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 Brggen

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 dayto-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.

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)

Content 1 2 Introduction Theoretical Underpinnings 2.1 The relationship between organizational size and Information Technology (IT) 2.2 ERP and organizational size 2.3 Limitations of the studies about organizational size and IT 2.4 The impact of ERP systems on Management Accounting and the firms MCS 2.6 Limitations of prior research about the impact of ERP on the MCS 2.7 Management Control Systems (MCS) design 3 Proposition Development 3.1 The underlying concept 3.2 Propositions 4 Research Methodology 4.1 Microsoft Dynamics NAV 4.2 Data collection 4.3 The Research documents 4.4 Measurement of variables 5 Data analysis 5.1 Quantitative data analysis 5.2 Qualitative data analysis 5.2.1 Information System Integration (ISI) 5.2.2 The enabling effects of the ERP system 5.2.3 The effects of the ERP system on the budgeting/planning process 5.2.4 The effects of the ERP system on the management reporting process 6 Conclusion 6.1 Limitations 6.2 Recommendations for future research 7 8 References Appendix Research documents (in English) Original research documents (in German) 6 9 9 10 11 12 15 15 17 17 18 23 23 23 27 28 29 29 31 31 32 34 36 42 43 43 45 56 56 62

List of figures
Figure 1: Theoretical model Figure 2: Summary of results 22 41

List of tables
Table 1: Results of the data collection procedure Table 2: Number of respondents per industry Table 3: Information about the interviewees Table 4: Descriptive statistics for variables (n=15) Table 5: Pearsons correlation coefficients (n=15) 24 25 26 29 30

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 firms 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 firms 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., 6

2000; Caglio, 2003; Davis and Albright, 2000; Granlund and Malmi, 2002; Hyvnen, 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 (Technologic). 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 mediumsized 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; OLeary, 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 7

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.

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 ODoherty argue that the duration of a project depends heavily on the complexity and size of

the customer relations and external software implementers can help to correct the firms 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 10

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 11

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 firms 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 organizations strategies.

Typical activities in the Management Control function are (1) planning and (2) coordinating of the organizations activities, (3) communicating and (4) evaluating information, (5) decision making and (6) influencing peoples 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; Hyvnen, 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 12

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 accountants 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 Caglios 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 13

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 firms 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

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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; Hyven, 2003; Newman, 2005; Scapens and Jazayeri, 2003) and thus were not able to explore long-term effects. Due to the complex systems 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 Systems (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

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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 companys 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 todays 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 systems 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.

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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 firms 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 systems 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.

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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 users 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

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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:

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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 firms 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 users 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 20

components of their budgets/plans and the drivers of the firms 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

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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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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.

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Original Sample: % Bankrupt companies: % Not residing in Germany: = New Sample: No reply on the phone or via email: Denials: Appointments: Direct interview (without questionnaire): Manual online-survey: + Added companies: = Extended Sample: Total no reply: Total denials: Total interviews: Total manual online-surveys:
Table 1: Results of the data collection procedure

43 3 1 39 10 14 13 1 1 7 46 16 14 15 1

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 24

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.

Industries: Automobile, Services Buildings, Construction Electronic industry, Hightech Energy Industry Law Society Non-Profit Organization Pharma industry Public Sector Services Trade, Distribution Waste Management Total:

% to total: 13,33% 6,67% 6,67% 6,67% 6,67% 6,67% 13,33% 6,67% 6,67% 13,33% 13,33% 100,00%

Number of companies: 2 1 1 1 1 1 2 1 1 2 2 15

Table 2: Number of respondents per industry

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Number of interviewee

1 2 3 4 5

Function Manager Controlling/internal accounting Controller Manager IT Manager ERP, Controlling Controller Manager Controlling/internal accounting Controller Manager Purchasing Manager Controlling/Administration Controller Manager ERP, Controlling Controller (Coordination of Sales) Manager Controlling (Planning/Allocation) Controller Controller

Employed since

Gender

2004 2000 1998 1996 2005

Female Male Male Male Male

6 7 8 9 10 11 12 13 14 15

2006 2008 1990 2001 2006 2007 2000 1997 1991 1994

Male Male Male Male Male Male Male Male Male Male

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 26

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 costbenefit 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 27

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. Systems 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.

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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.

1. IS Integration 2. Repair 3. Internal transparency 4. Global transparency 5. Flexibility 6. Success

Mean 4,30 3,97 4,03 3,66 3,00 4,25

SD 0,89 0,85 0,90 0,85 1,07 0,68

Theoretical range 1.00 - 5.00 1.00 - 5.00 1.00 - 5.00 1.00 - 5.00 1.00 - 5.00 1.00 - 5.00

Actual range 1.00 - 5.00 1.00 - 5.00 1.00 - 5.00 1.00 - 5.00 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 29

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. IS Integration 2. Repair 3. Internal transparency 4. Global transparency 5. Flexibility 6. Success
* ** *** P < 0.05 P < 0.01 P < 0.00

1 1,000 0,051* 0,598*** 0,378*** 0,604*** 0,478***

2 1,000 0,137* 0,242** 0,299** 0,383***

1,000 0,466*** 0,276** 0,526*** 1,000 0,539*** 0,221**

1,000 0,051*

1,000

Table 5: Pearsons correlation coefficients (n=15)

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:

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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 reengineering). 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

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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 reengineering 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 32

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 firms 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 dont 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.

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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.

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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 userfriendly 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.

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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 precalculations, 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/businessanalytics.aspx). Moreover, the system provides a tool to develop new reports according to the companys 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 dont 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.

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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.

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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 38

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.

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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.

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P6: weak support

Figure 2: Summary of results

41

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 users 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 42

and show knowledge constraints with regard to the ERP technology. Therefore, it is essential to clearly define the systems 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 mediumsized 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 43

such as SAP have developed similar products like Microsoft Dynamics NAV for mediumsized 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.

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Webpages

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Deutschland

GmbH,

Produkte:

Microsoft

Dynamics

NAV,

http://www.microsoft.com/germany/dynamics/produkte/nav/ueberblick/ 24/08/2010, 10.30 A.M..

default.aspx,

Microsoft

Deutschland

GmbH,

Produkte:

Microsoft

Dynamics

NAV,

http://www.microsoft.com/germany/dynamics/produkte/nav/eigenschaften/businessanalytics.aspx, 24/08/2010, 10.30 A.M..

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Appendix

Research documents (in English)

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Original research documents (in German)

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Der Einfluss von ERP Systemen auf das Controlling von mittelstndischen Unternehmen

Teil: Offene Fragen

1. Fr 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 Vernderungen auf die Ttigkeiten des Controllers durch Navision haben Sie bemerkt? 4. Wie hat das ERP System den Budgetierungsprozess beeinflusst (z.B. inhaltlich, zeitlich)? 5. 6. Wie wurde vor der ERP Implementierung geplant? Knnen 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 whrend des

Budgetierungsprozess auf? 8. 9. Wann wurden diese Effekte nach der ERP Implementierung realisiert? Haben sich diese Effekte ber die Zeit verndert?

10. Wie hat sich die Arbeitsatmosphre seit der ERP Implementierung verndert (z.B. mehr Teamarbeit, mehr Kommunikation)? 11. Haben sich Budgetschtzungen seit der ERP Einfhrung verbessert? Fall ja, wie?

12. Wie hat das ERP System den Reporting-Prozess beeinflusst? 13. Wie wurden vor der ERP Implementierung Berichte erstellt? 14. Knnen Sie bestimmte Funktionen des ERP-Systems nennen, die den ReportingProzess im Unternehmen erschwert haben. Falls ja, welche?

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15. Wie haben sich die Berichtszyklen mit dem ERP System verndert?

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 verndert? Falls ja, wie? 18. Nutzen Sie zustzliche Hilfsmittel neben dem ERP System, um Zahlen zu analysieren? Falls ja, welche? 19. Warum nutzen Sie diese zustzlichen Hilfsmittel? 20. Welche Vernderungen planen Sie fr den zuknftigen Gebrauch von Navision im Controlling (z.B. Beibehaltung von Navision, Nutzung von zustzlichen Tools)?

Vielen Dank fr Ihre Untersttzung!

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