e-INSIDER

December 13, 2006

The CEO, CFO, and TCO
From Technology Evaluation/Olin Thompson

Total cost of ownership (TCO) measures the ongoing expense of owning and maintaining software within a business. It is a key component of the i in return on investment (ROI). Naturally, the chief executive officer (CEO) and chief financial officer (CFO) care about ROI, but is TCO a measurement of complexity? Is TCO a measure of agility or the lack of agility? Does a higher TCO mean a company is less able to "turn on a dime" to meet customer and market demands?

An August 2006 Aberdeen Group report on enterprise resource planning (ERP) in manufacturing tells us that TCO is the number two selection criterion for ERP software selections behind functionality. While TCO has always been considered a key criterion for software selection for small to mid-sized companies, the report shows that it is even more important in large (with revenues over $1 billion) companies.

Looking at the two variables that rank first (functionality) and second (TCO) in software selection, we see that they relate directly to ROI. TCO is a measurement of investment--the ongoing investment required to own, maintain, and operate the solution. Functionality is not a measure of return, but it is an indicator of the potential. Without the right functionality, the software cannot have a positive impact on the business--and without that impact, it cannot generate a positive ROI.

TCO includes a number of different costs. External costs include checks written for software, hardware, and external services. However, while most companies understand these external costs, the internal costs are often not fully understood. The internal costs are often buried in a general information technology (IT) budget, and considered as the cost of doing business.

A Meta Group study decomposed the elements of TCO. The study found that internal costs, made up of staff expenses, account for 42 percent of total costs, while external services typically account for an additional 28 percent. In total, people account for 70 percent of TCO.

Cost by category and percent of TCO according to the Meta Group are as follows:
1. Hardware (6.6%)
2. ERP software (16.72%)
3. Other software (1.04%)
4. Implementation services (27.86%)
5. Maintenance costs (6.02%)
6. Implementation internal staff (16.86 %)
7. Post-implementation internal staff (two years) (25.18%)

With 70 percent of TCO going for people, one must ask, what tasks are these people performing? They are working to keep the system running. They are helping end users. They are tracking and fixing bugs (yes bugs do exist--either in the software or in how the software was implemented). They are installing new releases, and building and maintaining interfaces. Hopefully, these people are also changing the way the software works within the business to meet the ever-changing needs of the business. The business will change, in small ways and large ways, everyday. A system that falls behind the way the business needs it to work eventually becomes a liability instead of the asset that was hoped for.

These tasks take time. The more complex the tasks, the more time they take. Therefore, as the people cost makes up 70 percent of TCO, we see that TCO is a measure of complexity. We can conclude that the greater the TCO, the greater the complexity of the software.

Experience tells us that, although exceptions do exist, the larger the company, the more complex it is, and therefore the greater we should expect the TCO to be. This is true, but we should consider the cost per user as well as total cost. The Aberdeen Group study provided the cost per user. It shows that the cost per user actually declines as company revenue grows. Smaller companies actually spend more for systems than larger companies when the cost per user is considered.
TCO is a measure of complexity, and the opposite of complexity is simplicity. With almost everything in life, complexity is bad and simplicity is good. In software, complexity means both higher costs and less ability to keep the system up to meeting the ever-changing needs of the business.

No business stays the same. Challenges include customers demanding new ways of doing business. Challenges include governments setting new regulations. Challenges include companies changing to gain competitive advantage or to neutralize a competitive threat. As is often said, the only constant in business is change. When systems are complex, it means that the company is less able to respond to these challenges. Greater complexity means that the business will continue to change, and systems will fail to stay up to the needs of the business. Systems are often an obstacle to change. The CEO and CFO care because they direct changes in strategy, tactics, and business processes to meet these challenges. Today, the CEO and CFO expect the company to be agile to meet these challenges. TCO is a measure of a company's agility.

A direct benefit of a lower TCO is the pure economic benefit of lowered expenses. When TCO is lower, more money goes to the Bottom Line: a dollar saved in TCO means that dollar is available to go directly to the bottom line. Actually, that dollar can usually be used more effectively elsewhere in the business, for a purpose that offers a higher impact on the bottom line. Would a company rather pay for the care and feeding of its ERP system, or put that money into research and development (R&D) or marketing or additional sales resources?

Olin Thompason is vice-president of industry strategy with Lawson Software, is a frequent contributor to TEC of articles of general interest to ERP and manufacturing management. He has over twenty-five years of experience as an executive in the software industry, and has been called the "father of process ERP." He is a frequent author and award-winning speaker on such topics as gaining value from ERP, supply chain planning (SCP), e-commerce, and the impact of technology on industry. He can be reached at olin.thompson@us. lawson.com.
http://www.technologyevaluation.com

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Structuring BPM: Business Process Design or Evolution of Technologies?
From the BPM Institute/Jasmine Noel, Ptak, Noel and Associates

The buzz about business processes, how they should be designed and how employees should use them, is getting louder and more varied. Some vendors are striving to make business process design, implementation and improvement much easier. BEA, IBM WebSphere, Sun SeeBeyond, webMethods, and others are packaging comprehensive infrastructure solutions empowering business analysts as the designers and owners of business process. These solutions' capabilities include modeling, testing, application integration, and performance monitoring and reporting, all aiming to help process owners optimize business processes in a top-down manner.

On the other hand, Microsoft has launched a "power to the people" campaign, positioning Office 2007 as the interface to business processes and content. The goal is to transition enterprise thinking away from Office as a suite of productivity tools and toward Office as a platform for collaboration and executing business process tasks. For example, the collaboration between Microsoft and SAP produced Duet, a solution that allows employees to use Outlook to manage timekeeping, budgeting, scheduling, purchasing, recruiting, sales management, and travel information that is stored in mySAP ERP 2004 or mySAP ERP 2005. The recent partnership between Microsoft and EMC integrates Office's content creation capabilities with Documentum's long-term archival, policy, and compliance management capabilities.

These integration efforts are only the beginning. In addition, Microsoft is dedicated to making it easier for casual Office users to personalize their interfaces and access dynamic enterprise data. Thus employees (not business analysts) can potentially create individualized business and collaborative processes over time. In essence, enterprises can take an evolutionary, populist approach to creating business processes.
Are these different approaches to business processes a conflict in the making? Should enterprises have to choose between design or evolution?

There are several reasons why it should not be. First, it is actually the potential for continuous process improvement that drives both the design and evolution approaches to business processes. When enterprises can continuously improve their processes they become more efficient and profitable over time, and they can adapt more easily to changes in market demand. This is why continuous improvement is part virtually every business process maturity model. The designer approach allows businesses to quickly implement a process design, monitor its effectiveness against key performance indicators, test design improvements, and then quickly implement changes. This is a means to achieve continuous improvement process maturity for repetitive, automated processes. Similarly the evolutionary approach allows users to create individualized workflows, information dashboards, and process interfaces over time, achieving continuous improvement process maturity for non-repetitive processes.

Second, the approaches are tackling fundamentally different types of processes. There will always be repetitive processes and transactions that are best handled in an automated way, without any human intervention--these processes are best designed by a business analyst. There will always be creative and decision-making processes that tend to differ somewhat every time they are performed, making them impossible to automate--these processes are best evolved by the teams involved. Hence it should be apparent that these technological approaches can be complement and help improve the overall maturity of different types of business processes.

Finally, both approaches are fueled by SOA strategies and Web Services standards. These are the linchpins of the flexibility and adaptability delivered by both the process designer and populist evolutionary approaches to business processes. Microsoft is using SOA principles to "componentize" the Office suite to allow users to customize their interfaces. Microsoft's .Net implementation of Web Services eases the Office suite's integration with its partners. IBM and BEA position SOA and Web Services as fundamental underpinnings of business process management that will drive the next evolution of new enterprise applications. Without this common bond of standards adoption, enterprises would be doomed to the recreation siloed process technology, the resumption of integration nightmares, and the still-birth of end-to-end process performance management.

Enterprises should not be forced into choosing between process design or evolution technologies because: 1) it is the mix of both approaches that will make enterprises ultimately more agile and more competitive and 2) a standards-based implementation of both approaches should provide the answer before the debate begins. Thus enterprises must never let up the pressure on vendors to deliver on their promises of SOA and Web Services standards adoption and implementation.
http://www.bpminstitute.org

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World-Class IT Organizations Spend 7 percent More Than Peers
From the Hackett Group

World-class information technology (IT) organizations spend 7% more than typical companies, according to 2006 Enterprise Book of Numbers research from The Hackett Group. But this increased spending more than pays for itself by enabling improved efficiency and effectiveness in finance, procurement, human resources (HR), and other areas of back office operations. With the help of improved technology usage, world-class finance organizations spend 45% less than typical companies on finance operations. World-class procurement organizations also spend 25% less, and world-class HR organizations spend 13% less.

In each case, these functions operate with fewer staff and also show improved performance across a range of metrics tracking effectiveness and strategic alignment. For example, Hackett found a direct correlation between improved IT effectiveness and key value metrics in finance and procurement. In fact, Hackett found that in most cases, achieving world-class status in IT is a prerequisite to achieving superior performance in other back office functions. Hackett's research found that 86% of all companies that achieve world-class performance in two or more business functions within Selling, General and Administrative (SG&A) areas are world-class in IT.

Hackett's research found that world-class IT organizations now spend $9,024 per end user while typical companies spend 7% less, or $8,485. This is a continuation of a trend that was first identified in 2005 and makes IT the only area studied by Hackett where world-class performers outspend typical companies. World-class IT organizations are investing 17% more on technology-enabled solutions than typical companies.

"Our research clearly shows how IT is the foundation for world-class performance across SG&A functions," said Hackett Senior Business Advisor Scott Holland. "While many companies continue to slash IT budgets, companies with world-class IT organizations understand that by selectively investing in IT they can drive down overall SG&A spending. At the same time, IT serves as an enabler of improved effectiveness in finance, procurement, and HR."

According to Senior Research Advisor Eric Dorr, "By focusing on IT,world-class companies generate benefits well beyond cost, driving improvement to the bottom line and a back office that is better aligned strategically to support the needs of the business. Technology plays a role in how the bestcompanies do everything from close their books faster each month to achieve higher customer satisfaction and hire and train their staff more effectively."

In finance, Hackett's research shows a direct correlation between IT effectiveness and improved access to finance information. World-class finance organizations also deliver 57% more invoices to customers electronically and in part as a result reduce billing errors by half and significantly lower Days Sales Outstanding, thereby increasing cash flow.

In procurement, Hackett found a direct correlation between IT effectiveness and procurement efficiency. As a result of their technology usage, staff at world-class procurement organizations process 36% more purchase orders per staff member than typical companies, and cut the cost per purchase order by nearly half.

World-class HR organizations clearly benefit from their increased focus on technology, with 13% lower HR costs per employee and 15% fewer HR staff. They fill manager positions 10% faster, and are more than three times as likely as typical companies to offer employees online access to health and welfare systems.

In its 2006 Enterprise Book of Numbers research, Hackett also identified five major best practice areas where world-class performers excel: strategic alignment, complexity reduction, technology enablement, business process sourcing, and cross-functional partnering. Key findings in select best practices areas include:

STRATEGIC ALIGNMENT: To ensure IT strategic alignment and elevate the role of IT as an enabling strategic asset, world-class IT organizations are twice as likely as typical companies to have a CIO who reports to the CEO or Chairman rather than reporting to the CFO or another functional executive. World-class CIOs are also 48% more likely to be a member of their company's primary management committee.

COMPLEXITY REDUCTION: The human and financial costs of maintaining multiple data centers, packaged applications, customizations, operating systems, programming languages, hardware/telecom standards, etc., contribute to a marked increase in total IT cost. Reduction of unnecessary IT system complexity, hardware, software and networks directly reduces complexity, liberating time and money for investment in value-adding activities. For example, world-class procurement organizations are more likely to have a single master database for suppliers and items, providing executives with a more accurate picture of where things stand. In finance, world-class companies are 28% more likely to generate management reports from a centralized data repository, improving information access and
offering an enterprise view of performance while reducing time spent searching for and cross-checking data from multiple sources.

CROSS-FUNCTIONAL PARTNERING: IT organizations (and their external service providers) need to work as business partners to make sure that applications delivered are capable of achieving business goals. A key part of this is maintaining high user adoption and internal client satisfaction rates. World-class IT organizations use a project management office (PMO) to manage 90% of all projects, making them 130% more likely to do this than typical companies. Using a PMO provides better visibility, coordination, and planning on projects, which is why the level of PMO adoption is a key predictive metric of world-class performance.
www.thehackettgroup.com.

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SOA Pace Accelerating Into 2007
From AMR Research/ Dennis Gaughan, Ian Finley

Service-oriented architectures (SOAs) appear to finally be on the wish list of many companies. SOA is an approach to building and maintaining enterprise systems that promotes speed of innovation, flexibility, and re-use of existing assets.

A little over a year ago, AMR Research conducted a survey looking into SOA adoption trends and found that 21% of the respondents had adopted SOA in some form or fashion, with a little over half the sample (53%) planning to evaluate or implement in the next 24 months (see "Service-Oriented Architecture: Survey Findings on Deployment and Plans for the Future").

In the spring of 2006, we conducted a larger survey on SOA and found that adoption hadn't really changed; again 21% were currently using SOA in some fashion. However, two studies completed this fall and recent customer inquiries show SOA adoption is accelerating. Interestingly, the nature of customer questions has changed as well. For the most part, we are no longer getting "what is SOA?" inquiries. Customers are instead exploring "how do we get started?" and "what best practices have you seen emerging?"

SOA implementation questions are also no longer coming from just classic early adopters (like those in the financial services and telecommunications industries).We hear them from a broad set of buying sectors. In fact, this heightened interested is reflected in our latest Tech Trends survey, which shows a noticeable uptake in adoption relative to the previous two surveys. The number of respondents planning to evaluate or implement SOA in the next 24 months has jumped to 81% in our most recent study from 53% last year.

Spending will also be affected, with 99% of the respondents currently using SOA saying they plan to maintain (40%) or increase (59%) investment in SOA in the next 12 months. In conversations with early adopters, the majority of the early projects were what AMR Research would describe as "internal integration"--projects in which customers would use web services to connect existing applications together but not necessarily build new composite applications from those services.

Based on the most recent survey, the SOA use cases are expanding in parallel with overall adoption (see Figure 2). While those "internal integration" projects are still high priority, many customers are assembling, building, or buying composite applications to deliver against business objectives. Based on our interactions with customers, the majority of these initiatives are customer oriented--trying to consolidate customer information in new ways or creating more self-service capabilities to expose directly to customers.
The increasing customer interest has not been lost on the vendors, either. In fact, the major technology vendors have been force feeding the market a steady diet of SOA propaganda for well over a year. All are vying to become the SOA platform for the next-generation architecture.

Our survey data shows that the SOA platform will be the next defining mechanism for account control by technology vendors. As such, software heavyweights like IBM, Microsoft, Oracle, and SAP are investing significant resources to gain or maintain account control around the next-generation architecture.

For many of our customers, the battle lines are drawn between choosing their primary ERP provider (Oracle or SAP) as their SOA platform or developing their SOA platform from the infrastructure (using IBM and Microsoft, as well as BEA, TIBCO, webMethods, Progress, and others). Based on conversations with references and survey data, the infrastructure-centric approach is the preferred approach today.

In the Tech Trends survey, Microsoft and IBM show early leadership regarding SOA platform adoption. However, 2007 will be an absolutely critical year for SAP and Oracle, with many customers looking at next year to evaluate SAP's NetWeaver and Oracle's Fusion Middleware. Of course, it will likely take until 2008 or 2009 to determine the real SOA platform winners, but the battle lines are firmly drawn and the market opportunity will materialize the next 12 months.
http://www.amrresearch.com

Nearly $2 Billion Lost in E-Commerce Sales in 2006 Due to Security Concerns of U.S. Adults
From Gartner

E-commerce sales have experienced consistent revenue increases. However, recent security breaches (online and offline) are having a significant impact on buying patterns of U.S. adults. Due to consumer's concerns about the security of the Internet, nearly $2 billion in U.S. e-commerce sales will be lost in 2006, according to a survey by Gartner, Inc.

According to the Gartner survey of 5,000 online U.S. adults in August 2006, approximately $913 million in 2006 e-commerce sales is lost because of security concerns among online shoppers. Another $1 billion is lost because of shoppers who refuse to shop online because of security concerns.

Nearly half of online U.S. adults, or 46% of more than 155 million people, say that concerns about theft of information, data breaches or Internet-based attacks have affected their purchasing payment, online transaction or e-mail behavior. Of all the behaviors affected, online commerce (including online banking, online payments and online shopping) is suffering the highest toll.

"Financial institutions and other e-commerce service providers need to beef up security in their online channel to retain customers, but they must be careful to keep the added measures relatively convenient," said Avivah Litan, vice president and distinguished analyst at Gartner.

Gartner recommends that enterprises employ a two-prong strategy -- one part to increase consumer confidence and one part to reduce fraud and keep the crooks out.

"The two goals don't necessarily call for the same technical solutions since the most-effective fraud prevention applications are often invisible to consumers and criminals," Ms. Litan said. "A layered approach to solving security problems is the most effective. Companies should implement back-end fraud detection, stronger user authentication (beyond single factor passwords), transaction verification for high-risk transactions, and data masking/truncation of sensitive data that is shown on Web-based screens."
Gartner estimates that these security concerns have kept approximately 33 million U.S. adults from banking online. According to the survey, nearly 9 million U.S. adults have stopped online banking altogether, while another estimated 23.7 million won't start because of their security concerns.

Perhaps the biggest impact is a newfound and serious consumer distrust of e-mail. Nearly 70% of online consumers whose behavior has been affected by recent security incidents say that their concerns have affected their trust in e-mail from companies or individuals they don't know personally. Of these, more than 85% delete suspect mail without opening it.

"This figure has serious implications for banks and other companies that want to use the e-mail channel to communicate more cost-effectively with their customer base," Ms. Litan said. "For example, sending a bill electronically costs about half of what it costs to send that same bill through the regular mail."
Ms. Litan will provide more detailed analysis at the Gartner Identity & Access Management Summit, November 29-December 1 at the JW Marriott Las Vegas Resort. The inaugural Gartner Identity & Access Management Summit is designed to help organizations address the growing exposure that identity and access management (IAM) inefficiencies and lapses create. The Summit's three research tracks focus on the business impact of IAM, the practical applications IAM organizations are using today, and the future direction of IAM technologies.
http://www.gartner.com


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