23 December 2009

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).

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