Research Articles

ERP Implementations and Agency Theory

Written by Said Zazai

The focus of the discussion is to understand how might consultants who are aware of both the theory and the practicalities, make use of their knowledge to help make ERP implementations more successful?

In order to identify the consultants’ success factors in ERP implementation, it’s important to understand agency theory and how it affects the practicalities that consultants go through.

Agency theory describes the relationship between an agent and a principal, where the principal (owner of a firm) assigns tasks to the agent (consultant) (Eisenhardt, 1989). Agency theory states the problems arising from their relationship of which moral hazard and adverse selection are key in this case.  The objective of agency theory is to identify the conflicting goals between an agent and a principal and to verify the performance of the tasks assigned to the agent (Khosrowpour, 2000).

Since the mid-1990s businesses consider ERP systems influential in improving productivity and profitability (Velcu, 2008). However ERP systems are complex and costly, which makes the implementation process challenging (Basu & Lederer, 2004). The off-the-shelf nature of the product allow consultants to specialize in the implementation of ERP systems in specific industries.

The specialization of consultants makes them more attractive to the implementer and the consultants-implementer-vendor relationship becomes crucial in the success of the ERP implementation (Khosrowpour, 2000). ERP implementation like any other project is measured with time, cost and performance (Basu & Lederer, 2004). Therefore, from a moral hazard perspective, it’s very important for the consultant to show extensive project management skills and make sure their customers (implementers) are satisfied since the market has become more competitive than before (Basu & Lederer, 2004).  From adverse selection perspective, consultants should not claim the skills that they do not possess. They could sub-contract the portion of the work where they believe their expertise might not provide the service that the customer is seeking, which will improve their trust relationship with the implementer. Consultant should not misrepresent facts or problems about the project or the project status to the implementer (Basu & Lederer, 2004).

Consulting company should provide good incentives to its employees to avoid moral hazard within their company that could affect their project. Consultants should also provide extensive training and performance monitoring of the project to the implementer. Training and performance monitoring could be performed by providing job shadowing throughout the implementation process of the ERP system (Khosrowpour, 2000).

The consultants’ success factors are one of the many categories of reasons affecting the success of the ERP implementation.


Basu, V., & Lederer, A. L. (2004). An agency theory model of ERP implementation. Proceedings of the 2004 Conference on Computer Personnel Research Careers, Culture, and Ethics in a Networked Environment – SIGMIS CPR ’04, 8. doi:10.1145/982372.982375

Eisenhardt, K. M. (1989). Agency Theory: An Assessment and Review.

Khosrowpour, M. (2000). Challenges of Information Technology Management in the 21st Century. (M. Khosrowpour, Ed.) (Illustrate., p. 1227). Idea Group Inc (IGI), 2000. Retrieved from

Velcu, O. (2008). DRIVERS OF ERP SYSTEMS ’ BUSINESS VALUE (p. 133). Helsinki: Edita Prima Ltd.

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Said Zazai

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