EVALUATING THE EFFECT OF ENTERPRISE RESOURCE PLANNING (ERP) SYSTEMS ON THE PERFORMANCE OF COMMERCIAL BANKS IN SOUTH-WEST NIGERIA

ABSTRACT

This study seeks to evaluate the effect of enterprise resource planning (ERP) systems on the performance of commercial banks in South-west Nigeria. The study objectives are to evaluate the impact of ERP systems on the performance of commercial banks in southwest Nigeria; determine the impact of the type of ERP systems on the productivity of commercial banks; ascertain the impact of ERP systems adoption on customer satisfaction in commercial banks; ascertain the effect of ERP systems adoption on employees satisfaction in commercial banks; and evaluate the impact of ERP systems adoption on the overall efficiency of commercial banks under study. A combination of sample survey and oral interview were used to collect data on several aspects of performance from five selected commercial banks in South-west Nigeria. A total population of 750 respondents from the five selected commercial banks was considered manageable and therefore constitutes the sample size of this study. The data collected was analyzed using simple percentages and relative frequencies while the hypotheses formulated were tested using Z- test statistics and Test of Population Proportion at 5% level of significance. The findings from data analyzed indicates that ERP systems adoption have significant impact on the performance of the studied commercial banks; the type of ERP systems adopted also have significant impact on the productivity of commercial banks; ERP systems adoption have significant impact on customer satisfaction through efficient service delivery; ERP systems adoption have significant impact on employees’ satisfaction through participative management and continuous training; ERP systems adoption have significant impact on the overall efficiency of the commercial banks under study. The study however revealed that commercial banks adopting ERP systems should know that it is a continuous process that is embodied in a rapidly changing information technology world, hence they must be abreast of the latest development in the industry or they will face the risk of losing out in today’s competitive and turbulent operating environment. The study also recommends that ERP systems is an important strategic tools for surviving in today’s highly competitive operating  environment,  hence  any  commercial  bank  (irrespective  of  size)  that  must compete favourably and surpass its rivals must adopt ERP systems as an essential infrastructure. Also, commercial banks adopting ERP system must at the outset select the ERP  systems  modules that  fit  the  business practices  and  processes of their  banks,  a strategic  fit  analysis  of operational requirements and  ERP  systems  features  with  the involvement of technical staff and key users is a necessity in this regard. Besides, commercial banks implementing ERP systems must identify the relevant critical success factors that must be in place for the successful ERP systems implementation in order to realize its full benefits. The findings of this study can contribute to improved decision making and commercial banks’ efficiency especially in the aspect of setting ERP systems performance standards at the time of acquisition and implementation.

CHAPTER ONE

INTRODUCTION

1.1     Background of the Study

The most significant development of the millennium which has substantially influenced business operations globally is the emergence of the information age. Taking advantage of rapid technological progress and financial market development, a number of innovative products have been developed in recent years. As we live in a world that is driven by information and Information Technology (IT), IT is changing every aspect of human endeavour including business and organization. The business environment is equally changing dramatically, and in order to stay competitive in the market, organization must improve their business practices and procedures by upgrading their capability to generate and communicate accurate and timely information toward the realization of stated objectives (O’Bren, 2008).

A tidal  wave of IT-enabled  initiative  known as  Enterprise  Resource Planning  (ERP)

systems has elevated the  importance of investing strategically in IT (Ross and Beath

2002:51). An ERP system is a packaged software system that enables an organization to manage the use of resources (materials, human resources and finances) by providing a total, integrated solution to its information processing needs (Nah et al 2003:20). ERP system is a business management system that comprises integrated sets of comprehensive software which can be used, when successfully implemented to manage and integrate all the  business  functions within  an organization (Shehab et  al  2004:372). Though ERP systems evolved in the early 1990s from Manufacturing Resource Planning (MRP II) Systems but while MRP II which focused on manufacturing, ERP systems serve other businesses and services by integrating all data relating to production, materials, marketing, accounting,  finance,  human  resources,  etc.  allowing  organizations  to  price product/services, produce financial statements and manage human, materials and financial resources effectively. ERP system is now considered to be the price of entry for running a business;  hence,  many of the  world’s  leading  organizations consider  ERP  system as

essential IT infrastructure for surviving in today’s competitive and turbulent operating environment (Cook, 1996:12).

Despite the fact that the idea of commercial banking activities in Nigeria started in 1891 when the  first  foreign commercial bank  known as the  British Bank  for  West  Africa (BBWA)  which  later  metamorphosed  to  the  present  First  Bank  Nigeria  Plc  was established, informal ERP systems and other means of managing organizational resources had earlier be in place. Notable among them are material requirements planning (MRP), Manufacturing resource planning (MRP II). It was however, in the late 1990s that the formal ERP systems as a specific form of information technology were applied to commercial banking  activities  in  Nigeria.  Since  its  adoption, the  application of ERP systems concept, techniques, policies and implementation strategies to banking services has become a subject of fundamental importance and concerns to all banks and indeed a prerequisite for local and global competitiveness.

The commercial banking industry in Nigeria has also witnessed tremendous changes (since its inception in 1891 till date) as a result of various government interventions through various reforms  linked  with effective  management of resources and  compliance with global best practices. The quest for survival, global relevance, maintenance of existing market share and sustainable development has made exploitation of the many advantages of information and communication technology (ICT) through the adoption of ERP systems imperative in the industry (Agboola and Salawu, 2008:1-15).

The global success of Enterprise Resource Planning (ERP) systems has not only attracted the interest of researchers from the IT discipline, but from all major disciplines in business research including  management  and  accounting.  The  emergence of ERP  systems  has moved  the  topic  “Computerized  business  information  systems”  increasingly  from  IT domain to the business domain; from systems design and programming to business configuration, process mapping and re-engineering. ERP impose their logic on organizations and force employee to think in terms of integrated processes and to change the way they do accounting, management, production planning and control. All these

changes brought about by ERP systems made them very attractive research object of many business disciplines, and management is by nature the one from which we expect an answer to the question which ultimately counts in business: Are those systems worth the investment? (Wieder et al 2006:15).

Hossain et al (2002:232), observe that ERP systems affect organizations and are implemented mostly to enhance organizational effectiveness. The main purpose for deploying ERP systems is to improve control over organizational processes (Hanseth, et al

2001:35). ERP systems are information systems packages that are configurable and integrate information and information-based processes within and across functional areas in organization (Gattiker and Goodhue, 2004:438). ERP systems automate and structure an organization’s business process by furnishing reference models and process templates across the enterprise (Allen et al 2002:232). ERP systems are implementations of standard software modules for core business processes and are usually combined with specially tailored customization to provide competitive differentiation. The goal of ERP systems is to  provide  integration  and  functionality  across  multi-functional and  frequently  multi- national  organizations.  Implementing  ERP  system  involves  a  change  management initiative, which includes a review of processes across the organization, and entails more than just installing stand-alone pre-written software (Skok and Legge, 2001:194). The change management initiative almost certainly requires some form of business process re- engineering.

With respect to the banking sector, the utilization of ERP system as a specific information technology application  has  increased  attention  from key  players  (bankers,  customers, policy makers) in the  financial services industry. This is partly due to the rapid and significant growth in electronic commerce and the notion that electronic banking and payments such as on-line, real time, automated teller machine, mobile and internet banking etc  will  likely  advance  more  in  tandem with  electronic  commerce.  Besides,  industry analysis outlining the potential impact of electronic banking on costs, savings, revenue growth and increased customer convenience have also generated considerable interest and

speculation about the impact of ERP systems as a specific ICT application on the banking industry.

Allen et al (2002:234) observe that ERP systems improved decision making speed, enhanced control of operations and costs, reduced costs, and boosted enterprise wide information dissemination. However, the complexity of ERP systems implementations; the drastic organizational, cultural, and human changes; the typical high customization expenses; and implementation problems all contribute to new customers’ reconsidering their ERP systems implementation plans. Hossain        et al (2002:232) observe that ERP systems implementations are likely to be the largest change project in cost and time that most organizations have taken on in their history. However, inconclusive findings have been reported on the effect and benefit of ERP systems implementations. It is on this premise that various researchers such as Wilson (1993:102), Furst et al (2000:58) and others have been engaged in unending discourse on the positive pay-offs emanating from the utilization of specified information technology in various enterprises. Such academic debates have resulted in the birth of IT productivity paradox which is concerned with appraising the impact of IT on operational efficiency and the productivity of organizations. Gattiker and Goodhue (2000:438) observe that ERP systems offer an extra-ordinary level of business integration and related benefits, however, most IT managers identified ERP systems as the most difficult systems to implement. According to Hossain et al (2002:233), ERP systems are usually modular in design, utilize a centralized common database management system and have integrated modules so that data flows seamlessly to users through standard interfaces. They further noted that ERP systems are flexible and present best business practices, and require tailoring and configuration set-up for various business functions. In addition, ERP systems operate in real time, provide online, batch processing capabilities  and  are  increasingly  internet-enabled,  which  are  the  hallmark  of  today’s banking operations.

Robinson and Wilson (2001:28) observe that ERP systems aim at providing a business advantage by facilitating the management of all organization’s activities as a whole in addition  to  replacing  legacy  systems  and  resolving  inconsistencies  and  interfacing

problems  among  individual  information  systems.  ERP  is  turning  into  the  business backbone for organizations (such as banking industry) that perform online business transactions. Both practitioners and researchers have indicated that in order to survive in the emerging electronic-based economy, organizations should adopt ERP systems and use them strategically. Willcocks and Sykes (2000:39) opine that an ERP is competitively and technically necessary for many organizations. However, there is contradictory evidence in justifying an ERP economically and there is difficulty in rationalizing the associated costs and implementation complexity for achieving lasting business advantage.

Even though ERP systems have been used by many organizations for over a decade, there remains dearth of research on the impact of ERP on organizational performance especially in developing economy like Nigeria. Since researches indicate that ERP systems significantly affect various types of organizations, this study however seeks to measure the impact of ERP systems on the performance of selected commercial banks in Southwestern Nigeria.

1.2     Statement of the Research Problem

The Nigerian commercial banking sector since its inception in 1891 till date has been bedeviled with numerous challenges which prevented the industry from performing its financial intermediation role effectively. One of the major contributors to the high rate of commercial banks poor performance is the non-adherence to global standard and best practices   in   terms   of  technological  innovation.   The   continuous  use   of  outdated technologies in the Nigerian commercial banks aggravated the increasing challenges of banking services delivery, inter-bank operations and global retail financial services with attractive diversified product mix. This has greatly affected the productivity of these banks. In order to improve the level banking system performance the Nigerian banking industry need to comply with one of the global best practice in terms of technological innovation, which is the adoption of ERP systems.

The weak internal control systems which characterized the commercial banking sector in

Nigeria equally contributed to the poor performance indices of the banking system. The

weak  control  system  also  resulted  in  mismanagement  and  inept  behaviour  of  bank managers in respect of loan and advances due to non-adherence to standard practices in approval of credit; mismatching of assets and liabilities, prevalence of over extension of facilities, fictitious collateralizations. Other and equally important factors include insider abuses practices among banks directors and management staff. With good internal control system arising from the adoption of ERP systems, most banks in developed economies overcame the problem of mismanagement of banks resources.

The high level of competition is another major challenges confronting the commercial banking sector in Nigeria. Being one of the most turbulent industry in Nigeria, any bank that must survive and surpass rivals in the industry must comply with global best practices which will enable such bank to maintain its existing market share and become relevance in the global financial market. This compliance is what is actually lacking in the Nigerian banking industry.

Lack of a sufficiently developed infrastructure and business environment has had negative influence on the commercial banking industry. The legal process, absence of reliable credit rating agencies and poor infrastructure all contributed to non-standard banking practices. Nigeria legal process is long and expensive and banks seldom pursue borrowers in court, few banks were able to foreclose on borrowers, and this led to borrowers abusing the system. Lack of credit information on customers largely because there is no uniform way to identify customers has held back the development of credit bureaus and hampered customer credit assessment at banks, increasing the stock of bad debt in the system.

Another challenge confronting the commercial banking sector is poor customer service delivery arising from insufficient facilities (physical and manpower, and technological deficiencies). This has led to the movement of customers from one bank to another in quest of better banking services delivery without much delay. The modern day computerization (such as online and real time, automated teller machines) by many commercial banks in an attempt to minimize customer dissatisfaction have not yielded the much needed desired result due to frequent breakdown of such computerization and networking arrangement.

Following the dissatisfaction of customers due to poor banking service delivery, is the problem of dissatisfied workforce in the commercial banking sector. Most bank workers in Nigeria are not adequately trained and developed with the aid of modern technological innovation that will enhance their efficient service delivery. Besides, the high level of job insecurity arising from continuous labour turnover in the banking industry has significant impact on employees motivation and morale. It is obvious that a dissatisfied employee that is not sure of his job security will not give his best output to his employer. This ultimately impacted negatively on customers service delivery and overall performance of the bank in the longrun.

The unfriendly macroeconomic environment characterized by decaying infrastructure, high inflation, depreciating value of naira, large fiscal deficit has resulted in high cost of doing business in Nigeria, which in turn precipitated high level of inefficiency in commercial banking sector.

The ability of organizations to adapt to changes in a global market is of vital importance for a long term success. During the last decade, this has influenced many banks to work with quality issues on a strategic level and ERP systems has frequently been used by banks all over the world as a management strategy to develop the quality of service delivery in the banking industry. However, many banks in Nigeria fail to operate at the level of global competitiveness due to non implementation of ERP systems. This is because most banks realize  that  implementation of ERP  systems  involved a  comprehensive organizational change which is costly, hence several banks have not recorded remarkable success in this regard.   Based   on   this   experience,   researcher   have   expressed   doubts   whether implementation of ERP  systems  is  beneficial.  Problems emerged when attempting to measure the business values of ERP systems, which make the measurement of its contributions  to  organizational  performance  difficult.  How  far  has  the  utilization  of different modules of ERP systems in the banking sector been able to achieve the objectives guiding its acquisition is one of the major thrust of this study.

Despite the fact that some banks in Nigeria have adopted ERP systems and other form of IT, there is still the need to determine the level of adoption and the impact on the efficiency of such banks and the consequent effect on the Nigerian economy. In spite of its wide adoption, many stakeholders in the banking industry are of the view that ERP systems is a difficult and high cost project that places tremendous demands on organization’s time and resources. An in-depth analysis of the various dimensions of these challenges and drawbacks form part of the rationales for this study.   Hence after many years of the adoption of ERP systems in the banking sector, it is pertinent to evaluate its impact on their performance, productivity, operational efficiency, capacity building, and employment structure and staff development. If significant impacts have been made by utilizing ERP systems, there is need for policies to encourage both the sustainability of such impacts and greater investment in several modules of ERP systems.

1.3     Objectives of the Study

The aim of this study is to evaluate the effect of Enterprise Resource Planning (ERP) systems on the performance of commercial banks in South-West Nigeria. In specific terms, the research objectives are:

1.         To evaluate the impact of Enterprise Resource Planning (ERP) systems on the performance of commercial banks in Nigerian.

2.         To determine the impact of the type of ERP systems adopted on the productivity of commercial banks.

3.        To  ascertain the  impact  of ERP  systems adoption on customer satisfaction in commercial banks.

4.        To  ascertain the effect  of ERP systems adoption on employees satisfaction in commercial banks.

5.        To  evaluate the  impact of ERP systems adoption on the overall efficiency of commercial banks under study.

1.4     Research Questions

The following research questions are formulated to guide this study.

1.         What is the impact of ERP systems adoption on the performance of commercial banks in Nigeria?

2.         What is the impact of the type of ERP systems adopted on the productivity of commercial banks?

3.        Does the adoption of ERP systems have any impact on customer satisfaction in commercial banks?

4.        What  effect  did  ERP  systems  adoption  have  on  employees’  satisfaction  in commercial banks?

5.        What  is  the  impact  of  ERP  systems  adoption  on  the  overall  efficiency  of commercial banks under study?

1.5      Research Hypotheses

In  order  to  achieve  the  above  stated  objectives  and  provide  answer  to  the  research questions, the following hypotheses were formulated:

HA1:    ERP systems’ adoption has significant impact on the performance of commercial banks.

HA2:    The type of ERP systems adopted by commercial banks has positive impact on their productivity.

HA3:    The  adoption of ERP  systems  in  commercial banks  has a  positive  impact  on efficient customer service delivery.

HA4:    ERP systems’ adoption in commercial banks has positive impact on the satisfaction and morale of employees.

HA5:    ERP  systems’  adoption  has  significant  impact  on  the  overall  efficiency  of commercial banks under study.

1.6      Significance of the Study

This study seeks to evaluate the impact of ERP systems on the performance of commercial banks in Southwest Nigeria. The results of this study will be of much importance from academic research point of view as well as administrative and management point of view.

1.         From  the  academic  research  perspective,  this  study  will  add  to  the  body  of knowledge in the area of information technology management and banking finance since the study focuses on enterprise resource planning (ERP) system, which is a specific aspect of IT. Consequently, this study will serves as a base for further research especially in those aspects not covered by the scope of this study.

2.         From the administrative and management point of view, the findings of this study will be of immense benefits to bankers. The finding of this study will enable bankers and other senior executives to increase investments in IT facilities based on noticeable payoffs on performance evaluation.

3.         The finding of this study will also assist top management and policy makers with improved decision-making strategies and setting ERP systems expectations at the time of acquisition and implementation of ERP modules.

4.         Besides, the findings of this study will serve as a feed back mechanism to ERP vendors and manufacturers on how to improve the quality and functionality of ERP modules for efficient service delivery that will justify banks and other organizations investments in ERP systems.

5.         The results of the study will assist the commercial banking industry in achieving a new horizon of performance improvement viability and overall efficiency.

6.         Finally, the findings will test the overall usefulness of ERP systems in the bank industry.

1.7      Scope of the Study

This study focuses on evaluating the impact of enterprise resource planning (ERP) systems on the performance of commercial banks in Nigeria. The study covers relevant aspects of ERP systems such as the concepts, evolution, theories, implementation process, impacts on performance as well as its drawbacks. Commercial banking industry is selected as case study due to the nature of financial services provided which requires data and process

integration  across  various  geographical  locations  in  order  to  ensure  efficient  service delivery at customer convenience. Specifically, five commercial banks (First Bank; Union Bank; EcoBank; Zenith Bank; and Access Bank) in Southwest Nigeria were selected as case study. The study covers a period of sixteen years (1995 to 2010), this scope is chosen because such banks must have a history of pre and post ERP systems adoption experiences, which this study is structure to capture. The relevant variables of interest analyzed in this study were the effect of ERP systems’ adoption on the performance of commercial banks; customers service delivery, employees’ motivation and satisfaction, as well as the overall operational efficiency of the studied commercial banks due to ERP systems’ adoption.

1.8      Limitations of the Study

In general, the depth and thoroughness of this research was greatly constrained by the following factors which were beyond the control of the researcher. This study like most studies suffered the following limitations.

The first limitation is that of insufficient time on the part of the researcher which made in- depth analysis of the study almost impossible.

There  was  also  the  problem  of  inadequate  financial  resources.  This  curtailed  the extensive survey of all the commercial banks in the country that are operational. Hence, the study was limited to only five sampled banks and the study also concentrated on the Southwestern geo political zone of Nigeria. Thus it was impossible to study other commercial banks outside the selected sample and region.

Furthermore, attitude of the respondents is another limiting factor, because of the tight schedule and busy nature of bank workers, there is low level of response initially to the administered questionnaire; the researcher had to make repeated visits to the banks in order to retrieve the completed questionnaire.

Inspite of the above limitations, this study stand to be relevant.

1.9      Definitions of Terms

1.         Information Technology (IT): This refers to the modern technique of handling data by electronic means (computer, telecommunication, associated hardware and software) which involves its access, storage, processing, transfer and delivery

2.        Information System (IS): This is the group in charge of designing and delivering

IT applications throughout an organization

3.         Legacy System: Any IT system that has existing code, is presently useful and in use, and does not have distributed and object oriented architecture

4.         Enterprise Resource Planning (ERP) Systems: ERP systems are information systems packages that are configurable and integrate information and information- based processes within and across functional areas in organizations

5.         Commercial   Bank:   This   is   an   institution   that   offers   various   financial intermediation services such as the safekeeping, lending and exchange of money, and other financial services .

6.         Chief Information Officer (CIO): This is the senior information system executive in an organization saddled with the responsibility of managing all aspect of information technology

7.         Performance Evaluation: This is a formal assessment of how well or effective an action is being carried out by individual or organization. It is also defined as the process of management which involves continuous judgment on the behaviour or action of an entity.

8.      Business Process Re-Engineering (BPR): This is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in organizations’ critical measures of performance such as cost, quality, service and speed.

9.      Customer service : The act of providing intangible benefits to consumers and users of the activities of such firms as banks, insurance companies, consulting companies, law firms etc

10.    Material   Requirements  Planning:  This   is   a   product-oriented  computerized technique aimed at minimizing inventory and maintaining delivery schedules.

11.    Managerial efficiency: It is the act of “doing things right” and relates to the input requirements of the job.

12.    E-business: An organization which connects critical business systems directly to their customers, employees, partners and suppliers via internets.

13.    Organizations: A consciously coordinated social unit created to achieve specific purposes, common aims and objectives by means of planned and coordinated activities.

14.    Technology: The machinery, methods, systems and scientific procedures of carrying out the work of the organization and converting inputs to outputs.

1.10    Profiles of the Studied Commercial Banks

First Bank of Nigeria

First Bank of Nigeria Plc for over a century has distinguished itself as a leading financial institution and a major contributor to the economic advancement and development of Nigeria. The Bank was incorporated as a limited liability company on March 31, 1894, with Head Office in Liverpool by Sir Alfred Jones, a shipping magnate. It started business in the office of Elder Dempster and Company in Lagos under the corporate name of the Bank for British West Africa (BBWA) with a paidup capital of 12,000 pounds sterling, after absorbing its predecessor, the African Banking Corporation, which was established earlier in 1892. In its early years of operations, the Bank recorded an impressive growth and worked closely with the Colonial Government in performing the traditional functions of a Central Bank, such as issue of specie in the West African sub-region.

To justify its West African coverage, a branch was opened in Accra, Ghana in 1896 and another in Freetown, Sierra Leone in 1898. These marked the genesis of the Bank’s international banking operations. The second branch of the Bank in Nigeria was in the old Calabar in 1900 and two years later, services were extended to Northern Nigeria.

To reposition and take advantage of opportunities in the changing environment, the Bank had at various times embarked on restructuring initiatives. In 1957, it changed its name from Bank of British  West  Africa to  Bank of West  Africa.  In 1969,  the  Bank was

incorporated locally as the Standard Bank of Nigeria Limited in line with the Companies Decree of 1968. Changes in the name of the Bank also occurred in 1979 and 1991, to First Bank of Nigeria Limited and First Bank of Nigeria Plc, respectively. In 1985, the Bank introduced a decentralised structure with five regional administrations.

To further enhance the Bank’s operational efficiency, this was reconfigured into sixteen Area Offices in 2003. In view of the foregoing, it was therefore, a natural progression when in 2001, the Bank began the process of transforming its corporate identity to reflect its rejuvenated focus. The transformation process which began in earnest in 2001 gained momentum in 2003 and was launched on Tuesday, April 27, 2004 with the introduction of a new corporate identity. First Bank got listed on the Nigerian Stock Exchange (NSE) in March 1971 and has won the NSE President’s Merit Award eleven times for the best financial report in the banking sector.

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