M ANAGE M ENT J
CASE 2-1 OPENING CASE
36 CHAPTER 2 SYSTEMS INTEGRATION
---�----�---
CHAPTER 2 SYSTEMS INTEGRATION 3 7
Hartman ultimately sees three other advan
tages accruing to ACI [rom this ERP conversion.
These are:
• "Based on what I have seen so far, I am estimating that we will reduce our admin
istrative workload by about 10 percent, primarily by reducing manual data entry."
• "With the ERP system, we will provide more accurate, complete, and timely infor
mation to decision makers."
• "We are moving heavily into e-commerce, and eEnterprise provides the building
PREVIEW
blocks that enable two-way information flow bet ween e-business and financial s ys t e III s."
The ACT case highlights some of the prob
lems with heterogeneous systems and how they can affect the varioLis departmen ts within the company from Account ing to Warehousing. The systems integration at ACI has introduced some benefits and drawbacks. The qllestion remains Ivhether their benefits olltlveigh the dr(flviJacks.
What do YOII thil/k? •
In the Air Cargo case you can see what happened to functional departments when a company moves from silo systems to an enterprise information system. The critical benefit from such conversions is usual ly the elimina tion of manual data re-entry (i.e., rekeying information from one functional application into another). Another benefit is the reduction and near elim ination of spreadsheets to generate man age
ment reports and to answer special management queries. The drawbacks of imple
menting integrated systems can include the high cost of im plementing an ERP system, the required process changes to benefi t from the new system, and training the employees to use this new system.
In today's organization integration of information systems is very critical for their survival and growt h. Systems integration means that you al low a heterogeneous ( hodgepodge) IS to communicate or integra te and sh are information (or data) seamlessly with one another. I t is important to understand that the keyword here is seamless because systems have shared information with each other for a long time;
however, they required a human link. Information generated from one system had to be re-entered manually by users into other systems, as illustrated in the Air Cargo case.
This case also shows the typical problems faced by an organization with a manual data integration process. First, it takes much longer to get information into the system, there are errors and inaccuracies, and information sharing cannot happen in real time (or instantly as it's updated by others) between the various organ ization stakeholders. For example, the warehouse employee does not know the product sales cycle, and the cus
tomer service employee may not know the status of the shipped product. This breeds inefficiencies in the operations of an organization, which reflects poor customer service and in the long term in making the organization ineffective in its competitive land
scape. In fact , systems integration is a key issue for an organization for its growth;
therefore, management needs to pay a close attention to this issue. Enterprise infonna
tion system (EIS) plays a key role in systems integration as discussed in this chapter.
Enterprise Resource Planning (ERP) systems are a major kind of enterprise informa
tion system that allows organizations to integrate the heterogeneolls systems into one organization-wide application with an integrated database management system.
This chapter will trace the origins of how information systems have evolved into a heterogeneous collection of isolated systems or silos over the last 50 years - their
38 CHAPTER 2 SYSTEMS INTEGRATION
relationship with an organizational structure, the value of systems integration, and the role of ERP in systems integration. I nformation systems have generally evolved around the needs of the organization. B efore discussing evolution of I S, therefore, it is important to u nderstand the evolution of organizations. This chapter takes a brief look at the evolution of functional silos in organizations followed by a discussion on the evolution of IS in an organization. This is followed by a discussion on systems inte
gration challenges, benefits of integrated systems, and the role of ERP in systems inte
gration. The chapter will conclude with a set of challenges faced by management on systems integration and their role in resolving them.
__________________
� �
����������L_ ______________ __FUNCTIONAL SILOS
According to Webster's dictionary, silos are an airtight pit or tower for preserving prod
ucts. Silos are basically compartmentalized operating units isolated from their environ
ment. Why have information systems and organizations evolved into functional silos?
I n order to understand the reasons, we first need to look at the historical evolution of modern organizations and the systems supporting their information requirements.
HORIZONTAL SILOS
Management theorists Huber and McDaniel1 in t heir research study found that the complexity and turbulence in the organization's environment forces it to break com
plex tasks into smaller manageable units. If we take a closer look at the evolution of a modern organization, the early emphasis has always been on the horizontal or the functional paradigm. I n the early 1 900s, a management philosopher named Henry Fayol2 was the first person to divide functionalized organization into five basic areas:
planning, organizing, coordinating, commanding, and controlling. Fayol 's classification was extended and conceptualized in the 1 930s by Luther Gulick3 into the functional model of POSDCORB (Planning, Organizing, Staffing, Directing, Coordinating, Reporting, and B udgeting). The POSDCORB categorization (Figure 2-1) became very popular and led to a set of formal organization functions such as control, management, supervision, and administration starting in late 1 930s.4 Over the next 50 years the ter
minology of functions in organizations have changed, say from planning to management to strategy, but the concept of categorizing complex activities into orga
nized functions has remained for control and coordination reasons. The current classi
fication of organizations into divisions or departments like Accounting, Human Resources, Marketing, Management, and others reflects this evolution in organizations of breaking complex tasks that into smaller manageable tasks could be assigned to a group of people who could then be held responsible.
lHuber, G. and McDaniel, R., "TIle Decision-making Paradigm of Organization Design," Management Science, May 1986, pg 572-589.
2Fayol, H. (1916) A dministration Idllstrie//e et Genera/e, Paris: Dunod.
3Gulick, L., (1937) Notes on the TIleory of Organization, In: Papers on tlie Science of Administration, New York: Columbia University Press.
4Barnard, c., The Flinctions of the Execlitive, Cambridge: Harvard University Press, 1938
CHAPTER 2 SYSTEMS INTEGRATION 39
Organization
Planning Organizing Staffing Directing Coordinating Reporting Budgeting
FIG U RE 2-1 Functional Model of Organization (POSDCORB
A dapted froll1: Barnard, c., The Functions oftlie Executive, Cambridge: Harvard University Press, 1938
VERTICAL SILOS
In addition to the functional or horizontal division, organizations have also seen a ver
tical or h ierarchical layering of management functions. In the late 1 960s, Robert Anthony,S an organizational researcher, at Harvard University, found that organiza
tions also divided responsibility in hierarchical layers from strategic planning to man
agement control and operation control. For example, most organizations h ave their top-level management like CEOs and presidents to plan the long-term strategy of
FIG U RE 2-2 Hierarchical Model of Orgalliza.:;ti ... o ... I1 _______ ...
Strategic Management
Tactical Management
Functional Operations
S Anthony, R . , Plannillg and Control Systellls: A Frallleivork for Analysis, Boston: Harvard University Graduate Scbool of Business Press, 1965.
40 CHAPTER 2 SYSTEMS INTEGRATION
organizations, whereas midlevel management (e.g., vice presidents or general man
agers) focuses on tactical issues and on the execution of organizational policy to ensure that the company is accomplishing its strategic objectives. The lower-level management (e.g., supervisors) task is to focus on the day-to-day operations of the company. This vertical categorization, even though not discrete organizational functions, does involve a distinctive set of activities. The functional silos typically follow the scientific model for business and usually have hierarchical or multi-layered reporting structures, formal leadership, management positions, or both with final authority on decision making. In this traditional functional (or silo) organization, maintaining command and control is usually critical for the overall functioning of the business organization.
Thus, when organizations get big and complex they tend to break functions into smaller units and assign one or more staff the responsibility for these activities. This allows the organization to manage complexity as well as the staff to specialize in those activities that enhance productivity and efficiency. Work groups or teams with formal leadership or supervisors are part of this organizational structure as well. The quality of the products and services goes up, but the organization is divided into compartmental
ized units that know very little of each other. Sharing of information occurs only at higher levels of management.
Despite attempts to break them, functional silos are alive and doing well.
According to a survey by Purchasing magazine,6 96 percent of the respondents said their organization still maintains a functional structure but 86 percent also said they agree with their firm's decision to promote teamwork and integration of the functional areas in their organization. One reason for this is that information sbaring and com
munications problems gets worse as an organization spreads geographically and gets more virtual. The original purpose of functional division (i.e. , efficiency and effective
ness) is defeated. The lack of information sharing at all levels of an organization often leads to problems with inventory management, such as overproduction of goods, when the sales department is not sharing current data on projected sales with the production department or poor customer service when a customer service representative does not know the status of shipped goods. The inefficiencies can creep from operations control all the way to the strategic planning level of the organization. With global competition and virtual organizations, the traditional functional organizational structure must change to process-oriented structure to allow easy integration of information and more flexibility for an organization to re-align with its environment. In order to com
pete in a globalized economy, companies must take a business process view and utilize IT to integrate that business process.
BUSINESS PROCESS AND SILOS
The functional silo problem was felt by many organizations in the late 1 980s and early 1 990s, which gave birth to business process reengineering (BPR). The functional grouping often leads to a myopial view of improving the division or department rather than the entire organization. This causes intra-organizational friction and is counter
productive toward an organization's overall goals. Business process focus led by such
6Purchasing, November 4, 1999 P 24.
CHAPTER 2 SYSTEMS INTEGRATION 4 1
management gurus a s Peter Drucker7 and Hammer & Champy,8 re-oriented manage
ment on improving an organization's efficiency and effectiveness by focusing on busi
ness processes (e.g., product development and order processing). The business process provides an alternative view of grouping people and resources focusing on an organi
zation's activity, even if it means cutting across the traditional functional areas (e.g., order processing), which involves interactions between sales, warehousing, and accounting functional areas as the work progresses from initial sales order to collection of payment from the client. The cross-functional business process can involve people and resources from various functional departments working together, sharing informa
tion, if necessary, at any level of the organization. This business process focus has moved management thinking away from a functional department to business process view. The business process view flattens the organizational structure from a hierarchy to a matrix where people and resources from multiple functional units collaborated on such projects as new product development, procurement, or order processing in order to serve the external entities of the organizations better and quicker.
The cross-functional organizational structure breaks the traditional functional silos of an organization opening up the informational flows from one department to another. This opened the doors for more organizational changes because some organi
zations are moving from process orientation to customer orientation. A customer
centric organization focuses all its business processes around improving the relationship with its customers. For example, Dell Computers does not preassemble its computers for its customers; instead, Dell provides the configuration options to its cus
tomers via the Dell.com website. The customer designs the computer configuration based on his or her needs and then transmits the order to Dell. Dell then processes the order and ships it to the customer within 2 weeks. This customer-centric approach allows Dell to communicate and interact better with its customers and let them drive the organization's processes. B usiness process and BPR will be discussed in more
FIG U R E 2-3 Matrix Structure of Organization
Functional Operations
H-R Accounting Finance Marketing Manufacturing MIS
7Drucker Peter, Managing in a tillle of great change, New York: Truman Talley Books/Dutton, 1995.
SHammer, M. & Champy, 1. Reengineering the Corporation, New York: Harper Business Press, 1993
42 CHAPTER 2 SYSTEMS INTEGRATION
detail i n Chapter 9. This organizational evolution from functional silos to business process and customer-centric approaches has had a big impact on the evolution of information systems, as you will see in the next section.
EVOLUTION O F IS IN ORGANIZATIONS
As described earlier, the role of information systems has been and always will be one of supporting business activities and enhancing the workers efficiency. Over time, how
ever, as business changes and expands, systems need to change to keep pace. The result is sometimes a wide variety of information systems and computer architecture config
urations creating heterogeneous or independent nonintegrated systems. These systems ultimately create bottlenecks and interfere with productivity. These systems lack con
trol and coordination. They become the breeding ground for inconsistent, inaccurate, and incompatible data and ultimately lead to mismanagement. The information sys
tems that work independently and are grouped by the various functions and depart
ments, or both, are known as silos. These systems cannot share data and therefore require users to access multiple systems to integrate the data manually. As a result, the chance increases for data errors and inconsistencies. Silo systems focus on individual tasks or functions, or both, rather than on a process and team. In addition, these sys
tems make it very difficult for organizations to be customer-centric because data can
not be assimi lated from different functional areas to address customer needs. For example, if a customer support process requires information to be pulled from the accounting and the shipping departments, the task requires access to two separate sys
tems and then visually matching the shipping information with the billing information.
This can be time-consuming and prone to errors, resulting in poor customer support.
The essential problem with functional silos is that organizations design, manage, and reward their employees and managers by functional performance, yet they deliver value to customers via cross-functional processes. Getting the right balance between functional management and process delivery is at the heart of organizational perfor
mance. Organizations have been designed around functions for a very long time and for good reason. The functions of an organization (e.g., sales, manufacturing, claims assessment, HR, and warehouse) are important. They provide a structure by which an organization functions smoothly. For example, the warehouse department and the warehouse manager are essential for maintaining control over the product inventory.
When the emphasis is strictly on functional performance, organizations tend to create silos that optimize functional outcomes, perhaps at the expense of end-to-end process performance. Nor is organizational performance optimized by focusing on process tunnels at the expense of functional operations. Replacing functional silos with process tunnels will be a self-defeating function because it will only make the process efficien t without delivering value to the customer. In today's organization, a silo information system creates bottlenecks for employees, vendors, and clients. As shown i n Figure 2-4, a silo environment is inefficient, inaccurate, and expensive.
I nformation is captured and re-entered several times, and is not available in real
time. Silo environments hamper enterprise decision making and overall effective
ness because key information never makes it out of the different pockets of the
CHAPTER 2 SYSTEMS INTEGRATION 43
Users
Functional Departments
Functional Silos in Organization ����---�----�--�
Adapted from: Oracle, Inc. (www.oracle.com)
organization in time for the decision maker. In a silo system environment only selec
tive employees from that department have access to information; customers, partners and suppliers are dependent on these employees to provide them with answers.
For example, before UPS implemented its publicly accessible package tracking system for customers, partners, and suppliers, there were tremendous bottlenecks in finding the status of a package in UPS's vast'distribution network. It was costing UPS millions of dollars to answer customer queries on package status. Implementing an integrated package tracking system was a win-win for UPS and its customers, partners, and suppliers. UPS spent less on answering customer queries, and customers got their answers whenever they wanted to know. In an integrated system environment, all par
ties have access to the same data sources from a network in real-time.
The evolution of IS, when observed from its hardware and software architectures to the various system generations, suggests that the role of IS has generally been to support evolving information needs of the organization.
44 CHAPTE R 2 SYSTEMS INTEGRATION
IS GENERATIONS
The first-generation computer systems (shown in Figure 2-5) were mainframe-based systems with a centralized architecture, focusing on best-of-breed products. There were many vendors with many applications. It took a lot of time and money (i.e., data inter
faces and consulting) to get them to work together. Only a small number of employees (power users) could connect to these best-of-breed applications through expensive, rigid, proprietary networks. These power users had limited and ineffective methods (i.e., regular mail, phone, fax, early email) to share information with customers, suppli
ers, partners, and other employees.
Information systems (IS) as we know them today have been used in business since the 1960s. Before that decade, computer systems were only used by scientific and govern
mental organizations for research and developing defense weapons. For example, the UNIVAcr�i system is considered to be the first computer system that was used to build weapons in World War II. In the 1960s, however, the introduction of computers into busi
ness organizations by such vendors as IBMn'i and UNISYSTM started to change how com
puter systems were used. See Figure 2-5 for a chronological evolution of computer-based information systems. The IS evolution is often viewed as a socioteclmical change process in which technologies, human factors, organizational relationships, and tasks change con
tinuously. This sociotechnical process, often known as the systems life cycle for analyzing information system requirements, helps to analyze complex sociotechnical dynamics
FIG U R E 2-5 Information Systems Evolution Cbart
---�--�
1940s - 1950s 1960s - 1 970s 1 980s - 1990s 2000s -.
Mainframe Personal web services
U N IVAC Computer with Computer with
architecture
computer Centralized client {server systems
architecture architecture
• Direct-access • Centralized • Client { server • Web-services
architecture architecture architecture architecture
• No operating system • Operating system • Operating system • Virtual machine
• No remote access built-in within the separated from operating system
• Only scientific hardware hardware
• Application, data and computing • Remote access; • Application and data services are
• No software available from client are distributed distributed
applications terminals
• Processing is shared • Processing is shared
• Application and data between smart clients and utilized are centralized and distributed intelligently within
• Applications servers grid-computing or
designed to function • Applications shared P2P application
as silos throughout the • Applications shared
organization between clients, suppliers and external partners