the Impact of IT Investments
Tucker, CFO of the $1.3 B adhesives manufacture H.B. Fuller, finds, "
We can't really understand all of the benefits that will come from electronically
enabling our business. We know that as we standardize on technologies
we will grow our business. The benefits will probably come from places
we don't expect to see them". Tucker states that the problem with financial
analysis of technology investment is, "Technology investments can impact
organizations in many ways. When we can associate operational metrics
with technology investments we have another tool to measure if we are
getting positive results."
is a hypothetical example of how operational metrics or Key Performance
Indicators (KPIs) might be associated with the cash flow projections for
an IT project.
A company plans to install Radio Frequency/Bar Coding in its
main warehouse. The project's cash flow projection is based on 1) enabling
the company to carry lower inventory, thus reducing working capital
and 2) reducing the staff required during peak shipping hours. For the
IRR calculation the value of the lower working capital and the lower
staff salaries are put in monetary terms. In other words, the projected
dollar savings will be estimated and used to justify the project. Let's
assume that the payback period for the investment is projected to be
3 years. If all the conditions that are in place today remain static
for 3 years, the company will be able to measure if the project met
the cash flow/financial projections. But if the number of SKU's shipped
from the warehouse change or shipping volume goes up or down the cash
flow impact will be skewed. The company could develop KPI's that are
associated with but not the same as the cash flow/financial measures.
Here are some options:
- Units shipped per man hour
- Orders shipped accurately
- Warehouse inventory turns
- Orders shipped on time
- Time it takes to ship standard orders
- Average days of inventory on hand
of the KPI's we've developed can be easily turned into monetary terms.
But the KPI's we've suggested are indicators of more effective use of
working capital or better utilization of labor. No KPI will be perfect
nor will KPIs be immune from the impact of changing business conditions.
However, if the underlying business assumptions change, the cash flow
projections may be critically flawed but the KPI's can still be relatively
reliable indicators of the impact of an IT project.
is Part Two of a two-part tutorial. Part
One discussed the difficulty using ROI to evaluate an IT Investment.
Supply Chain Investment Problem
emerging problem with traditional financial analysis and IT investments
involves the expanding scope of IT projects. Today, companies are increasingly
making IT investments that impact the cash flows of themselves, their
suppliers, and customers.
financial analyses justification for an IT project traditionally has been
confined to the improvements in cash flow that accrue to the company that
is doing the project as it is extremely hard to put into monetary terms
the long term benefits that accrue from supply chain improvements. This
is another opportunity to use KPI's to measure the impact of an IT project.
It is relatively easy to develop KPI's that measure supply chain metrics
like lead time requirements, supplier responsiveness to change orders,
or the reliability of customer service information.
software technology improves, the benefits to a single company in a supply
chain will be even more difficult to measure in financial terms. Companies
will need to increasingly rely on KPIs that are associated with the financial
projections they used to justify IT investment.
the free spending era of IT is over. Unfortunately, the traditional financial
measures that companies use to make investment decisions are only partly
applicable to IT investment. Companies that have a strategic imperative
to gain competitive advantage through investment in IT infrastructure
should look to develop KPI measures that can be indicators of the financial
performance of their IT investments. In the long run, IT project KPIs
may be the best indicators for IT managers to use in evaluating the results
of their IT investments.
"Bill" Friend and Olin Thompson are consultants who specialize
in the application of IT to business problems in the process industries.
Bill is a principal of WR Friend & Associates (www.wrfriend.com)
and has over 25 years executive experience in food and chemical manufacturing
and can be reached at email@example.com.
has over 25 years experience in the software industry and is the founder
of Process ERP Partners (www.processerp.com).
He can be reached at firstname.lastname@example.org
They co-write a monthly column for Food Engineering (www.foodengineeringmag.com)
and are the co-founders of the Food, Chemical and Life Science CIO Forums
which are found at www.foodcioforum.com,