25 November 2009

The New ERP – Part 14

Compare with Traditional ERP – the Everything Replacement Project – approach

Let us stop to compare where our management team is now in its decision-making process with what an organization that embraces traditional ERP – the Everything Replacement Project – might be going through in their processes.

How do most small- to mid-sized businesses go about setting budgets for their major or minor IT initiatives? We will take a look at a few of the methods I have run into over the years:

  • Don't set a budget: Far too many firms simply find out what the executives and managers think needs to be done, and then get quotes from some vendors or resellers on what it will cost. This gives them the "cost" – assuming it is accurate, but many times it is not. As for "benefits," may management teams just "expect improvement" in some unquantified and unquantifiable way. They don't have a "budget" and they don't have an "ROI." Furthermore, they generally don't measure the results of "improvement" afterwards either.
  • Educated "guess": In such cases, frequently the CFO, the president, or someone from IT is simply asked to "put together some numbers." Frequently, these almost exclusively "cost" numbers come from telephone conversations with vendors or resellers, Internet searches, or conversations with people from other companies that have done something similar. Again, in far too many cases, the management team does not even attempt to quantify the "benefits" or calculate an ROI for the proposed initiative.
  • How much can we afford? Naturally, this attempt at "budget"-setting comes directly from cost-world thinking and entirely neglects the fact that, if the organization is going to see no increase in Throughput (T), no decrease in Inventory or Investment demands (I), and no significant decrease or future savings in Operating Expenses (OE), then the budget that should be assigned to the project is zero-dollars.
  • Find out: This approach is almost equivalent to "Don't set a budget" above inasmuch as the method (if you can call it that) amounts to "finding out" how much an Everything Replacement Project will cost, then factoring it for "overruns," which have come to be expected in the industry. Again, this approach has no bearing on the value the traditional ERP project will bring to the organization, only the anticipated "cost" to the firm accompanied (frequently) by only the vaguest of notions as to how the change will actually increase Throughput (T), or reduce Inventories or demand for new Investment (I), or drive-down or hold the line on Operating Expenses (OE) while sustaining growth. Unfortunately, often times even the "growth" itself is merely assumed.
  • Comparatives: This approach is simply a variation on "Don't set a budget" or the "Educated 'guess'" methods. Here the way it's done is to get the CEO or other executives to ask their golfing buddies or other industry friends (and maybe even relatives) how much their companies paid for their last Everything Replacement Project. Once again, no focus is placed on specific areas of improvement and the far too frequently the estimates of "benefits" and "ROI" are vague – to say the least.
Now, I know you probably laughed out loud (or at least chuckled to yourself) when you read some of the above "methods." The fact is, it is funny to read these when the truth is laid out in some embarrassingly plain language. However, as sad as it may be, many of the budgets for IT initiatives I have run into over the years have no more substantial basis in reality or value for the enterprise what I have described above.

Of course, given the scenario for "budget setting," it can hardly be a surprise to find that many owners, executives and managers make many, many wrong decisions about what kinds of investments their firms should make in information technologies – or other improvement efforts, for that matter. They also frequently make wrong decisions regarding how much to spend on improvements in any given functional area, since they are quite often at a loss to link daily execution improvements with financial results.

By the way, as you can see from the approach we have laid out in our radically new Extended Readiness for Profit – the New ERP, it may be as foolish for a CEO to under-invest in technology (or other improvements) – because she does not understand the dollar-benefits that would be delivered by such investments – as it is to over-spend on technologies. (Here I draw the clear distinction between investing and spending. An organization is investing if they have calculated the benefit relative to the expenditure; whereas, an organization is only spending if they have not calculated the benefit relative to the expenditure or no actual increase in Throughput, reduction in other Investment, or decrease in Operating Expenses will likely result from the expenditure of time, energy and money.) Either way, the CEO is probably doing long-term damage to her own organization – making it less capable, not more capable, of delivering more profit today and in the future.

This clearly highlights the value of the Current Reality Tree (CRT) (see prior posts) in helping your management team identify "what needs to change" before taking any steps toward assuming that new technology – applied in a general way – will deliver some general, but unquantifiable, benefit to your organization.

If you and your management team are following along in our Extended Readiness for Profit – the New ERP approach for your own organization, then you now need to take some time to calculate the values for the changes in T, I, and OE with regard to the actions you may have under consideration – whether they are technology-related or not. Your proposed actions, of course, should be based on the findings at the roots of your CRT. (For those of you just catching up, you will probably need to go back and read prior posts on The New ERP.)

[To be continued]

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