Many technology vendors are squeaking because their customers have delayed, or even stopped, buying technology. As one US storage vendor wrote in its recent third quarter financial results: “Most large corporations continue to delay major IT projects, generally limiting their purchases to deployments that provide rapid return on their investment.”
While the pain of the current technology ‘downturn’ is not as acutely felt in this part of the world an element of tightfistedness prevails, nevertheless. I personally know number of IT managers within large organisations who have to really fight to get approval for fundamental IT purchases.
High profile failures, like apparel maker Nike’s implementation of supply chain planning system – which caused product shortages and an earnings warning – have not helped. Nor has the traditional view of the IT business case, which is fixated on cost savings and cost-of-ownership rather than the effect of IT investments on the bottom line.
Language is another problem. Some IT professionals are not familiar with the “language of finance” and do not properly articulate the real value of their proposed solutions in terms of C-level objectives.
The only question that needs answering is: how will technology investment help improve the company’s overall financial performance?
The key is demonstrating return on investment, as without competitive return it is difficult for an organisation to attract the funds necessary to maintain existing business and provide for future growth.
The bad news is that the business benefits of technology investment often are presented only from “lower operating costs” perspective. What’s more, the benefits identified are often unrealistic and too optimistic for the timeframe in which they are expected to accrue. The result: The CFO is left with an incomplete view of the solution’s potential impact on overall financial performance.
Preparing business case for IT must identify the impact of IT investment on the three business drivers of growth, profitability and capital utilisation – the need for speed.
Growth: The impacts of IT on revenue growth are varied and can be thought of both in terms of existing business and new business. The existing business growth enablers deal with increasing revenue growth for existing products and services. The impact of implementing new technology, such as supply chain planning, can grow revenue by providing better forecasting and therefore lower stock-out losses. Supply chain software can also help companies enter into new businesses through improved speed-to-market, ‘speed’, and cost management.
Profitability: Profitability is what’s left over per dollar of revenue after paying all operating expenses. The CFO perspective is the impact technology has on the bottom line, so the initial cost-reduction perspective should be broadened to encompass the overall financial performance.
Capital utilisation: Capital utilisation, or ‘speed’, is key driver of providing competitive return to investors. ‘Speed’ is how efficiently company uses its capital and measures the dollar revenues generated for each dollar invested in capital.
For example, Dell’s ‘speed’ is $7.45. This means that $7.45 in revenue is generated for every dollar invested in capital. company’s ‘speed’ reflects what it does. grocery store like Coles Myer would have ‘speed’ of over $7 because it does not require much investment in capital to generate revenues. Whirlpool/Electrolux has ‘speed’ of $1.80 because it is manufacturer and is more capital intensive than grocery store. highly capital-intensive telecommunications company like Telstra might have ‘speed’ of $0.70.
The strategic perspective
More and more CFOs are looking to ‘speed’ as means of creating more competitive business models to improve the performance of the existing business and to expand into new businesses. Suppose supply chain solution involving better forecasting and network optimisation lowers inventory and warehouse investment and improves scheduling and manufacturing plant throughput. More than likely there also would be reduction in costs and an improvement in profitability. In both cases the technology’s contribution to capital utilisation and increasing ‘speed’ provides the company with competitive advantage.
Speed resulting from improved supply chain management increases competitive advantage and economic profit. For the same profitability, any supply chain initiative that increases ‘speed’ increases economic profit. An increase in ‘speed’ also creates competitive product advantage by letting company generate the same or higher economic profit with the same profitability.
My advice is to first get C-level sponsorship by building business cases with tangible benefits, which are realistic and conservative. You should identify and agree on some key metrics – such as cost reductions, inventory, throughput, and accurate delivery – that link up and measure return on investment. Only then can the real value in IT investment be ascertained and boardroom battles won.
Sanjiv Bansal is value assessment specialist with consultants JD Edwards.
