Decision-making about ROI and your technology spending

Dan Gilmore wrote in “The ‘Probability’ of Supply Chain ROI” propounds properly and rationally the fact that any “forecast,” including forecasts of ROI (return on investment) should not be a single number. Rather, as anyone properly trained in statistical methods will tell you, it should be a range of numbers. The range of numbers would generally be calculated based on a single calculated value plus and minus values that represent the confidence intervals or, simply put, how likely the statistician believes his estimates the calculates will approximate reality. A larger range indicates lower levels of confidence and a smaller range higher confidence levels.

Now, while Gilmore is mathematically correct, the fact remains that most small-to-mid-sized businesses (SMBs) simply do not have anyone trained in statistics on their payroll and they are not likely to go out and hire a statistician to produce ROI forecasts for their IT projects – since this would, by definition, automatically reduce the ROI of the enterprise as a whole in the short term.

Back on a growth trajectory

Gilmore makes another comment in his article with which I wholeheartedly agree: “[T]here is some evidence that companies are in fact looking at investments that can help them to get back on a growth trajectory (read: increasing Throughput) without having to add much in the way of head count (read: Operating Expenses) by achieving productivity gains.” Given the world-wide economic malaise that is showing some signs of lessening (for the moment, at least), Gilmore’s description probably suits the vast majority of SMBs across the U.S. and beyond.

Furthermore, many others besides me have written that a firm stand on return on investment will be the hallmark of technology spending in the 2010 and beyond. So, I can hardly fault Gilmore for suggesting that SMB executives and managers need to become increasingly sensitive to and realistic about ROI for every kind of investment in their firms’ futures.

Too much complexity already

Despite my agreement with Gilmore on theoretical grounds regarding forecasts – including ROI forecasts; and despite my agreement with him regarding the goal of companies to get back on a growth trajectory through wise investment of capital resources, I must disagree with him on the matter of adding useless complexity to the return on investment forecasting process.

Allow me to explain why I use the harsh term “useless” to describe such an effort in the development of a ROI forecast for an IT project.

First  of all, let me say that statistical methods ought to be applied where they make sense. Statisticians generally agree that a valid statistical sample must contain at least 30 members. This works great where you have 30 dogs, 30 cows, 30 houses, 30 automobile, 30 miles of roadway, and so forth for comparison. Then, of course, you need to factor for environmental differences. Thirty or more cows all in the same pasture, eating the same foods, and enjoying the same climate would make a pretty good statistical sample for some studies of cows. On the other hand, three Holstein cows in northern Minnesota, two long-horns in west Texas, 15 black whiteface cows in eastern South Dakota, and ten mixed-breed cows in central Florida are not likely to constitute a good “sample” for cow studies.

Why?

Simply because there are too many environmental dissimilarities surrounding the cattle. By the time these factors were accounted for, (generally speaking) any results would have such a large confidence interval as to make any prediction almost meaningless.

When considered as a whole, a typical SMB has tens of thousand of variable at work within the enterprise. Any number of those variables are likely to dramatically separate it any “sister” enterprises in a sample group used to forecast ROI outcomes.

Of course, the fact that traditional ERP – Everything Replacement Projects – are going to affect the whole enterprise is a big part of the problem of predicting ROI outcomes. With tens of thousands of variables at play, picking the winning number is far more challenging than winning the lottery.

Reducing the scope reduces the complexity

First of all, a good many SMBs today have a “pretty good” ERP system in place – regardless of its brand. Unless there is some pressing reason to undertake a traditional ERP – Everything Replacement Project, it is probably a far better idea to consider a New ERP – Extended Readiness for Profit project instead.

Narrowing the scope of the project reduces the complexity. And, reducing the complexity increases the likelihood that your ROI forecast will be more on-target. Allow me to give you a couple of examples:

• Warehouse automation – Suppose your Current Reality Tree (CRT) shows you that, in order to increase Throughput, you need to enable your warehouse to be able process 80 to 100 shipments per hour, rather than the present 30 to 40 per hour. Furthermore, you need to do this while holding the line on Operating Expenses.
  
• Business intelligence – After reviewing their Current Reality Tree and laying out a Transition Tree (TrT), your marketing and sales team has assured you that, if they are provided tools with which to better understand customers and markets, they will be able to segment the market and create UROs (un-refusable offers) and increase Throughput by 130% in two years. No additional staff or other increases in Operating Expenses would be required.

If your executive management team were to elect to pursue either of these projects – or both – the goals are specific and measurable – as would be the expected outcomes. ROI calculations become simple:

Where T = Throughput (Revenues less Truly Variable Costs), OE = Operating Expenses, and I = Investment.

Simple. Elegant. And ROI calculations are far more likely to be right than any calculation around traditional ERP – Everything Replacement Projects.

©2010 Richard D. Cushing

Surviving the recession with breakthrough thinking - Part 3

 [Continuation]

As you and your management team will realize as you work through the Thinking Processes (TPs), this approach to achieving breakthrough thinking recognizes that each challenge you and your organization faces requires a unique approach and a unique solution. Unlike other methods of problem-solving, applying the TPs recognizes the distinct needs, interests, abilities, limitations and power of all of the stakeholders. This capability of the process helps achieve breakthroughs by maximizing the quality and the effectiveness of the solution. Furthermore, the fact the solution will be invented by you and your management team, the likelihood of full implementation is increased. After all, people seldom work against their own inventions.

Discovering the transitional steps

One of the dangers of adopting or adapting a solution from a previous effort or somewhere or someone else is that, in doing so, the “easy answer” too frequently leads your team to also accept an “easy implementation” in which the transitional requirements are never fully understood. Warning! If the transitional steps are not understood – and usually not even clearly articulated – then the transitional steps are never fully developed for implementation.

What your management team may have previously understood as “the problem” and “the solution” have usually been nothing more than cryptic images shrouded in a fog of language leading to lots of action but seldom (if ever) a real breakthrough in improvement. However, if you have undertaken to build and understand the Current Reality Tree (CRT), then you have in your hands a document that depicts clearly and logically what is constraining your organization from making more money tomorrow than you are making today. Chances are that, as a result, you and your managers have a clearer understanding of your organization as a whole than you have ever had previously. You may be feeling a sense of empowerment – a renewed sense of being in control – that you have been lacking as manager for years now.

However, the Thinking Processes have more to offer than helping you clearly understand the “root” of your problem – the one thing (or very small number of things) that is your bottleneck (constraint) to achieving more of the goal. The CRT you have built has helped you answer a critical question for good management: What needs to change?

But two additional questions need to be answered, as well: What should the change look like? And, How do we effect the change? Fortunately, the Thinking Processes supply powerful tools to help your team discover and clearly articulate answers to these questions.

By building a Transition Tree (TrT), your management team will go through a Thinking Process that will help you apply sound logic to determining the transitional steps necessary to move from your organization’s Current Reality to your intended Future Reality. When you are done, your team should have three Thinking Process logical “trees” – a Current Reality Tree, a Transition Tree, and a Future Reality Tree. These three documents represent answers to the three critical questions to which your management team needs sound answers:

1.       Current Reality Tree – What needs to change?

2.       Future Reality Tree – What should the change look like?

3.       Transition Tree – How do we effect the change?

Note that the TrT should become your “road map” to change. This document, you will find, should clearly define the necessary steps to achieving the desired change right along with the rationale for taking these steps. Without such a map it is easy to get lost or lose focus on the breakthrough your team has calculated for achieving more of the goal.

Don’t get derailed

Chances are, while you and your management team are building the Transition Tree, that there will be some that will step forward say, “We won’t be able to do that because….” There are a couple of important points to consider when this happens.

First, keep your focus on what happens most in making more money for your organization. If you can increase Throughput on 97% of your transactions, do not let the unpredictable 3% of exceptions keep you from achieving the breakthrough change for the vast majority of circumstances. Paying too much attention to these exceptions will likely distort your solution.

However, if there is an objection raised that needs to be evaluated and where it could have an impact on effecting the overall change anticipated by the FRT, then there is a Thinking Process for this, as well. Under such circumstance, you and your team should consider what Eliyahu Goldratt called “Negative Branches.” These are smaller logic trees that supply answers to questions such as: “What will we do if…?”

Don’t get stuck

Sometimes – in fact, with some frequency – management teams such as yours get caught on the horns of a dilemma. They find that there appear to be rational arguments for two mutually exclusive paths to the same interim objective in their Transition Tree development.

For example: A manufacturing manager is measured and rewarded on two different metrics – defect rates and equipment maintenance expenses. Of course, he wants to be a good manager and to be rewarded properly for being a good manager, so he wants simultaneously produce quality parts and hold-down the equipment maintenance expenses. He knows that he can reduce maintenance expenses by doing on-demand maintenance only. He also knows that he can achieve lower defect rates if he applies routine preventive maintenance on the equipment under his management. Which of the two approaches to equipment maintenance should he choose?

Fortunately, the Thinking Processes have an answer for this situation, too. The tool is called the Evaporating Cloud and is critical to actually achieving breakthrough solutions.

Summary

To my knowledge, no for-profit organization in the world has ever achieved ascendency in its industry through “cost-cutting” efforts. Companies that grow and gain market share are more likely to be those that have achieved breakthroughs.

There are three basic ways to reach a breakthrough in your organization’s thinking:

1.       By chance

2.       By hiring people who are intuitively breakthrough thinkers

3.       By finding and applying a tool that is proven in drawing out breakthrough thinking from ordinary executives and managers – like the Thinking Processes

Which will your organization choose?

©2010 Richard D. Cushing

The New ERP – Extended Readiness for Profit – Part 39

We are continuing our discussion of Sue Bergamo's article entitled "Is Your Implementation in Trouble?" She listed seven "high level categories [in troubled ERP implementations]…. in the order from the highest to lowest number of responses" from her informal LinkedIn survey. Here is the list:

1. A misconception of business expectations
   
2. The lack of top level leadership involvement in the project
   
3. Business processes were not correctly redefined and continued to be inefficient
   
4. The impact of the organizational change was not addressed properly and caused a major upheaval in the company
   
5. The vendor wasn't managed correctly and over-promised, then under delivered [sic]
   
6. Project management was weak and over-customizations lead to increased scope and time
   
7. The integration of diverse applications was harder than anyone expected
   (Bergamo 2010)
   

In this process we are drilling-down on Bergamo's symptoms list and setting them in the context of the New ERP – Extended Readiness for Profit while contrasting them with traditional ERP – Everything Replacement Projects to see if using the New ERP approach would have mitigated the failures.

2. The lack of top level leadership involvement in the project

This is a no-brainer for the New ERP – Extended Readiness for Profit, and the reason is simple: "Top level leadership" are always interested and involved in those things that are going to lead to increasing profit. They are less likely to be interested and involved in "housekeeping" and "maintenance" matters.

For better or worse, top-level executives frequently consider IT either "a necessary evil" – like paying the janitorial staff; or they see it a "necessity that no longer delivers a business advantage" – like maintenance on well-worn manufacturing equipment on the shop floor. It may have been a competitive advantage when it was purchased (several years ago), but now it is only an "expense."

If top-level leadership had begun their search by looking for improvement leading to a competitive advantage, or improvement leading to significant increases in Throughput they would be "involved" in the project. Not only so, but if they had followed the New ERP – Extended Readiness for Profit approach, their application of the Thinking Processes (see prior posts) would have led executives and managers to uncover the answers to the three critical questions we have so frequently reiterated:

1. What needs to change (Current Reality Tree)
   
2. What should the change look like (Future Reality Tree)
   
3. How to effect the change (Transition Tree)
   

What could be simpler or more effective in gaining top-level leaderships involvement with the project at hand?

3. Business processes were not correctly redefined and continued to be inefficient

This is another problem easily created when traditional ERP – Everything Replacement Project methods are employed and even more easily avoided when taking the New ERP – Extended Readiness for Profit approach. Here is why:

If the executive management team has discovered what needs to change, then they have already automatically "correctly defined" the business processes involved. They know exactly what specific business processes are acting as a constraint or bottleneck to making more money. By using the Thinking Processes' CRT (Current Reality Tree), the firm's leadership has already unlocked and decoded tribal knowledge so as to precisely what business process should be improved.

And, if they are following the New ERP methods, then their next step likely would be (depending on certain factors) the creation of a Future Reality Tree (FRT) or a Transition Tree (TrT). Either of these logical trees would help them understand what the change should look like and how to effect the change. Specifically, the FRT would define for them what their business processes should look like after the proposed change, and the TrT would become the management team's roadmap for change management. [Note: For Theory of Constraints purists, there are other portions of the Thinking Processes that might become a part of this (e.g., Negative branches, Prerequisite Trees) that I have left out of this discussion for the sake of simplicity.]

I think you can see from this that, by employing the New ERP methods, there is simply no way to leave behind "inefficient processes" that remain unchanged. Fundamental to the Thinking Processes and the planning that results from the logic of the trees is the inherent roadmap to changing whatever it is that was defined in "what needs to change" (the CRT).

In the traditional ERP – Everything Replacement Project so much change is happening all across the organization, it is no surprise that all that some processes get overlooked and remain unchanged and, as a result, inefficient as well. 

4. The impact of organizational change was not addressed properly and caused a major upheaval in the company 

This cause sounds sort of redundant, does it not? This is a symptom that has its roots in the whole philosophy of traditional ERP – Everything Replacement Projects. After all, it is really hard to avoid a "major upheaval in the company" when your approach is to "replace everything" in their core IT systems.

That is precisely why the New ERP – Extended Readiness for Profit is not only vastly more likely to provide a sound and significant return on investment (ROI), it is also likely to produce an ROI at lightning speed. Many traditional ERP projects take years to produce a return and, sadly, some never do.

[To be continued]

©2010 Richard D. Cushing

Works Cited

Bergamo, Sue. CIO Update: Is Your ERP Implementation in Trouble? Feb 01, 2010. http://www.cioupdate.com/features/article.php/3862056/Is-Your-ERP-Implementation-in-Trouble.htm (accessed Feb 02, 2010).


 

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 28

Strategic alignment is the "best determinant" of success

According to writer and researcher Meridith Levinson, "Many factors influence project success and failure…. But new project management research from training company Insights Learning and Development, the Project Management Institute and a strategic execution consultant suggests that the single most important factor influencing project success is the project's link to the organization's business strategy and the project manager's understanding of how the project supports the business strategy." (Levinson 2009) [Emphasis added.]

This should be an encouragement to any executive or manager who has been following along with us in our development of The New ERP – Extended Readiness for Profit. I say this because we have emphasized the following THREE SIMPLE STEPS:

1. Discover what needs to change, which we have helped you do by applying the Thinking Processes (TPs) and leading you and your management team to the creation of your own Current Reality Tree (CRT). By looking to the roots of your CRT, you were able to see clearly those few things (usually fewer than a half-dozen) that need to change in order for your business to reach more of its goal of making more money tomorrow than it is making today.
   
   
2. Work through what the change should look like. Here again, we suggested that you apply the Thinking Processes to build a Future Reality Tree (FRT) and Transition Tree (TrT). These two logical trees will help you and your management team understand with considerable clarity what the changes should look like if your "system" is going to improve.
   
   
3. Last, how to effect the change must be considered and, actually, if you have built your Transition Tree, you already have determined how to go about making your changes. It is worth mentioning, however, that sometimes the evidence at the "roots" of the CRT is so plainly evident that it is not necessary to build either an FRT or a TrT. (We do not advocate this approach, but some matters are so plain and so easily changed, that the actual work can be documented later, or a new CRT is drafted immediately following the implementation of the "simple" changes.)
   

You will note immediately that, having applied the TPs, you and your management team have already addressed the next element Levinson mentions: "Strategic value alone is not enough to ensure project success…. Project managers need to understand the business strategy and how the project supports it." (Levinson 2009) Having built your logical trees (i.e., CRT, FRT, TrT), you have the tools in your hand to quickly, accurately and effectively communicate "how the project supports" your business strategy of ongoing improvement to anyone involved in any part of the improvement projects that might be set forth.

A strategic road map for the improvement project

Here is a terrific side-benefit you get by having used the Thinking Processes to guide your New ERP – Extended Readiness for Profit project up to this point: For no additional investment of time, energy or money you and your team have a ready-made road map to keep yourselves and your project leads on target with the projects.

Levinson states that under traditional ERP scenarios, "[P]roject managers lack 'the context required to flag when the project is veering from its original intent and course-correct towards the intended outcome,' [write Suzanne Dresser and Mark Morgan, authors of a report published by Insights Learning and Development and the Project Management Institute]. And that's when cost and time overruns begin and when projects start to veer from business requirements." (Levinson 2009)

Your Thinking Processes diagrams provide not only the crystal-clear rationale for your efforts, the logic has already helped your management team set unambiguous metrics by which to compare outcomes with desired results. No fumbling around is required or allowed. Furthermore, the budget that you team has set is equally unambiguous.

Summary

In short, if alignment of IT projects with "business strategies" is, indeed, the "best determinant" of project success, you and your management team are well on their way to success if you have been following along with us in applying The New ERP methods. Plus, you have provided for yourself and those involved at every level with a clear, concise road map to keeping the entire effort – or even multiple efforts – on target for the desired ROI (return on investment) and within a budget that makes sense.

References

Levinson, Meridith. Business Strategy: The 'Best Determinant' of Project Success. Nov 17, 2009. http://www.cio.com/article/508018/Business_Strategy_The_Best_Determinant_of_Project_Success (accessed Nov 17, 2009).