EVALUATION OF ERP IMPLEMENTATION ON FIRM PERFORMANCE:

A CASE STUDY OF AT&T

Xin Chan1 and Yui-yip Lau2
1

Department of Industrial and Systems Engineering

The Hong Kong Polytechnic University
2
Department of Logistics and Maritime Studies
The Hong Kong Polytechnic University

ABSTRACT
Recently, the firms face the twofold challenges from the global economy deteriorated sharply and the continual
risen in customer demand and expectations. The invention of ERP brings the firms with operating cost
minimization and customer service level maximization in a changing economy. This study illustrated AT&T, is
the largest Telecom services provider in the United States is used as our studied organisation. This paper
investigated the critical elements on the ERP implementation process. This study also illustrated comprehensive
approaches of valuing and evaluating ERP from the pre-implementation to post-implementation performance
including cost-benefit analysis, multiple linear regression and intensity index method.
Keywords: ERP; Cost-Benefit Analysis; Multiple Linear Regression; Intensity Index Method
INTRODUCTION
In the globalization era, the firms face a multitude of forces pertain the growth of fierce competition, market
expansion, and rising customer expectations in the dynamic business environment [6]. The competitors
continuously upgrade their capabilities to stay competitive in the dynamic business environment. This
intensifies the firms need to lower total cost and provides better customer service over their competitors [26]
[24]. It is crucial to develop strategies on information systems (IT) in order to overcome the complexities of
global businesses [6]. By investment wisely on IT infrastructure and its improvements, companies are able to
root out volatilities and disruptions in the supply chain, hence to grasp the competitive advantage over the other
industry players and to drive for firm performance. The IT is the main enablers for the firms to achieve
competitive edge by reducing operating costs, increasing productivity, and improving customer services [26] [14]
[3]. The major types of IT can be grouped into inter-firm and intra-firm information systems. Inter-firm system
not only supports communication between firms among different parties, but also reduces the duplication of
paperwork to save the time and cost of administration [14] [15]. On the other hand, intra-firm systems are
mainly to span internal functional boundaries and facilitate the collaboration of different activities within a firm
[14] [16] [15]. The enterprise resource planning (ERP) is categorized as intra-firm system which is
multi-module application software to manage the resources and coordinate a boarder scope of activities [14]
[19]. ERP highlights the broad scope of application on different functional areas and multiple business units
comprise accounting and financials, human resources, operations and logistics, sales and marketing [26] [20]
[21] [19]. Broadly speaking, ERP is one of key IT applications that are used to capture, store, and transmit
information so as to enhance efficiency and visibility in handling physical goods moving within the firm [14].
According to [26], it proposed that using ERP brings the two significant advantages that do not occur in
non-integrated departmental systems: (1) encompasses all functions and departments within the firm; (2)
enhance the interdepartmental cooperation and coordination because of the firm database in which all business
transactions are entered, recorded, processed, monitored, and reported. Overall, ERP can facilitate the firms to
accomplish their objectives of enhanced communication and responsiveness to all stakeholders [26].
Regarding the global economic downturn because of the financial tsunami, it is inevitable to see its impact on IT
for various businesses. The IT budget has been given considerable pressure due to declination of profiles [22].
The firms should confront the uncertainties ahead in a rigorous and fact-based way instead [5]. So
rationalization and strategic mapping for IT projects are often being called under this uncertain time. Many
firms are maintaining high-priority investments on IT while most firms are reviewing and reducing their IT
expenditures and budget. Hence we can see the uncertainty of the business environment makes this decision
perilous [1]. For this reason, more realistic approaches are needed to test potential strategies and investments on
IT. This study aims to illustrate different approaches of valuing and evaluating IT projects, with the inspiration
from the ERP project in AT&T and other scholars contribution reviewed [18] [7]. Detailed information on the
ERP implementation process of AT&T case will be discussed in support of the later compiled research
1

approaches, namely cost-benefit analysis, multiple linear regression and intensity index method. This paper will
also describe how the above-mentioned approaches would be beneficial to the ERP project appraisals from the
pre-implementation to post-implementation performance evaluation respectively, that cover not only factors of
the business entity on its own but also the economic factors. It will also demonstrate how firms could see a
general picture of their performance by making use of these models at different stages.
CASE STUDY: AT&T
AT&T, American Telephone and Telegraph Company, being one of the worlds leading telecommunication
companies, is the largest Telecom services provider in the United States. The company itself is well-known not
only for its wide coverage and provision on different telecommunication services, but also for its innovative
strategies in IT applications. Not until the merge with Bellsouth Corporation, AT&T made its own name in the
industry (source: www.att.com). Thereafter the size and services provision from AT&T has been proceeding in
an incredible speed. Its most recent move in the limelight is the exclusive iPhone partnership with Apple [10].
What lies behind AT&Ts glamorous success and what forged its road to Rome is believed to be its use of
Enterprise Resource Planning (ERP).
This paper is under the inspiration of [7], titled The transformation of AT&Ts Enterprise Network System
Group to Avaya: enabling the virtual corporation through reengineering and Enterprise Resource Planning.
Since ERP helps AT&T to integrate every data and transactions, regardless the components separation, into a
unified whole in the company. Introduction of ERP information system replaced individual applications, such as
accounting and payroll systems. It also removed the co-existence of different interfaces which were needed to
enable communications between the software portals. In addition, ERP system provides standardizations which
can avoid the teething of data from different software, and hence thereby reduce maintenance costs. It was
aimed at replacing the legacy technologies and enhancing the integration of and the scope of the value chain, so
that overall operations could be greatly improved to save costs of at least $125 million each year. The company
intended that the ERP implementation could finally achieve the final goal that was an increasing focus on
customers, via emphasis on service quality and materials flow along the supply chain [7]. This case the ERP
implementation of AT&T, which is one of the largest, is therefore selected and discussed in detail in this paper.
Implementation Process
Implementation of ERP is a long-term and difficult process [26]. With reference to [7], AT&T started their
implementation process in 1995, which consisted of few steps. The first step was the formation of
implementation teams, followed by the establishment of a release process where a number of activities, such as
configuration, testing, learning, communications and data conversion, were all integrated. At first, project
implementation teams were formed from senior representatives from each area of the business to follow the plan
of the project, ranging from developing the future state business processes and people practices, converting the
requirements into technical specifications, configurations and testing the SAR software, to deploying the new
business process, people practices and enabling technologies to their respect business constituencies [7, p.327].
IT teams were assembled to give technical support to the implementation teams. Second, a release process was
developed to indicate the steps along different stages of the transformation project that the teams should follow.

Figure 1: ERP implementation process of AT&T (Source: Cowan and Eder, 2003)

Figure 1 show the integrated release process. Different steps shown in the figure derived from the business
process requirements from different functions. This can be done by working backwards from the demand side
through the value chain. The resultant integrated release process ensured that internal inputs match the outputs
as well as facilitated configuration of SAP and the applications architecture. The implementation teams had to
follow the steps indentified in the release process. There were a number of activities as follows:
- SAP Configuration was about the installation of the ERP software to customize and align the business
2

practices and process of firms [19].

Learning design and deployment referred to the training of the implementation teams for process engineering
as well as the end users for system usage.
Communications deployment ensured successful integration between different functions within organization.
Testing referred to system trial runs where real data was selected to test various modules in ERP.
Data conversion aimed to change different formats of data into a single one. It was base on based on
different customer segments, i.e. small, large, multinational and international customers.
EFFECTIVE EVALUATION

In this part, we aim at providing some references for firms on IT investment appraisals and performance
evaluation methods through a case study of the ERP implementation in AT&T with the aid of some parametric
methods and more qualitative methods. In usual IT investment appraisals, the substantial or expected benefits
are to be divided into two main categories tangibles and intangibles. Historically, the different treatments of
tangibles and intangibles can be traced to the distinction between goods and services [27]. In our case, we define
tangibles as those that can be quantified while intangibles cannot, or are too difficult to do so. For tangibles,
stepwise multiple linear regressions will be presented. Intangibles will be discussed in brief and quantification
process will also be referenced and introduced, including Cost-Benefit Analysis and Intensity Indices.
Multiple Linear Regression
When more than one independent or explanatory variable are needed in the regression model in order to best
predict an important response and to obtain improved fit, a multiple regression mode is needed. With linear
coefficients, the model is then called multiple linear regression. According to [23], by holding constant other
included independent variables in regression model, it is able to examine the impact of change on a specific
independent variable on the dependent variable. In our study, our proposed dependent variable, operating
revenue, will be relying not only on financial contribution from the variables in the basic accounting formula,
but will also be impacted by the financial figures out of the formula in other meaningful way. Therefore, it is
being studied in this paper for the part of post- implementation evaluation. Stepwise regression is then selected
as the approach to investigate into the most predictive explanatory variables to the firm performance and make
our conclusion. The general multiple regression equation is as follows:
(1)
where y = dependent variable
xks = independent/ explanatory variables
for any xks
,
Cost-Benefit Analysis
Cost-Benefit Analysis (CBA) has been widely used in the socio-economic investment and financing appraisals.
The aim is to weigh anticipated costs against the benefits over a time horizon up to around 15 to 20 years, by
meaning of taking investment and financial costs as well as opportunity costs adhered, in addition to the
monetary value of estimated values and benefits, into consideration [9]. The result, or say, the Net Present Value
(NPV), of CBA not only gives a quantitative review on the feasibility, but also provides scopes and evidences on
the desirability of the project from a more value-based point of view, as well as the need for further financing to
make the project financially viable. According to [18], the family of CBA techniques is most often utilized in
estimating the economic value of I.T. projects and the results are comparatively easier to interpret. Therefore, it
is included in this paper for valuing the ERP project. The formula of CBA is as follows [18] [13]:
(2)
where

Bt and Ct = value of benefit and cost for the tth period in the future respectively
v = the discount factor where
(reciprocal of accumulation factor)
i = the interest rate fixed being known as hurdle rate

and

(3)
where

B0 = values of initial benefit

C0 = values of initial cost
and the rate of interest I which satisfies the Formula 3 is called the yield rate or the internal rate of return, such
that the present value of returns from the investment equals to the difference between the initial benefit and cost.

Intensity Index
The motivation to use index numbers as a model is to reduce data complexity for interpretation, to transform to
an easier-to-use, more convenient form. With simple index numbers, it will be sometimes a better approach for
businesses to represent a particular aspect over a period of time [4]. Therefore, the index approach has always
been chosen as an indicator to compare performance across different variables, both financially and
economically. This approach allows different financial performance and economic indicators to compose an
overall indicator for comparison. The index value for the baseline year for the intensity indices is 100.
The inspiration comes from [1], which mentioned about steel consumption intensity with index and IT intensity
in terms of percentage of GDP, as well as the Private Consumption Index from [25]. Here in this paper, we study
I.T. expenditures and performance evaluation. Therefore, the actual financial figures from firms are being made
reference to general economic figures. They can be integrated to construct the composite intensity index, such
that companies can make use of different combination of variables and different base year as reference point to
construct the index for further research uses, especially for comparisons for different economic situations
growths or recessions, where:
Simple industry spending intensity indices can be constructed as:
(4)
Integrating with firms I.T. expenditure, we have:
(5)
where the above two indices are comparable for further researches.
The index can be more specific to firm level, such as:
(6)
where the result is also comparable to the industry index for the reason that firms spending with respect to its
own performance is comparable to industrys spending in certain country with respect to that countrys
economic performance.
FINDINGS AND DISCUSSIONS
Application of Cost-Benefit Analysis
In terms of intangibles, ERP systems can enable effective management of information, generate more accurate
forecast of demand, accelerate production cycle, enhance customer services [17], improve efficiency, decrease
time to clients with information, reduction of error [18], etc. These are all classified as perceived value to the
business [12] to deliver high service value [17]. The following customer satisfaction survey matrix is an
example that sums up how the implementation to help AT&T to improve their operation in terms of intangibles.
Item

Current System
Proposed ERP System
Reduced
Quote to cash speed
Reduced
Offer realization time
3 out of 4 (75%)
19 out of 20 (95%)
Accurate cycle time
in days
in minutes
Order processing speed
> 9 days
few days / real time
Financial Close book data
Table 1: Customer satisfaction survey matrix (Source: Murphy & Simon, 2002)

[8] claimed that nonfinancial criteria account for 35% of investors decision. [27] suggests that service quality is
the main determinant of customer satisfaction. Service quality is however inherently intangible in nature and
difficult to define [11]. Therefore, [18] suggests the evaluation of customer satisfaction in monetary terms, i.e.
cash flow generated from market share gain. The quantification technique is illustrated in the following graph:

Figure 2: Quantification process for intangible benefits

The first step is to identify and categorize the intangible benefits. Then, make use of some measurable terms
which are able to represent and elaborate the benefits in a reasonable and sensible way. After that, the future
value or substantial changes of those quantities will be predicted. Finally, from the prediction, future or potential
cash flow. The potential cash flow can be substitute into the traditional CBA using Net Present Values (NPV)
and Internal Rate of Return (IRR) by using Formula 2 and 3. [18] justifies the NPV and IRR by taking into
consideration a number of assumptions with supports of the companys internal data. Productivity saving,
potential I.T. operations savings, and user/customer satisfaction are quantified into measurable terms. The
quantified user satisfaction is the significant factor to make the IRR impressive to managements, where potential
cash flow generated represents the increase in user satisfaction.
Financial Data Analysis by Multiple Regression
It is also interesting to study on the dependencies on different possible revenue-generating activities before and
after the implementation. We carry out this by stepwise regression by selecting 4 independent variables:
operating expenses, capital expenditure (and construction), debt ratios and number of employees to be the
possible estimators to the operating revenue, which directly reflect how well the company has been running due
to the effect of infrastructural capital investment. We will compare the performance in the accounting year
before and after the ERP implementation, from 1991 to 1995 and from 1996 to 2008 respectively. The criterion
to enter is p-value is smaller than 0.05 for 1991-1995; 0.01 for 1996-2008 (due to the difference in number of
degree of freedom); to leave is 0.05. The table of data and results (Table 3 and Table 4) are as follows:
Capital
Debt Ratio
Number of
Expenditures
Employees
(million USD)
(million USD)
(million USD)
%
41842
39161
2424
48.2
115300
42960
36714
2293
45.7
118200
43780
37203
2537
57.6
118100
46063
38670
3504
50.8
116400
48449
43280
4659
54.8
126100
45716
37375
7084
61.6
128700
46226
39391
7714
57.2
130800
47287
39655
7981
36.7
107800
49609
37065
13511
83.7
147800
46850
34057
10462
122.1
117800
45381
35085
11189
44.3
193420
42821
34383
6808
39.9
175980
40498
34214
5219
32
168950
40733
34832
5099
40
162700
43764
37596
5576
35.9
189950
63055
52767
8320
34.1
302770
118928
98524
17717
35.7
309050
124028
100965
19676
43.8
302660
Table 2: Data Set Table (Financial Data of AT&T retrieved from AT&T Annual Report)

Operating Revenue Operating Expenses

Year
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

1991-1995 (Before ERP implementation)

Summary of overall model
R
R2
p-value
0.9955
0.9910
0.0090
Entering independent variables
Coefficient
p-value
Constant
53811.13
0.0081
Capital Expenditure
3.786219
0.0106
Operating Expenses
-0.53497
0.0721
Table 3: Regression Result Table (Before ERP implementation)
1996-2008 (After ERP implementation)
Summary of overall model
R
R3
0.9994
0.9987
Entering independent variables
Coefficient
Constant
-613.463
Capital Expenditure
1.063153
Operating Expenses
0.855246
Table 4: Regression Result Table (After ERP implementation)

p-value
< 0.0001
p-value
0.4373
< 0.0001
< 0.0001

The two regression models correlation coefficients (R) are greater than 0.99; the coefficients of determination
(R2). This implies that the independent variables in the regression model are good estimators to the dependent
variable operating revenue. After carrying out the stepwise regressions, two of the four independent variables
5

were able to enter the models of regression operation expenses and capital expenditure; debt ratio and number
of employees are left.
Comparing the results between before and after ERP implementation, the coefficient for capital expenditure has
dropped from 3.78 to 1.06 after ERP was implemented. This means that the operating revenue has been less
dependent on the capital expenditures, and/or the infrastructure of the company in a great extent. In other words,
the multiplier effect of capital expenditures on revenue has reduced. This also implies that the return on
investment of the company has improved. Meanwhile, the Debt ratio, which usually reflects how companies
leverage its granted equity, both short and long-term, for financing or investments on assets, has been ruled out
from the regression. This probably implies AT&T has been having difficulties in dealing with this issue.
However, AT&T has been increasingly relying on the operational expenses to generate income, which include
general administration costs and sales expenses. The coefficient increased from -0.535 to 0.855. This will be
favorable to the company if the market is good and they are in an expansion. For instance, while the operating
expense to revenue has been dropping, so generate 1% increase in revenue from 1.07% increase in operating
expenses is reasonable and quite healthy, in a long-term perspective. However, during down market, the
multiplier effect can be significant since the demand-driven expenses could be adversely affected by the decline
of downstream demand by end-consumers.
IT Spending Intensity Analysis
During recession, it is especially important for firms to look into the macroeconomic environment and the
corresponding industry trend by snapshot tools such as different kinds of economic indicators and indices. It is
because that by understanding the long-term industry trends, executives are able to highlight structural issues of
the industry and plot robust strategies under the times of uncertainty [1].
Due to the availability of the data set, we selected 1995 as the base year. Since AT&T is an US-based firm, the
economic figures of the US are selected. In addition, since we are unable to retrieve the breakdown structure of
the capital expenditure of AT&T, so we assume the same portion of this expenditure have been spent over the
selected year and we take this lumpsum figure as the reference for our index. In summary, we have identified the
following (Table 5) set of data for our indices construction. Hence, Figure 3 is plotted.
Year

US
GDP

US I.T.
Expenditure*

AT&T
Capital
Exp
(F1)
46.6
70.8
77.1
79.8
135.1
104.6
111.9
68.1
52.2
51.0
55.8
83.2
177.2
196.8

AT&T
AT&T Net
Index E1:
Index E2:
Index F1:
Index F1:
Operating
Profit
E2 w.r.t.
F1 w.r.t E1
F1 w.r.t.
F1 w.r.t.
Revenue
E1
F2
F3
(formula 4)
(formula 5)
(formula 6)
(formula 6)
(E1)
(E2)
(F2)
(F3)
7414.7
263
484.5
54.3
1995
100.0
100.0
100.0
100.0
7838.5
290.1
457.2
50.6
1996
104.3
143.8
161.1
163.0
8332.4
330.3
462.3
40.9
1997
111.8
147.3
173.5
219.9
8793.5
366.1
472.9
49.2
1998
117.4
144.4
175.5
189.2
9353.5
417.1
496.1
80.4
1999
125.7
229.9
283.2
195.8
9951.5
478.2
468.5
80.4
2000
135.5
167.3
232.2
151.6
10286.2
452.5
453.8
70.1
2001
124.0
173.1
256.4
186.0
10642.3
419.8
428.2
56.5
2002
111.2
101.8
165.3
140.3
11142.1
430.9
405.0
85.1
2003
109.0
74.5
134.0
71.5
11867.8
455.3
407.3
58.9
2004
108.2
68.4
130.2
100.9
12638.4
475.3
437.6
47.9
2005
106.0
70.2
132.5
135.8
13398.9
505.2
630.6
73.6
2006
106.3
98.8
137.2
131.8
14077.6
537.4
1189.3
119.5
2007
107.6
200.3
154.9
172.7
14441.4
562.9
1240.3
128.7
2008
109.9
216.8
165.0
178.2
Table 5: Index construction data table
(Sources: U.S. Department of Commerce - Bureau of Economic Analysis (http://www.bea.gov/) and AT&T Annual Reports)
*Gross private domestic investment on information processing equipment and software is selected to best represent the spending on specific I.T.
infrastructure such as ERP

Figure 3: Intensity Index of I.T. Expenditure of U.S. and AT&T

From Figure 3, we see similar behavior amongst Index E2, F1 and F2, which are based mainly on the
performance and I.T. spending behavior of AT&T. And the trends of these indices have shown consistency
compared to Index E1, which is the national spending level on I.T. It is also quite obvious that the overall
spending on I.T. had been increasing in the overall trend for the U.S. firms and AT&T before 2001. The surge in
asset prices such as the price of the stock of I.T. firms were being driven by the optimistic assessment by the
investors, who were looking high for future return from the new I.T. age economy.

The burst of technology stock bubbles directly led to sharp reduction in capital expenditure, followed by a
significant economic contraction and recession lateron [28]. After 2001, the decline for I.T. expenditure was
sharp for AT&T, along with the overall national spending on this sector. This was because the spending on
computing and telecommunications equipment as a percentage of GDP had previously soared to historic levels
[1]. Being one of the largest companies in this sector, the above indices have shown its leading role across the
industry, though at the moment it was talking about contraction and downturn. Hence, this implies that the
indices are not only able to help executives to compare and justify their companys I.T. spending to the industry
as a whole under different economic situations by making use of information that can be easily retrieved, but
also help to reflect and understand the market position of the company in the particular sector at uncertain times.
The reasonale for this claim is that market leaders usually act forth than market followers and other small
market players. Their research and forecast capabilities are usually stronger and so able to understand the market
trend better. Therefore their investments and spending intensity, for instance, on I.T., will be more effective and
more likely to be in phase or evening leading the phase when comparing with the industrial trend in general.
Moreover, since they may be more effective, so the intensity index value will be lower in this case. In order to
achieve this, the major issue to be address is the internal cost effectiveness, which means that the capital being
spent on the I.T. infrastructures could drive internal efficiency and bring out the operational savings from I.T.
facilitation, and further its scale economies.
On the other hand, it could be inferred that for market followers and other smaller firms, their spending intensity
will be out of phase or lagged behind from the industrial trend and tend to be high due to unwise investment and
over-spending on particular aspects, i.e. less cost effective. Therefore, we can see, under the sense that in mature
markets, companies with better cost structure usually rule, it is able to see from the intensity index a companys
place in the particular market.
CONCLUSION
Rising customer expectations and the worsening global economy have put pressure on the firms to improve their
service quality and minimize their operating cost in a globalized market. This prompted the firms to adopt the
ERP to improve their performance in terms of efficiency and effectiveness. This study provides two-fold
implications. From a research perspective, we developed a reliable measurement tools to evaluate ERP
implementation on the firm performance. We not only demonstrated comprehensive non-parametric (qualitative)
methods, but also illustrated in-depth parametric (quantitative) methods to report some preliminary findings
from the pre-implementation to post-implementation of ERP performance evaluation. In the previous studies,
the majority of literatures are mainly focuses on the ERP from the operational and technical perspective [26] [2]
[20] [19]. In our research, we consider not only various factors of the business entity on its own, but also
highlights the economic factors. Overall, this study contributes to expand the knowledge and deeper
understanding of the ERP implement evaluation on firm performance. From a managerial perspective, we
propose key ERP implementation process to suggest the firms critical elements on the ERP adoption. Hence,
the firms can avoid the pitfalls on the ERP adoption to generate the profitability and reduce the losses during the
operation.
However, there are some limitations that we cannot be ignored in this study. Our investigation took one case
study approach AT&T leads to reduce generalizability of our findings and lacks representative for our study.
Further research will conduct a large-scale longitudinal study with an extensive survey in the other countries to
get a comprehensive study and thoroughly analysis of the ERP implementation and then generalize our research
results. In addition, the model of intensity index is of a preliminary study. Many factors are probably ignored.
Therefore, it can be further improved by making more scenario-based or fact-based assumptions, adding and
adjusting more components in the formula, such as volatility factors, weightings on different factors being
considered, as well as better variable from cost breakdown when such data is available. From these, the model
will be more generic, comprehensive and accurate.

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