News & Views

October 13, 2011 from Supply Chain Management Review – “To create a business case for an ERP investment and select the right ERP option, organizations should follow a 7-step process:

1. Describe the business challenge
2. Assess the potential benefits of the ERP investment
3. Assess the potential costs of each ERP option
4. Assess risks and issues that might arise during the implementation
5. Recommend the preferred solution
6. Describe the implementation approach
7. Measure potential and actual ROI…”

180 View – The article gives examples of challenges, benefits, costs and risks associated with ERP.  However anyone following the advice given is likely to fail making a business case to any CA or CPA. Accountants have been trained as auditors to not believe anything unless there is credible support for the numbers. So don’t throw numbers around without stating your assumptions and backing it up with credible support. As well accountants recognize the time value of money so you want to do a cash flow over at least 5 years and base ROI on Net Present Value. Finally most business cases have a negative ROI – look for intangible benefits that are linked to Critical Success Factors – what an organization must do well in order to be successful.

February 6, 2011 from The Enterprise System Spectator – “…My hypothesis is that, due to a reluctance to say “no” directly, ROI calculations are often a convenient way to refuse projects that management simply doesn’t want to do. This “ROI trap” can take several forms:

• Management argues the project budget is underestimated
• Management argues the benefits are overly optimistic
• Management argues the benefits cannot be connected to the proposed initiative…”

180 View – We disagree. The so-called traps are in fact exactly the questions management should be asking. Often the people who are driving the project want it to proceed for personal reasons. I say bravo to the hard-ass decision makers who ask the tough questions.

May 16, 2011 from BusinessFinance – “The business case process is seriously flawed in all too many companies. This is a very important issue, because evaluating business cases is one of the core processes for allocating capital to move the company forward…”

180 View – We think that business cases are an essential tool and agree with the author that “Critical benefits that are hard to measure are all too often disregarded.” We would take this point further. We recommend that organizations should define their CSFs (critical success factors – what organizations must do well strategically in order to be successful) and the metrics or KPIs (Key Performance Measures) that measure whether the CSFs are attained. If an investment can make a significant improvement of one of the KPIs, then it helps make the business case.

December 2010 from Aberdeen Group – “…The focal point must now expand to include Return on Investment (ROI) of ERP projects in order to justify continued investment and maximize business benefits. What can the average company expect to pay for ERP and the resultant business benefits that can be derived from a successful implementation? Read this valuable and insightful Aberdeen Report…”

180 View – The article does provide some interesting information including average cost of ERP by company size. However the respondents purchased their ERP systems on average about 7 years ago so the numbers reported are higher than they would be today for license costs. The article also includes a service to software cost ratio by company size which is also useful information. Aberdeen claims that a 1:1 ratio is the average for most of the implementations. However this ratio is not in line with what we have seen. Vendors are prepared to discount their license but not their implementation services, which tends to increase the ratio. As well, one would expect that more complex implementations would have higher ratios than 1:1. Aberdeen also looks at the benefits of an ERP system and provides other useful information. Although Aberdeen admits that some companies are unable to quantity benefits, they also claim that “Best-in-Class” companies achieved 100% payback on their investments in one year and the majority (60%) achieved it in three years. How they arrived at these numbers is a mystery considering the difficulty of quantifying benefits and the time it takes to implement systems.

December 2, 2010 from Toolbox for IT – “Small and medium-sized companies face significant challenges in implementing company-wide or enterprise-wide solutions. These challenges arise from the scarcity of resources − money, time and people and expertise. And yet the business imperative to implement truly effective systems is even greater, since the technology gap between large and small companies is widening. In response to these challenges, the prevalent thinking among business owners and management is to push ERP vendors to produce ROI measures, most frequently citing statistics such as reduced inventory and inventory carrying costs, reduction in days sales outstanding, or reduced order cycle times. This thinking misses the mark. Not that those metrics aren’t important. It’s just that smaller companies need to think “beyond ROI,” to the strategic long term value that ERP can deliver…”

180 View – Although the author makes a number of good points, the article also misses the mark:

• The article uses very high level terms to describe going beyond ROI such as “continuous improvement and streamlining of business processes over time”.
• ROI is equated with metrics such as such as reduced inventory and inventory carrying costs, reduction in days sales outstanding, or reduced order cycle times. Reduced order cycle time may not provide an ROI as you need to quantify it for the purposes of ROI.
• The suggestions on getting beyond ROI include “Look for a fully integrated ERP solution. Best-of-breed software applications are dead.” This is not true. Many companies choose a best of breed option based on a compelling business case. For example, a company may have complex HR requirements and simple financial requirements and it makes more sense to invest in a best of breed HR system.
• ROI is hardly ever achieved in a new ERP system. But what can be attained is the achievement of strategic goals which are defined as Critical Success Factors and measured by Key Performance Indicators.

2010 from Global Knowledge – “…There is no universal business case template. An effective way to consider what should be contained in a business case is to think like the decision makers. Put yourself in their shoes and imagine you were being held accountable for selecting the best investments for your enterprise. What would you want to see in business cases that would lead you to those decisions? The information would probably include the following information. 

• Executive Summary
• Why consider this project?
• What does this project deliver?
• The financial case: How much will it cost? What are the benefits? How does this project compare to other projects?
• What is the time frame?
• What are the risks?
• What is the forecasted resource usage?
• What other alternatives were considered?…”

180 View – The article does contain some basic and useful guidance in preparing a business case with some examples. However the number crunching and presentation of the business case is the easy part. The hard part is coming up with quantifiable benefits that can be clearly supported.

September 1, 2010 by InformationWeek – “In a strikingly detailed and rare peek inside a huge ERP deal, Airgas Inc. has disclosed that its highly customized enterprisewide SAP implementation carrying a price tag of about $85 million should begin generating significantly more than that investment in annual incremental operating profit by 2013…

So just as we had all been led to believe that big ERP deals are a relics of the past, that they’ll never happen again, that they don’t work, and that they inevitably blow up in the faces of the customer, the software vendor, and the integrator, here we have one of life’s surprises: a big, multi-year, many-moving-parts ERP implementation that by all accounts is succeeding beyond everyone’s wildest expectations…”

180 View – On the surface, it looks like a huge win for Airgas and SAP. But scratch the surface and it does not look so great. For example, there are more costs to keep the highly customized system up to date with future releases. Also it’s not clear whether only out of pocket costs were considered and not the internal costs to implement the system. The benefits include $25 million to $50 million increase in income as a result of anticipated sales growth because of SAP. But I can’t imagine anyone at Airgas or SAP could prove the direct link between the sales growth and implementing SAP. At the very least, they should have provided a little support for their claims.

2009 by Aberdeen Group – “…Increasingly, ERP customer have come to realize that the value from ERP investments can be increased dramatically through the analysis of the consolidated data captured within and at the edges of the ERP system. BI users value having a single source of that data producing a single version of the truth…”

180 View – We agree that BI and ERP go hand in hand. ERP vendors know this and include out of the box dashboards and predefined OLAP (Online Analytical Processing) cubes as well as ad-hoc reporting tools and interactive query/filter tools that provide grid views of data that can be easily changed within the system or exported to Excel. When selecting an ERP system, BI must be one of the components.

The article also included metrics for “Best-in-Class ERP Criteria” which were:

• 20%  reduction in inventory
• 97% inventory accuracy
• 97% complete and on-time delivery
• 96% internal schedule compliance
• 3.7 days to close a month

Good metrics but when Aberdeen claims that the metrics could be the source of the total or partial ROI of ERP, we disagree. ROI requires a dollar value on savings or increased revenues and these metrics with one exception don’t provide it. The only one that does (inventory reduction) does not give you a 20% reduction in savings in an ROI calculation as you might think. Inventory is included in the Balance Sheet and not on the Income Statement. But there are benefits including interest savings in not having cash tied up in inventory, less warehouse space, less inventory obsolescence and less insurance.

2010 from ITBusinessEdge – “…The cost/benefit analysis should be the real meat of your case, yet this is where most IT business cases falter, largely because they approach it as a purely financial case for investment, according to research by two professors from the UK…”

180 View – We agree. It can be difficult if not impossible to show a positive ROI in IT investments. But that does not mean that the investment is not worthwhile. We recommend that the business case should include Key Performance Indicators (KPIs) measuring Critical Success Factors (CSFs) or those things that an organization must do well in order to be successful. Determine the current KPI and estimate the projected KPI based on evidence that can be defended.

February 3rd, 2010 from ZDNet – “The research describes five primary results:

1. ERP implementations take longer than expected
2. ERP implementations cost more than expected
3. Most ERP implementations under-deliver business value
4. Software as a service (SaaS) implementations take less time than on-premise ERP implementations, but deliver less business value
5. Companies do not effectively manage the organizational changes of ERP…

Measurable benefits. These figures are perhaps the most damning in the study. The report says a significant number of implementations surveyed did not deliver anywhere near the anticipated benefit or value…”

180 View – The ERP Report is based on research by Panorama Consulting Group. We understand that the research was based on online polling and qualitative data gathered from focus group interviews with a sample of survey respondents from December 2005 to December 2009. We also understand that the 1,600 participants represent global organizations that have completed an ERP implementation within the last four years.

The results of the survey are unfortunately not surprising especially with regard to on time and on budget. There are so many unknowns at the beginning of an ERP implementation that make scheduling and budgeting a huge challenge. We think the problem of lack of measurable benefits is less a problem with ERP than it is with misguided expectations from the beginning. The people within an organization wanting to proceed with the ERP implementation often prepare business cases which help support their recommended decision. Our perception is that there is a lack of independence and a lack of competence in preparing the business case, which rules out ever achieving the expected benefits.

December 9, 2009 from the Resource Centre of Industrial Distribution Magazine – “In October 2009, Industrial Distribution conducted a study on behalf of Microsoft Dynamics to learn more about industrial distributor goals, challenges and initiatives. Specifically, the study examines what role technology plays in achieving business profitability and growth…”

180 View (written by Lawrence Young) – This White Paper is based on a study done of 303 industrial distributors in October, 2009 by RBInteractive Research Group on behalf of Industrial Distribution magazine for Microsoft Dynamics. The purpose of the study was to learn more about industrial distributors’ current business goals, challenges and initiatives, and specifically what role technology will play in achieving business profitability and growth going forward.

The study cites the following key challenges facing today’s distributor:

1. Managing the realities of the current economic climate, which has led to intense competition and pricing pressure.
2. Dealing with excess inventory, as the same number of distributors compete for less business with more products considered commodities.
3. Retaining current customers and facilitating new client relationships.

Accordingly, respondents to the study are looking to improve efficiencies in their businesses that help to achieve their sales and profitability-related goals. Planned actions are focused in the areas of marketing, customer service and support, inventory forecasting & management, warehousing & distribution and e-commerce.

The number one action being considered or taken by respondents to prepare for the anticipated economic recovery is investing in technology (i.e. computer hardware and/or software applications). Whereas 2009 saw many of our prospects and clients putting technology-based projects on-the-shelf as they struggled to weather the storm of the recession, an increasing number of companies over the last few months have started to gear up for better times by evaluating and implementing new software tools and reengineered business processes.

However, we aren’t as sold on the study’s claim that 83% of respondents felt that the payback on their investment in technology would be two years or less (34% anticipated a payback of less than one year!). While we are not suggesting that the study misrepresented the responses of the respondents, we are concerned that the responses may not be reliable for several reasons.

First, only 46% of respondents even attempted to measure ROI, perhaps owing to the difficulty of doing so. As the study aptly points out, “There does not appear to be a “standard formula” used within the industry, with a wide array of views on what factors contribute to the measurement.”

Second, by definition calculating ROI ignores any benefit that cannot be sufficiently quantified so as to be measured (i.e. providing a better level of customer service will likely result in increased customer retention and therefore more sales and a better bottom line, but the calculation of ROI will ignore the value of this benefit unless the company is prepared to quantify the resulting improvement in profitability).

Accordingly, it is possible that some of the respondents to the ROI question may have used a method of calculating ROI that is not generally accepted and/or inconsistent with the method used by other respondents. Nonetheless, companies should consider using measures in addition to the ones included in traditional ROI calculations to justify whether or not an investment in technology is warranted. For example, these may include compliance to the requirements set forth by a dominant trading partner or regulatory body, such as internet portal or product traceability.

The article was sponsored by Microsoft and is somewhat self serving, but it does contain worthwhile information and it hopefully reflects that better economic times are around the corner.

August 2009 from Oracle – “…Based on input from more than 920 midsize companies (annual revenues under $250 million), the report found that the most successful ERP projects include aggressive, clearly quantified business goals; well-established timelines; and an ongoing commitment to measure return on investment (ROI), including a clear baseline for measuring performance improvements…”

180 View – We agree except with the ROI. Although ROI would be great, it’s usually not possible as many performance improvements are often impossible to calculate. We think the metrics, often called Key Performance Indicators (KPI’s), should relate to Critical Success Factors (what an organization must do well in order to be successful) and achievement of these KPI’s is the key.

June 1, 2009 from Forbes – “Information technology experts didn’t cause the current economic downturn, but they certainly made it worse. The creation of incredibly complex risk models on Wall Street by pedigreed quantitative analysts, or quants, and the almost total reliance by trading houses on those models turned what could have been just another housing bubble into a global disaster…

Some people realized those equations had serious flaws from the beginning. But when things are going well people ignore those risks and make money while they can. These computers had a role in convincing people everything was OK. And obviously the top management in firms can’t understand these equations. They’re very complex. There are lots of variables, lots of equations, and they assumed they were OK. In the end, it gave them a very false sense of confidence…”

180 View – I think the bigger problem with the “models on Wall Street” was not the complex equations but in the underlying assumptions. There is also the greed factor that will find a way to make the models and statistics work in a favourable way. The same lessons should be applied to any organization’s forecast or ROI calculation. You need to validate the assumptions. You also need to be wary if the person who did the forecast or ROI had something to gain by it.

June 2009 from CAmagazine and written by Michael Burns – “…Many organizations have been forced to lay off employees and cancel or postpone new projects. Companies that are not facing collapse are just hunkering down and waiting out the storm.

There are obvious ethical reasons for keeping employees in tough times, but there are also excellent business reasons. What better time to train employees than when they have some extra time? They will learn new skills and forever be motivated to work that much harder for their employer. Does it make sense to invest in IT projects during tough times?…”