Between Y2K fears and the internet boom, a number of companies based their futures on unquantified business propositions, or what Samuel Taylor Coleridge - admittedly in a very different context - called "the willing suspension of disbelief." But much like the old Who song, "Won't Get Fooled Again," successful companies rely upon sound business cases to improve their enterprise's prospects.
As Pete Townsend presciently sang: "Meet the new boss/same as the old boss." In today's more conservative economic climate, it's important to qualify any new IT initiative with quantifiable results. The new boss is the same as the old boss, and kicking off any major initiative is still about increasing revenues and profitability while decreasing costs.
ROI Small Piece of Puzzle
Traditional justification of IT initiatives has typically been based on return on investment, which answers the question, "When will it be done paying for itself?" But a number of cost-justified ERP and CRM implementations have failed to meet expectations and show bottom-line results. In some cases, these projects have brought unwanted publicity to a company, eventually showing up in their quarterly reports to Wall Street. As one top executive explained recently, "The ROI for my ERP rollout didn't consider 12 different versions in 4 geographic regions."
While ROI is a valuable measure for implementing projects, it doesn't resonate with top executives and shareholders at the same level as increasing revenues and profits. What is needed today is a means of justifying new initiatives in terms of shareholder wealth creation. "Wealth-creating business cases are rooted in calculations that positively affect a company's share price," according to Brian Sommer, a researcher at IT consulting firm B2B Analysts of Cambridge, Mass. "These address four elements: improvements in key financial and non-financial corporate assets; reductions in the capital appetite of the company; opportunities to increase top- and bottom-line performance; and methods to improve cash flow and free up working capital."
In order to achieve these results, companies need to re-think their approach to project justification. The new boss is looking for more than just a payback - the new boss expects results.
Identifying Wealth Creation
No technology is an island - there are significant impacts throughout an organization for any newly introduced solution or concept. When identifying new areas to apply technology for wealth creation, a specific set of steps should be followed. Over the last five years a number of significant technological and cultural changes have occurred to create new possibilities for more efficiently managing the supply chain, to the extent that this is now often referred to as "the value chain."
Companies have created new business models that utilize technology to focus on their core competencies and have outsourced non-core operations to specialists in logistics, manufacturing, design and other business processes. This has created the need for new software and services focused on cross-enterprise trade, as well as a re-evaluation of the measurements and metrics that define an effective supply chain. Just as successful four-wall enterprises need to balance individual silos of performance against overall corporate goals, the new extended enterprises need to collaborate in defining the metrics for their future supply chain's competitiveness.
As companies begin to embrace the concept of the extended supply chain (in effect, creating a virtual company comprising their customers, suppliers, logistics partners, outsourced manufacturers, installation resources, and their own departments and divisions), they are also realizing the inherent risk in these relationships and the need for greater "trust" between and among partners. But this trust cannot be established either through a handshake or a novel-length contract. It must be fact-based with clearly articulated goals that result in mutual benefits for all participants.
All of these factors must be considered when justifying expenditures in new areas of technology that offer extremely large rewards. The following steps present a framework to approaching the justification of these initiatives and determining their impact on revenue growth and profitability:
• Identify major value opportunity areas: The first step in any improvement initiative is to identify the process segments where opportunities for value creation are significant. Initially, it is critical to create a cross-functional team (with executive sponsorship and key participation from the CFO's organization and business process stakeholders) that can offer a 360-degree view of the company's strategies and operations. This team must then identify all potential areas of opportunity and rank them in terms of impact on improving shareholder value. Focusing team members on corporate objectives, rather than departmental (or silo) concerns, can expose new opportunities that otherwise may not have been considered.
• Perform a process improvement analysis: Such an analysis provides a detailed review of these process areas, summarizing the key challenges associated with the current processes, and identifying process improvements that add value. The analysis of each process area should be presented in the following manner:
• A review of current ("as is") business processes.
• A summary of the key challenges and pains associated with the "as is" processes.
• A discussion of process improvements ("to be") that can be facilitated by adopting new technology.
• Quantifying value: The process improvement analysis represents a critical step in the value discovery process, serving as the foundation for bringing resolution to the value opportunities in the form of quantified value. The cross-functional team must work to derive quantified value through the application of a value-mapping framework. This framework, which provides a high level map of how and where new technology will add value, is used to facilitate dialogue with key process owners regarding the magnitude of impact within each value opportunity area.
3 Sheets of Paper
During the quantification of value phase, it is important to understand that a technology vendor's online value calculator can't achieve this quantification by applying "best practices" percentages. This can create a false sense of precision as each company operates with different goals and strategies. The business process owners must calculate cost savings and revenue improvements, because they will be the ones asked to commit to those numbers for their MBO's. When proposing headcount reductions (or the more polite "re-assignments") top executives are not interested in percentages, they want names.
Saving 10 percent of a salesman's time that results in an increase of his personal web surfing is not wealth creation. But if a receiving clerk saves 10 minutes with new software, you can increase the target throughput within that facility to reflect the time savings - a hard benefit that goes right to the bottom line. (As for that salesman surfing the web with his freed up time, you can increase his quota, and that will directly be apparent to the shareholders.)
When Results Are Faster
The last two important pieces in justifying new IT initiatives are speed-to-benefit and continually measuring the results against expectations. Even if the initial benefit is not the largest cost saver or revenue producing component, it is important to have something quantifiable happen in 90 days. Too many ERP implementations didn't show results for over a year or more and this causes a loss of momentum and focus. Identify one area to demonstrate a proof of concept and then build on your early wins.
Most importantly, revisit your expectations and constantly measure the improvements. Your shareholders will thank you for it as they see the results on a quarterly basis.
John Davies is a co-founder of Optum, a software firm specializing in supply-chain visibility and warehouse management solutions. Author of numerous articles in supply-chain industry publications, Davies is also a frequently requested speaker at international trade shows and educational events, including the Council of Logistics Management.
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