ERP Systems Usage in Banking Industry Development
Banking broadly covers deposits, lending services and money transmission. Banks play a crucial role in mobilizing and distributing a nation’s wealth to ensure a healthy growing economy. Banks normally have large branch networks, many of them comprising over a thousand branches. A bank customer can an individual or an organization with a current or similar account with the bank (Lipscombe & Pond, 2005).
ERP systems in business are typically used with an internal perspective and less with external perspective. However, in banks the applications are more with external perspective as a bank deals with money that is transferred from person to person, from business to business and from country to country. A national banking system consists of thousands of individual national banks, their branches and extension counter located in large cities and small towns across the country (NBS, 1999).
A bank owes to serve customers to the best of its capabilities for which ERP is a useful aid. A bank needs to fulfill several obligations towards its customers. For instance, it needs to maintain strict secrecy about customer affairs. As part of its typical responsibilities, it needs to receive a customer’s money and cheques as collection and to credit his account with them. It also needs to provide a statement of account with a reasonable time and a statement of the balance on request. Banks are supposed to honor their cheque upto the credit balance or overdraft limit, provided they are in order and there is no stop (Lipscombe & Pond, 2005).
As the name suggests, ERP systems utilize a companywide framework that links all process driven information systems together into one large integrated system. Information determines the speed and efficiency with which customers’ orders are processed and progressed as a vital link in the overall efficiency of a nationwide banking system. ERP is basically an integrated system that links individual functions and coordinates information flows to achieve overall organizational efficiency including customer satisfaction.
In earlier days, large volume of data was stored centrally on mainframes but with the advent and growing popularity of PCs, local area networks, and client server technologies becoming the norm, a new requirement emerged whereby data was stored on desktop computers instead of mainframes. However, this transition also posed several problems. For instance, many different systems that were developed independently over the period within a company were often incompatible that created problems for sharing information. A need arose for enterprise-wide data sharing and it was within this background that ERP systems assumed critical significance.
ERP helps to integrate and synchronize different organizational systems such as finance, human resource, operations, support services and other functions which may be organization specific. ERP system for banking includes complete solution which provides widespread support for financial processes, human resource management and support services. ERP enables business firms to integrate their sales, finance, manufacturing, distribution, customer service and other functions.
ERP systems facilitate companies to replace their existing information systems, which are often incompatible with one another, with a single integrated system, that is streamlined data flows throughout an organization that may result into significant gains in a company’s efficiency and bottom line. ERP systems are essentially an enterprise-wide package that tightly integrates all necessary business functions into a single system with a shared database (Lee & Lee, 2000). Extensive databases created by an ERP system provide Banks play a crucial role in mobilizing and distributing a nation’s wealth to ensure a healthy growing economy and platform for decision support, data warehousing, data mining, and executive support systems (Sean, 2001). Decision support system helps decision maker in solving structured, semi-structured and unstructured problem by creating a decision environment.
competitive banks in the globalization era are those that are more customer centric, well organized, cash rich, IT and web-enabled and highly flexible in providing wide range of services to million of customers located along length and breadth of the country. Such needs of competitive and financially healthy banks can be more easily met if they are equipped with ERP software though it may need to be customized first for its more specific needs. However, before taking a decision to install ERP, it is also desirable to carry out cost-benefit analysis that the expected returns would far exceed the system costs (Piturro, 1999).
Based on client/server architecture, ERP systems have graphical user interface. ERP solutions provide banking companies real time access to numerous types of information and facilitate them to share data. System integration of ERP solutions with IT systems has greater flexibility and adaptability than mere standard ERP system. The distinguishing feature of ERP is that it enables system integration of all kinds which improves its sustainability over a period of time.
Approaches of Implementing ERP Systems in Banks
ERP implementation support many approaches, it may varies from one organization to another depending on the capabilities and the requirements of the organization. Implementation approaches includes; the comprehensive implementation, pilot implementation, phased implementation.
The bank uses an approach which best suites its business needs and operations, since the banking systems make use of almost all the modules of ERP. Therefore, it has to look for a method that will encompass the business activities.
Organizations that are ambitious and big use comprehensive approach to implement ERP system. It is unusual for organization to implement all modules at the same time but several organizations are willing to take the risk.
By adopting this approach organization can save cost, minimize the time taken to complete a business process, facilitate day-to-day working and decision making. However; several resources have to be allocated, the implementation cost and time are economical and not very high but filled with a high risk and uncertainty.
The pilot implementation approach involves implementing the complete ERP system at a selected site, branch or location of an organization. The legacy system continues to function in the organization, subsequent to the success of the ERP system at the pilot site, it is implemented in the outstanding branches or locations of the organization, typically using direct comprehensive implementation approach (S Chien and S Tsaur, 2007).
The risk of system failure is reduced by using pilot implementation approach since it will act as a testing procedure of the ERP system. Pilot implementation approach is expensive compared to the comprehensive ERP implementation approach and also keep organizational data safe with horizontal operation (Richard G. Ligus, 2006).
In phased implementation approach, ERP modules with high priority typically Financials, Controlling, Asset Management and Project System are implemented in one or more branches or locations of an organization; it’s also considered to be a significant level of business process re-engineering where organizations align business process with ERP system instead of modifying the ERP system to imitate a distinctive business process (R. Michael Donovan, 2001).
Only the core modules of the ERP system are implemented which minimize risk and uncertainty compare to comprehensive approach, failure can be limited to the implemented ERP module, although integration of ERP modules is used at the later stage of the project. However, this approach cost more than a pilot approach as it involves a large number of different modules such as Financials, Controlling, Asset Management.
On the downside; the potential problems with phased implementation approach includes, less institutional control when compared to comprehensive approaches. Although most researchers accept the above problems, a few have criticized its main points as long as the goals of the ERP implementation are achieved e.g. Vedabrata Basu, Al Lederer (2011).
BENEFITS AND PROSPECTS OF ERP FOR BANKING INDUSTRY
Being highly data-oriented banking industry offers enormous potential for ERP applications. An ERP system offers wide-ranging integration between different banking system modules. ERP integrates users, information, processes, and applications for higher productivity. It facilitates decision making with simulations for enhanced responsiveness and change. It uses portal technology, business intelligence, knowledge management, and mobile technologies that save time and reduce costs. It enables banking employees interact with bank’s top brass for reduced time and effort and reverses the usual communication ‘top-down’ to ‘bottom-up’.
ERP system provides complete end-to-end solution covering payment processing, cash accounting, cash management and security (Lee & Lee, 2000). Revamping payment processing needs a high quality understanding on how banks make payments. This may be clear cut for one branch at particular location but may become more complex while dealing with multiple branches in different countries and operating under country specific legislations. Similarly, cash accounting complexity increases with multiple locations and currencies. As for cash management, there is a need to administer available account on regular basis so that investments of funding decisions can be made in an appropriate manner.
ERP system offers facility of sharing bank processes with vendors, customers, and other partners for optimum use of bank assets. It combines planning, reporting and analysis of all bank assets in one process. ERP for banking solutions make available on one platform a widespread variety of functions, numerous industry-specific features, a wide collection of augmentation options, and support for bank assets.
A good ERP system should be essentially module based, multi-currency, multi linguistic, multi user and multi-firm in operation. It should provide online support, online trading and can generate online manuals. In banks it can be integrated with all financial systems and back-office systems. It can simplify processing of incoming and outgoing payments for efficient cash flow. ERP system provides a far-reaching range of services and tools to monitor all financial accounting transactions in real time. It strengthens the logistical capability in handling bank notes, valuable metals, and non-banking specific goods and services for a more efficient, streamlined business.
ERP systems for banking industry are generally very helpful for operational planning, tactical planning and strategic planning decisions. Accounting and financial management functions of the banking industry using ERP system may cover a number of important responsibilities such as monitoring and analyzing an enterprise financial condition, managing accounting systems, and preparing financial statements and reports Bottom level (operational) planning is done by employees at lower level in the hierarchy who are generally assigned with responsibilities to complete day-to-day tasks such as payroll, banking inventory and fixed assets. Middle level (tactical) planning is done by middle level employees in the hierarchy who are concerned with system support decisions such as resource allocation. Top level (strategic) planning is done by the bank’s top brass who are concerned with strategic directions and long term strategic goals of a bank.
‘Financial management solution for banking industry with an ERP system integration for issues of this nature is designed to facilitate and customize a roll out plan for implementation by standardizing information, processes and applications across all departments of a typical banking system.
Reasons for ERP Implementation Failures in Some Banks
Where there are vast opportunity for growth and value creation like ERP implementation there are also vast opportunities for risk, high cost of IT infrastructures, system updates, application maintenance, customization as well as consultation.
The common reasons behind ERP implementation failures in any organization are more or less due to weak organizational structure and governance which are critical business issues in implementation as explained in the publication of Christian Vogt (2002).
In a survey conducted by Shari S. C. Shang and Tsung-Lin Wu (2004) shows that 60% of the ERP system implementation fails due to the inadequate review of the causative agent for the failure as many researches focus on its strategic benefit, advantages rather than identifying the motive behind its disappointment after implementation. Therefore, some of the reason associated with ERP implementations failures include:
- Inaccurate data
- Ineffective consultation
- Non corresponding of Software with business requirement
- Eagerness in implementation
- Long term finance
- Exit of guarantors
Many study (Silja Eckartz, et al 2009), shows that many organizations willing to implement ERP systems in organizations make use of incorrect data which tempered with the record. Therefore, data inaccuracy affects the record of information and data that need to be
integrated with the ERP systems, thus, is make the records to be inactive in terms of confirmation of records to which will be integrated.
ERP system software misfit because of poor selection and estimation process of the integrated ERP system for the bank, in the sense that the software found to be not suitable with the bank business requirement and inefficient in managing high quantity of product, incapable of planning complex bills of materials and inventing of planning formulation. The ERP system was develop in a limited way because of misfit problem. Lack of compatibility between organizational business processes and ERP system can cause a severe loss of definite or anticipated benefits, the fundamental business processes flow will duly depend on the integrated ERP system; oddity between them can guide organization to slow productivity and finally failure of the ERP system.
ERP system implementation can fail due to lack of well-defined functional requirement, almost 60% of the ERP systems implementation that lack broad requirement definition fail. Inadequacy of specification and description of required modules definition as well as the level of understanding the business process can lead to collapse of ERP system implementation as communicated by Vedabrata Basu, Al Lederer (2011). Over-reliance on intense customization because of ERP software inequality, intense customization was required in the program customization which leads to project delays, budget overspent and even unreliable system.
The time taken for the new business process to pay on its own, which sometimes is referred to as Return on Investment (ROI) also affect ERP systems implementation success in the organization and leads to overall failure. Another considerable cause of ERP implementation failure is the overestimation of return on investment (ROI) and other benefits mostly due to the ERP vendor’s exaggeration about the quality and benefits of their ERP system software. Lack of understanding other cost such as training, testing, and data conversion takes-away the possibility of organization achieving the predicted return of investment.
Exit of guarantors is another problem associated with the implementation system failures in some organizations. Because ERP implementations usually take place within the period of one and half years approximately, in case of the people and management who initiated the plan for the project implementation which may encounter during the implementation processes, critically distracting the performance process and leads to overall system failure. Therefore, their exit or change in management positions may hinder the success of ERP systems implementation in the organization.
Ineffective use of consultants by most organization who implement the ERP systems whereby the consultation happens once or twice throughout the process. The consultation should be as many as possible so as to keep track with latest information regarding the project many organizations think of implementing process without proper consultation from expert and therefore leading to its total failure.
How to avoid the ERP system implementation failure
ERP implementation is a bizarre that comes with challenges and problems therefore any organization must either prepare to deal with the common reasons for implementation failure or risk undesirable failure.
Support and commitment from top management is identified by the major reason that guide ERP system implementation to failure. Therefore commitment and support from the top management; and effective project management practices are used to make sure that the ERP system implementation is a success not a failure.
The unavailability of the required level of expertise, among staffs for the ERP implementation is another problem which required special consultant to help in training the staffs that uses the system. Therefore hiring a team of consultants to assist in the ERP system implementation is very vital in order to avoid failure.
Most of the employees and customers of are too anxious to the new ERP system due to their own perception of its complexity, lack the necessary credentials to operate the system; This creates a protest, objection and complains from the customers as they are more used to the old payment system. Therefore Banks have to use training to allow users get acquainted with the changes introduced by the system; the endorsement by key personnel is also used to help in acceptance of the ERP system, which aids the users to understand the excellence element of the system and its impending benefits.
The expectation levels of services may not be as anticipated by Banks and the customer’s expectation toward the ERP implementation is higher than what is in the initial stage. Therefore Banks have to analyze the intangible benefits of the ERP system implementation, and by margin the tangible and the intangible benefits, combine with future benefits, the return on investment can be realized.
Banks should know that inadequate resources, lack of financial and technical support can cause failure, therefore; Planning and monitoring human resource mobilization from various teams to various locations can be used to ensure the availability of sound technical infrastructure and a successful implementation.
Setting up an agile and flexible governance framework and dynamically managing all implementation activities is a very big issue for Banks. This defines what to do and how to do it.