Retooling Technology for Economic Recovery

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.

New Aberdeen Report Lays Out Road Map for Maximizing ROI on ERP

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.

IT's Role In The Recession

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.

A problem becomes an opportunity

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?...”

Five tips for proving the business case to the CFO

2009 from Nucleus Research – “1) Credibility is #1; 2) Build value early; 3) Calculate a worst case; 4) Payback is stronger than ROI; 5) Focus on a few strong benefits”

180 View –We think Nucleus Research is missing the main point about business case. It’s not a sales tool. It should be an independent evaluation of whether an investment should be made. Often investments are made when the business case shows a negative ROI. This is because there are compelling intangible benefits. Don’t ever try to bias the business case as it will come back to haunt you.

SMB ERP Projects: Don't Forget the ROI

April 1, 2009 from Computerworld – “The average SMB ERP implementation takes 10 months, though the installation work continues long after the go-live date hits, according to recent Aberdeen Group survey data of 920 SMBs. The financial costs can be just as significant: SMBs with less than $50 million in annual revenue will typically pay nearly $300,000 for ERP software and services, while larger businesses (revenues between $100 million to $250 million) will spend $1.4 million, the survey data states.

"Given this level of investment, one would think ROI would be top of mind for most companies,"

180 View – Not surprisingly, we read a lot about ROI (or lack of it) these days. We agree with the article that organizations should determine the ROI of an IT investment. But if ROI was the sole criteria, the investment would usually not happen assuming unbiased building of the business case. But there are other compelling reasons for the IT investment involving intangible benefits and risk mitigation.

The biggest problem with ROI and business case is the underlying assumptions. Be skeptical of the assumptions if the person responsible for the business case will gain by the IT investment. Make sure that the assumptions really make sense and have some supporting documentation.

Recession is ideal time to invest in technology

February 20 from the Financial Post – “With client and customer demands waning for small businesses as the economy lumbers along, this may be the moment to put down time to good use…

We just had our biggest year ever," says Mr. Stroink about sales at his Halifax-based retail business, The Trail Shop, which sells hiking and outdoor gear. Mr. Stroink attributes his recent success, achieved as Canada's economy began descending into a nosedive, to a new information technology system he implemented in his store that simplifies everything from inventory tracking to point-of-sale figures. He purchased the system from SAP Canada, a company that is currently touting IT solutions for small businesses to help them with efficiencies that could translate into cost savings…”

180 View – The natural tendency for most organizations is to put IT investment on hold in the face of economic uncertainty. It’s just about impossible to show an ROI on ERP investments without making unsupported assumptions. But some organizations have no choice as their systems are no longer supported or the system can’t support new acquisitions or business models. Other organizations are recession proof. And other organizations see every problem as an opportunity…

Six ways to save your IT project from the scrap heap

February 2, 2009 from InfoWorld – “To weather the current economic maelstrom, enterprises not only are reducing head count but also are cutting back on ambitious or long-term projects in IT. Knowing how best to keep your IT project in the pipeline could mean taking a cue from those best versed in achieving project approval: outside consultants...

To paraphrase Benjamin Disraeli, there are three kinds of lies: lies, damn lies, and ROI calculations for IT projects...”

180 View – The author of the article should have qualified the advice to get outside consultants to save an IT project. The advice given by a consultant that is trying to sell their product and services should be highly suspect. Later in the article we read “Most ROI calculations from vendors are flawed toward magical and large returns” However the vendors may have ideas or formatting that could potentially be useful.

The article’s first tip is to work the numbers but it does not offer much guidance. The article distinguishes between hard ROI based on reduced head count, inventory or transaction costs and soft ROI such as improved relationships. We would add that the hard numbers need to be backed up by some evidence. We also suggest trying to turn the soft ROI into hard ROI. For example, improved relationships could lead to better customer retention.

The article also talks about the importance of business need – “If the business has asked for IT's hand in a project, that should be enough.” We disagree – business need is obviously important but it is not enough. Business need should also be translated into ROI. There are some projects where you have no choice and something needs to be done. But even for these projects, there are alternatives with different benefits, costs and risks that should be quantified.

Squeezing the Most Out of Your Project Budget

January 26, 2009 from gantthead.com – “The economy is clearly the worst it has been since I entered the professional workforce in the early 1990s. I have been asked to cut everything from people to paper to pencils…

While there is great scrutiny against project expenses and hard business return, companies know they must continue to invest in good projects to position themselves when the economy recovers. The mantra of this year seems to be: Do more with much less. The question on everyone’s mind is clear: How can you deliver in the face of significant cost pressures?...”

180 View – The topic is a good one but the article could be better. The author says “Projects that are required should fall into one of three categories: efficiency drivers, revenue generators or mandatory regulations.” These are good but I would also include effectiveness drivers, which allow an organization to more effectively achieve their critical success factors or what they must do well in order to be successful.

The author also says “Efficiency drivers are those projects that focus on a company’s cost structure. These may include projects around software efficiencies, application decommissioning, alternate sourcing and hardware consolidation (just to name a few). However, the clear driver is operating cost reduction. The key is that over a short timeframe, the project should pay itself back many times over.” Unfortunately the reality is that it’s highly unusual for projects to generate that kind of ROI.

“During good times, hiring marquee consultants at high bill rates is no object. However, during these times, frugality is king. There are few consultants that are worth the value of a bill rate over $100/hr”. Paying inflated rates for consultants will be an issue in both good and bad times for any organization. As well, finding good consultants (other than lone wolves) at less than $100/hr is unlikely.

Starting Small Is Good Way to Build BI Benefits

June 10, 2008 from ITBusinessEdge – “Whenever I talk to customers, I ask them how they determined their ROI. And they’ll often say they haven’t yet, or it’s very difficult. With BI, companies will see the benefits of BI and keep on investing in it, because it’s helping them with certain efficiencies and with performance management issues. But at the same time, it’s hard to actually quantify the value in dollar terms. Is it just doing a cost benefit analysis, so over a certain number of years, the money the company might have been spending in certain areas will be less now that it's adopted a BI platform?

For organizations making a first-time investment in BI, I find that if they have a small goal, such as helping customer service reps manage their time more efficiently, and can use BI to achieve those goals, that works better than making a large investment at the beginning.

180 View – We think the topic is interesting and could use a lot more discussion. First in terms of business case, we agree that building a cost benefit analysis for BI is difficult. Any estimates on savings from BI because of better decision-making are WAG (Wild Ass Guesses). However it is ok to have intangible benefits that justify an investment, especially if the benefit is linked to CSF’s (what an organization must do well in order to be successful). There also may be savings from BI that can be quantified. Some organizations need to go through hoops to get something equivalent using traditional reporting tools. Calculate the savings from eliminating these traditional reporting methods to help support the business case.

The other interesting idea in the article relates to starting small. When you can tell a senior executive that, in no later than three months, he will get a solution, it's very different from saying, I'm going to deliver a project in 18 months, and trust me. A small project is a good idea as long as the investment in BI considered the big picture. You would not want to invest in a technology that would fail at a later point.