How not to set your IT budget

If you have read my posts in the past, you will know that I advocate the use of the following formula for determining the ROI for any given improvement project (whether IT-related or not):

Where

• ROI = Return on Investment
• delta-T = Change in Throughput, and Throughput is defined as Revenues less Truly Variable Costs (TVC)
• delta-OE = Change in Operating Expenses
• delta-I = Change in Investment

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Incidentally, where there is no change in I (Investment, including changes in inventory) or the change in I is negative, then projects can be compared based on profit alone. That formula is simply:

Profit = delta-T – delta-OE.

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However, here’s what far too many IT project’s ROI calculations look like:

ROI (don’t know) = ((never took time to estimate it) – (never took time to calculate it)) / $200,000

 

The only figure the company knows going into the project is the estimated “investment” or “cost” of the project.

The common excuse

The common excuse for not calculating an ROI for an improvement project is that changes in Throughput and changes in Operating Expenses are “too hard to estimate,” and “if they are estimated, they will be wrong anyway.”

This argument is specious on the face of it. Think about it!
The $200,000 estimated “cost” or “investment” value of the project is likely to be wrong, too. But that does not keep the CIO and CFO from making their best efforts to calculate that value.

The Real Reason

Of course, the real reasons that CIOs and CFOs do not take time to calculate a real and measurable ROI for their IT (and other) improvement projects is likely two-fold:

1. Too many CFOs and CIOs are under the wrongheaded impression that the value of IT (or other improvements) is both “automatic” and “cannot be measured.” When it comes to new technologies they have succumbed to the strange notion that new technologies are like an engine additive for business—you just pour them in and somehow your business will run smoother, faster, longer and get higher mileage! And, just like people who buy engine additives, they never take time to calculate whether there was any real benefit from using the product.
   
2. They have never taken time to actually determine what root-cause they are attacking with the IT (or other) improvement project, so they do not really know whether the project will actually lead to increased Throughput or will, in fact, drive down or hold the line on Operating Expenses. In fact, they probably do not even know what the “weakest link” is in their customer-to-cash stream or whether that weakest link is internal to their organization or whether it lies somewhere outside their organization in their supply chain.

Isn’t it time to stop that kind of folly? Can businesses still expect to thrive and grow without taking a sound look at how and why they are spending their most valuable resources—time, energy and money?

I don’t think so.

What does technology project “success” mean to you?

I’m sure many of you are familiar with the common Venn diagram of “project management success.”

PMI (Project Management Institute) and others advocate that a project is successful if it is on-time, within the budget, and of high quality (or, at least, meeting the project’s original standards for quality). Of course, this is true when compared to the alternatives of over budget, late or of poor quality.

But, in the business world, we shouldn’t undertake projects—any kind of improvement project—for the sake of the project itself. So, while this might a satisfactory view of the project manager’s or the project team’s performance, it really doesn’t tell us very much about the net effect on the business.

Another popular Venn diagram used relative to technology deployments is the processes-people-technology one.


Here the aim is assure that the technologists involved in the project carefully consider the business processes that must be supported by the technologies deployed. Furthermore, the IT folks should also understand the people involved and they will desire to apply and benefit from the new technologies.

However, once again, we should be reminded that a business enterprise should never undertake any kind of improvement project merely to automate business processes for automation’s sake. Nor should they undertake an improvement project with the sole aim of people-pleasing.

In a for-profit organization, there are proper metrics to use for IT decision-making, but these are not the ones.

Consider, for example, the business that spends $150,000 on an IT project. The project is deemed to be “a resounding success” based on the following results:

1. The project was completed on time
2. The project was completed under budget
3. The project met all of the initial quality requirements
4. The project’s technology deployments properly supported the intended business processes
5. The project’s new technologies were well accepted and utilized by the people involved
6. The company was no worse off after this major undertaking (and everyone has heard the horror-stories of huge IT failures)

So, the project management team all got big pats on the back and a few VP’s got bonuses and all the stockholders and stakeholders are pretty happy about the whole “successful project” thing.

But, my question is: Should they be happy?

They just spent $150,000 with an admitted ROI (return-on-investment) of a big fat ZERO!

To me, that’s just not good business!

There is a Venn diagram that I, personally, have never seen, but it is the one Venn diagram that makes sense for business investments of every kind because it includes the three factors that should always be considered for “success.” Here it is.

Here are the questions that should be asked about every improvement project—IT-related or not:

1. How much does the project increase Throughput (where Throughput is defined as revenues less truly-variable costs directly linked to producing the revenues)?
2. What affect does the project have on Operating Expenses? Do they go up or down? If so, by how much? Is the change “real” or a calculation based on “savings” when no one will actually be laid-off or no additional Throughput will consume the man-hours “saved”?
3. How much will our Investment change? Besides (as in our example) the $150,000 we will invest in the project itself, will our inventory go up or down? Will we need to invest in new buildings, or can we sell off some capital equipment and increase our cash?

When you have the answers to these questions you will have the answer as to whether your technology project was just a “project success” or a “business success.” And, while the numbers may not be precise, knowing that they are approximately right will give you far better understanding of your company’s success or failure than not considering them at all.

What do you think?

[Cross-posted at Kinaxis Supply Chain Expert Community.]

Strategic Alignment of Information Technologies – Part 3

The Income Statement

A company’s income statement[1] is a financial report that tells us what transpired over a range of dates that led to either profit or loss for the organization. Just like we have laid out balance sheet numbers side-by-side for easy comparison, we can do the same thing with income statement figures, as well.
By looking at ABC Widgets Manufacturing’s Income Statements spreadsheet, one might immediately note that year 2004 was a very good year for the company. The firm made PBIT (profit before income taxes) of $126,000 on sales of $8.1 million. Revenues for 2004 were nearly $850,000 more than the average in years 2005 through 2008.
Of course, one cannot help but notice that NPAT (Net Profits after Taxes) declined dramatically between 2004 and 2007, where it reached its nadir of only $2,000. Things were not much better in 2008 where it rebounded to only $9,000 on more than $7 million in revenues.
Once again, these are interesting observations, but it is still hard to tell – at a glance – the management implications of some of these numbers. What might help us would be looking at some of the working relationships (ratios) between various numbers supplied to us from this historical data.

Ratio Analysis

Ratio analysis allows us to look at a set of calculated values – calculated from the underlying data we have just reviewed – in order to assess more quickly our organization’s positions and trends relative to

1. Solvency
2. Safety
3. Working Capital
4. Profitability
5. Asset Management

Solvency Ratios

Current Ratio = Current Assets / Current Liabilities  Interpretation: Higher is better

This ratio simply tells you, at a glance, how many dollars your organization has available in “current assets” to meet the demands of “current liabilities.” As we can see, in 2004, ABC Widgets had a little over $2 ($2.05) in current assets to satisfy every dollar in current liabilities. However, by 2008, that number had dwindled to only $1.35 to cover every dollar in current liabilities.

Quick Ratio or “Acid Test” Ratio = (Cash + AR + Marketable Securities[2]) / Current Liabilities  Interpretation: Higher is better

The Quick Ratio is referred to as the “acid test” of solvency because it looks only to the firm’s most liquid assets to meet the requirements of current liabilities. In 2004 our sample company had nearly 80 cents to satisfy every dollar in current liabilities. By 2005 that number had fallen to only about 50 cents for every dollar in current liabilities and has remained almost unchanged since.

Safety Ratio

Debt-Equity Ratio = Total Liabilities / Equity  Interpretation: Lower is better

The intent of this metric is to indicate the ability of the firm to withstand adversity (from a financial perspective only, of course). It may be understood as the “risk” metric, so the higher the value, the higher the risk. Over the five years we are considering here, this firm allowed its Debt-Equity (D-E) ratio to drift well above 1.30 at times, but has recovered to the present 1.37. The “1.37” means that the firm owes $1.37 for every dollar it has in equity. Therefore, in the midst of adversity, even if the company could not meet its obligations from current assets, the firm’s equity could likely step up to help meet the challenges.

Working Capital

Working Capital = Current Assets – Current Liabilities  Interpretation: Lower is better
Working Capital is the spread (in dollars) between current assets and current liabilities. It measures how many dollars the firm has tied up in its supply chain. In general, it is better to reduce this number. Organizations with higher cash velocities tend to have less cash tied up in their supply chain.[3]
Cash Conversion Cycle = Inventory Days + AR Avg. Days – AP Avg. Days  Interpretation: Lower is better
An organization’s Cash Conversion Cycle measures how long – how many days – cash is tied up in the supply chain on average. Again, fewer days in a firm’s Cash Conversion Cycle is better because it is indicative of one or more of the following:

• More rapid inventory turnover
• Improved AR average days-to-pay
• Faster payment of AP vendors[4]

[To be continued]
©2010 Richard D. Cushing

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[1] Sometimes referred to as a “Profit and Loss Statement”
[2] In our examples, the firms have no marketable securities.
[3] Some speed-demon companies even manage to have “negative” Working Capital through special supply chain arrangements.
[4] Only vendors that supply inventory or other product-related services should be included in calculating AP Average Days to Pay.

Strategic Alignment of Information Technologies – Part 2

Setting Strategic Goals

Leveraging Technologies for Sustained Competitive Advantage

What makes new technologies valuable to a business?

• Answer: In general, the ability of the technology to contribute to a sustained competitive advantage[1] is what makes it valuable to an enterprise.

What about a new technology allows it “to contribute to a sustained competitive advantage”?

• Answer: Scarcity – the less available it is to your competitors, the larger will be your advantage in leveraging it
• Answer: Innovation – the more innovatively your organization applies specific technologies, the less likely your competitors will be able to achieve the same results or benefits

Consider the example of steam engines. When steam engine technology became available, for those that had direct access (e.g., they could afford to buy steam powered equipment), steam engine technology gave them a significant advantage over competitors that could not pay the entry costs to gain access to that technology. Similarly, those that did not have or did not require direct access, but could benefit from indirect access (e.g., they could afford to ship goods faster on steam ships or by steam locomotive), also had a significant and sustained competitive advantage over their competitors that had no such access to the new technology.

Basic Information Technologies

Today, information technologies provide only the following basic services:

• Data capture
• Data storage
• Data processing
• Data retrieval
• Data transportation (communications)

Since none of these basic IT services is any longer scarce, simply applying the technology in a routine sort of way – as a “copy cat” – cannot provide any long term competitive advantage to your organization. In all likelihood, applying IT in typical fashion will provide no competitive advantage at all.
At best, applying non-scarce technologies in a way that simply matches your competition might help you take your firm from “failing” to “competing” (see accompanying diagram), but such an application of technologies could not, in itself, take your business from “failing” to “leading.”

Strategic Planning Begins with Understanding Where You are Today

Since most organizations begin planning their strategies based on where they have been and what they already know, they generally turn to their in-house history-keeping systems – that is, their accounting applications.[2] We, too, will begin our journey by looking at a sample company’s historical information and considering some of the implications of the data presented.

The Balance Sheet

As many of you already know, the Balance Sheet is a “snapshot” of a firm’s financial position with regard to three categories: 1) Assets – what the company owns, 2) Liabilities – what the company owes, and 3) Equity – the difference between the value of its assets and its liabilities or what it owes to its investors.

In preparing our strategies for fiscal year 2009, our company “ABC Widgets Manufacturing” is looking back over five years of history. The organization has a balance sheet with a little less than $3.7 million in assets, about $2.1 million in liabilities, and $1.55 million in equity. With a quick glance over the spreadsheet we’ve laid out, one might notice the following:

• While total assets have remained fairly steady over the last five years, cash has shrunk by about 15% (down from $102,000 to $85,000) and accounts receivable are also diminished slightly.
• The company has invested significantly in the following assets over the five years we’re reviewing:
  
  • $590,000 in land and buildings
  • $354,000 in equipment
  • $97,000 in furniture and fixtures
• Short-term bank notes payable have zoomed from $211,000 to $589,000, an increase of $378,000 or about $95,000 per year (average).
• Accounts payable have also increased about 34% between 2004 and 2008, moving from $558,000 in 2004 to $750,000 in 2008.

While these are interesting facts in themselves, they really tell us very little about what might be good or bad about operations in general. So, let us turn to the same company’s Income Statements between 2004 and 2008.

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[1] “Sustained competitive advantage” is a relative term. In some rapidly evolving industries an advantage of six months or a year may be enough. In other industries, perhaps “sustained” would be an advantage lasting a year, two years, or even longer.
[2] We call accounting systems “history-keeping systems” simply because that is what accounting really is – it is the fiscal record of your organization’s historical transactions. While the historical data may be used to produce forecasts and budgets of various kinds based on purely historical data or upon a combination of history and “forecasting parameters,” the accounting system is useless in actually connecting “forecasts” with the actions required to achieve those forecast results.

[To be continued]

©2010 Richard D. Cushing

Strategic Alignment of Information Technologies – Part 1

The Changing Role of Information Technologies

Fewer than 50 years ago (in 1965), U.S. firms were investing less than five percent (5%) of their capital budgets in information technologies (IT). By the early 1980s, about 15% of capital expenditures in U.S. companies were going toward IT. A decade later (the 1990s), U.S. firms had doubled that number and were making capital investments in information technologies at a rate of about 30%. By 1999, in fear of significant failures due to the feared “Y2K problem,” U.S. firms were investing in IT at a rate approaching 50% of all capital expenditures. Even today, due to the challenges of competing in an unmistakably global economy, U.S. companies continue to invest huge dollars (about $2 trillion every year) in new information technologies.

By the mid-1980s, the increasing power of the (then) new Personal Computer (PC) was putting computing power within the reach of the pocketbook of even the smallest “mom-and-pop” operations. There seemed to be a growing consensus amongst managers of every ilk and in every trade and industry that, “If I could just get my computer systems to collect enough data about what my business is doing and how it’s doing it, I could manage flawlessly.” Some companies have been investing in information technologies, sometimes without much more thought about the investment than the underlying fear that if they did not invest in technology, they would somehow be left behind entirely.

Underlying Assumption

As the power and pervasive presence of information technologies have increased, many executives and managers have simply made the assumption that the strategic value of IT has increased right along with it. Some have made this assumption based more on what they see everyone else doing than upon any actual analysis within their own organization or upon any actual effort to align IT spending with strategic or tactical gains.

This willy-nilly approach to IT investment has been somewhat underwritten by the fact that many small businesses have no actual strategic planning mechanism in place anyway. The organization’s planning about the future or thoughts about how to attain certain future goals may still be contained wholly or in substantial part solely in the head of the owner (and maybe a handful of key managers).

Making the Leap from Entrepreneurial to Enterprise

One of the things that occurred in the late 1980s and through the 1990s was a relatively sustained period of economic growth in the United States. Fed directly or indirectly by the rapid opening of both domestic and global markets accessible via the Internet, there were thousands of new start-ups. Many of these new entrepreneurial organizations found rapid acceptance and grew at startling rates from miniscule one or two person operations to firms that employed hundreds or even thousands.

One of the challenges faced by owners and managers in organizations that find themselves forced to transition from entrepreneurial to enterprise is the discovery that what worked effectively when managing an organization with 15 or 20 employees in a single office may not be effective in an enterprise with 1,500 employees scattered geographically. Entrepreneurial managers were finding themselves forced to somehow capture the “tribal knowledge” resident in key personnel who still carried the vision that had led the organization to its initial success. Many times, the “tribal knowledge” was most easily captured and codified into “business rule” within new IT systems.

This series is intended to help executives and managers – whether or not your organization presently has a standard method for setting strategic goals – to establish some effective operational goals; to quantify the expected results as forecasts based on the goals; and in the final step, to offer some ideas about how budgets might be established and new technologies engaged to help achieve the firm’s goals.

[To be continued]

©2010 Richard D. Cushing

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 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 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

The New ERP – Part 22

What else might change the value proposition of a technology initiative?

We have already pointed out the foibles of the traditional "aim-and-shoot" approach to IT initiatives and their proclivity toward considering every matter in terms of "cost," rather than "value." (See prior post in this series.) We even pointed out some of the factors that may change the value proposition for an IT initiative well after the project launch. But, what else might have an effect on the value proposition of an IT project aimed at "improving" a company like yours?

Earlier we mentioned things like the introduction of new products, changes in the economy, or even public policy changes that might change the value proposition for a technology deployment. Now, however, we need to turn our eye to technology-specific elements that might also affect the value proposition of a project already underway.

I am not sure why, but my more than 25 years in dealing with business technologies has clearly proven to me that firms reaching out to make technology purchases assume (far too frequently) some measure of clairvoyance on the part of their technology vendors. It is clear, and the purchasing companies' management teams seem to recognize, that they cannot know everything there is to know about the technology they are buying. However, that same management team will somehow come to the tacit conclusion that the technology vendor must know and understand all there is to know about the company that wishes to buy and deploy their technology.

Okay! Maybe I'm exaggerating; but just a tiny bit.

The managers on the buying side may not actually assume that the vendor's team understands or knows everything about the buying company's firm and operations, but they generally do assume that the vendor's team knows and understands enough about the prospective purchaser's company and operations to ask every possible question in order to assure that every facet of the product or services provided will fit precisely the customer's expectations. Never mind that "expectations" are never plainly visible to either party in the transaction. Expectations far transcend anything placed in any agreement or "requirements" document. Expectations may be reduced to the number of mouse-clicks it takes to navigate a certain transaction, or the "look-and-feel" of screens, or where data is placed in the user interface. The list of expectations is, literally, without end. In fact, the purchasers themselves may not know or be able to articulate their expectations. They only know when their expectations have not been met.

The point is this: As a buyer, you and your management team need to recognize that, when first engaging a technology vendor, the vendor knows proportionately as little about every facet and detail of your enterprise as you know about every facet and detail of their technology and services. In essence, you have witnessed "a demo" of their technology and they have experienced "a demo" of what your company is like. Therefore, it is incumbent upon you, as the buyer, to beware – caveat emptor. You and your team must thoroughly and precisely know what you want and need the technology vendor to do in order to effect the change you have in mind – the change derived from your Current Reality Tree that will help your company reach more of its goal of making more money.

At this point, an "on the other hand" would be nice to hear. Am I right?

On the other hand, there actually is an upside to this mutual blindness between technology seller and technology buyer. Frequently I have experienced situations where, as the vendor and the buyer learned more about each other's technologies (on the one side) and operational requirements (on the other), fresh new insights emerged about how the buying firm could leverage to great advantage previously undisclosed features or functions in the technology. A management team employing the value-based New ERP approach can readily see that the presence of some unanticipated feature, function or capability might radically increase the value proposition to the organization. Unfortunately, this kind of value serendipity is sometimes missed entirely by tradition-bound managers and vendors totally enmeshed in "meeting documented requirements," deadlines and budgets.

[To be continued]

©2008, 2009 Richard D. Cushing

The New ERP – Part 19

Another reason traditional "requirements gathering" approaches may be unnecessary

As we have already discussed (see prior posts in this series), some of the reasons that traditional ERP – Everything Replacement Project approaches to "requirements gathering" – whether internal or as performed by a vendor or VAR (value-added reseller) – fail to deliver real value or results for the organization purchasing new technologies. Now we want to turn our attention to one other matter that we believe will help you see why traditional approaches to "requirements gathering" may be a huge waste of time, energy and (in some cases) money.

Think back to the scenario we described (in a prior post) where some executive makes the announcement regarding his firm's intent to replace their existing ERP software, sending off silo leaders to develop a list of "requirements." Two or three weeks later the firm has assembled a list of 300 or so "requirements."

Unless the organization is very unusual, the truth is that more than 80 percent of the typical "requirements list" contents will be found in some form or other in almost all of the contending software packages to be considered. In the middle market – software designed for small- to mid-sized businesses – there are far more similarities in features and functions across the different packages than there are differences. Furthermore, most of the distinctions (i.e., differences) between the most common competitors in mid-market ERP are to be found around the edges of the application software, not in its core functions. For this reason, it is quite likely that about 80% of the "requirements" collected will be present and therefore little value was added to the process by collecting and documenting such "requirements."

Next, it is worth noting that many of the so-called "requirements" listed by staff from the various organizational silos will not be genuine "requirements" at all. Many so-called "requirements" will be nothing more than what the silo staff is used to in their existing software application. Stating these as "requirements" merely fixes in the mind of staffers from the various functional silos that they can and will all get a relatively precise duplication of existing functions plus added features in their functional domains. This sets many wrong expectations and may lead to demands for modifications and customizations where, in a more open-minded environment, adaptation to new methods or processes would have been perfectly acceptable or even an improvement in itself. Never mind whether any of these now cast-in-concrete "requirements" will actually have any effect on increasing Throughput (T), reducing Inventories or demand for new Investment (I), or cut or hold the line on Operating Expenses (OE) while allowing the firm to sustain significant growth.

[To be continued]

The New ERP – Part 18

Post-sales requirements gathering

As we continue our review of traditional ERP – Everything Replacement Project methods and processes, while comparing them to the New ERP – Extended Readiness for Profit, we have been discussing the various aspects of "requirements gathering." So far we have covered both in-house and pre-sales requirements gathering. However, even if one or, indeed, both of the preceding forms of "requirements gathering" have been performed, it is not at all unusual for yet another aspect of "requirements gathering" to be done following the close of the software sale. We refer to this, naturally, as post-sales requirements gathering.

Many technology vendors and value-added resellers (VARs) maintain a process that looks something like this:

What's wrong with this picture?

The problem is that, most likely, it was the salespeople that did the pre-sales high-level requirements gathering. Then, they sold your company the technology!

Now, after you and your organization have already made what is probably a non-refundable purchase commitment of their technology, the vendor is sending in the people that really know whether the technology is "a good fit" for your specific organization and its application of it. Only now are they discovering your real and practical requirements.

Of course, the vendor's technical team's analysis will still not be based on a holistic view of your organization – they will not be looking at your entire organization as a "system." They will be looking at individual organizational silos and functional areas, frequently assigning different personnel to oversee "requirements gathering" in the different silos. Supposedly, this is to make things "better," because the different persons will each be "specialists" in their respective assignments. But, if they are like far too many vendors and resellers, no one has the training or experience to really see how your organization functions as an integrated "system" or "chain" of dependent events and actions. Thus, their "requirements gathering" will also fail to seek out and discover how to optimize the "system" in order to help your organization achieve more of its goal to make more money tomorrow and in the future.

In the best-case scenario, this post-sales "requirements gathering" process will stumble upon one or more of the things that must change to increase Throughput (T), reduce Inventory or demand for new Investment (I), or hold the line on Operating Expenses (OE) while permitting your organization to sustain substantial growth. Absent a holistic – a "system" view and theory – this new "requirements gathering" team will still be operating entirely under the assumption that if, in the Everything Replacement Project, they improve every functional area or even some functional areas as a result, the whole organization will benefit and be more successful at achieving its goal. As we have seen, since an organization is a "chain," only strengthening the weakest link will improve the organization as a whole. Time, money and energy spent elsewhere are substantially wasted.

That was the good news. Here's the bad news:

In the worst-case scenario, this new "requirements gathering" team will complete their more detailed "requirements gathering" and determine that, yes, they can make the technology that you have already purchased "fit" your firm's "requirements," but it is going to take a whole lot more time and money than you and your management team had anticipated. But, what can you do? You've already made an irrevocable commitment to purchase the vendor's technology.

If your team has been working along with us up to this point, you may have recognized that the work you have done in creating your own Current Reality Tree (CRT) and the analysis of the "roots" of your CRT was your "requirements gathering." If you have done your work correctly and effectively, you already know the critical requirements you must address with technology (where it applies). In the example company we have been using (see prior posts), the management team has already identified (among others) the following critical requirements that will require technological support in order to improve the performance of the whole "system":

1. Integrated bar code printing
   
2. Integrated ASN (advanced shipping notice) generation and processing
   
3. Reduction or elimination of paper-based picking and shipping processes
   

Our example firm's management team is already well prepared to seek from vendors and resellers specific and targeted "requirements" focused on the specific and targeted functions that must be improved (changed) to increase Throughput (T), reduce Inventories or the demand for new Investment (I), or slash or hold the line on Operating Expenses while sustaining substantial growth. They do not feel the need to do an Everything Replacement Project – traditional ERP, because they are already well aware of the few and limited things that need to change to bring effective improvement in moving toward their goal of making more money.

[To be continued]

The New ERP – Part 15

Setting priorities

If you and your management team have been working along with this series on The New ERP – Extended Readiness for Profit, then you have already created your organization's CRT (Current Reality Tree) and discovered what needs to change. Also, you have determined some potential courses of action – some answers to what the change should look like and how to effect the change – based on the roots found in your CRT. Now it is time to start setting priorities between the options that lay before you.

As we pointed out earlier, your organization's "bottleneck" is the choke-point in your system that reduces the flow of Throughput (T) into your organization. If you have identified your "bottleneck" or constraint, then you should always address your constraint first. In effect, you want to strengthen the weakest link in your chain of Throughput-producing functions. However, how should you and your management team prioritize multiple improvement projects that may each lead to improvement in organization's "bottleneck"?

There are two basic formulas to apply in making such evaluations and setting priorities. For proposed initiatives that require no additional investment (I), simply comparing the Benefit value is generally sufficient, and the following formula should be applied:

Benefit ($) = delta-T – delta-OE

Where, T = Throughput (Revenues less Truly Variable Costs)
OE = Operating Expenses

Where additional Investment (I) is required to make the proposed changes, then apply this formula:

ROI = (delta-T – delta-OE)/delta-I

Where, I = Investment
(including increases or decreases in inventories)

[Also, see definitions in Part 1 of this series.]

You will undoubtedly notice that the value of "Benefit ($)" is nothing more than the top portion of the "ROI" calculation formula. Therefore, while initiative-specific ROIs may be calculated only for those changes that will require a change in Investment (i.e., delta-I is not zero), the "Benefit ($)" value for any number of change initiatives may be compared. (This is also true for the Net Present Value [NPV] of the estimated multi-year series of "Benefit ($)" calculations for an array of different proposed initiatives.)

Once your team has calculated the Benefit or ROI, or both, for the potential change initiatives suggested by the analysis stemming from your Current Reality Tree, you can then set them in priority order. Those initiatives that reap the greatest estimated "Benefit ($)" or greatest relative ROI should be undertaken first, then the initiatives that produce lesser values may be considered for action.

My recommendation, however, is that before your team takes on subsequent improvement projects, they should reassess the Current Reality Tree to be certain that changes made in prior initiatives did not have unexpected affects that change other aspects of your reality. Addressing new or slightly different roots may be required, or perhaps you will discover that having dealt effectively with one root, your system has reaped unexpected positive results in other areas, as well.

[To be continued]

The New ERP – Part 14

Compare with Traditional ERP – the Everything Replacement Project – approach

Let us stop to compare where our management team is now in its decision-making process with what an organization that embraces traditional ERP – the Everything Replacement Project – might be going through in their processes.

How do most small- to mid-sized businesses go about setting budgets for their major or minor IT initiatives? We will take a look at a few of the methods I have run into over the years:

• Don't set a budget: Far too many firms simply find out what the executives and managers think needs to be done, and then get quotes from some vendors or resellers on what it will cost. This gives them the "cost" – assuming it is accurate, but many times it is not. As for "benefits," may management teams just "expect improvement" in some unquantified and unquantifiable way. They don't have a "budget" and they don't have an "ROI." Furthermore, they generally don't measure the results of "improvement" afterwards either.
  
• Educated "guess": In such cases, frequently the CFO, the president, or someone from IT is simply asked to "put together some numbers." Frequently, these almost exclusively "cost" numbers come from telephone conversations with vendors or resellers, Internet searches, or conversations with people from other companies that have done something similar. Again, in far too many cases, the management team does not even attempt to quantify the "benefits" or calculate an ROI for the proposed initiative.
  
• How much can we afford? Naturally, this attempt at "budget"-setting comes directly from cost-world thinking and entirely neglects the fact that, if the organization is going to see no increase in Throughput (T), no decrease in Inventory or Investment demands (I), and no significant decrease or future savings in Operating Expenses (OE), then the budget that should be assigned to the project is zero-dollars.
  
• Find out: This approach is almost equivalent to "Don't set a budget" above inasmuch as the method (if you can call it that) amounts to "finding out" how much an Everything Replacement Project will cost, then factoring it for "overruns," which have come to be expected in the industry. Again, this approach has no bearing on the value the traditional ERP project will bring to the organization, only the anticipated "cost" to the firm accompanied (frequently) by only the vaguest of notions as to how the change will actually increase Throughput (T), or reduce Inventories or demand for new Investment (I), or drive-down or hold the line on Operating Expenses (OE) while sustaining growth. Unfortunately, often times even the "growth" itself is merely assumed.
  
• Comparatives: This approach is simply a variation on "Don't set a budget" or the "Educated 'guess'" methods. Here the way it's done is to get the CEO or other executives to ask their golfing buddies or other industry friends (and maybe even relatives) how much their companies paid for their last Everything Replacement Project. Once again, no focus is placed on specific areas of improvement and the far too frequently the estimates of "benefits" and "ROI" are vague – to say the least.
  

Now, I know you probably laughed out loud (or at least chuckled to yourself) when you read some of the above "methods." The fact is, it is funny to read these when the truth is laid out in some embarrassingly plain language. However, as sad as it may be, many of the budgets for IT initiatives I have run into over the years have no more substantial basis in reality or value for the enterprise what I have described above.

Of course, given the scenario for "budget setting," it can hardly be a surprise to find that many owners, executives and managers make many, many wrong decisions about what kinds of investments their firms should make in information technologies – or other improvement efforts, for that matter. They also frequently make wrong decisions regarding how much to spend on improvements in any given functional area, since they are quite often at a loss to link daily execution improvements with financial results.

By the way, as you can see from the approach we have laid out in our radically new Extended Readiness for Profit – the New ERP, it may be as foolish for a CEO to under-invest in technology (or other improvements) – because she does not understand the dollar-benefits that would be delivered by such investments – as it is to over-spend on technologies. (Here I draw the clear distinction between investing and spending. An organization is investing if they have calculated the benefit relative to the expenditure; whereas, an organization is only spending if they have not calculated the benefit relative to the expenditure or no actual increase in Throughput, reduction in other Investment, or decrease in Operating Expenses will likely result from the expenditure of time, energy and money.) Either way, the CEO is probably doing long-term damage to her own organization – making it less capable, not more capable, of delivering more profit today and in the future.

This clearly highlights the value of the Current Reality Tree (CRT) (see prior posts) in helping your management team identify "what needs to change" before taking any steps toward assuming that new technology – applied in a general way – will deliver some general, but unquantifiable, benefit to your organization.

If you and your management team are following along in our Extended Readiness for Profit – the New ERP approach for your own organization, then you now need to take some time to calculate the values for the changes in T, I, and OE with regard to the actions you may have under consideration – whether they are technology-related or not. Your proposed actions, of course, should be based on the findings at the roots of your CRT. (For those of you just catching up, you will probably need to go back and read prior posts on The New ERP.)

[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]

The New ERP - Part 3

Failure No. 3: Substantial -- sometimes even huge -- budget overruns
Unfortunately, the causes of the "go-live" delays typically are also the major contributors to exorbitant budget overruns, too. Executives and managers that have lost sight of specific and measurable objectives -- or they never had any such objectives in mind from the beginning -- are likely to make many foolish decisions related to customizations and modifications. Having lost focus -- or never having had any focus -- such projects will soon take on a life of their own. Managers may be incapable of bringing them back under control without the direst of actions.

Failure No. 4: Stopping or slowing production and delivery
This is clearly the worst-case scenario: the very technology investment undertaken with some vague and likely unquantified hope of delivering business advantages becomes an albatross around the neck of the whole organization. Rather than delivering a "sustainable business advantage," the new technology bogs down or stops the organization's ability to produce Throughput entirely.

Almost without exception, this dire result can be traced back to a poor understanding of the organization's real situation prior to the decision to deploy new technologies. The circumstances may be further aggravated by the fact that the organization did not obtain a valid proof-of-concept from the technology vendor before the purchasing decision was made and the Everything Replacement Project (traditional ERP) undertaken.


The Everything Replacement Project (traditional ERP) decision to buy

Since the introduction of the computer especially, executives and managers with money to spend on technologies have often carried about within themselves a peculiar mindset. That mindset tells them, "If I just had more data; if I just knew more details about my enterprise, then I could manage better. In fact, if I could know in detail everything about my enterprise, then I could manage perfectly."

Of course, traditional ERP (Everthing Replacement Project) vendors prey on this mindset. In fact, they often help instill and solidify this mindset within their prospects and clients. As a result, the decision-making process regarding whether executives and managers should buy new or more technology often follows along these lines:

There are at least two incorrect assumptions in this chain of reasoning.

The first wrong assumption is that "information" is the key to better management. Information is not the key to better management. Knowledge is the key to better management and information is not knowledge.

Data gathered and presented by technology is a representation of what your organization has experienced. That experience (history) may include what you sold, some cost data, some profit data, data about your expenses, and so forth. However, as W. Edwards Deming put it so plainly, "Experience teaches you nothing without theory." He also said, "Knowledge comes from theory."

[To be continued]

Contact me!

...

The New ERP - Part 2

So, what's wrong with traditional approaches to ERP? Why do so many ERP implementations lead to disappointing results? Why do so many companies spend so much money on new technologies and then end up reaping so little return on their investment?

Failure No. 1: Not achieving the planned return on investment (ROI)
It remains today a regrettable fact that many small to mid-sized companies considering new technologies have only the vaguest of notions about the ROI that their new investment should deliver. This is not to say that executives and managers haven't thought out ROI, or even that they may not have already "pinned a number" on the ROI that they'd like to see from the expenditure of their time, energy and money.

What they do not know -- far too frequently -- is precisely how the new technology will deliver results. They have not tied the expected results to specific improvements in Throughput, specific reductions in Investment, or specific savings in Operating Expenses. Rather, there appears to be a general consensus among executives and managers -- despite considerable evidence to the contrary -- that investments in information technologies (IT) sort of auto-magically deliver a return on investment (ROI). That, somehow, IT and automation investments bear an inherent capacity to make the company better and more profitable.

Over the more than 25 years that I have been working with IT from both sides of the desk -- as an executive and as a consultant -- there have been fewer than a handful of companies with which I have worked that actually calculated an ROI for their investment in technology. Fewer still had any measurable objectives for specific IT investments beyond some number clearly picked from the air like "increase revenues by 5%" or "cut manufacturing costs by 7%." Almost none of these firms could tie specific technology functional deployments to the expected ROI.

Given these facts, it is no wonder that traditional ERP (Everything Replacement Project) fails to deliver ROI. The executives and managers deploying the new ERP have not based their ROI expectations on much more than "gut feelings" and some vague sense that having more data will make them better managers.

Failure No. 2: "Go-live" delayed inordinately
Substantial delays to "go-live" in Everything Replacement Projects (traditional ERP) are generally attributable to one or more of the following factors:

• Poor decisions related to customizations or modifications -- when they are selected; how the program code is designed, developed and managed; and the methods chosen for testing and deployment
  
  
• Executive management's improper view of the goals and objectives of a valid ERP project -- thus leading to out-of-control scope creep, usually with absolutely no correlation to project ROI
  
  
• The organization being overwhelmed by an Everything Replacement Project -- rather than being focused on leveraging specific technologies for the benefit of the "system" (i.e., the organization) as a whole

[To be continued]

Contact me!

...

Extending the Power of Your Information Technologies

In today’s exceedingly challenging business environment, it is becoming increasingly important for executive management to establish corporate strategies that include extending the reach and power of the organization's information technologies beyond the four walls of the firm. If your company is not building "communities" of customers or con-necting with your vendors and customers in real time up and down your supply chain, then it is likely that you are falling behind your competition.

No Technology for Technology's Sake

I am not advocating new "gee-whiz" connections beyond your enterprise just so the CEO can brag about them on the golf course or in the steam room at the club. Before embarking on a spending spree to extend your IT systems beyond the walls of your enterprise, it is important that you determine what you want to accomplish by moving forward with such efforts. Generally speaking, the valid reasons for investing in the extended enter-prise may be reduced to three fundamental categories:

1. Increasing throughput,

2. Reducing inventories or the need for new investment, and

3. Slashing or holding the line on operating expenses.


Let's consider some of the thinking that might go into such an analysis.

Increasing Throughput

When considering increasing throughput, your team should ask questions like these: Could a CRM (customer relationship management) system, a corporate blog or forum, or other enterprise extensions improve our ability to connect with our customers? Could such efforts improve our comprehension of our customers' needs enough that fresh new insights would result from understanding them better? Could the new insights lead to improved products, enhanced market segmentation, and the ability to create superior win-win offers?

If the answers to any or all of these questions are affirmative, then the next step would be to quantify the estimated impact and to set specific goals for any investments in new technologies. Each individual part of the IT investment plan should be directly correlated to expected quantifiable results. How many new customers will be added? How many additional sales to existing customers are to be expected? What additional market share are we likely to gain as a result of these efforts and investments?

Reducing Inventories or the Need for New Investment

The questions that should arise regarding inventories or investments should be along these lines: Will improved supply chain visibility with our customers allow us to better manage and reduce the volume of inventory lying between our manufacturing plants and our products' end users? Will linking our inventory systems with those of our suppliers allow us to reduce lead times and, as a result, reduce the amount of inventory we keep on-hand? Will improved end-to-end supply chain linkages reduce losses due to obsolescence and shrinkage?Again, if asking these questions leads to some "yes" answers, then the organization should take steps to quantify the benefits that are likely to accrue to the organization from reduced carrying costs, managing and handling less inventory, and (if true) the reduction in a potential investment in additional warehouse or production space, for example.

Slashing or Holding the Line on Operating Expenses

Generally, this area faces a two-fold battle: First, most organizations today have already done all the cost-cutting that they really can (or should) do. This is no longer the 1980’s – the heyday of cost-cutting as U.S. industry was struggling against the onslaught of Japanese products. Second, when you are talking about implementing new technologies, it is really difficult to get buy-in from your organization if the move is likely to lead to a significant reduction in the workforce.
However, results stemming from efforts to increase throughput (revenues) and reduce inventories are likely to drive growth, on the one hand, and internal improvements, on the other. Normally, then, a case can be made on the basis of these combined factors (i.e., growth and internal improvements) that your organization can support 30%, 60% or even 100% growth in the near future with little or no growth in operating expenses. The net result is often estimated and stated as savings in FTEs (full-time equivalents, i.e., the average cost of a full-time employee). In this way, the effect of “holding the line on operating expenses” may be properly factored in to the benefits accruing from investments in new technologies.

Conclusion

There is no longer a place for business as usual. In today’s highly competitive markets – driven to a significant degree by the international reach of the Internet and other technologies – every business owner, CEO, and CFO should be considering how extending their information technologies beyond the four walls of their enterprise might lead to in-creasing throughput and reducing inventories, while holding the line on operating expenses. However, every investment in technology should be carefully planned, be geared to achieving measurable goals, and fully aligned with the enterprise’s strategic and tactical objectives.

©2008 Richard D. Cushing

Getting IT right!

Writing in InfoWorld magazine (6 Jan 2003), Ephraim Schwartz said:

"The goal of IT, since its inception, has been the timely (a relative term) delivery of information to those who need it. Behind this goal is an unspoken belief in technology: If IT could deliver to its internal enterprise customers all of the information all of the time, it would be impossible for them to make a mistake."

Understanding the difference between data and information

More likely than not, many of the folks working in your organization's IT department don't actually know the difference between data and information. To be fair, they are not alone: Many people working as supervisors, managers, and executives probably don't recognize the difference between data and information either.

• Data are the bits of information your various systems store. The system may be any kind of system -- not necessarily and IT-related system. Those old metal filing cabinets still found around many offices store data, just like that 160 gigabyte hard-drive on your desktop computer stores data.

• Information is data transformed (e.g., gathered, analyzed, collated, sorted, coded) to allow the user to rapidly digest and comprehend the implications of the underlying data for timely, accurate, and effective decision-making.

For example, a 300-page report printed on green-bar paper, like an old mainframe computer used to spit out for us at a firm I worked at years ago, is data. Make no mistake, the data -- in the 300-page report -- contained everything we needed to know to make an effective decision. However, it its form as a report, it was not readily digested and comprehended for effective decision-making.

At another firm for which I consulted a few years ago, one of the firm's key production managers would take home several reports from their existing system almost every night. Working at home in the evenings, he would comb through these various reports and, using an assortment of colored highlighters, would mark up the reports with various colors to guide his production decisions the following day.

What was he doing? He was transforming data into information.

The data contained in the aforementioned 300-page report could have been more easily digested and decision-making could have been faster and more effective if the data had been presented, perhaps, in a chart, a graph, or even reduced to some form of exception list.

Placing the information in its context

Data content may typically be broken down into three general classes for most organizations:

• Operational data such as orders, purchases, inventory, and so forth;
• Process data such as schedules, routings, bills of material, logistics, and similar; and
• Administrative data including accounting, customer lists, vendor lists, employee lists and more.

The data context, however, must be understood before effective decision-making may be done for any particular organization. The context of the data give the data meaning within the framework where it is to be applied. The context includes such elements as:

• The organization's purpose,
• The organization's strategy,
• The organization's vision and mission,
• The organization's execution model,
• The organization's capabilities and competencies,
• The organization's structure,
• The organization's policies and procedures, and
• The organization's values and culture.

Clearly, depending on an organization's purpose or strategy or production model (for example), essentially the same data may drive two different organizations to make equally effective but totally different decisions.
It should be part of every organization's IT strategy to mandate the transformation of the huge volumes of data being collected into information by their IT systems. This transformation, in itself, should be flexible, timely, and subject to ad hoc transformation, as well.

That's what business intelligence is all about. In today's world, this is all about survival, not just improvement or excellence.

"Business, we know, is now so complex and difficult, the survival of firms so hazardous in an environment increasingly unpredictable, competitive, and fraught with danger, that their continued existence depends on the day-to-day mobilization of every ounce of intelligence."
-- Konosuke Matsushita, founder of Matsushita Electric (Panasonic) as quoted in Managing on the Edge: How Successful Companies Use Conflict for Competitive Advantage by Richard Pascale (New York: Simon and Schuster, 1990), p. 51.