Does risk management help ensure success in ERP projects?

Decisions in corporate management during an ERP selection and during a subsequent ERP implementation can have far-reaching consequences.

A description from behavioral economics shows why it is sometimes difficult (even for decision makers) to minimize risks and what can be done about it.

Imagine you want to improve your ERP planning, optimize processes, stabilize the supply chain and are considering whether you need new software for this or should select and implement software.

This is a decision with far-reaching consequences: On the one hand, new software could better meet your company's needs and increase your efficiency. On the other hand, introducing such an important software represents a potentially high risk for the company. If you choose the wrong software or if something doesn't go according to plan during the implementation, your business could, in the worst case, come to a standstill for an indefinite period of time.

How you can put risk management to work for you

Of course, you want to minimize this risk in order to protect your company and make a possible "ERP software" project a success. However, you can only minimize risks that you are aware of. So, at this moment, you are facing a decision under uncertainty in terms of behavioral economics: the risks or probabilities of occurrence of the consequences of your decisions are unknown. You may not even know all the alternative courses of action.

Let's consider an example from everyday life to illustrate this: you want to walk to work, or go for a walk, and on your way out you are wondering whether it would be better to take an umbrella with you or whether it will stay dry today. You are a bit late and don't have time to look at the weather forecast, so you don't know the probability of rain today. You look at the sky and decide by gut feeling. This is a decision under uncertainty, since you don't have rain risk figures to help you evaluate.

Turning a decision under uncertainty into a decision under risk

What does this mean?

In this situation, you cannot minimize risks because you do not know their level. In most cases, operational controlling does not support decision makers with the dashboards or figures provided either, because the view of the controllers is different. Thus, their representations are usually not designed for uncertainty either.

This may not be so bad during a walk through the park, you can make yourself comfortable in the dry living room afterwards. In an ERP project, the consequences of wrong decisions are more serious, there is more at stake. This is true for the pagatoric variables, as well as for process definitions that do not realize a desired process optimization as well as for customer process design that cannot be implemented.

So what you need first is a resilient and professional evaluation of the possible scenarios and risks associated with the selection and introduction of new ERP software or new IT. Then you are faced with a decision under risk, i.e., a decision in which the possible alternative courses of action and their probabilities of occurrence are known. It is only in this situation that you can minimize risks by choosing the action that exposes your company to the least risk.

In our example with the umbrella, this would be a situation in which you have, for example, read the weather report beforehand and learned that there is an eighty percent probability that it will rain in the next few hours. Now you can decide, based on objective numbers, whether this risk is high enough for you to take an umbrella. Unlike deciding under uncertainty, you don't need to rely solely on your gut feeling.

So, for both the walk and the ERP project, you need one thing above all else to assess the risks: more information about the various options for action and their probabilities of occurrence. You either already have this information if you have extensive experience in ERP software purchase and implementation. Or you must first obtain this information through research, which usually means a high expenditure of time and money. It is also not easy to assess which information, especially from the Internet, is reliable and which is not.

Therefore, if you do not regularly introduce such elementary software in your company, you may find it difficult to reliably assess the risks of different options. At this point in the decision-making process, it can be helpful to turn to specialists who can routinely and resiliently perform precisely this risk evaluation.