24 December 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

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