must decrease during the project – otherwise the system will not “take root” in the enterprise.
  3. A qualified group for the implementation and maintenance of the system has not been formed, and a strong group leader has not been identified.
  4. Personnel training is not organized during and after the implementation project.
  5. Loss of current management tools as a result of their replacement with new ones. After the introduction of modern management methods, for the automation of which the majority of ERP solutions are created, some methods familiar to top managers risk can become unclaimed. For example, if earlier the head of the transport department uninterruptedly satisfied the needs of other departments precisely thanks to his organizational talents, now he will be more challenged with a comprehensive analysis and search for ways to improve labor efficiency, since the most share of the organizational work will be taken over by the ERP system.

Risks In-Depth Analysis

To manage the risk of non-obviousness and ambiguity of business processes, one should avoid excessive changes in business processes “for” implementation, adjusting the company’s internal processes to the capabilities or requirements of the system, and not vice versa. Quite often, a company that implements an ERP system either agrees to reengineer all business processes and their subordination to the requirements of the basic functionality of the selected system, or insists on maintaining the existing work practice and, accordingly, on a radical restructuring of the selected system (Salimi, 2016). In the first case, there is a great risk that the system, created with the expectation of a radical restructuring of business processes, will not be used at all. In the second case, the resulting system loses its reliability due to modifications and rework.

Before embarking on the implementation of the automation system, the enterprise needs to carry out a partial (determined depending on the actual need) reorganization of the main processes that ensure the solution of business problems. Therefore, one of the most important stages of the implementation project is a complete and reliable survey of the enterprise in all aspects of its activities. Based on the survey results, the entire further scheme for constructing a corporate information system is being built (Thangamani, 2018). Undoubtedly, one can automate everything “as is,” but this should not be done for a number of reasons. As a result of the survey, it is possible to identify a significant number of places where unreasonable costs arise, as well as contradictions in the organizational structure and processes, the elimination of which will reduce production costs, as well as significantly reduce the execution time of various stages of the main business processes.

To minimize the risk associated with the absence of checkpoints in the implementation of the project, the entire scope of work within the implementation project must be divided into separate, independent stages, recording the expected result and the time to achieve it for each of these stages. One can proceed to the next stage only after fulfilling three conditions:

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  • The project team has developed a common understanding of the stage results;
  • This understanding is formalized in the form of a document;
  • The results of the stage are accepted by the head of the enterprise.

This approach allows controlling the risks of the project, moving progressively towards the intended goal.

A Critical Discussion of Difficulties

The risks of non-obviousness of business processes are directly related to the absence of control points in the implementation of the project, since namely the control points allow trace and arrange business processes to achieve their optimal organization by the time of project implementation finishing. Adjustment of project indicators by replacing their design values with risk-based values causes additional difficulties associated with the uncertainty of all factors affecting the income and expenditure cash flows of the project.

To overcome these problems, one can use methods that are based on the description of business processes and allow identifying changes in their individual parameters associated with the implementation of information systems. An adequate tool for such research, in our opinion, is system dynamics, which allows considering business processes, taking into account the relationships between their elements, in development. Modern systems dynamics tools also include scenario analysis capabilities, in particular, using fuzzy numbers (Blokdyk, 2019). This is what makes it possible to check sustainability through the calculation of the main initial indicators of the project in various scenarios of its development, usually in the most optimistic, most pessimistic, and most probable. In general, the list of factors contributing to the success of the ERP system implementation is as follows:

  • A clear understanding of the goals and objectives of the project;
  • Taking into account the specifics of the business;
  • Realistic but aggressive implementation plan;
  • Attraction of the best specialists of the company;
  • Selection of the best partner for the implementation of the system;
  • Careful planning of migrations, interfaces, and reports;
  • Informing the company about the project;
  • Training of the project team and users;
  • Involvement of the company’s management in the project;
  • Minimization of developments and changes in the system;
  • Achieving results that can be measured.

In the course of the project, after the completion of the next stage, it is necessary to return to the original goals of the project and, if necessary, adjust them depending on the changed fundamental requirements, a new vision of the company’s development strategy, and other influencing factors. Objectives and requirements tend to change, and in this regard, the necessary and timely adjustment will allow at the right stage of the project to choose the right direction for subsequent actions within the project.

Reference List

Bissonette, M. (2016) Project risk management: a practical implementation approach. Project Management Institute.

Blokdyk, G. (2019) Risk management tools: a complete guide. 5STARCooks.

Fink, D. (2016) Project risk governance: managing uncertainty and creating organisational value. Routledge.

Gachie, W. (2017) ‘Project risk management: A review of an institutional project life cycle,’  Risk Governance and Control Financial Markets & Institutions, 7(4-1), pp. 163-173.

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Pelphrey, M. (2015) Directing the ERP implementation: a best practice guide to avoiding program failure traps while tuning system performance. CRC Press.

Salimi, F. (2016) Project management of ERP implementation. LAP LAMBERT Academic Publishing.

Thangamani, G. (2018) ‘Practical risk assessment methodology for ERP project implementation,’ Journal of Economics, Business and Management, 6(3), pp. 84-90.

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