Ensuring technology returns investment
1 April 2005 | 0
One of the best known examples of business wisdom is that you can’t manage what you can’t measure. Yet IT directors of Irish and UK businesses continue to spend money on systems without establishing or measuring their real benefits to the company. As a result, they are unable to prove return on investment, and are failing to implement IT that supports business growth.
So why does this disconnection exist? Quite simply it is because of the age-old problem of a communications chasm between IT and business. They speak different languages: The language of faster clock speeds and gigabytes on one side, and the language of balance sheets and profitability on the other.
Some recent initiatives driven by the technology industry seemed to provide a way forward. Customer relationship management (CRM), for example, appeared to meet the needs of the business to build customer loyalty and maximise share of customers’ spend on specific services. Yet the fact is that most companies believe that they have failed to gain ROI (return on investment) from their CRM investments, and have in some cases simply added to bottom line costs.
It’s a similar story with e-business, which was supposed to revolutionise the way in which organisations provided products and services to customers. In reality, only a few dot.com ventures made money, while the failure of new electronic channels had a damaging effect on many established brands.
Enterprise resource planning (ERP) software implemented to improve business performance as a whole has been found equally guilty in some quarters. In the 1990s, larger organisations in Ireland invested significant budgets in ERP software designed to make business operations like finance, HR and supply chain work more effectively.
Unable to prove
These systems promised huge improvements in efficiency for business—shorter intervals between payment and orders, reduced inventory in the supply chain, or improved customer service. Yet in many cases, organisations have been unable to prove ROI to the business beyond reducing headcount or speeding up processes.
The question is whether this is a new phenomenon, or whether it’s a problem that has been around for much longer. Why has ROI in ERP (and other technologies) become such a key preoccupation for businesses?
The answer can be summed up in two words: Economic downturn. When the economy is strong and business is booming, companies can draw a veil over investments in new IT projects that go wrong, or fail to add value. But when accounts and financial performance are under scrutiny both internally (by the financial director) and externally (by investors and analysts), then it’s more difficult to hide the truth.
Not only that, but FDs (financial directors) and investors now want to see demonstrable proof of wise investment of increasingly scarce funds, whether that’s in technology, new office buildings or manufacturing equipment. Market pressures are pushing Irish businesses to re-evaluate technology investments, both new and existing.
So where should this process start? One of the biggest problems that Compass has identified is the gap between IT and the business when new systems are introduced. The language gap already discussed is exacerbated by the way in which the benefits of technology have traditionally been measured.
One example is call-centre technology. The temptation is to measure call throughput speed as a benefit to the business. But speed of throughput may not equal good customer service, especially in industry sectors which require customer service operators to provide quite detailed information during phone calls. A more effective measurement may be reduction of customer churn, or a higher number of services/products sold to each customer.
Justify & Measure
The ROI process must therefore start with a sensible assessment of business benefits delivered by new technology projects. These must be agreed by the business and by IT objectively, and filtered through the current and future business plan. If IT projects will not deliver elements of the business plan, then they will clearly be difficult to justify and measure.
A sub-question to consider at this point is how many of the claims of software vendors should be factored into ROI business cases. One way to answer that is to look at SAP’s own figures, which suggest that less than 10 per cent of customers actively report measurable business benefits back to SAP. This does not mean that less than 10 per cent of customers fail to gain benefits, but that they do not establish sensible, measurable benefits at the outset.
What tends to happen is that IT systems are implemented as IT systems, with little thought given to how they will bring real cost savings and more effective processes to the business. The problem is that companies do not know how, when or what to measure to identify benefits, and many of the benefits that ERP delivers are either soft measurements or very small improvements at a granular, process level.
For example, an improvement could be something as simple as a lower cost of sale. From an IT point of view, this would not be an obvious measure to be derived from implementing SAP. But from an FD’s point of view, it could represent significant savings.
So what needs to happen is that IT begins to speak in the language of business. It needs to understand what the actual benefits of IT-enabled or enhanced processes are to the individual organisation, not what generic improvements software packages are supposed to deliver.
One way to move towards this is to work with an independent organisation that can help to measure the progress of projects against fact-based models. Compass has worked in this way with companies around the world for 26 years, and has developed a clear methodology for assessing the success and progress of IT projects, and helping IT to interpret the specific improvements gained in terms that the business understands.
This approach means that companies have an accurate view of the success of their projects, partly by measuring that success against a database of comparative facts gained from peer organisations. For the first time they know with some degree of confidence whether they have got better or worse value from their IT investment than other companies, and also what remedial action they need to take where ROI is not being realised.
The issue of the communications chasm between IT and business is long-standing and perennial. Can it ever be bridged? Five years ago the temptation would have been to say no. But the fact that the spotlight is now firmly trained on corporate investment in IT means that something has to give. The business knows it needs to stop seeing IT as a kind of Emperor’s New Clothes that drains resources and is difficult to understand. IT knows it needs to get better at telling the business how new systems add value.
Those changes will not happen overnight. It could be that IT will always be from Mars, and business from Venus. But there are approaches that companies can take to ensure that they are getting the most from their investments in ERP. To return to that old management adage, companies in Ireland are no different to those anywhere else: To start managing ROI from ERP, they need to start measuring projects—and the benefits they introduce—much more stringently than ever before.
The author is head of enterprise applications at Compass Management Consulting, an independent consultancy that advises global organisations on operational improvement by analysing and optimising their operational practices in relation to their core business objectives. For further information please visit www.compassmc.com