Measuring Enterprise Resource Planning (ERP) Software Risk Management for Digital SMEs

ERP has evolved since their first emergence [6]. Started as simple tools to more sophisticated that integrate with business processes in organizations [7]. At first, ERP used to make accounting and financial functions more seamless, but then over the time, they expanded to cover more functions such as supply chain management, human resources, and customer relationship management [8]. Even nowadays, with the advancement of technology made the cloud-based ERP is possible which could improve the scale and flexibility and making ERP more attractive to SMEs [9].

ERP systems have become indispensable tools for organizations aiming to streamline and integrate their diverse business processes. Traditionally, the primary focus of ERP systems has been on improving operational efficiency and ensuring data accuracy in areas such as finance, human resources, and supply chain management. However, the ever-evolving business landscape has prompted a paradigm shift in the role of ERP systems. The historical evolution of ERP systems traces their journey from being mere transactional tools to becoming comprehensive solutions for managing enterprise-wide functions [10, 11]. Early ERP implementations focused on addressing specific business challenges and improving efficiency. Scholars highlight how ERP systems have evolved over time to encompass a broader spectrum of organizational processes [12, 13]. Despite their initial successes, organizations began facing limitations as they grappled with growing complexities, leading to the realization that traditional ERP systems were insufficient in addressing contemporary challenges.

The adoption of ERP system in business functions not only limited to large companies but also SMEs [14] and it is more important than ever for SMEs as they need to make sure to remain competitive in evolving digital business. However, to some extent, the implementation of ERP in SMEs faces certain challenges that come from financial limitations, resource availability and risk management. Prior research show that the struggle of SMEs often comes in form of the complexity of ERP itself, vendor selection and problems in integration [15, 16]. In addition, another such as data silos, system complexity, and resistance to change are identified as common obstacles [17]. Ensuring seamless communication between different modules and fostering a risk-aware organizational culture are critical factors that researchers emphasize in successful implementations. Understanding and addressing these challenges are crucial for organizations seeking to leverage the full benefits of risk management ERP systems. These challenges potentially become the biggest risk factor for ERP implementation in SMEs [18].

The integration of risk management functionalities into ERP systems represents a pivotal response to the limitations identified in traditional ERP implementations. Researchers discuss the significance of incorporating risk management into ERP systems to address emerging threats and uncertainties [19]. This convergence aims to empower organizations with proactive risk mitigation strategies, fostering a resilient business environment. Prior research shows how beneficial the integration of ERP system with risk management in company. ERP could offer high capability in data centralization which could help risk management to identify the potential risk in real time [20]. Even if we go beyond, the usage of artificial intelligence and big data analytics could help RPS system to be able to predict risk with their potential solutions even before the problems happened [19]. These features could elevate the risk management practices for SMEs as they usually do not have the dedicated risk management standard operating procedures. However, the implementation of AI based ERP in SMEs still underexplored and limited [6].

The literature underscores the need for ERP systems to go beyond operational efficiency and actively contribute to organizational risk management strategies. Current literature highlights several key trends in risk management ERP software. Cloud-based ERP solutions are gaining prominence, offering flexibility and scalability in managing risks associated with data security and accessibility. Additionally, advancements in analytics and artificial intelligence within ERP systems enable organizations to proactively identify and respond to potential risks. Integration with external data sources and real-time monitoring are becoming critical features, allowing organizations to stay agile in the face of rapidly evolving risk landscapes [21].

While the integration of risk management functionalities into ERP systems holds immense potential, it is not without challenges. The literature consistently highlights the potential benefits of integrating risk management into ERP systems. Improved decision-making, enhanced visibility into organizational risks, and increased agility in responding to dynamic environments are some of the touted advantages. Organizations can achieve a more comprehensive understanding of their risk landscape, leading to proactive risk mitigation strategies and a competitive edge in the market [22]. The alignment of risk management with overall business objectives is emphasized as a key outcome of successful implementations.

Despite all that potential that could be unlocked, within the realm of research, the gaps remain especially regarding SMEs. The major stream of ERP research for risk management developed to fit large companies and lacking the insight from SMEs [7]. Even some researcher still has concern on the contributions of previous ERP research that lacking multi-sector perspectives [6, 7]. In addition, there is still lack of research regarding the implementation of more sophisticated ERP system (e.g. cloud-based ERP system) for SMEs [15].

This study aims to fill the gap on the lack of empirical evidence on ERP risk management within SMEs context. By focusing on vendor stability, data security and system cooldown, this study attempts to reveal the understanding of risk that SMEs faced during the adoption of ERP in small enterprises. The novelty of this research lies in the use of neural networks and their effect to the succession of ERP adoption in SMEs.

Based on the research findings regarding ERP risk assessment, a map of ERP usage risks can be presented. The risk map constructed in this study refers to respondents' answers regarding the risks of using ERP.

Based on Table 2 and Figure 1, ERP implementation SMEs presents unique challenges, with "complexity," "data security," and "system downtime" emerging as high-risk factors. Limited resources are a central issue, with smaller teams often grappling with the intricacies of ERP complexity. Unlike larger enterprises that might have dedicated IT departments, SMEs may lack the specialized expertise required for comprehensive ERP configuration and customization. The complexity inherent in ERP systems can strain the capabilities of these smaller teams, increasing the risk of errors during implementation. This complexity challenge is further accentuated by potential skill gaps within SMEs, making it imperative for these businesses to carefully navigate the intricacies of ERP adoption.

Data security stands out as another significant risk for SMEs undertaking ERP implementations. SMEs typically operate with constrained budgets, and allocating sufficient resources to robust cybersecurity measures becomes a challenge. The limited financial capacity may compromise the implementation of comprehensive security protocols, leaving SMEs more vulnerable to data breaches. Given that ERP systems centralize vast amounts of sensitive business data, including financial information and customer details, a breach could have severe consequences for an SME, making data security a critical risk factor that demands careful consideration and mitigation strategies.

Table 2. Result of ERP risk identification

1.png

Figure 1. ERP risk mapping

System downtime is a high-risk factor for SME ERP implementations due to its potential impact on business continuity. SMEs often operate with leaner margins and may lack the redundancy and backup systems that larger enterprises can afford. ERP implementation processes can disrupt regular business operations, leading to downtime that SMEs can ill afford. This downtime can result in delays, impacting customer service, order fulfilment, and overall productivity. For SMEs heavily dependent on efficient and continuous operations, the risk of extended system downtime during ERP implementation poses a significant challenge that requires meticulous planning and risk mitigation efforts. In essence, addressing the challenges of complexity, data security, and system downtime is crucial for SMEs to reap the benefits of ERP systems while minimizing potential disruptions and setbacks.

Another key consideration is "data security." ERP systems centralize a vast array of sensitive business data, including financial information and proprietary details. Inadequate data security measures pose a severe risk, especially for small and medium-sized enterprises [19]. Insufficient financial resources may constrain these businesses in implementing robust cybersecurity measures, making them more susceptible to data breaches [23, 24]. Given the potential consequences of unauthorized access or data loss, the risk associated with data security demands meticulous attention and mitigation strategies during the ERP adoption process. Vendor faces financial instability or undergoes organizational changes, there is a heightened risk of discontinued support or updates for the ERP system. This can potentially leave businesses in a precarious situation, lacking the necessary assistance and updates required for the optimal functioning of their ERP solution.

When assessing the adoption of ERP based on risk severity, as shown in Table 3 and mapped in Figure 2, several critical aspects merit vigilant consideration. One such aspect is "vendor stability." The stability and reliability of the chosen ERP vendor hold significant importance as they directly influence the long-term success of the implementation. If the "System downtime" emerges as a critical risk factor during ERP adoption, particularly for businesses with limited operational redundancy [3]. SMEs, in particular, often operate with leaner margins and may lack the backup systems available to larger enterprises. The implementation process can disrupt regular business operations, leading to downtime that SMEs can ill afford. Extended periods of system downtime may result in delays, impacting customer service, order fulfillment, and overall productivity. Mitigating the risk of system downtime necessitates careful planning and strategic measures to minimize disruptions during the ERP implementation phase.

Table 3. ERP risk severity score

2.png

Figure 2. ERP risk severity mapping

Table 4. Case processing summary

Lastly, the risk of "inadequate support" from the ERP vendor or service provider is a significant concern. Businesses require ongoing support for troubleshooting, updates, and addressing issues that may arise post-implementation. Inadequate support can impede the effective utilization of the ERP system, hindering its ability to meet business objectives. Ensuring a robust support framework is in place is crucial for businesses to navigate challenges and maximize the benefits of their ERP investment. In summary, considering and mitigating these risks is pivotal for a successful ERP adoption, ensuring a smoother transition and long-term effectiveness of the implemented system.

The Table 4 indicates that the research sample consists of 85 Small and Medium-sized Enterprise (SME) owners who have adopted ERP, and the analysis was conducted using a neural network approach. Notably, the results from this analysis reveal an impressively low rate of incorrect predictions, standing at only 1.7%. This remarkably low error rate signifies the accuracy of the neural network model in predicting outcomes related to ERP adoption within the SME context.

Table 5 indicates that the minimal 1.7% incorrect prediction rate suggests a high level of reliability and precision in the neural network's ability to analyze and forecast various aspects of ERP user adoption. Such a low error percentage is indicative of the effectiveness of the neural network in capturing and understanding the nuanced patterns and variables influencing the decisions and behaviors of SME owners in the context of ERP implementation.

Given the robust performance of the neural network analysis, there is a notable expectation that the testing results can significantly contribute to the field of risk management in the context of ERP user adoption. The precision of the model implies that the insights derived from this analysis can be considered trustworthy and valuable for understanding and managing potential risks associated with the adoption of ERP systems among SMEs.

Table 5. Error model

The implications extend to providing SME owners, researchers, and industry practitioners with valuable insights into potential challenges and opportunities related to ERP implementation. By leveraging the accurate predictions from the neural network analysis, organizations can enhance their risk management strategies, making informed decisions that foster a smoother and more successful adoption of ERP systems. Ultimately, the low rate of incorrect predictions reinforces the credibility of the testing results and positions them as a reliable foundation for shaping risk management approaches in the dynamic landscape of ERP user adoption within the SME sector.

Adopting an ERP system is a significant undertaking for organizations aiming to enhance their operational efficiency and decision-making processes. One of the critical factors influencing user satisfaction in the ERP context is the availability of adequate support. Users rely on timely and effective assistance when they encounter challenges or require clarification on system functionalities. This support extends beyond just technical issues to encompass training and guidance on how to maximize the system's capabilities. However, the research indicates that user satisfaction in this regard is not always met. In some instances, organizations may struggle to provide the necessary support due to limited resources, including skilled personnel and comprehensive documentation. The absence of a robust support system can lead to user frustration, negatively impacting the overall perception of the ERP system.

Another crucial aspect influencing user satisfaction is the occurrence of system downtime. Users expect a reliable and consistently available ERP system to carry out their daily tasks seamlessly. The research findings, however, suggest that this expectation is not universally met, with instances of downtime being a source of discontent among users. Downtime can disrupt operations, result in productivity losses, and contribute to a diminished perception of the ERP system's reliability.

Data security is a paramount concern for organizations implementing ERP systems, as these systems typically store and manage sensitive business information. Users expect a high level of data security to protect confidential information from unauthorized access, breaches, or loss [25]. The research reveals that, despite advancements in ERP security measures, user satisfaction in this area remains a challenge. Instances of data breaches, whether real or perceived, can erode trust in the ERP system, leading to dissatisfaction and concerns about the system's overall integrity.

Perceived ease of use is another critical factor influencing user satisfaction. Users expect ERP systems to be intuitive and user-friendly, facilitating a smooth adoption process. However, the research indicates that many ERP systems still fall short of meeting user expectations in terms of ease of use. Complex interfaces, steep learning curves, and a lack of user-friendly features contribute to dissatisfaction among users, hindering the system's successful implementation. While ERP systems hold the promise of improved organizational efficiency, user satisfaction is often compromised due to challenges in providing adequate support, minimizing system downtime, ensuring robust data security, and enhancing the perceived ease of use. These factors are not only sources of dissatisfaction but also represent significant risks that organizations must address to realize the full potential of their ERP investments.

ERP systems are often acquired from external vendors, making the stability and financial health of these vendors a critical concern for organizations. The explanation lies in the fact that these vendors provide not just the initial implementation but ongoing support, updates, and maintenance. If a vendor encounters financial instability or goes out of business, it can pose a serious risk to the organizations relying on their ERP solutions [2]. The repercussions include potential disruptions in essential services, lack of necessary updates, and a compromised long-term viability of the ERP system. Organizations must thoroughly assess the financial stability of ERP vendors to mitigate this risk and ensure a sustainable partnership.

Another significant risk in ERP adoption revolves around data security. ERP systems house a vast amount of sensitive business data, ranging from financial records and customer information to operational details. Inadequate data security measures expose organizations to the risk of data breaches, unauthorized access, and theft. The explanation lies in the potential consequences of a security breach, including financial losses, regulatory penalties, erosion of customer trust, and damage to the organization's reputation [24]. To address this risk, organizations must implement robust security protocols, encryption measures, and continuous monitoring to safeguard their critical business data.

The interconnected nature of ERP systems across various departments makes system downtime a substantial risk. ERP systems play a central role in coordinating and streamlining business processes, and any significant interruption can lead to disruptions in daily operations. The explanation for this risk lies in the potential impact on productivity, customer service, and overall business efficiency. Extended periods of system downtime can result in delayed decision-making, hindered communication, and financial losses [2]. To mitigate this risk, organizations must implement strategies such as redundancy measures, robust disaster recovery plans, and regular system maintenance to minimize the chances of extended downtime and its associated negative consequences.

Inadequate support from ERP vendors or service providers is a persistent risk in ERP adoption. The explanation for this risk lies in the reliance on external entities for ongoing support, troubleshooting, and updates. If organizations do not receive timely and effective support, it can lead to operational inefficiencies, unresolved issues, and hindered system optimization. The risk includes the potential frustration of users, prolonged system issues, and a lack of responsiveness to emerging challenges [19]. To address this risk, organizations should carefully evaluate the support mechanisms offered by ERP vendors, ensuring they have access to responsive and knowledgeable support teams throughout the entire lifecycle of the ERP system [26]. The finding from this research contribute to ERP risk management research literature, especially the ones that focus on SMEs. In general, the findings in line with prior research [7, 16], the results identify several key factors that could affect ERP implementation in SMEs, such as vendor stability, data security, and system downtime. However, our research provides deeper knowledge as we examine the adoption of ERP risk management for SMEs, where they potentially have higher risk factors compared to larger enterprises due to lack of resource. Moreover, prior research mostly used qualitative ERP assessments method [15, 27], the research explored the research question using quantitative approaches which could help us predict the succession of ERP adoption in SMEs. Lastly, our research helps to fill the gaps by providing result of that represent the ERP adoption for SMEs, which quite different with that previous research regularly focused on (i.e. larger companies) [28].

Digitalization is a ‘must’ in this era, especially when businesses like SMEs want to accelerate their businesses globally [29]. This study provides SMEs with clear view on how to identify and measure risks that potentially occurred in the digitalization process. Furthermore, this study also can unify a wide array of SMEs business owners that comes from different level of academics to be able to understand on identifying, measuring and analyzing risks in resource planning. In other word plural kind of SMEs activist can practice more thorough risks management in logic and simple ways. This study also attempts to spread ERP adoption more widely throughout SMEs, since after the pandemic the business ecosystems are significantly change drastically, and this study will assist new or existing SMEs to have more in-depth understanding on how to analyse risks and reduce severe impact on the businesses. This research also emphasises importance of risks management in SMEs, since common risks management is on financial basis, this study highlights on how non-financial risks can have impact in business survivability and performance, at least it will awaken SMEs businesses’ people to be more aware that risks do exist, and need to be managed.