February 2010: A Note from Jeff Mack
"No Decision" – May You Forever R.I.P. (Part 4)

If you missed an earlier issue, read Part 1, Part 2, or Part 3.

This is the last installment in a series that has been discussing a problem plaguing many businesses today - 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.

Step 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 simply to tally up the projected value of your benefits and costs in a worksheet. With today’s extremely cash-conscious business environment, I would focus more on the shorter term horizon measurements such as the Net Dollar Value of Benefits. In other words, focus on items that will have an immediate positive impact on the cash position. You should be able to determine the Net Dollar Value of Benefits with the following formula.

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) 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 is a simple determination of how many months it will require to earn your investment back.

C) Net Present Value (NPV) 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.

Step 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 out, you have all the figures 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 makers 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.

I'd like to hear your reactions to this series. Please drop me a note at jeff@ics-support.com.

 

Here's a summary of the steps for a successful ERP software selection process outlined in this series of articles:

1.Determine to justify and produce a well-organized and clearly documented business case: understand the short and long term business reasons for embarking on the project.

2. Quantify the need for change.

3. Assess the value:, financial benefits and non-financial benefits, as well as tangible savings and intangible savings.

4. Estimate the costs.

5. Get out your calculator and determine the correct metric for your organization to evaluate the investment.

6. Wrap it up: 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.