This is the last installment in a series that has been discussing a problem plaguing many businesses today, and that is the situation of ERP or IT projects being aborted midstream before they accomplish their stated objectives. In the last issue, we discussed the means by which the project’s financial impacts would be assessed and projected. In this issue, we will summarize those projections with some commonly accepted evaluation formulas accompanied by the closing arguments for the project.
5. Get Out Your Calculator. We have explored the need for completing a thorough justification process and the strategic business imperatives that are driving the initiative. We have also discussed some of the potential benefits and costs to examine when conducting your justification. What remains is to simply tally up the projected value of your benefits and costs in a worksheet. You should then be able to determine the Net Dollar Value of Benefits with the following formula. With today’s extremely cash conscious business environment, I would focus more on the shorter term horizon measurements. In other words, focus on items that will have an immediate positive impact on the cash position.
Net Dollar Value of Benefits = Total Value of Benefits – Costs of Implementation
As the business climate and available credit improves, a longer term horizon measurement such as a simple Return on Investment may be appropriate.
ROI = (Net Dollar Value of Benefits/Costs of Implementation) x100
Different organizations use different perspectives to evaluate potential investments so I can’t tell you whether ROI is an accepted metric in your organization or not. However here are a few other measures you may find used to evaluate an investment.
A) Internal Rate of Return (IRR). This can be useful in comparing one investment opportunity in an organization vs. another. For example comparing an ERP system investment vs. a new factory investment.
B) Payback period. A simple determination as to how many months it will require to earn your investment back,
C) Net Present Value (NPV), this involves a bit of black magic so you may want to leave this to the finance folks
D) Total Cost of Ownership (TCO), simply looks at costs while ignoring value and benefits
6. Wrap it Up. You have now completed a thorough analysis of the strategic elements that are driving the organization to consider this investment. In addition, you have outlined the chain of events, symptoms and potential problems that are occurring in your existing environment. You have evaluated the various categories of value and benefits to be derived by the organization, along with supporting details. On the flip side, you have calculated all the projected costs over a fixed period of time. Assuming the numbers pencil, you have all the numbers to show that this project has been carefully analyzed for a positive business impact.
What remains now is to present your business impact analysis to the appropriate decision makes and stakeholders. When done properly, this process will not only justify the organization’s decision to move forward, but much more importantly provide a solid footing for the project to launch and sustain critical momentum when you get lost in the woods or the occasional storm surfaces on the horizon.