The impact of enterprise resource planning systems on firm performance

Debate exists regarding the contribution of information technology to firm performance. Prior research has examined technology and firm performance in the aggregate. This study, however, focuses on a specific technology—enterprise resource planning (ERP)—and its impact on firm performance. Economic and industrial organization theories are used to predict how ERP technology should affect firm coordination and transaction costs. ERP is expected to (1) reduce costs by improving efficiencies through computerization and (2) enhance decision making by providing accurate and timely enterprise-wide information. These effects should be associated with improved firm performance. This issue is examined empirically using archival financial data of COMPUSTAT firms that have implemented ERP systems compared to control firm counterparts. Results indicate a significant increase in costs as a percentage of revenue but a decrease in the number of employees as a percentage of revenue the year after ERP implementation. However, control firms experience a greater reduction in employees. Results indicate a paradox where firms having fewer employees supporting more revenue simultaneously experience higher cost to revenue ratios after their ERP implementation.