Measure Twice, Cut Once Applied to ERP Implementations
March 23, 2009 Dan Burger
What does you ERP software do for you? Or if you look at it from the other side, what doesn’t it do for you? Most companies continue to make sizable investments in ERP applications, but mysteriously they don’t measure their return on those investments. Isn’t that a heck of a way to run a business? A soon to be released report from Aberdeen Group examines this dirty little secret, and pulls the rug back on a bit of the dirt that’s swept underneath.
The survey is based on the survey responses of 168 companies that have ERP projects in various levels of maturity: some from companies implanting ERP for the first time, some replacing one ERP system with another, and others that are engaged in ongoing implementations that include minor and major upgrades and possibly customization. It also contains feedback from companies that have deployed ERP in the software as a service model.
“In today’s economy, if you are spending money to save money, return on investment comes into play,” says the report’s author, Cindy Jutras, a vice president and group director at Aberdeen. “If you can’t point to hard dollar savings, then you need to be pointing to something equivalent, whether it’s improved profit margins or the prevention of lost revenue. It’s going to be different for every company.”
What should not be different for every company, Jutras says, is a system of measurement to establish ROI. It needs to be in place before the project begins and it needs to remain in place after the project ends. This yardstick or scale or gage, whatever you want to call it, monitors items you want to reduce like operational and general administration costs, inventory, and waste. And it monitors items you want to increase like utilization of resources, value-add to customers, and profits.
In every ERP report that Jutras has put her name on at Aberdeen, and that’s been more than just a few, she has recommended that all projects begin with a stake in the ground to measure the baseline and have something to measure results against. “I don’t see a lot of evidence that people are doing that,” she admits. “Certainly no software company can guarantee a return on investment. That’s because two companies can implement the same software and get very different results. But the bottom line is that if you don’t do a project to get a particular return on your investment, you probably won’t get it. You could be getting ROI and not know it, but my guess is that if you aren’t measuring it, you aren’t getting it. Because if you were measuring it, you would know it.”
The comment that no software company can guarantee a return on investment caught my attention. It seems to me there are plenty of software companies willing to tell that story all day and all night and into the next week, too. And I’m not just pointing fingers at the ERP software vendors. ROI is the new TCO. Remember total cost of ownership? It’s gone from a leading role to a supporting one. What executives most want to know is when will the money they spend on IT be back in the bank. I wouldn’t totally dismiss TCO, however. It still plays an important role in comparing the costs of hardware, software, services, and maintenance. In almost every instance, these costs are not inconsequential.
The stake in the ground baseline marker that Jutras emphasizes is what allows companies to estimate expected return on investment. The estimated ROI is not a particularly easy target to hit. An unnamed business transformation program director at a national food distributor is quoted in the report saying, “We used consultants to help us with establishing the benefits realization, and a strategic view on the program, and also QA. They were extremely important because they provided the guidance and methodology for determining the ROI of our ERP platform.”
When estimating is done in terms of real dollars, the bull’s eye becomes much more clear. Everyone needs to agree there’s no shell game going on with the numbers relating to factors such as general administrative costs or better utilization of resources. In other words, the books need to balance at the beginning and at the end. There should be a fiscal and an operational audit trail.
“I prefer things to be pretty much black and white,” Jutras says. “It’s not just about quality. It’s more about the financial result–the improvement of profit or actual hard dollars savings. It can’t be funny money. It has to be actual hard cost savings in order to validate a project. Unfortunately not too many people exert a great amount of rigor in something like an ERP project. But there is no reason why anyone shouldn’t apply rigor to the metrics with any project.”
It makes me wonder about the amount of rigor that went into some of the legendary ERP projects that cost twice as much as anticipated and take twice as long to complete.
Only 58 percent of the best-in-class organizations surveyed achieved an ROI within the estimated time frame. On the other end of the scale are the ROI laggards who don’t bother to measure it or never achieve it. That’s the bottom 30 percent of the survey responders. The in-betweeners get value out of it, Jutras claims, “but they don’t necessarily prove that to themselves.” If they would take the time and make the effort to measure, she argues, it would not only benefit the ERP project, it would help keep more IT projects in the pipeline so that more and better things could be accomplished.
“I hate to boil it down to such a simplistic observation,” she says. “But the reality is that if you actually say ‘this is what I expect to spend and this is what I expect to gain,’ then start measuring the milestones, you have an enormously better chance of actually reaching those milestones. If you don’t, you have no chance at all.”
The Aberdeen report is titled Measuring the ROI or ERP in SMB. It’s expected to be available by the end of March. Related research from Aberdeen includes three reports on the total cost of ERP ownership. One is designated for small companies, another for mid-sized companies, and the third for large companies.