01 October 2010

On Seeking Success

In a recent informal poll I conducted, I asked "Which ERP success is most important to your organization in the long run?" I offered the following options:
    1. An ERP project that is on-time and within budget
    2. An ERP project that increased throughput (i.e., revenues less truly variable costs)
    3. An ERP project that reduces inventories or the need for other investments
    4. An ERP project that reduces operating expenses

I was somewhat dismayed when the results were that fully two-thirds of respondents count success in ERP as a project that reduces operating expenses. The only worse answer, in my opinion, would have been "An ERP project that is on-time and within budget."

Here's why I believe that is true.

First, consider that I can dramatically reduce the operating expenses of any business enterprise virtually over night -- saving the organization, perhaps, millions of dollars every year -- and I can guaranty those results. All I have to do close the business. That automatically reduces operating expenses to zero.

If an organization is seeking "success," and they are making progress in that direction. It would seem to me that they would want more and more of whatever it is that they are calling "success." That would just make common sense, would it not?

But executives and managers that pin their "success" hopes on "reducing operating expenses" want only "partial success." Few of them are really endeavoring to reduce operating expenses to the "ultimate prize" of zero dollars.

What is worse is that they constantly face the law of diminishing returns. If they reduced operating expenses last year by five percent, the chances that they can reduce costs this year by another five percent are pretty slim, and even if they do, this year's five percent will still be a smaller actual dollar amount than last year's five percent. And next year will require even more effort for less dollar-savings.

However, for people caught in cost-world thinking, this does not seem foolish. They see no contradiction or futility in these efforts (sadly), ususually because that is all they know or have been taught to think.

On the other end of the spectrum are those one-in-three executives and managers who have discovered that real and enduring success comes from the "throughput" side of the business. If you can increase T (Throughput, which is Revenues less Truly Variable Expenses) this year by five percent -- all else being equal -- then you have made gains. In fact, if operating expenses have not increased, then that five percent increase in T falls directly to the bottom line just like a five percent reduction in operating expenses does.

What is even more exciting is the fact that there is no law of diminishing returns at this end of the enterprise. If you are able to increase T by five percent next year, that five percent will bring more dollars of profit to the bottom line than last year's five percent increase did. And next year's five percent will make an even larger contribution to stakeholders in the business.

Success on this end of the business -- if repeated year after year -- leads to real success, not "closing the business" (as "ultimate success" in reducing operating expenses does).

So, why are not more managers and executives seeking ERP success differently?


Robert Merrill said...

I'm assuming your last question isn't rhetorical. Here are three possible answers.

1. The dominance (stranglehold) of cost accounting in management education and practice?

2. Project-management tradition (scope/schedule/budget=success)?

3. Local optimization (evaluate one exec for driving revenue and another for reducing cost, and hoping that the net result is increased profit)?

Anonymous said...

Great post! I've been promoting this idea in the SAP world for some time.

Unfortunately too many of the System Integrators only understand cost reduction as well. There is little understanding of what drives business.

check out the site some time:


RDCushing said...

Thanks for you comment and it looks like you've got some great insights on your blog, as well.