Proving ROI on ERP solutions

From www.itshowcase.co.uk

Proving ROI on ERP solutions Dave Worsman, Operations Director of Ochiba Business Solutions, a dedicated SAP Business Partner specialising in the delivery of SAP Business One to the SME marketplace, shares his experiences Having worked with so many businesses over the last 20 years that have undertaken projects without a proven business case, it's good to see the tide has well and truly changed. Now projects are forced to have that all important definition of goals aligned to business benefit and that does make for easier, quicker, and ultimately cheaper implementations. This is of great interest to us as specialists in SAP Business One for small to medium enterprises. The case for justification is just as significant for a 4 user system as it is for a 400 user system, and we need to be able to help both extremes prove their potential ROI. At Ochiba we have been working closely with SAP UK and with Martin Southern at Shark Finesse Limited (specialists in ROI software) in order to drive business case justifications for ERP and other software solutions. This has taken us deeper into the world of 'the business cases for ERP' than anyone else I know. Shark are specialists in this field, and it isn't for the highest £'s value of business cases ever written, or their complexity, but certainly for sheer range of experiences then I believe they are hard to beat and we can all learn from that. So relax...this isn't an advertorial...and we will now share with you some real life experiences of business cases and provide a light hearted insight into the murky world of ROI (Return On Investment) and business case justification for ERP installations. Not interested in this subject ?...Well, bury your head in the sand at your peril...because like everything else in life, there are always lessons to be learned...and no-one knows it all. What is ROI ? Businesses exist to generate profits, fulfil the planned objectives and to an extent serve the community at large. Good business decisions are essential to protect long term business strength and ensure benefits for everyone. But what constitutes a good business decision and how can these be determined from an economic perspective? Let's get in the mood with a simple example... Assume your mobile phone bills are £100 per month and a rival operator offers the same service for £70 - if there truly was no difference in the service everyone would look to ways to cut the costs. This is pretty obvious. However, what if the new operator charged £200 to transfer to the new service - how many people would consider this a good deal? There are a number of technology, service, and coverage questions, but the hard headed business decision is: "Am I prepared to spend £200 now to reduce my bills by £30 per month?" This is exactly the same scenario that many businesses face when examining whether to invest in ERP solutions for their business. They already have solutions that work, are producing profits, altogether successful - so why do they need something new that's going to cost money at this point in time? Traditionally, these discussions have been based around features of a solution rather than its economic impact on the company. That's because everyone can understand the technical terms, but quantifying what it will do for the business P&L, and proving that the large up front cost is justifiable - now that's scary ! To find these economic benefits, we need to turn our minds to the language of savings that are understood by our financial friends, because it's those hard £s that are going to justify the investment spend required. Try some of the terminology around improvements in invoicing, for example: The Technical message - Economics meaning - Electronic invoicing = Avoid postage, stationery costs, manual time Auto posting to customer ledger = Faster invoice approval and payment Avoid manual input = Fewer errors, fewer concessions and faster cash If we can find these economic savings, then we can prove that the additional up front investment is more than covered by the benefits that will be generated. Always remember that the "do nothing" decision is available at all times, but if we can prove the benefits are good enough, then everyone will be happy to move forward on the economics as well as the technical aspects of the solution being reviewed. What measures do finance people use to assess what is a good return? There are 3 of them: Payback - At what point in time will the economic benefits recover the original costs? In the mobile phone scenario above it is 6.7 months, being £200 up front cost divided by the £30 per month savings. The answer is a time saving. But now you ask: "What happens after the 6.7 months period?" The decision just gets better, so how do we find the annual percentage return on the £200 just like we would be quoted an APR% on a loan - we can all understand that. IRR or Internal Rate Of Return - the percentage rate of return on the incremental spend, over a selected time period, by comparing all the benefits with the original cost. OK, now I get it, but let's say that I am borrowing money at 6% to fund my extra spend, what profit do I make over time, using a cost of money, and turning this into a £s value? A sort of increase in shareholders worth. This is... NPV or Net Present Value - a £s profit in today's terms, comparing costs out, savings in, and an annual cost of money. So, now that I have all three measures, if I could identify solution benefits, I can deliver a full ROI based business case for my technical proposal. Let's see this in action... A department store proposes to spend £250,000 on an ERP solution. The owners agree that benefits will accrue from reduced queuing time (1 in 12 people waiting would previously have left the queue), reduced stockholding and better buying margins. Benefits totalled £18k per month, but supplier would charge an extra £2k per month for the service. Over a 36 month review period and a 10% cost of money ...is this a good deal? Who can possibly tell unless we look at the 3 key economic measures: Payback 16 months (OK....but not that exciting) IRR 89% per annum (fantastic) NPV £249,000 (increased shareholder values) It's now plain to see this makes sense and the technical decision is now supported by the financial language that business people understand.

Case study examples Our experience tells us that business cases (economic justifications) pivot on the identification of benefits inside organisations. Sometimes these are hiding away as internal inefficiencies long ago forgotten about by the business - and are talked about as just something that never quite got "fixed". Some of these caused major business pain though....Here's a sample of what we found on our own travels: "What about stationery" Sometimes being an expert is a bad thing....you tend to miss the most obvious savings, because your own expertise and ego makes you look for the difficult issues. A £100 Million distributor of paper and stationery was considering a new ERP implementation. The benefits discussion had found the obvious savings - some inventory, some time savings - when someone in the room said: "what about the stationery that we use for delivery notes?" A chortle went around the room. "Don't be silly, we'll still need to print the things" and the contributor went quiet. 10 minutes later he said again: "what about stationery?" And the audience became intrigued. He then went on the explain that the current delivery notes were printed on a non standard size paper and had a peculiar print layout that only one company could supply. The new ERP solution could print straight onto A4 at virtually no cost. "How much do we spend on this funny paper at the moment?" "£21,000 every year, over 3 years this would save £60,000 and tip the whole project into positive returns." Moral of the story....never ignore a benefit just because it sounds simple The supplier didn't major on the feature of printing straight onto A4, but this is where the biggest financial benefit actually existed. "This project just can't be justified" Both client and sales account teams are often concerned that starting an exercise to discover economic benefits could actually backfire if there were insufficient benefits for the business case to be justified. It's actually very uncommon, but sometimes you need to look in the most unlikely places. A car rental company had grown so quickly it needed better ERP systems to manage its business. The sales team managed to get the IT Director and the Finance Director in a room specifically with the objective to discover reasonable benefits that could arise. We looked everywhere - all through the finance dept, the IT budget and we could only find savings to cover about half of the project cost. We thought we had exhausted everything and stopped for lunch. The Operations Director joined us and casually asked: "how's it going....we all know we need new systems". He then said: "on the new unified ERP system, will it track all the mileages of the vehicles that we have ?" "Of course" we replied, "why do you ask?" "Well I can get the vehicles serviced at the proper intervals rather than overrunning the mileage and incurring penalties." "What penalties?" someone asked. "Oh, the £165,000 per annum from the suppliers who charge penalties if we don't service the vehicles properly - we wouldn't pay that if we had accurate mileages." One argument supported the whole business case. "We don't have any IT at the moment" Imagine a business that had grown successfully to a significant size without ANY major computerised ERP systems. This is much more common that you think. A food business employed over 200 people and was hugely profitable without any major IT infrastructure. This gives major opportunities for improvement, but also an in-built resistance to spend: "Why do we need IT...we are successful without it ?" I attended a meeting to examine the economic benefits, and they were everywhere. Excitedly we began firing benefit after benefit to the client - it was too easy. However, in the middle of this I became disturbed as to the impact that we were having on the client. Our own incredulity about how this business had grown without IT had started to become a little offensive. We stopped the conversation and apologised. We started again with a whole new emphasis about building upon what they were already doing and explaining what could be possible in service, customer improvements AND supporting them with the benefits. The financials were the easiest I've ever seen and the customer's FD knew this. We just had to be sensitive to their success and emphasise how much more success could follow. Summary Many people are frightened by business cases because it's an area of expertise that has a certain mystery surrounding it. I hope that this article has helped reduce the fear and provide anecdotal evidence that the majority of proposals really do deliver positive ROIs. Ochiba use the tools and business case histories from Shark Finesse Ltd that allow us to engage customers and focus on the real hard benefits that can arise as a result of new ERP solutions. This ROI approach can be completed in a minimum amount of time, does not involve boring / mistrusted spreadsheets, and can make a major difference to the perception of a project inside our customers. Our own business has a mission to simplify this for everyone because making good business decisions and delivering returns are key to the constant improvement in the impact businesses have on the whole community.