Nov/090
No Decision – May You Forever R.I.P. (Part 4)
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.
Nov/090
No Decision – May You Forever R.I.P. (Part 2)
In the last issue, we discussed an extremely costly syndrome that plagues many businesses, namely that of projects that get launched with great intentions and then quietly run out of steam without producing tangible results or meeting stated objectives. I see this frequently with regard to ERP or IT projects.
Fortunately, there is plenty that can be done to avoid this wasted effort. However it requires a significant undertaking, careful analysis, clarity and organizational resolve to see it through. It requires lots of short and long term assumptions, as well as countless questions to be answered. When completed and properly documented, it results in a comprehensive business case for the project. This document is a critical tool used to justify the long term investment of organizational assets (people, time, money) to select and successfully implement an ERP system. It also serves as the foundational rock to guide and encourage the organization to continue pressing forward through the murky process.
Several suggested steps for a successful ERP software selection process are outlined below. Notice I said successful ERP software selection as opposed to successful ERP software review. After all we are focusing on ways to complete the project rather than getting halfway through and aborting it.
1. Determine to Justify. The first thing you’re probably asking yourself is whether the formal business case justification exercise is really necessary. After all, isn’t it common knowledge throughout the organization that the existing system is dysfunctional? If so, then why waste time documenting what is already known? Can’t we just get on with it and begin the shopping process? Sure you can, but in all likelihood you will end up regretting it. The reason is that you do not have a clear business imperative to proceed. What I mean by that is that you must understand the short and long term business reasons for embarking on the project. This will likely include the strategic objectives and vision of the company ownership and stakeholders. You should also consider the organization’s track record on difficult projects, and what other competing short and long term priorities might exist. In addition, you will need to identify the goals and benefits to be achieved, the measures to be used, and the problems to be overcome.
Conversely, if you are simply focused on certain functions that need improvement, you are looking at this more as a computer or IT project, as opposed to a critical business project. If it’s cast primarily as an IT project, your bullets will not be nearly potent enough to slay the dragons that lie on the ERP system path. Those dragons frequently come in the form of undesirable trade –offs, higher than anticipated costs, ambiguity and unclear outcomes.
Having a well organized and clearly documented business case will provide strong support from management and employees when the going gets tough. Without it you are merely relying on hope and faith to carry the day. Based on my experience, I can tell you that faith can go out the window when the challenges start mounting. The difficulty and risk involved in an ERP project is significant, and therefore in order to assume that risk, there must be clear and compelling reason to do so, and more importantly organizational resolve from top to bottom to succeed.
2. Quantify the Need for Change. Now that you have determined the value of a thorough business case justification project, the question is how to do it. At its most fundamental level, you are attempting to quantify the value of the benefits to be gained, versus the cost to attain those benefits. You are examining these benefits and costs over the perceived life of the ERP system, bearing in mind the timing of when specific costs and benefits are likely to occur.
It is admittedly difficult to determine concrete value from a new ERP system implementation. But far better to do it now, rather than after the money is spent. Credibility must be a critical overarching objective in the finished document. This requires soliciting feedback from several key people and departments, while frequently erring on the conservative side in your estimates.
Most organizations can readily identify functions in their existing ERP system that are not working well. However, a deeper inspection will frequently reveal several events occurring in the organization that may be symptoms of a bigger problem. For example, you may discover a chain of events similar to that illustrated below.
profits are down
→ sales are down
→ orders are not being fulfilled
→ excessive stock outs
→ excessive inventory obsolescence
→ poor demand and supply chain visibility
→ wrong inventory items being replenished ↑
You can see from this example that even though there are a variety of problem events taking place, the likely root cause is that the organization has poor insight relative to their demand and supply. So they are essentially operating blind in the replenishment area and ordering too much of what they don’t need and too little of what they do. If they could address that single issue, a number of other issues would disappear or become less of a problem.
Make a list of all your events and then determine which seemingly unrelated events are in fact actions or reactions to another event in your list. Being able to address and manage the root cause event more effectively with a new ERP system should yield a cascade of financial value.
In the next issue we will look at ways to quantify the tangible and intangible financial values and benefits of your project as well as the myriad of costs that will need to be borne.
Sep/091
Do ERP Best Practices Equate to Improved Company Performance? Part 5
Where’s the Elephant?
I concluded the previous post with the notion that there was a large elephant in the room and that we best find it soon before we startle one another. The obvious elephant in the room for me is the question of which came first? The ERP system best practices or the best-in-class companies? In other words, does fanatical discipline and commitment relative to ERP system best practices lead an organization to achieve best-in-class status? Or does a best-in-class company simply exhibit similar champion-like execution and management relative to their ERP system, just as they would in any other element of their business?
This Aberdeen report does not attempt to answer the chicken or the egg question. However based upon my 20+ years of working with ERP systems, and what the report does reveal, there are some reasonable conclusions that can be drawn. In my belief, best-in-class companies exhibit the following characteristics with regard to their businesses, their ERP systems, and their other investment assets.
- They plan well in advance
- They take the long term view.
- They systematize and integrate practices, processes, and procedures wherever possible.
- They establish objectives in advance and constantly measure against those objectives.
- They set the bar high, keep raising it whenever possible, and hold people accountable.
- They adapt to change rapidly and avoid getting boxed in a corner.
- They face touch challenges head on and make tough decisions quickly.
- They reinvest continuously in their systems and their people.
- They recognize the value technology can bring to their business and they aggressively use it to their maximum advantage.
In other words, they avoid the duct tape patch jobs and do things right the first time whenever possible.
Looking in the Mirror
We have examined several of the critical factors relative to the way best-in-class companies manage and utilize their ERP systems. But as you might expect, we have just scratched the surface in terms of the ERP system best practices exhibited by best-in-class companies. My hope is that some of the data provided herein may enable you to assess your particular situation and the correlation that your ERP decisions are having on your overall business performance so that you can move the needle in the desired direction. I would love to know whether you agree with the preponderance of the Aberdeen data or do you think it misses the mark in some way?
Jeff Mack
President & CEO
ICS Support, Inc.
Sep/090
Do ERP Best Practices Equate to Award Winning Company Performance? Part 4
ROI – What’s Possible?
Speaking of ROI and measurement of same, Aberdeen reports that best-in-class companies are way ahead of the game in this regard as well. They are 57% more likely to utilize ROI estimates to cost justify an ERP project. And here’s the big one, they are 163% more likely to continue measuring ROI even after it has been achieved. Do you get the impression that there’s a strong commitment to continuous improvement?
Typically when initial ROI is analyzed, the total acquisition costs are measured over the time required to recoup the investment. You can see below 5 unique measures that can be used to calculate the ROI. These sources for ROI are equally viable for best-in-class companies as all others; it just takes the others about twice as long to recoup their investment.
Why do you suppose it takes the average and laggard companies twice as long to recoup their ERP system investments as the best-in-class companies? The chart below reveals that the best-in-class companies are much more aggressive than the rest of the companies in setting the ROI bar high.
As you can see in the chart below, the act of setting the ROI bar higher than the rest pays off handsomely when it comes to realized ROI.
We have examined enough data to get a clear picture indicating that best-in-class companies demonstrate best practices relative to their ERP systems, and that they derive more functionality, performance, and ROI from their systems. However, from my perspective, there is still a big elephant in the room and I think we need to find it.
Jeff Mack
President & CEO
ICS Support, Inc.
Sep/090
Do ERP Best Practices Equate To Award Winning Company Performance? Part 3
Telltale Traits
You may recall that as we concluded Part 2, we were just beginning to examine what impact keeping an ERP system upgraded and current had on a companies performance. In addition to the company performance metrics that you were shown in Table 1, Aberdeen analyzed 5 other key characteristics of the surveyed companies in an effort to further delineate the best-in-class from the rest. The 5 additional characteristics are shown in Table 3 below and included process, organization, knowledge management, technology, and performance management.
There were several notable highlights in the background that went into comprising the above table. The ability for a company to standardize processes, and the degree to which they are standardized in their systems are fairly obvious indicators. With regard to the organization metric however, 88% of best-in-class companies feel that executive management support is critical throughout the entire life cycle (selection, implementation, upgrades, extensions, and continued investment) of an ERP system, rather than merely during the selection and initial implementation. I believe this fact alone is a huge differentiator. And speaking from personal experieince, I have seen several projects severely challenged simply because the process bogged down without executive leadership and involvement.
Similarly, best-in-class companies also have a strong commitment to continued training for employees. As you might imagine, these metrics are in stark contrast to the companies outside the best-in-class category. Another organizational metric indicates that better ROI is obtained from the ERP system when assigned to line of business executives outside the IT department. That’s generally because these executives stand to gain the most from full system utilization and focused performance improvement. In general, you can see that the best-in-class companies are much more committed to measurement at all phases of a project.
It appears that the evidence is continuing to mount suggesting that yes indeed there is a trackable correlation between these best practices and actual company performance. But as we know, the purchasers of ERP systems are often looking at specific ROI to justify the acquisition of a new system. So in our next installment, we will evaluate ROI indicators as they relate to ERP best system practices.
Jeff Mack
President & CEO
ICS Support, Inc.
Aug/091
Do ERP Best Practices Equate to Award Winning Company Performance? Part 2
Best-In-Class Performance
We should understand what Aberdeen defined as best-in-class so we have a meaningful yardstick by which to measure. These metrics are of course closely related to the manufacturing sector, but you can easily see that many of them would apply equally well to non-manufacturing environments. At the end of the day, there will still be a top 20% in any industry, a bottom 30%, and those 50%’ers stuck in the middle.
The data contained in Table 1 should be a huge wake-up call because it indicates that the top 20% are getting leaner and meaner, and thus stronger. The rest (average and laggard) are not keeping pace, which leads to the conclusion that the competitive advantage gap between the best-in-class and the others is growing larger.
How do the best-in-class do it? Do they have better visibility and communication across departments and functions? If so, is it due to different or better versions of software? Are best-in-class companies perhaps operating more current versions of their ERP systems than the rest of the companies surveyed? The reported data indicates that 62% of the best-in-class companies are running on the publisher’s latest available software release or one release back, compared to only 17% of the companies in the average or laggard classification able to make the same claim.
Is this the first piece of evidence suggesting that keeping an ERP system current and updated (a best practice) correlates to better hard dollar results for a company? Stay tuned as we will examine this question and more in the next posting.
Jeff Mack
President & CEO
ICS Support, Inc.
Aug/091
Do ERP Best Practices Equate to Award Winning Company Performance? Part 1
We often disseminate information about best practices for a company involved in selecting and implementing an ERP business system. These words of advice are frequently rather academic in nature as they are generally not linked with any real before and after examples. So it got me to wondering about how we can derive cause and effect analysis between ERP system best practices and best-in-class company performance. And as I thought about this further, many questions came to mind.
- Do best-in-class companies adhere to best practices regarding their ERP systems?
- If so, is there a direct and traceable connection, or is it more of a feel good association?
- Is the ERP system implementation viewed as an event or a journey?
- What percentage of system functionality is actually being used?
- Do they opt for best-of-breed point-to-point solutions or a well integrated suite of products?
- Who’s the best person to place in charge of the ERP system?
- What impact do post go-live practices and decisions have versus pre go-live decisions?
- How do they view the practice of customizing their ERP software?
- What’s their strategy regarding upgrades and keeping their system current?
- How and when do they measure ROI?
As you can imagine, it would require an exhaustive study to connect all the dots and produce empirical data to answer these questions across all major industries. So I settled for the next best thing – I found an Aberdeen Group study entitled “ERP in Manufacturing 2009 – Expanding Beyond Traditional Boundaries”. This study solicited feedback from 435 North American manufacturers in a diverse set of industries. Since the manufacturers serve a strong cross section of industries, I am inclined to believe that the reported data is reasonably comparable for distributors, service industries, and several other industries not specifically targeted in this study.
In the next several days, I will tackle some of these more tantalizing questions to determine how the star performers view and manage their ERP systems and investments.
Jeff Mack
President & CEO
ICS Support, Inc.