Introduction
After a few years of incredible hype and some very wishful thinking, enterprise software has finally returned to reality. Plans and promises that assumed the repeal of business fundamentals have disappeared along with the sky-high stock prices for some software vendors. But, we've been here before.
In the early 1990s, we thought manufacturing automation would revolutionize business for all time. And in some ways it did. But it did not eliminate the workforce and all the attendant issues of human capital as some advocates envisioned. Nevertheless, automation became a powerful tool in the business arsenal for productivity and growth.
Similarly, most enterprise software spins through a crazy phase. Then it settles down to capture a valuable place in modern productivity and growth.
What still floats around in hyper-space is how we measure the return from enterprise software investments.
This
is Part One of a two-part note.
Part
Two will continue the discussion.
What is ROI?
The
concept of ROI (return on investment) is not new. It's quite straightforward.
ROI relates the benefits of a project, initiative or purchase to the associated
costs and investment. It helps compare different programs and investments.
Doing
the ROI math is easy. Deciding what numbers to plug into the calculations can
be tough. Making certain you understand the scope and dynamics of the whole
program or initiative presents the great challenges.
ROI—Upside
Down, or Backward?
When I hear the phrase "return on investment in information technology," my ears perk up. Often, I cringe. In too many cases, this question seems backwards, upside-down, or both. Return on investment happens in the context of overall business processes. It's very tough to isolate it to a piece of hardware or software.
I
spoke recently with a Microsoft executive. He called attention
to a Microsoft campaign to help customers and channel partners with ROI evaluation.
Being Microsoft, they took the liberty of re-labeling this ROI modeling as "Rapid
Economic Justification of Technology." The vested interest seems obvious.
Rather than try to justify spending money on a particular technology, businesses need to articulate clearly an overall business goal or operational imperative, such as
- improving
customer satisfaction ratings
- reducing
order fulfillment time
- anticipating
and incorporating competitor activity into product design, or
- collaborating
with suppliers to dramatically reduce costs in the value chain—not just shift
costs from one company to another
With
the business goal and initiative as context, it's then possible to find process
improvements and information technology can help deliver results. Successful
businesses care about getting attractive return on the overall initiative
investment—not just the expenditures on technology.
This starts with understanding how a change in key processes and business relationships could deliver better results. The benefits of doing things in a fundamentally better way sometimes jump right out. But knowing where you'd like to go is easier than knowing how to get there. Getting there requires the right investment mix of time, money, resources, training, and leadership capital. Projecting a realistic ROI—and then actually achieving it—demands careful scrutiny of these factors.
Whose ROI is it, anyway?
With growing frequency, we hear business and IT managers asking a technology vendor to "justify the expenditure" or "demonstrate the ROI" on their particular hardware, software or service offering.
In
some cases, this may be possible. Straightforward automation of routine tasks
to reduce or eliminate staff expenses, for example. A top executive at software
vendor ActivCard told me early in 2003 that his company had
been growing well, even in a difficult market, because it has "a very clear
ROI story." The company's software addresses needs—digital identity management
and security—that top the priority list in many corporations and government
agencies. Customers are pre-disposed to buy.
This
executive noted that his firm generally does not provide the ROI justification
directly to prospective customers. Rather, they refer prospects to a select
list of customers who are pleased to tout the ROI benefits they have achieved.
When companies deploy ActivCard's technology, identity management, and access
control moves from traditional passwords to more efficient and secure smart
cards. The automation replaces staff costs associated with password management
and administration, security and access control, and loss of information assets.
Training requirements are small. Business processes don't need to change profoundly.
Simple automation opportunities like this fall on the left side of the figure
below.
Nice
work if you can get it. But what happens with more sophisticated undertakings—
like customer relationship management, supply chain optimization, and collaborative
product development? Vendors offer enterprise applications that address these
opportunities. Just installing the software hardly scratches the surface of
the investment and ongoing costs associated with operating these key aspects
of a business differently. Asking a software vendor for ROI justification in
these areas presents substantial challenges. The best you can hope for are possibly
relevant case studies. The returns that other companies generate usually depend
more on changes in their processes, relationships and
culture than on the selection of any particular software or technology.
Infrastructure
technology faces even more challenge. Infrastructure includes shared capabilities
that can provide a foundation for a range of initiatives and programs. Infrastructure
can support various enterprise applications and simple automation projects.
It's necessary for many undertakings. But infrastructure is not sufficient.
You can quantify the investment in infrastructure. However, it is almost impossible
to characterize, let alone quantify, many of the benefits.
Asking about the ROI on technology infrastructure is like asking about how many guests the foundation, wiring and plumbing of a hotel will accommodate. None—but just try putting in the guest rooms without that infrastructure.
This
concludes Part One of a two-part note.
Part
Two will continue the discussion.
About
the Author
Dennis
J. Crane is the President of Business Navigation Group. BNG assists
clients as they chart a course and get underway with new initiatives—products,
markets, partnerships, and entire businesses. Over the past twenty years, Mr.
Crane has held executive positions in information services and software
firms including GE, AOL, Bell & Howell, and SCT Corporation. He has also advised
clients including VeriSign, Safeguard Scientifics, Deloitte Consulting, Software
AG and investors in numerous early stage software firms on strategy, precision
marketing and sales, and partnerships. He is a graduate of the US Naval Academy
and holds and MBA from Stanford Graduate School of Business. Contact: www.biznavgroup.com
or djcrane@biznavgroup.com.