Improving Your Bottom Line Boosting profits with the right ERP and CRM tools

No Decision – May You Forever R.I.P (Part 3)

In our last issue we discussed the rationale and importance of developing a comprehensive business case for your ERP or IT project to ensure that it presses forward to completion and does not fall victim to the countless threats that swamp many projects. We also discussed the methods for determining why change, and in fact the project, is needed. In this issue, we will discuss how to determine the dollars and cents of the analysis.

3.  Assess the Value. You should recognize that there are financial benefits and non-financial benefits, as well as tangible savings and intangible savings. Financial benefits and tangible savings are fairly easy to identify. While the Intangible savings will certainly require more digging to be able to quantify, don’t overlook them as they could be more significant than the tangible savings.

Possible benefit categories might include time savings, increased productivity, improved quality, employee quality of life, improved customer service, and reduced inventory. Each of these categories can be further analyzed for specific projections of financial savings. For example, reduced inventory is a tangible financial benefit that should also result in reduced carrying costs (reduced storage, less time handling inventory, reduced inventory obsolescence, reduced insurance expense), reduced freight expense, and improvement in working capital. There are very real financial benefits associated with each of these and you need to project those values.

Improved customer service would likely be considered an intangible financial benefit. However there are several sub elements, including increase in market share, decrease in customer complaints, decrease in returns or warranty claims, decrease in uncollectable AR and write-offs that could be projected to produce tangible savings.

4.  Estimate the Costs. Identifying and quantifying the costs is more straight forward than tracking the benefits, but mistakes can still be made if you are not careful. First recognize that there are costs associated with the initial acquisition of the system (hardware and software), as well as installation costs. In addition, there are onetime costs and recurring costs.

An all too common mistake is to underestimate the costs, resulting in an over budget project. Why does this repeatedly happen? There can be a variety of reasons but the primary ones are indicated below.

• Costs are understated at the outset due to looking at projections through an overly optimistic scenario. Rarely do best case scenarios materialize. And when you consider the odds of best case becoming reality when it involves multiple people, processes, and deliverables from multiple organizations – well let’s just leave it at almost never and call it good. 
• Costs are understated due to a lack of understanding of complete project requirements. The firm providing the ERP system may not fully understand the scope of requirements and therefore underestimates the costs. Or perhaps they low balled the estimate in order to win the business. Alternatively, the organization purchasing the ERP system may not have fully evaluated their requirements and capabilities, and thus has incorrectly identified the project scope.
• Costs are understated because the organization purchasing the ERP system is anxious to trim implementation costs and thereby takes on responsibility for self-performing much of the work, or simply eliminates what are deemed to be discretionary services such as training or report writing. It is a rare organization that is able to pull off a significant self-perform effort successfully. Consequently this will generally lead to a severely challenged project that is both late and short on deliverables, and ultimately over budget when the tasks are reassigned outside the organization.
• Costs are purposely underestimated in order to get a project approved with the thought that additional funding will be sought later once the project is off the ground. Thankfully we don’t see this approach often but it does surface in certain types of organizations. 
• Costs are understated due to ignoring internal labor costs and diminished productivity during the implementation. Productivity suffers merely as a result of having to learn new systems. In addition, organizations will generally look at the wages for existing employees as sunk cost and not fully realize that every moment taken away from their primary duties results in incremental operating costs for the organization. This happens when normal productivity suffers due to spending significant time on non-core tasks, such as implementing an ERP system. The problem can be exacerbated by electing to reduce money spent on expert consultants (obvious incremental cost), and instead assign extra tasks to existing employees (less obvious incremental cost) that might be able to complete the task in a given period of time. Aside from the very real incremental cost of having the employee pick up the extra tasks, is the danger that the task won’t be completed on time or at satisfactory levels and now you may start incurring additional costs as other areas are impacted.

In the next issue, we will discuss the means for pulling all this hard work together into a credible and meaningful set of recommendations that demonstrates thorough analysis and provides the means to launch the project, and most importantly, complete the project.