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 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 13

Calculating an ROI for a specific improvement initiative

Here is something that is rarely done effectively in preparing for traditional ERP – an Everything Replacement Project: our management team at the example company (see prior posts) now has everything it needs to calculate ROI for the specific warehouse and pick-ship initiative they have under consideration. Here is the formula they will apply:

ROI = (delta-T – delta-OE)/delta-I

Where T = Throughput
OE = Operating Expenses
I = Investment

Substituting into this formula the numbers calculate by the team (see prior post), we get:

ROI = $0 – (-$168,942)/$75,000 = 225.3% in the first year

"But," you say, "this company will not experience the full $168,942 in savings in the first year!" And, of course, you are correct. The management team recognizes this also. So, they quickly do some "napkin" calculations and estimate that, as revenues grow, they may reap about 40% of the calculated annual savings through deferred hiring of additional FTEs (full-time equivalents) in the first 12 months following the implementation. This means our first-year calculations need to be adjusted as follows:

ROI (first year) = (0.4 * $168,942)/$75,000 = 90.1% ROI in the first year

What these calculations tell the management team is this: "If we invest up to $75,000 in an initiative to improve processes highlighted by our Current Reality Tree (CRT) (see prior posts) in the areas of bar code printing, ASN (advanced shipping notice) processing, and picking-shipping operations; and our Throughput continues to grow; then we ought to see about 90% of the money invested in this initiative returned in savings to the organization within the first 12 months following deployment." (Note: The real firm upon which this scenario is predicated had been experiencing double-digit growth in sales for more than five consecutive years when I was introduced to them.)

This also tells the team that, in subsequent full years, since no additional investment is required (unless they should wish to capitalize some portion of the software maintenance), the company should continue to reap about $169,000 in annual savings as a reward for this effort. (Note: If anyone wishes to extrapolate further from these figures, it would be possible to calculate the Net Present Value [NPV] of the series of estimated cash flows resulting from this or any other particular Extended Readiness for Profit – the New ERP – initiative. While this is not generally required for initial decision-making, the true value of the initiative – and, indeed, the value of the firm as a whole – is best represented by the NPV of "the system.")

[To be continued]