The New ERP – Part 35

Death by data

Writing for the Aberdeen Group, Matthew Littlefield and Shah Mehul suggest, "The only way for manufacturers to achieve world-class performance [is] by providing greater visibility into what [has] long been the black box of production. And the only way to do that [is] to start collecting a lot more data on work in process (WIP)." (Littlefield and Mehul 2009) This is an all-too-common misconception that originated long before the inception of the computer, but has been dramatically augmented and expanded since computing power was made available to the business at low cost and on an unprecedented scale with the introduction of the personal computer.

A never-articulated, but oft-held, belief amongst business executives and managers is that more data leads to better management. This thought has been sometimes carried to the extreme in the minds of some executives – and fully supported by their all-too-willing IT departments – to the point that the concept may be formulated along the following lines:

1. More data will help me make better decisions
   
2. Better decisions means that, as a manager, I will be more effective and make fewer mistakes
   
3. If I can know "everything" – have all the data – about my operations, I can manage flawlessly
   

Even as I write this, I am certain that there are business owners, executives and managers busily scouring the Web for new "business intelligence" tools as the next real wave in ERP.

Nevertheless, all the data can tell an executive is what has happened. Data, by its very nature, is entirely historical. (Yes, there are "forecasts," but forecasts – if they are known for anything – are best known for being wrong. Not a reputation likely also sought by executives and managers in pursuit of "flawless" management.

What the historical data cannot tell the executive is, "What lever should I push or pull to produce some particular outcome in the future – an outcome that assures improvement and not just added cost, expense or consumed capital?" Only a sound theoretical framework about how the executive's "system" – read: whole organization – works (or fails to work) can aid him or her in finding "the right lever" and applying the correct amount of force in the proper direction.

Employing reams of data will not keep you and your management team from spending precious time, energy and money optimizing the efficiency of departmental silos while reducing the efficiency of the organization as a whole. Investments in business intelligence in the absence of a sound theoretical framework will not prevent you and your managers from building work-arounds to keep work moving instead of solving problems that repeatedly delay revenues or disrupt operations. In fact, data – wrongly understood and improperly applied – may actually move your management team to take actions that sacrifice quality and lead time in a mistaken attempt to increase production or meet standard cost goals.

What's wrong here?

As H. Thomas Johnson, professor of Business Administration at Portland State University, puts it, "Causing [such] destructive practices is the assumption that financial information not only defines the purpose of the business, it also provides the primary means to control the financial outcomes of a business…. A key reason [that] American companies fail to emulate Toyota's long-term financial results is their belief that managers can use financial targets as 'levers' to control those results." (Johnson 2006)

Professor Johnson's argument is precisely the reverse of that stated by Littlefield and Mehul. Johnson argues that U.S. executives and managers tend to believe that they can employ relatively linear and one-dimensional data – the data they use to report on the financial performance of operations – to "understand, explain, and control" the results of those operations, "even though the results emerge from nonlinear and multidimensional operations." Toyota's executives and managers do not make this same mistake.

In fact, while Littlefield and Mehul state that "world-class performance" can only be achieved by companies developing systems to give them "greater visibility into… the black box of production," Toyota has, in fact, achieved "world-class performance" by virtually assuring that accounting has no visibility into "the black box of production." In Toyota's arrangement, corporate finance knows only two things about "the black box of production": 1) what goes in, and 2) what comes out. Everything else is invisible to "accounting." In fact, it may be because "Toyota makes virtually no use of management accounting targets (or 'levers') to control or motivate operations" that they have achieved financial performance levels that are "unsurpassed in its industry." (Johnson 2006)

Understanding your operations

Inside "the black box of production," Toyota's managers are highly visual in their management style. They do not believe that they "know" or "understand" what is happening on the shop floor simply because they have worked in the plant ten years, or 20 years, or more. They believe that to understand how to improve again and again, they must thoroughly understand what is happening today – everyday. Toyota managers employ genchi genbutsu ("going to the place") to see first-hand where and why there is any delay or disruption in production of quality products. These managers understand that the sought-after financial "results ultimately emanate from, and are explained by, complex processes and concrete relationships, not by abstract quantitative relationships…." (Johnson 2006)

Whether you and your management team choose to employ the Toyota method of genchi genbutsu and asking "Why" five times to get to the root of what needs to change, or if you choose to employ the Thinking Processes (as we have discussed elsewhere on this site and in this series on The New ERP – Extended Readiness for Profit), do not fall for the line that "more data will help you manage better." Avid IT staffers aided by value-added resellers (who genuinely believe the mantra to be true) are more than happy to have you spend your money on systems to collect, organization and report on more and more data. However, if you do not yet understand your "system" thoroughly – if you have not yet developed a sound theoretical framework by which to manage your enterprise – most or all of what you spend to obtain "more data" will be wasted.

©2009 Richard D. Cushing

Works Cited

Johnson, H. Thomas. Manage a Living System, Not a Ledger. December 2006. http://www.sme.org/cgi-bin/find-articles.pl?&ME06ART83&ME&20061210&&SME& (accessed November 18, 2009).

Littlefield, Matthew, and Shah Mehul. Operational Excellence in the Process Industries: Staying Profitable Through the Downturn. White paper, Boston, MN: Aberdeen Group, Inc., 2009.

The New ERP – Part 34

What executives and managers need to know

It seems we must constantly return to fundamentals – to simplicity. Meredith Levinson , writing for CIO magazine, points all too clearly to the fact that executives and managers in far too many business enterprises do not understand clearly the three simple things necessary to improve an organization:

1. What needs to change
   
2. What the change should look like
   
3. How to effect the change
   

Levinson writes: "Part of the reason project managers don't know projects are strategic is because the projects are chosen in many organizations in an ad-hoc manner. Half of survey respondents said that projects are selected in their organizations on the basis of a stakeholder requiring it or some through some other informal process, or they indicated that they didn't know how projects were chosen.

"Since projects are often initiated through informal processes, organizations shift project priorities in an equally informal manner. This severely complicates project managers' work." (Levinson 2009)

It seems all too apparent from Levinson's findings that organizations spend far more time and energy trying to figure out how to assure that their selected projects are "successful" – i.e., they are on-time, on-budget, and delivered with some measure of quality – than they do deciding whether the projects should be done at all. Worse! Shifting priorities within the organization make even efforts on poorly selected projects less likely to produce the desired results.

Only one reason to select an improvement project

For-profit organizations (i.e., business enterprises) will find themselves in one of four classes based on two critical criteria:

• How effectively are they increasing Throughput?
  
• Are they significantly differentiated (in a positive way) from their competitors?
  

The four classes become:

1. Failing – firms that are neither effective at increasing Throughput nor differentiated from their competitors
   
2. Risking – firms that are differentiated from the competition, but ineffective at increasing Throughput (sometimes, "bleeding edge")
   
3. Competing – firms that are effective at increasing Throughput, but are not significantly differentiated from the competition ("commodity" firms)
   
4. Leading – firms that are both effective at increasing Throughput and successful at differentiating themselves from their competitors
   

Note: For readers unfamiliar with the definition of Throughput or other terms used in this section, see Part I in this series.

In the New ERP – Extended Readiness for Profit, we advise that executives and managers always seeking to maximize R.O.I. (return on investment) according to the following formula:

ROI = (delta-T – delta-OE) / delta-I

where T = Throughput,
OE = Operating Expenses, and
I = Investment

For executives and managers, the analysis becomes a simple matter of maximizing the change in T (delta-T), with the lowest possible change in OE and I. Doing so assures that the planned action will help the organization achieve more of its goal of making more money – both today and in the future.

Being rescued from cost-world thinking

Executives and managers looking at this simple formula are immediately rescued from cost-world thinking and are transported into the realm of guiding their organization toward achieving the potential for which they are already paying. Guided by new understandings brought to light through the application of the Thinking Processes executives and managers in companies of all sizes are exposing heretofore unrealized potential within their own organizations. As published in The World of the Theory of Constraints, Vicky Mabin and Steven Balderstone report the following astonishing results:

• Lead Times – 70% mean reduction in lead times
  
• Cycle Times – 65% mean reduction in cycle times
  
• Inventory Levels – 49% mean reduction in inventory
  
• Due Date Performance – 44% improvement in on-time delivery
  
• Combined Financial Variable – 63% improvement in combined financial results
  
• Revenue/Throughput – 73% mean increase
  
  (Mabin and Steven 1999)
  

Cost-world thinking causes management teams to shrink their organizations in an attempt to hold costs and expenses within present revenues. Unfortunately, this leads to diminishing returns in several ways. However, getting your management team to focus on increasing Throughput and helping them achieve breakthrough thinking on new ways to differentiate what you do, leading to increasing market segmentation and penetration, can help your firm unlock more and more of its potential for making money.

©2009 Richard D. Cushing

Works Cited

Levinson, Meridith. Business Strategy: The 'Best Determinant' of Project Success. Nov 17, 2009. http://www.cio.com/article/508018/Business_Strategy_The_Best_Determinant_of_Project_Success (accessed Nov 17, 2009).

Mabin, Vicky, and Balderston Steven. The World of the Theory of Constraints. Boca Raton, FL: St. Lucie Press, 1999.

The New ERP – Part 33

One of the things I try to do in working with a new team of executives and managers is to get them to enlarge their view of their own organization – their own enterprise. I encourage them to think in terms of potential and not just the results they are beholding today.

Most managers and executives think in terms of "forecasts" versus "actuals." In their minds, they compare forecast sales with actual sales, and they compare forecast profits with actual profits. But what the enterprise is really giving up is not the difference between "forecast" and "actual." What the firm is actually giving up – what the enterprise is actually losing – is the difference between their actual profit and the full profit potential for the firm. These losses are irrecoverable – gone forever – as a lost opportunity.

Cost-world thinking

If you are like most folks in management, you've heard the oft-repeated mantra of the cost-world: "Every dollar of cost (or expense) that is cut falls directly to the bottom line." This makes sense because it is true.

Unfortunately, this concept is a very constrictive, and sometimes misleading, fact when taken by itself.

Three or four decades ago, it was possible for companies to actually "cut costs" in a way that made, in some cases, a real difference. New technologies – not necessarily computer-related – were making companies more efficient. Competition from abroad just beginning to emerge in a good many industries, and real waste had to be cut away to stay profitable as prices fell.

By the 1980s and into the 1990s, most U.S. companies had already completed (or were wrapping up) major cost-cutting efforts. By this time, executives and managers had trimmed a good deal of the true waste available in their systems. Attempts to reduce costs further frequently butt heads with the law of diminishing returns: the efforts to reduce costs further simply do not produce enough benefits on the bottom-line to make them economically sensible to undertake.

Cost-Cutting Period	Est. Cost to Implement	Savings	Change in Profit
Pre-1980 Cost-Cutting	$10,000	$80,000	15%
1980 - 1999 Cost-Cutting	$20,000	$25,000	4%
21st Century Cost-Cutting	$30,000	$10,000	2%

Actually, the real picture gets worse than this simple chart of diminishing returns.

Understanding protective capacity

Every business entity or other functional organization has two types of capacities: First, there is the organizations core capacity. This is the capacity the organization calls upon day-in and day-out to meet its normal workload. However, surrounding your enterprise's core capacity is another layer of capacity that is automatically generated. No deliberate act of management created this layer of capacity and its appearance varies dramatically from firm to firm. We refer to this capacity as protective capacity, and it is this capacity that is called upon whenever "Murphy" attacks and disrupts the organization's ability to meet its normal day-to-day demands. When protective capacity engages, it causes resources in the organization to work harder, faster, longer, more efficiently or in other ways to meet short-term requirements. It causes the organization the "sprint" to catch up at a pace that is unsustainable in the long-run.

Note: Some organization's have a third type of capacity: namely, excess capacity. We will address that capacity in a few moments.

During cost-cutting cycles, many management teams fail to recognize the presence of and need for the organization's protective capacity. When this happens, such firms run the risk of cutting away, not "fat," but protective capacity that is necessary to the maintenance of the organization in the long-term.

If protective capacity is, in fact, trimmed away during cost-cutting actions, the natural reaction of the organization is to shrink core capacity in order to rebuild the layer of protective capacity and thus protect itself against "Murphy." The resulting reductions in core capacity will have several ill effects on the enterprise:

• A reduced capacity to recover from business disruptions
  
• A reduced capacity to meet periods of unusually high demand
  
• A reduced capacity to emerge rapidly or successfully from economic recessions
  
• A reduced capacity to take advantage of unanticipated opportunities
  

Understanding excess capacity

During cost-cutting cycles, what executives and managers are frequently looking to efface from the organization is what might be deemed "excess capacity." But, if management will stop to consider, what might be classified as "excess capacity," is really the capacity in your organization that is unconstrained and which your management team has not yet exploited in the production of Throughput and profit. It is precisely that capacity that your enterprise has been paying for all along but failing to reap the benefits of leveraging it toward reaching the firm's full potential.

Cutting is always easier than thinking, but thinking is generally the more profitable.

Consider how Federal Express got its name. As I understand it, Frederick Smith, founder of FedEx had developed the concepts behind such an overnight courier service in college. When he got ready to put his ideas into action, he bought or leased some airplanes and hired some pilots, on the one hand, while negotiating with the U.S. Federal Reserve system on a contract to courier money and documents between the banks of the Fed on an overnight basis. However, just he was about to put it all together, the Fed backed out of the deal. That left Smith a lot of excess capacity in the nature of airplanes and pilots. The name "FedEx" stuck, but Smith put the excess capacity to work in private commerce by developing offers that made economic sense to his customers while creating new Throughput.

Had Frederick Smith been a "cost-cutter" rather than a visionary and an entrepreneur, FedEx may have fallen by the wayside instead of becoming the firm it is today.

©2009 Richard D. Cushing

The New ERP – Part 32

IDC author Michael Faucette published a report in December 2009 entitled "Modifying and Maintaining ERP Systems: The High Cost of Business Disruption". (Faucette 2009)

Interestingly, the "Five Key Drivers of System Change" at the more than 200 companies surveyed by IDC were these:

1. Regulatory requirements
   
2. Organizational change or restructuring
   
3. Mergers and acquisitions
   
4. Financial management-driven changes
   
5. New or changed business processes
   

Now, while I suppose it could be argued that "new or changed business processes," "financial management-driven changes," or even "mergers and acquisitions" were actually the actions of these businesses to increase Throughput (T), reduce Inventories or demands for new Investment (I), or to cut or hold the line on Operating Expenses (OE) while sustaining significant growth, I find it quite amazing that the first and foremost response by the firms being interviewed was not: "We change out ERP system when we find it necessary to do so in order to achieve more of our goal, which is to make more money tomorrow than we are making today."

Meeting changing regulatory requirements

I am not disputing that some "regulatory changes" may force upon an enterprise the need to make changes to their ERP systems. This is an inevitable part of government interventions in our economy. Organizations should have the goal to accommodate these, of course, with a focus on the smallest possible values of DT and DOE, as they certainly will have a zero-value (or even a negative value) for DT. These should be evaluated using the same basic formula that we have previously introduced:

In the case of changes for regulatory purposes, your ROI will almost always be negative. Therefore, the goal would be to keep that negative as small as possible, thus producing the smallest possible negative impact on the bottom-line.

For all other changes

For changes driven by any of the other four reasons listed above, precisely the same formula for ROI should be applied, with the goal of maximizing the value of ROI. After all, consider the following:

• Reorganization or restructuring that produces a negative ROI should simply not be done
  
• Mergers and acquisitions that produce a negative ROI should simply not be done
  
• Financial management-driven changes that produce a negative ROI should never have been considered by "financial management" in the first place
  
• New or changed business practices that result in a negative ROI should simply not be undertaken
  

While these simple rules are nothing more than common sense, it is amazing to me how many organizations undertake reorganization, mergers, acquisitions, or business practice changes without ever considering the impact on T, I, or OE. To do so is not "management," at all. It is simply "acting" without consideration of the basic goals of the organization. It is action in the absence of a theoretical framework by which to understand how "the system" – the enterprise – really works in achieving the goal of making more money.

Failure to manage the enterprise as "a system"

Faucette's IDC report goes on to list nine categories of disruption costs associated with actions taken based on the "drivers" listed above. Here are the nine categories:

1. Decreased operational efficiency (increased OE)
   
2. Decreased decision-making efficiency (lost T? increased I?)
   
3. Delayed cost-reduction plans (increased TVC – Truly Variable Costs; reduced T)
   
4. Reduced levels of customer satisfaction (reduced T)
   
5. Delayed product launch or increased product time-to-market (reduced T; increased OE?)
   
6. Lost market share (reduced T; increased OE)
   
7. Payment of fines for non-compliance (increased OE)
   
8. Missed opportunities for or delayed acquisitions (reduced T)
9. Decline in stock price (reduced NPV)

Note: If you are not familiar with any of these terms, go back to Parts 1 and 2 in this series and get your bearings.
 
Executives and managers are not stupid. However, if they fail to manage the entire enterprise as "a system" and, instead, take their various management actions (see "drivers" above) with the goal of optimizing departmental silos, the list above (and worse) are the results they are likely to see. In the absence of a clear "system view" of the enterprise, actions taken for "improvement" may actually lead to achieving less of your goal or achieve your goals only after much painstaking recovery.

I cannot emphasize strongly enough how applying this simple formula to any planned "change" in the enterprise can help executives and managers stop making decisions that do not consider the business as an integral system.

This simple formula enforces a "system view." Essentially, this formula asks executives and managers to consider three factors: If we make the change under consideration…

• How much will Throughput change (+/-)
  
• How much will Operating Expenses change (+/-)
  
• How much will Investment/Inventory change (+/-)
  

Almost any rational ballpark estimates of changes in T, OE, and I are better than forging ahead with changes without giving due consideration to the effects of the impending changes on the enterprise's movement toward the goal of making more money.

Let us now take a brief look at how much money was given up by the 214 enterprises in the IDC survey as changes to their ERP systems were undertaken based on the "drivers" listed earlier. Here is the summary:

Reason for Losses	Percent of Respondents	Losses per Respondent
Financial management-driven changes	51.4%	From $12 to $296 million
Delays in product launches	72.2%	From $10 to $255 million
Delayed cost-reduction plans	76.2%	From $10 to $255 million

Restoring focus

These shocking losses are, to a great degree, attributable to – and testimony of – the unfortunate rigidity to be found in most ERP software today. This rigidity clearly exists – and may cost your company millions of dollars – despite the vendors' and VARs' near constant sales chatter about "flexibility" and "agility" to meet "your company's growing needs" or "changing requirements."

Nevertheless, as W. Edwards Deming put it so succinctly, "It is management's job to know." It is management's job to know what will make a business improve – and what will not. Certainly for improvement to occur, some change must be implemented. But it does not follow that all change will bring about improvement, even if it is management's good intention that improvement be derived from the change.

In the system view, "the system" must have a singular goal. In for-profit organizations, that singular goal is generally to make more money tomorrow than it is making today. The goal is not to make people's jobs easier, faster or more efficient department by department. The goal is to make more money. With that goal in mind, management can go back to restoring focus by employing the Theory of Constraints focusing steps.

When applying these focusing steps, your organization's executives and managers must see the system – the entire organization – as a chain of interrelated functions and not as departmental silos. Once your management team understand the concept of the chain, they can begin to see that the only change that makes sense today is the change that will strengthen the weakest link in the chain. Spending precious resources of time, energy or money on any other factor will not produced improvement for the system. The "weakest link" is the system's constraint to achieving more of its goal.

So, as in the accompanying illustration, here are the Five Focusing Steps:

1. Identify the weakest link – the system's constraint
   
2. Decide how to exploit the system's constraint – to strengthen the weakest link in the chain
   
3. Subordinate all other decisions to the constraint and your methods to exploit it
   
4. Elevate the system's constraint
   
5. Check to see if your system's constraint has changed, then go back to Step 1 and do not let inertia set in (that is POOGI – a process of ongoing improvement)

Contact Me!

(c)2009, 2010 Richard D. Cushing

Works Cited

Faucette, Michael. Modifying and Maintaining ERP Systems: The High Cost of Business Disruption. White paper, Framingham, MA: IDC, 2009.

The New ERP – Part 31

Cost-world thinking

It is clear that in the traditional ERP – Everything Replacement Project world virtually everyone is deeply mired in cost-world thinking. Lip-service is paid to terms like "investment" and "return on investment," but is all too evident that executives and managers consider information technologies (IT) an "expense" or a "cost" and, sadly, not an investment. What is worse, however, is that technology vendors and value-added resellers (VARs) have willingly opted into this same cost-world thinking.

Vendors and VARs would simply love to talk to their prospects and clients about ROI (return on investment). However, even if they tried in the recesses of the dark past, they soon gave up, and the reason they gave up is because their prospects simply never believed the ROI numbers that these vendors and VARs presented.

Why didn't these executives and managers believe the ROI numbers provided by the VARs?

The answer is simple and complex at the same time.

It's the sales guy

I think, clearly, the first reason that VAR-developed ROI calculations are generally not believed is simply because they come from "the sales guy." Every executive and manager in the prospect's office knows that "the sales guy" is here to sell us something. What that implies is that the prospect clearly believes that the VAR – and "the sales guy" – is in their office for one, and only one, reason: to line their own pockets with cash taken directly from the prospect company's bank accounts. The prospect company's management team is likely to conclude that the calculations provided by the VAR's "sales guy" – usually predicated on averages and formulas – have little bearing on reality in their own company.

This is compounded by the fact that, up to this point in the relationship between the VAR and the prospect, nothing of substance has really been discussed about specific changes in the prospect's operations – supported by the new technologies – that would induce the prospect to believe that the calculations done by the VAR constitute anything more than a "guess" for their specific situation.

It is nothing more than "mystical mojo" to suggest to a management team that the following transaction will lead to ROI for the buyer:

1. Buyer gives Seller $250,000
   
2. Seller provides and implements new technologies
   
3. Buyer gives Seller an extra $75,000 for budget overruns
   
4. Buyer "mystically" improves and makes more money because they have new technologies
   

This is nothing less than a witch-doctor approach – in the absence of solid discussions about

• What need to change to make the company more profitable
  
• What should the change look like in order to make the company more profitable
  
• How can we effect the proper change in the company in order to make the company more profitable
  

Up to this point, the VAR has delivered nothing more than promises to the management team in the prospective company. The prospect has no reason – literally – to believe that the VAR can deliver anything of value, and the horror stories abound of traditional ERP failures and cost-overruns. On what rational basis should the executives at the prospect company believe the ROI calculations provided by "the sales guy"?

Too many ROI discussions are disingenuous

Since (like good old Ivory soap) VARs are 99.44% purely mired in cost-world thinking – just like their counterparts on the management team at the typical prospect firm – when they talk about ROI they are almost always talking about "cost savings." However, at the root of it, these discussions are disingenuous.

Sad, but true, usually neither the VAR nor the prospect's executives will bring up the fact that calculated "cost-savings" based on reducing labor are almost entirely fictitious in the absence of the VARs ability to convince the prospect firm that they will also see substantial growth in Throughput as a result of the new technology deployment. It is relatively easy to throw that labor "savings" number into the calculations, but very, very few firms are actually going to lay people off or reduce their working hours following a traditional ERP – Everything Replacement Project deployment. Therefore, in the absence of significant and sustainable growth in Throughput, wherein additional personnel need not be hired, there are no real "cost savings" to the organization from the "labor" portion of the VAR's ROI estimates.

"The sales guys" frequently ignore this fact in their discussions with the prospect's team – because they do not have an answer for increasing Throughput. Meanwhile, some or all on the prospect's management team know and understand the fiction underlying the VAR's ROI calculations and, because of this recognized but unacknowledged fiction in the numbers, they are wary about accepting any portion of the VAR's ROI numbers.

Even if the ROI estimates are correct…

There is another major factor that plays into the executives and managers of prospective buyers of traditional ERP failing to place much value on VAR-provided ROI estimates. That is simply the lousy (I would like to use another word here, but this is probably the most appropriate word without collapsing into vulgarity) performance of traditional ERP in terms of actually delivering promised business benefits. Consider the following. Despite spending an average of $2.6 million (Microsoft) to $16.8 million (SAP) and taking about 18 months to implement (average), traditional ERP projects:

• Take longer than expected to implement 93% of the time – thus delaying business benefits and reducing ROI
  
• Exceed original budget expectations 59% of the time – thus reducing ROI
  
• Only about 21% of traditional ERP efforts effectively realize at least 50% of the anticipated business benefits – thus dramatically reducing the likelihood of achieving any ROI at all
  
• The average achievement of business value for traditional ERP deployments is only 68.6% –thus, ROI, if any, should be estimated using about two-thirds of earlier calculations
  

Is it any wonder that most prospects for traditional ERP – Everything Replacement Projects are a bit jaundiced about ROI figures coming from the vendor or VAR?

There is an answer. Stay tuned.

©2009 Richard D. Cushing

The New ERP – Part 30

Show me the R.O.I.

One of the things that amazes me, in my more than 25 years in working with PC-based technology solutions for small-to-mid-sized business enterprises and my review of literally hundreds of articles covering traditional ERP – Everything Replacement Projects in trade publications and on the Web, is the near total absence of any substantive discussions regarding return-on-investment (ROI). Sure, there are some articles and some vendors that give lip-service to ROI. Generally, whenever they do, however, they do so sometimes by simply implying that the buyer, indeed, should be concerned about ROI and they, as the seller, will somehow mystically deliver "ROI," if you buy and implement their software. In some cases, they go a step further. They offer ROI calculations based on averages and factors built into formulas that, generally, will calculate an ROI no matter what numbers you plug into their spreadsheets or Web forms.

Unfortunately, business enterprises are systems that do not necessarily respond in ways that will make the averages and predetermined factors applicable. While an "average" ROI may be calculated, the fact is, no matching "average" company exists to achieve the ROI.

Some R.O.I. is intuitive

No, I am the first one to admit that some actual ROI cannot be reduced to hard numbers. For example: Let us say (as we have seen in earlier posts – see Part 12 of this series) we calculate our planned ROI based on the saving of 0.5 FTE (full-time equivalents) through the deployment of integrated barcode printing, 1.2 FTEs by adding integrated ASN processing, and another 1.7 FTEs through paperless picking, packing and shipping while growing the Throughput 18% over twelve months. These "savings" are based on actions the company will not have to take – namely, at some point following deployment, the company will not have to hire some new employees.

It is impossible to determine the date at which the firm did not have to hire an employee. It is impossible to determine exactly how much the firm would have paid the employees it did not have to hire. So, while it is possible to determine that the firm did (or did not) successfully grow Throughput by the planned 18%, it is not possible to determine exactly how much money was saved through not hiring additional employees.

At least two aspects, however, are likely proof-positive that the planned ROI was reasonably accurate:

1. Bottom-line profits should reflect values that would approximate the net effect of the increased Throughput and the reduced Operating Expenses
   
2. Executives and managers can probably intuit that, had the changes not been made, additional employees would have been necessary to support the activity resulting from the increase in Throughput
   

A business initiative

Eric Kimberling, president and founder of Panorama Consulting Group, an independent ERP consulting firm, in his blog post entitled 7 Steps to Choosing the Right ERP Software, points out that "ERP is first and foremost a business initiative…." (Kimberling 2008) Kimberling goes on to say that ERP buyers should "[u]nderstand the total cost of ownership," and they should "[t]rack the potential business benefits of the new system." Nevertheless, although Kimberling shows some keen insight, he does not suggest that in looking for "the right ERP software," that the business enterprise should a) actually determine in advance what specific changes in the firm's current reality will lead to measurable improvements, or b) actually calculate an ROI based on reaching specifically measurable outcomes in terms of increases in Throughput, reductions in Inventory or demand for other Investment, or cutting or holding the line on Operating Expenses while sustaining significant growth.

Kimberling is right. IT decisions should be, "first and foremost a business initiative." While the IT department should be keenly aware of new technologies appearing on the horizon, their mental processes should be entirely synchronized with the organization's primary goal of making more money tomorrow than they are today (in for-profit enterprises). When they bring forward to executive management concepts for applying new or different technologies in the enterprise, these ideas should be thoroughly subjected to review in light of managements "framework" as defined in their Current Reality Tree (CRT), Future Reality Tree (FRT), and Transition Tree (TrT) as part of the firm's POOGI (process of ongoing improvement). (See prior posts, especially Part 5 in this series.)

Whenever anyone – even the CEO – in the organization wants to spend money for the "improvement" of this process or that one, the expenditure should be considered in light of the basic formula we have used previously and reiterate here:

Where T = Throughput (Revenue less Truly Variable Costs only),
OE = Operating Expenses, and I = Investment

If this is not done routinely, there is a great likelihood that precious time, energy and money will be spent with no benefit being reflected on the bottom line of the company's financial reports. This is nothing but waste.

Works Cited

Kimberling, Eric. 7 Steps to Choosing the Right ERP Software. May 30, 2008. http://blogs.techrepublic.com.com/tech-manager/?p=517 (accessed December 15, 2009).

The New ERP – Part 29

What makes technologies valuable?

Let us stop for a few moments to think about just what it is that makes new technologies valuable to a business enterprise. If we take this time to think, it should occur to us that there is no inherent value in new technologies. Just like everything else that resides within your enterprise, new technologies only add to Operating Expenses (OE) in and of themselves. It is only in the application of technologies to business processes that value may be found.

Interestingly, the value delivered through the application of technologies to business processes may be broken down into three elementary categories – categories that we have discussed on numerous occasions elsewhere in these posts:

1. Increasing Throughput (T)
   
2. Reducing Inventories or driving down the demand for new Investment (I)
   
3. Cutting or holding-the-line on Operating Expenses (OE) while sustaining significant growth
   

If you and your management team are going to purchase new technologies as part of a process of ongoing improvement (POOGI), you will know – or should recognize – automatically that you will either increase Investment (capitalized purchases) or increase Operating Expenses (in at least one year), or both (since any capitalized purchase will be amortized as an expense over multiple future periods. Therefore, it is also important that your team has compared this proposed improvement project with other improvement options using this simple formula:

ROI = (delta-T – delta-OE) / delta-I

Where ROI = Return on Investment,
T = Throughput (Revenue less Truly Variable Costs only),
OE = Operating Expenses, and
I = Investment.

As you can see from this simple formula, the ROI is maximized by achieving the highest value for delta-T while holding delta-OE and delta-I as low as possible. This leads to a very simple set of priorities:

1. Projects that increase Throughput are generally a top priority
   
2. Projects that reduce Investment (including reductions to inventories – being the most common reduction in Investment) should be considered next
   
3. Projects that reduce Operating Expenses are generally reserved for last for consideration
   

The Technology Value Matrix

If you will review carefully the accompanying figure you will see immediately something about what makes new technologies or, more appropriately, new applications of technologies valuable. In this matrix, the lowest value values are to the lower left - "Commodity Technologies." Commodity technologies are those that are widely available, they tend to have a "standardizing" affect on the enterprise, and they are generally applied in a typical (read: non-innovative) way. Examples of such technologies include desktop computers, graphical user interfaces (GUIs), network servers, relational or other databases, and so forth.

So, what would a "Wasteful Technology" or technology application be?

Consider a small business that has a typical range of departments. They do everything from R&D to shipping and receiving, invoicing, and general ledger accounting. In the shipping department is a bright young lad that never completed college, but he is a hard worker. He is effective, full of good ideas, and does whatever it takes to keep customers happy inasmuch as it lies within his power to do so. The president and founder of this young company still works in the R&D department helping to design the next generation of products. This firm generally introduces four to six new products a year, so the president doesn't even work in R&D on a full-time basis. On the other hand, the young man in shipping is constantly working 50 or 60 hours a week trying to assure that the firm's customers' orders are filled on-time.

While this scenario is not based on any particular client with whom I have worked in the past, the general scene is not all that distant from far too many clients in my experience. All too frequently, if an investment is going to be made in technology, the president and R&D 'guru' is far more likely at having $10,000 thrown toward a high-end CAD workstatation, while the guy working 50 or 60 hours a week in shipping remains stuck doing his work on a six-year-old machine that is long past its prime. Or, worse, the guy in shipping is still filling out paperwork on shipments by hand, and these data are then being keyed by someone else into the firm's accounting software.

Let's compare these two options based on the following (usually true) assumptions:

• The firm does not expect the technology investment in R&D to accelerate time to market, the frequency by which new products are introduced to the market, or have any other affect leading directly to increased throughput
  
  
• The firm will not include in its calculations any supplementary beneficial effects on Operating Expenses that my accrue through increased accuracy, support for significant growth, or the elimination of potential data redundancies under the old regime
  
  
• Investment (delta-I) will be the same for each option
  
  

Improvement Option	Effect on Throughput	Effect on Investment	Effect on Operating Expenses
New CAD workstation for President in R&D	No increase in Throughput	Increase by $X	Increase by $Y
New automation for shipping	Yes, increase Throughput	Increase by $X	Increase by $Y (amortization of investment) LESS decrease in overtime wage expense

Time and time again I have spoken with companies that make just such foolish expenditures on new applications of technologies. Why would a company make a decision to spend money for what is clearly zero-dollars in net benefit to the organization?

The answer is usually found in one of two areas:

1. Company politics – the investment goes to the person or department with the greatest "pull" in the organization
   
   
2. The company's management team simply considers all IT expenditures an "expense" and, therefore, never calculates a return-on-investment
   

Such an approach is folly on multiple counts, but considering that time, energy and money are all limited resources within a firm, it seems blatantly silly to "spend" any of them where there is no return on the "investment."

That, in a nutshell, is a display of "wasteful technology." Since the firm had no deliberate plan to do anything particularly "differentiating" along with the purchase of the new CAD workstation for the president, and since CAD in itself is "standardizing" (not "differentiating"), the high expense for an engineering "workstation" made about as much since as the purchase of a $10,000 Rolodex™ for one of the secretaries.

[To be continued]

The New ERP – Part 28

Strategic alignment is the "best determinant" of success

According to writer and researcher Meridith Levinson, "Many factors influence project success and failure…. But new project management research from training company Insights Learning and Development, the Project Management Institute and a strategic execution consultant suggests that the single most important factor influencing project success is the project's link to the organization's business strategy and the project manager's understanding of how the project supports the business strategy." (Levinson 2009) [Emphasis added.]

This should be an encouragement to any executive or manager who has been following along with us in our development of The New ERP – Extended Readiness for Profit. I say this because we have emphasized the following THREE SIMPLE STEPS:

1. Discover what needs to change, which we have helped you do by applying the Thinking Processes (TPs) and leading you and your management team to the creation of your own Current Reality Tree (CRT). By looking to the roots of your CRT, you were able to see clearly those few things (usually fewer than a half-dozen) that need to change in order for your business to reach more of its goal of making more money tomorrow than it is making today.
   
   
2. Work through what the change should look like. Here again, we suggested that you apply the Thinking Processes to build a Future Reality Tree (FRT) and Transition Tree (TrT). These two logical trees will help you and your management team understand with considerable clarity what the changes should look like if your "system" is going to improve.
   
   
3. Last, how to effect the change must be considered and, actually, if you have built your Transition Tree, you already have determined how to go about making your changes. It is worth mentioning, however, that sometimes the evidence at the "roots" of the CRT is so plainly evident that it is not necessary to build either an FRT or a TrT. (We do not advocate this approach, but some matters are so plain and so easily changed, that the actual work can be documented later, or a new CRT is drafted immediately following the implementation of the "simple" changes.)
   

You will note immediately that, having applied the TPs, you and your management team have already addressed the next element Levinson mentions: "Strategic value alone is not enough to ensure project success…. Project managers need to understand the business strategy and how the project supports it." (Levinson 2009) Having built your logical trees (i.e., CRT, FRT, TrT), you have the tools in your hand to quickly, accurately and effectively communicate "how the project supports" your business strategy of ongoing improvement to anyone involved in any part of the improvement projects that might be set forth.

A strategic road map for the improvement project

Here is a terrific side-benefit you get by having used the Thinking Processes to guide your New ERP – Extended Readiness for Profit project up to this point: For no additional investment of time, energy or money you and your team have a ready-made road map to keep yourselves and your project leads on target with the projects.

Levinson states that under traditional ERP scenarios, "[P]roject managers lack 'the context required to flag when the project is veering from its original intent and course-correct towards the intended outcome,' [write Suzanne Dresser and Mark Morgan, authors of a report published by Insights Learning and Development and the Project Management Institute]. And that's when cost and time overruns begin and when projects start to veer from business requirements." (Levinson 2009)

Your Thinking Processes diagrams provide not only the crystal-clear rationale for your efforts, the logic has already helped your management team set unambiguous metrics by which to compare outcomes with desired results. No fumbling around is required or allowed. Furthermore, the budget that you team has set is equally unambiguous.

Summary

In short, if alignment of IT projects with "business strategies" is, indeed, the "best determinant" of project success, you and your management team are well on their way to success if you have been following along with us in applying The New ERP methods. Plus, you have provided for yourself and those involved at every level with a clear, concise road map to keeping the entire effort – or even multiple efforts – on target for the desired ROI (return on investment) and within a budget that makes sense.

References

Levinson, Meridith. Business Strategy: The 'Best Determinant' of Project Success. Nov 17, 2009. http://www.cio.com/article/508018/Business_Strategy_The_Best_Determinant_of_Project_Success (accessed Nov 17, 2009).

The New ERP – Part 27

Recap

This is Part 27 in our series, so let's take a moment to briefly recap what The New ERP – Extended Readiness for Profit has done for us so far in contrast to traditional ERP – Everything Replacement Project.

Aspect	Traditional ERP	The New ERP
Setting the goal	Lack of focus: Traditional ERP often has several goals (read: lack of focus) or a goal that is entirely generic (read: lack of focus). Therefore, ROI is frequently predicated on little more than hope that throwing new technology at the organization will somehow lead to improvement and better profits.	Laser-like focus: In The New ERP began with uniting executives and managers around a singular goal (in for-profit organizations that is typically making more money both now and in the future). Next, The New ERP applies the Thinking Processes to help management understand what is keeping the organization from achieving more of its goal. This gave management a clear view of: What needs to change What the change should look like How to effect the change
Linking ERP objectives to financial goals (IT alignment)	Loosely bound to financial goals: Far too many traditional ERP projects are bound to financial goals only by a tenuous thread of hope in the hearts of managers and executives. Others may calculate an ROI (return on investment) based on broad estimates of overall "improvement," but these are generally not tied to specific effects and measurable expected outcomes.	Tightly bound to financial goals: The New ERP – Extended Readiness for Profit uses what is learned through the application of the Thinking Processes to tightly aid managers and executives in linking measurable execution metrics to the achievement of financial goals. If "revenue is to increase by 12% in the first year," then the management team knows precisely which actions and improvements are expected to lead to these results.
Invention of the "solution"	Solution is a "package" brought from the outside: Traditional ERP frequently revolves around the organization defining their "needs" or "requirements," and then seeking a "package" brought to them from the outside (by a vendor or value-added reseller) to provide them with the "solution." If the executive team or the vendor cannot achieve enterprise-wide "buy-in" by the end-users, then the implementation of the "solution" may be more costly or less effective than intended, or it may fail entirely.	"Solution" is invented by the executives and managers in charge: By applying the Thinking Processes and determining with precision "what needs to change" and "what the change should look like" in order to achieve more of the organization's goal, the management team employing The New ERP becomes the inventor of their own "solution." By inventing their own solution, and by doing so using a rational toolset, "buy-in" becomes automatic. No one fights against their own invention.
Budget setting	See "Linking ERP objectives to financial goals" above	See "Linking ERP objectives to financial goals" above. The New ERP allows your management team to set rational budgets for specific, highly-targeted and measurable improvements so that the budgets make sense relative to the return on investment calculations. All of this is done with relative simplicity and paralysis by analysis is avoided entirely.
Software selection	Wholesale replacement: Traditional ERP – Everything Replacement Project does just what you would expect. It leads to replacing everything – or almost everything – in the organization. It is not focused on alleviating or eliminating organizational "bottlenecks."	Targeted Extensions: The New ERP – Extended Readiness for Profit is focused on effecting change in specific areas that have been rationally identified as being constraints ("bottlenecks") that are keeping the organization from achieving more of its goal. This focused approach means that the whole organization need not be disrupted to bring about effective improvement. Furthermore, very specific technologies selected to achieve very specific ends is the objective in software selection.
Vendor demonstrations	Unfocused review of functionalities: Vendor demonstrations under traditional ERP approaches often occupy days or weeks, sapping time, energy and money from all of the various departmental silos involved. This process alone may increase operating expenses by driving up overtime costs for "catch-up" work.	Tightly focused "proof of concept": Under the New ERP, vendors or resellers are invited to present proofs of concept around improvements that are very narrowly defined. They are also asked to speak specifically – and convincingly – about how their technologies will allow the "client" organization to achieve its goals within the budget prescribed.

What has been accomplished to date under the New ERP concept for the organization applying it (as in the table above) has likely saved the entire organization no small amount of time, energy and money. In addition, they are in a far better position to see actual results in the near future – results predicated on sound logic and real strategies, not hope and guesswork.

[To be continued]

Can Your Company Handle an Onrush of Risk? - Risk Management - CFO.com

Can Your Company Handle an Onrush of Risk? - Risk Management - CFO.com

The application of the Thinking Processes can help your organization deal more ably and successfully with risk. The Negative Branch is a tool specifically designed to help your organization face challenges that might arise in moving toward achieving more your your goal -- to make more money tomorrow than you are making today (in a for-profit firm).

Contact me for more information at rcushing(at)ceoexpress(dot)com.

Curbing Fleet Costs - Budgeting & Planning - CFO.com

Curbing Fleet Costs - Budgeting & Planning - CFO.com

Despite the mindset of cost-cutting in economic hard-times, it can be dangerous. It is possible to cut away "meat" while you think you're slashing only "fat." When you cut away protective capacity, you make recovery more difficult when the economy improves.

Better: Apply the Thinking Processes and increase Throughput while reducing Inventories or the demand for new Investment, and cut or hold the line on Operating Expenses while sustaining real growth in revenues.

To find out how, contact me at rcushing(at)ceoexpress(dot)com.

...

The New ERP – Part 26

Vendor demonstrations

It is an unfortunate fact that, if our foundation is wrong, chances are the rest of the building will not be too great either. This is certainly the case as we come to the matter of vendor demonstrations in a traditional Everything Replacement Project. Consider the typical steps that have been taken to get the firm to the "vendor demonstrations" stage in traditional ERP:

As we have been discussing all along (see prior posts), none of these steps, when undertaken in with traditional ERP in view, are designed to focus the effort on those few things that need to change in order to make the enterprise more effective at producing profit. Instead, an almost egalitarian approach is assumed in which the "concerns" expressed and "requirements" supplied by department X carry equal weight with those expressed by department Y. After all, it is only fair.

This remains precisely why traditional Everything Replacement Projects so seldom deliver really dramatic results in terms of increase profit. And, when they do, it is mostly serendipity that delivers the improvement. Likely it was because three or five things that actually needed to change got some or all of the change they required, and the remaining several hundred things that also changed in the traditional ERP effort did not do enough harm to overwhelm the benefits delivered.

When we, then, extrapolate this lack of focus down from "requirements gathering" through "software selection," and "vendor selection," we arrive at the prospect of sitting through vendor demonstrations that are equally unfocused. People from several – perhaps dozens – of departmental silos are invited down to view essentially redundant demonstrations of how the proposed new software will replace the way they presently execute the same basic tasks.

Vendor demonstrations in the New ERP – Extended Readiness for Profit

If you and your management team have been following along with us (see prior posts), then you will immediately see that preparing for vendor demonstrations in the tightly focused environment of the New ERP would be and should be dramatically different. Rather than sitting through long and (usually) somewhat boring vendor demonstrations of how General Ledger, Accounts Payable, Accounts Receivable, or Purchasing works, or even generic (though somewhat more exciting) demonstrations of how the warehouse will operate with the new software in place, the management team in our example company has laser-like focus on crystal clear and measurable objectives. For this team, the vendor demonstrations are not generic, at all. Instead, the vendors are called upon to demonstrate "proof of concept" around tightly-defined metrics.

Rather than giving the selected vendors a 32-page "demo script" that covers elements of every module to be part of the traditional Everything Replacement Project, your well-prepared executive management team has handed off "Proof of Concept" requirements to the selected vendors. A "Proof of Concept" requirement might read something like the following (in our example company):

• Demonstrate how your bar code printing solution can be integrated with our existing inventory system and how bar code label printing will be performed in connection with receipt of goods and manufacturing production operations. Explain how leveraging your existing APIs (application program interfaces) will hold the cost of development and deployment of your bar code printing solution below $X.
  
  
• Demonstrate how ASNs (advanced shipping notices) will be automatically generated via integration with our existing technologies. Furthermore, demonstrate how ASNs will be transmitted to the appropriate destinations by retrieving data from our existing back-office accounting and sales order entry software. Explain how you will leverage your integration engine to hold total cost of development and deployment below $Y.
  
  
• Demonstrate how your combination of hardware and software will lead to essentially paperless pick-pack-ship operations. Further, demonstrate how your solution will permit us to process (on average) N orders per hour through the entire pick-pack-ship process. Show how you will keep the total cost of development and deployment below $Z.
  

Notice that the goals of discovery for vendor demonstrations under the New ERP are two-fold: results within budget. Of course, this implies something on the part of your organization, as well. You should note, for example, that there is no "touchy-feely" language in these "Proof of Concept" requirements. This lack of UI (user interface) formulation suggests that, if you can get to the results you require within the budget you have established – based on return on investment (ROI) – then your organization is willing to adapt their business processes to the demands of the new technologies.

This really makes superabundant economic sense from a business perspective. You and your management team have already identified what needs to change and what the change should look like using the Thinking Processes (see earlier posts). You have also set rational budgets for Investment (I) based on the ROI formula. Now it is up to the technology vendors to demonstrate how they intend to effect the required changes within the Investment budget.

Once your management team has reviewed the "proofs of concept" offered by the vendors, you can make determinations if any adjustments need to be made in the benefit or ROI calculations. Such adjustments, however, should be relatively minor – not a major overhaul of the intended target.

[To be continued]

The New ERP – Part 25

Choosing a vendor or reseller

In the traditional Everything Replacement Project, there are several different paths that a firm may take to decide which reseller they wish to employ in the project. (Here I will use the term "vendor" or "reseller" interchangeably to some extent. There is real distinction, and I do not mean to minimize that difference. If your firm is choosing from among value-added resellers – "resellers" – then they have a greater opportunity to select the actual personalities that will be involved in the deployment. On the other hand, if you are dealing with a national or international vendor directly, it is quite likely that you will be "stuck" with whomever is assigned to your account by the vendor barring, of course, what could be a contest of wills over the personnel.)

The simplest and most straightforward approach is the one most often followed by small- to mid-sized firms. This one-step process may be flatly stated as: Decide which software you are going to buy, and then take whatever reseller happens to come along with that software. This simple, single-step process makes decision-making very easy, but it may not necessarily garner for your organization the best-qualified persons for achieving success in your Everything Replacement Project.

Other organizations recognize the risks inherent in not placing some kind of hurdle between themselves and a potential traditional ERP reseller. Therefore, either their management team or their hired consultant will create a vendor screening process. While the process itself takes various forms, it usually includes gathering seemingly important data about the potential field of resellers like:

• How long the reseller has been in business
  
• How many clients the reseller has
  
• How many times the reseller has implemented the software under consideration
  
• How financially stable the reseller is
  
• How many references the reseller can supply
  

Now, as important at these various aspects might be in selecting any vendor with which your firm wishes to do business, only one of these elements even approaches what might be important in helping you and your team achieve more of your goal of making more money today and in the future. Specifically, that would be the last point – client references.

Unfortunately, when most organizations get their hands on client references from a vendor or reseller, they squander the opportunity asking questions like these:

• "Was your project completed according to schedule?"
  
• "Was your project completed within budget?"
  
• "How were you treated by the reseller?"
  
• "How long did your project take to complete?"
  

Now, never mind that the differences between the project being considered by your company and the project undertaken by the reference company may be as different as night from day, what do these questions really tell you about the things you should actually be considering? Why are not there questions like the following included in the mix? Are not these the really important questions to be answered?

• "Before selling you the software, did the reseller really help you come to clear understanding of the very specific areas where improvement would lead to your firm's ability to make more money tomorrow than you are making today?"
  
• "Have you seen real and measurable improvements in your organization's ability to make more money since the reseller sold and implemented the technology in your business – over and above your preexisting growth trajectory?"
  
• "What is your calculated return on investment for the money you paid to this reseller?"
  

I am compelled to reiterate (see prior posts): Any traditional ERP effort – or any other kind of improvement project on which a firm spends its precious and irrecoverable time, energy and money – for which there is no measurable improvement in Throughput, Investment or Operating Expenses is a failure whether or not it was completed on-time, within the budget, or with huge self-congratulations.

The Toyota measure of quality

Toyota, a company that emerged from the rubble of post-World War II Japan to become the world's leading supplier of cars and light trucks, developed a very interesting concept regarding "quality." For Toyota, quality is not about defect rates or meeting specifications. Toyota's management agrees that there is only one measure of quality that counts, and that is the customer's measure.

Toyota's management principle is that the customer measures quality in two ways: the first metric is the customer's experience. Note that all of the questions in the traditional ERP's reference checking were related to the customer's experience. Toyota's second customer-centric measure of quality is the customer's results. Now, with a car or light truck for personal use, the results sought may be nothing more than ego-satisfaction (like the guy that goes out to buy a Titan pickup, or the ecology-centric individual that buys a new Prius. But, in business – in your enterprise – real results are not so ethereal.

Note that none of the questions in the traditional ERP's reference checking list of questions dealt with the vital results that drive business improvement. In my opinion, limiting reference-checking to such vain questions is only a waste of time for executives and their teams. Consider instead additional questions along these lines:

• Did the reseller demonstrate keen insight into the core business issues that are keeping you from making more money, causing inventories or demand for new investment too high, or creating undue upward pressure on operating expenses while your business is growing?
  
• Was the reseller able to work competently with your management team to unlock "tribal knowledge" so that both you and the reseller's team were able to easily comprehend what was working and not working in your organization?
  
• Did the reseller help you create a set of rational metrics by which to measure the success of your ongoing improvement efforts?
  
• Were the reseller's consultants able to help you focus your efforts and investment on the critical areas that could and would lead to making your firm more profitable in the near term, or did they replace everything and hope for the best?
  
• In short, do you feel like your organization is more profitable today – having engaged the reseller's team – than you were before?
  
• Did the reseller leave you with something truly valuable to your organization other than hardware and software?
  

Asking questions like these would surely bring to light differences between those resellers and consultants engaged in traditional Everything Replacement Projects from those delivering value-based approaches like the New ERP – Extended Readiness for Profit.

[To be continued]

The New ERP – Part 24

It is all academic

We have covered several aspects in the matter of developing a "requirements list" so far. (See prior posts.) Of course, whether you are developing your requirements list in-house or your firm is retaining as traditional Everything Replacement Project consultant to do it for you, it is entirely academic and suffers from the same bad assumptions and lack of focus.

As I am writing this, I have before me a real-life "Request for Information" (RFI) stemming from a real-life traditional Everything Replacement Project. This particular document presents 286 "requirements." Sadly, it is quite likely that the folks behind this RFI – because they are employing traditional ERP concepts and methods – have absolutely no idea which of these "requirements" reflects the small handful of things that will actually permit their organization to improve by increasing Throughput (T), reducing demand for new Investment (I), or cutting or holding the line on Operating Expenses (OE) as their firm grows. In fact, they probably "hope" – but cannot state with any certainty – that any of these requirements will actually aid the firm in growing beyond its natural trajectory as of today.

The danger of lack of focus

It is precisely this lack of focus as reflected in a 286-item "Requirements List" that drives firms to undertake an Everything Replacement Project rather than identifying and changing that very small number of things that will actually deliver results by permitting the firm to elevate or even break a constraint and, thus, to increase Throughput – or to make significant improvements in I or OE, for that matter.

The firm that unwisely elects to spend half-a-million dollars on an Everything Replacement Project when a more focused investment of some (likely, significantly) smaller amount would deliver effective and valuable improvement has wasted capital that it will never be able to reclaim.

The Everything Replacement Project approach is supported by the false underlying assumption that, if we just throw enough money and technology at our organization, our organization will somehow improve. As evidence, I quote a gentleman who once said to me the following regarding a time-consuming and costly implementation of SAP that he had ongoing in his organization: "We've spent so much money already, it's got to work." (Emphasis is his.)

This unfortunate lack of focus in a traditional Everything Replacement Project, is to be contrasted with the New ERP – Extended Readiness for Profit approach that we are introducing here. The New ERP encourages you and your management team to focus on "what needs to change" (by looking at the roots of your Current Reality Tree [CRT]) – that relatively small handful of things that will actually lead to measurable improvement. Then, and only then, should you take your precious cash and other resources to apply them in a focused way, knowing in advance the measurable outcomes you expect from each critical investment.

What does all this have to do with "software selection"?

While traditional Everything Replacement Project methods will have you and your organization searching for software (and, potentially, other technologies) to replace – well – "everything" based on the all too traditional "Requirements List," the focusing steps of the Extended Readiness for Profit method will direct your team to consider only those particular technologies that will actually lead to real and rapid improvement (read: return on investment). Rather than a shotgun approach – throwing time, energy, money and technology – at everything – the New ERP gives your management team the option to become sharpshooters for improvement and new profits.

The New ERP approach will

• Conserve cash
  
• Provide more targeted uses for capital
  
• Avoid the waste of spending on IT projects that result in little or no real value-add to the "system" – the organization, as a whole
  

Going back to the example company (see early prior posts in this series), since the management team understands precisely "what needs to change" in order to improve the "system" – the organization – as a whole (namely, integrated bar code printing, integrated and automated ASN generation and transmission, and reducing or eliminating paper-based pick-pack-ship operations), they do not need to look at replacing everything. Rather, this wise team is prepared to turn to vendors and do "software selection" based on a very small domain of critical functions.

Rather than spending several hundreds of thousands of dollars on an Everything Replacement Project, our example team can set – as we previously described – a reasonable budget for the accomplishment of just the critical changes they have identified and for which they have already created measurable objectives.
[To be continued]

(c)2008, 2009 Richard D. Cushing