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PEST Benefit/Threat Analysis for Selection of ERP in Cloud for SMEs

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Research Article ISSN 2229 – 3795

PEST- Benefit/Threat Analysis for selection of ERP in Cloud for SMEs

Tripti Mahara
International School of Business and Media, Nande, Pune
[email protected]

ABSTRACT

Enterprise Resource Planning (ERP) packages are used to integrate business processes of an
organization through shared information flow. Majority of the large organizations within
India have either implemented or are implementing ERP software. With the increasing
market competition and globalization, small and medium enterprise (sme) are keen to deploy
them, but the high cost involved in implementation of these packages is a major hurdle to go
ahead with this decision. The solution is to go for cost effective ERP solution. ERP on Cloud
is one of the viable options, as there is no initial hardware or software infrastructure
investment needed making it a cost effective solution. A framework called PEST-
Benefit/Threat is presented in this paper to analyze the factors that should be addressed by
sme to select ERP in cloud environment. This framework categorizes a factor in the PEST
framework as political, economical, social or technological. A factor can either be benefit or
a threat to sme. If a factor is a benefit, it will create a positive influence on the sme to go for
this solution. But if a factor is a threat, a sme can take appropriate measure to mitigate the
threat. Thus this framework will assist sme to assess the ERP on cloud as a viable option for
their organization.

Keywords: ERP, SME, Cloud Computing, PEST, Benefit, Threat.

1. Introduction

1. Introduction

ERP system is a result of efforts in the field of computer science and business management to
produce a single IT platform, incorporating all the essential business logic. It is a
comprehensive packaged software solution that integrates organizational processes through
shared information and data flows (Rosemann, 2001). An ERP system optimizes a
company’s day-to-day business, whereby optimization is a process of reducing the space of
potential problems and enhancement of business by utilizing the integration between business
units. Current industry demand to implement ERP system is fast growing (Ho et al., 2004)
despite the fact that ERP projects are the largest information technology projects in terms of
project investment worldwide (Gattiker, 2005). Mostly all large organization in India has
invested huge in ERP implementation. For instance, ONGC, invested around 95 crore Indian
rupees for SAP R/3 installation and around 30 months of time. Similarly, Goodlass Nerolac
Paints implemented SAP R/3 in around 18 months with approximate investment of 18 crore
rupees. Other organizations that have successfully implemented ERP packages are BPCL,
Apollo tyres, Siemens, Samsung, Cadbury India, Times of India, Sony India, Kirloskar Oil
Engines, GE India, Bharati Cellular, Dr. Reddys Lab, Hyundai Motors and the list is
exhaustive.

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With the saturation in ERP market for large organizations (Deep, 2008), and with the fact that
around 95% of industrial units in India are smes (Sharma, 2010), the focus of leading ERP
vendors like SAP, Oracle and Ramco has shifted to capture the sme market in India (Saini,
2012). The ERP market for SME is projected to be Rs. 728 crore ($160 million), 47% of the
overall market (Munjal, 2006) of Rs. 1,550 crore ($341 million) as per the study conducted
by IDC. Even the smes have started to show deep interest in ERP implementation due to
following reasons (Sharma 2010, Kale 2010).

1. Providing competitive advantage over the competitors by standardizing processes.

2. Tighter integration of data across organizations that helps in taking timely decisions,
reducing the turnaround time.
3. Liberalization and opening of Indian markets to foreign investments and MNCs, smes
in India are forced to adopt standardized business practices and strategies.
Even though smes want to aggressively adopt ERP to efficiently manage their business, high
software and license fees, and implementation complexity has created some resistance for
traditional ERP packages (Davenport, 1996; Haddara, 2011). To add to this, lack of IT
infrastructure and people to support implementation along with reduced IT spending by
organizations due to slowing down of economies (Hofmann, 2008) has further strengthened
their view of not opting for traditional ERP packages. With all these limitations, they still
need to find a solution to implement ERP to keep them sustained in the global market and to
provide them with a competitive advantage.

The alternate solution under consideration for smes, should be cost effective as compared to
the traditional ERP solutions. Cloud based ERP is one such technology that allows
organizations, users or individuals to access and use ERP software installed on vendors site
through internet access on demand (Saini, 2012). The main reasons to consider this option are
the low entry cost, as no initial investment is required to set up IT infrastructure and pay-per-
use model as no license fees needs to be payed upfront. This paper explores the option of
selecting ERP in the Cloud as compared to traditional ERP package. The factors that need to
be considered while selecting ERP in cloud are discussed in this paper. A PEST (Political,
Economic, Social and Technological)- Benefit/Risk framework is presented to evaluate these
factors as benefits or risks to an organization while selecting ERP.

The outline of the paper is as follows. Section 2 gives an overview of cloud computing and
ERP, followed by section 3 that presents PEST- Benefit/Threat framework to analyze various
factors that are important for considering ERP solution in cloud followed by conclusion in
section 4.

2. Cloud Computing and ERP – An overview

The term Cloud Computing (CC) was coined in 2006 and it is a technological platform that
allows users, organizations or individuals, to access and use computer resources via the
internet on demand. AJAX, Multitenancy and Virtualization are the three technologies that
lead to emergence and development of cloud computing (Schubert, 2011). AJAX enables the
client to communicate with the server dynamically; multitenancy describes shared use of
single software by multiple clients through their private and individual data space whereas
virtualization allows for sharing of physical resources. Three services namely Saas (Software
as a Service), Iaas (Infrastructure as a Service) and Paas (Platform as a Service) are provided

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by different clouds for different service models as depicted in figure 1 (Schubert, 2011). In
the Saas model, the cloud provides software to the users. Many customers use the same
software in their own private data space. Users are not required to install any application on
their PCs to access the software services provided by the cloud. They can use the software
utility but have no rights to control or manage the infrastructure. The minimum requirement
to access cloud services are internet connection with a PC. For IaaS model the cloud provides
capability to the users to use various computing resources, instead of buying them. The users
have right to control the storage, operating system and deployed applications. The services
are billed for their usage. In case of PaaS, cloud provides platform to build user applications
and software. Deployed application can be accessed from anywhere and the space for these
applications can be increased and decreased based on the usage. The users have rights to
control their deployed application and several application hosting environment configurations.
Private, Community, Public and Hybrid clouds are the deployment models that are supported
in the cloud computing environment. In case of Private cloud, the cloud infrastructure is
operated solely for one organization whereas infrastructure is shared by multiple customers/
organizations in public cloud. For Community cloud, infrastructure is shared by several
organizations that has common concerns and are managed either by one of the participating
organization or a cloud vendor. Hybrid cloud is a composition of two or more clouds (public,
private) that remain unique entities, but are bound together by standardized or proprietary
technology. Each deployment model instance has one of two types: internal or external.
Internal clouds reside within an organization infrastructure and an external cloud resides
outside the organization and is provided by a cloud provider.

More than 20 definitions to describe and focus on certain aspects of cloud technology
(Geelan, 2011) exists, but the following definition best suits for the area of ERP systems that
is the major focus of the study here. “Cloud Computing is an information technology service
model where computing services (software) are delivered on demand to customers over a
network in a self-service fashion, independent of device and location” (Marston, 2011).

Software as a
Cloud can be.
service -SaaS 1. Private Cloud
2. Public Cloud
Platform as a 3. Community
Service - PaaS Cloud
4. Hybrid Cloud
Infrastructure as a
Service - IaaS

Figure 1: Cloud Computing Model (Source- Schubert, 2011)

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SaaS service model is best suited for selection of ERP software on cloud platform. In this
model the ERP software is be deployed on the vendor’s server. This will not involve upfront
IT hardware and software investment. No hefty licence fees needs to be paid as the main
advantage of SaaS is pay-per-use. The Paas model is not applicable as the organization is not
involved in coding and testing of the ERP software. Regarding the Iaas model the only
infrastructure required by sme to use this software would be the internet connection with
good bandwidth and hence this model is also not evaluated for the study.

In the next section, various factors that affect the selection of ERP software in cloud are
compiled and a PEST analysis is done. PEST – (Political, Economic, Social, Technological)
analysis of these factors will provide valuable information to analyze the selection of ERP for
sme (Neves, 2011) from four important perspectives namely political, economical, social and
technological in an organization. For example, if the PEST analysis highlights that politically,
many people perceive lack of control while ERP selection, it needs to be addressed. Once the
PEST analysis is done, the factors that fall in the one of the PEST category will be grouped as
either benefit or threat to an organization for ERP selection in cloud. All threat factors need
to be addressed by proper mitigation strategies. This will highlight how prepared the business
is for the required change. Some mitigation strategies will be mentioned for the risk factors.

3. PEST- Benefit / Threat Analysis

In this section, PEST analysis( Neves, 2011) for factors that contribute to selection of ERP in
Cloud by sme is given in table 1 (Makkar, 2012; Saini, 2012; Marston, 2011; Motalab, 2011;
Hadidi, 2010, 2011; Hosseini, 2011; Sohag, 2011; Djohnson, 2010; Koehler, 2010; Hofmann,
2010; Clarke, 2010; Mozafari, 2012; Rassule, 2010). These factors of PEST analysis can
either be a benefit or a threat to an organization that wants to go for ERP in Cloud. The table
2 presents the PEST analysis in two categories namely: Benefit- Threat. For the factors that
are considered as threat for an organization, a possible mitigation approach has been
mentioned.

Table 1: PEST Analysis for ERP selection in Cloud

PEST Views Factors/Evaluation Criteria

Political Resistance by leading ERP vendors. They try to influence the
organizations decision to consider an ERP solution on Cloud.
Service Survival. It is the situation when the vendor might
collapse or stop providing CC services.
Non Compliance Issues. It can be for unauthorized access of
data by cloud providers.
Vendor Credentials and Market existence.

Economical Flexible Payment- Pay per use.

Low Entry Cost. There is no need to purchase software and
its licenses.
Low Operational Cost. No IT infrastructure is needed other
than internet connection with good speed is needed.
Low IT manpower requirement.
Low Implementation time.

Social Reaching the extended user community. This will provide

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opportunity to collaborate between various stakeholders.

Loss of key staff members. The people in an organization
might not be clear about their position and roles when ERP
selection and deployment is done and hence might decide to
quit the organization.
Resistance to change by people. There is change in work
methodology and structure and people might resist these
changes.
Perceived lack of control. The people in an organization
might feel that they have lost authority to manage the
processes. Also there is a perception that they have no control
over the various resources that are on cloud.
Technological Elasticity. It is the ability to scale IT resources both up and
down as per the need.
Ubiquitous access. It is the ability to access the cloud services
over a network.
Service quality. The service should be provided without
interruption and loss of data.
Data Lock in. There should be policies that easily allow data
to be retrieved and migrated to other vendor.
Customization. The ERP on Cloud provides certain level of
customization
User friendliness. The software is user friendly.
Availability. Uninterrupted services should be available
24X7.
BackUp and Storage. It mainly deals with issues of how and
where the organization data is stored.
Security. The data should be not be accessed by unauthorized
persons on the network and within an organization. The
public perception of lack of security is a major threat to
adoption of ERP in cloud.
Interoperability. It is the issues that arise when services of one
cloud are to be moved to another other cloud.
Performance. The performance keeps on fluctuating
depending upon the network and server load.

Table 2: PEST-Benefit/Threat Analysis for ERP selection in Cloud

PEST Views Factors Category

Benefit Threat Threat Mitigation
Approach
Political Resistance by Ignore and do not let
leading ERP vendors. them influence the ERP
adoption process.
Service Survival Issues related to
services to be clearly
mentioned in SLA
(Service Level
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Agreement).
Non Compliance To be mentioned in
Issues SLA.
Vendor Credentials Market study to know
and Market about the vendor and
existence. the products.

Economical Flexible
Payment- Pay per
use
Low Entry Cost.
Low Operational
Cost.
Low IT
manpower
requirement.
Low
Implementation
time.
Social Reaching the Loss of key staff Change Management
extended user members. to be adopted within
community. an organization. Get
Resistance to change users involved,
by people. motivated and focused
on the project. Define
roles and
responsibilities.
Perceived lack of Clearly define roles
control. and responsibilities for
users. List resources
needed and their usage
before ERP adoption.
Technological Elasticity Ubiquitous access High internet speed
connection to be taken
by organization and
study of network
issues to be done.
Customization Service quality To be discussed and
finalized with vendor
and included in SLA.
User friendliness Data Lock in Policies to be framed
for retrieving and
migrating data to other
vendors cloud.
Availability To be discussed and
finalized with vendor
and included in SLA.
Backup and Storage It can be improved by
using redundant sites.

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Security The study of security

policies, encryption
and decryption
algorithms supported
by vendor to be done
to know security
measures provided by
vendor.
Interoperability It is an ongoing issue
and to be handled with
a specific clause in
SLA.
Performance Benchmarking tools
can be used measure
performance claims of
the vendor. After
Deploying ERP on
cloud performance
analysis tools can be
used.

PEST-Benefit/Threat Analysis indicates that there are economical benefits involved when a
sme decides to go for ERP software in cloud. The cost incurred to go for such a solution is
much lower than implementing the traditional ERP solution for sme as there is no investment
in IT infrastructure required. The cost related to IT personnel’s also reduces. There is a need
to pay a hefty license fees to traditional ERP vendors whether or not the organization
consistently uses the ERP software, but in cloud platform there is flexible payment
depending upon the usage of the software service. It is termed as pay-per-use. As the number
of users and processes on cloud scale the payment needs to be done. Thus there is a huge
amount of cost saving, if an organization specially a sme goes for ERP solution in cloud.
Social and Political are the two major threats that an organization faces for ERP selection.
Social threats are mainly related to people’s perception within an organization and political
threats are those that an organization faces from outside. Effective change management
strategies are needed to overcome the social threats within a sme. For instance, resistance that
an organization faces when deciding to move for ERP system can be handled by providing
them training to make them realize the benefits of ERP, how to use the software. Incentives
can also be a part of this so that the persons who are involved get rewarded. Some of the
political as well as technological threats need to be addressed before the final selection of
ERP on cloud and a possible mitigation solution to be given in the Service Level Agreement
(SLA) with the vendor (Hadidi, 2011). Technologically the ERP on cloud will support high
elasticity and medium customization. The technology threats with respect to security,
availability of data, performance and other issues can be handled by specific mitigation
approaches duly addressed in SLA.

4. Conclusion

The main focus of this study is to provide a theoretical framework called PEST/Benefit-
Threat Analysis, to decide the factors for selection of ERP in Cloud by sme. The framework
categorizes the factors as benefits or threat to a sme who is considering an option of ERP in
Cloud on four organization perspectives namely political, economical, social and
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technological. The main benefit areas for an organization are economic and technology
benefits. There are more of political and social threats, but they can be dealt with suitable
mitigation approach. Further study includes collecting data from smes in India to find out the
most relevant factors for selection of ERP in cloud.

5. References

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