IN SEARCH OF BUSINESS VALUE: HOW TO ACHIEVE THE BENEFITS OF ERP TECHNOLOGY

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1 Introduction IN SEARCH OF BUSINESS VALUE: HOW TO ACHIEVE THE BENEFITS OF ERP TECHNOLOGY In today s increasingly competitive business environment, significant investment in Information Technology (IT) is becoming an important source of competitive advantage and operational efficiency. Companies are implementing tens of millions of dollars at a time to implement SAP, Oracle, Siebel, or other large ERP or CRM technologies in hopes of achieving dramatic improvements in an organization s efficiency. In their quests to successfully implement these complex technologies, most companies are well versed in their abilities to develop detailed business cases to gain management approval for the proposed systems. However, despite the benefit appeal of information technology, managers need to understand the primary drivers of technology benefits realization and avoid the many obstacles to full benefit achievement. Many of the drivers are related to employee and technology alignment with overall strategy; an organization s employees are ultimately the ones that will determine the benefits and overall success of an implementation. By focusing on using ERP as a tool to achieve overall business objectives, IT and corporate managers will be able to better maximize the potential benefits of any particular system. A comprehensive benefits realization program is needed as a part of any IT implementation to ensure that this maximization occurs. This paper will discuss the obstacles and drivers of technology benefits realization and focus on how managers can optimize the potential of information technology. In particular, this paper will outline the obstacles to technology benefits realization and the levers managers can use to realize IT benefits using their existing people, processes, and organizations. In addition, the paper will outline specific tools and approaches for leveraging the possibilities of technology, including performance measurement, organizational design, process improvement, training and communications. An understanding of the topics presented in this paper will ensure that managers understand the organizational challenges of benefits realization, as well as how to leverage their people to achieve the benefits promised by technologies. In addition, this paper will allow managers to maximize the potential return on IT investments within their organizations. Only by understanding these concepts and tools described above will managers be able to drive their organizations to high performance and maximum operational efficiency. The Need for Benefits Realization There are a number of reasons that companies implement cutting-edge technologies as part of their IT strategies. Cost pressures, organizational inefficiencies, and hype are all common Copyright 2007, Page 1 of 8

2 catalysts for the introduction of new technologies. However, despite the compelling reasons for information technology, many companies fail to realize the full benefit of these technologies. According to Gartner Group, 27 percent of organizations are not able to or have not tried to measure the benefits of technology. In addition, another 64 percent of companies have only realized some benefits that are possible through the use of technology. Similarly, Information Week recently found that through the end of 2002, only 25 percent of IT projects will have delivered hard monetary benefits. Given the millions of dollars that many companies spend on IT projects annually, these figures can be disturbing to management and shareholders. To many CFOs and other managers, it is difficult to fathom the thought of a $5 million to $40 million-plus IT investment without knowing what the exact benefits payback will be. Many companies develop business cases to justify IT investments to gain budgetary approval, but very rarely is any type of follow-up analysis done to determine what the actual benefits of the implemented technologies are. While many IT projects are positioned to deliver nonquantifiable strategic benefits, it is difficult to justify current and future IT spending without a more disciplined approach to such investment decisions. Clearly, there are a number of compelling reasons to incorporate a benefits realization approach into any IT implementation project. This type of approach addresses the above-mentioned difficulties in measuring and understanding the actual benefits of information technology. What Is Benefits Realization? Benefits realization is a comprehensive project approach that focuses on identifying, measuring and ensuring the business benefits achievable through technology. As mentioned above, business cases and cost-benefit analyses are often developed by managers to gain initial budgetary approval for IT expenditures. In contrast, benefits realization breaks down high-level benefits into manageable chunks, measures benefits after implementation, and utilizes tools to ensure that the true benefits potential of projects are attained. Benefits realization is a comprehensive and integrated approach that focuses on realizing business value, and it combines elements of a cost-benefit analysis, performance metrics, organizational change management, and process modeling. In short, benefits realization supplements the technical aspects of an implementation with the business side of the equation to ensure that potential benefits come to fruition. An effective benefits realization approach consists of a number of activities beginning at project inception and continuing through implementation. These activities, which are illustrated in a timeline relative to an IT rollout schedule in Figure 1, include the following: Development of business case, corporate metrics, and benchmark One of the first activities to occur as part of an IT project is the financial justification of the necessary technology investment. It is important to identify and quantify the potential benefits of the project, and compare those to the projected costs associated with the proposed information technology. Copyright 2007, Page 2 of 8

3 Organizational Change Management (OCM) Cultural Assessment Since most IT implementations involve large-scale change in terms of end users learning new technologies and processes, it is imperative to assess the company s culture early in the project to identify cultural areas that will need to be addressed. Cultural obstacles can significantly undermine the success of a project, and this area should be addressed early in a project since implementing cultural changes are long-term in nature. Cultural Change Based on the results of the cultural assessment, there may be areas that need improvement to enable the large-scale changes required of the project. Given the challenging nature of cultural change at many companies, it is recommended that managers focus on the largest gaps rather than try to change each and every aspect of culture that needs to be addressed. Communications To ensure acceptance of the new technologies, it is important to effectively communicate changes to end users. This should be done through a variety of channels and should be targeted for each audience. Business Process Modeling While this may seem intuitive to most, it is often not performed adequately or not performed at all. In order to realize the full benefits of technologies, business processes need to be modeled and improved to improve efficiency and to make certain that technology is not merely used to pave the cowpaths. Development of Operational and Departmental Metrics and Benchmarks While most business cases effectively develop high-level projected business benefits for an implementation, it is perhaps even more important to translate those metrics into operational numbers that department and other middle managers can be held accountable for. High-level benefits are useless if they are not presented in a way in which individual managers can be measured. Therefore, the business case must be translated to target levels of performance at the departmental level. Organizational Job Design and Planning Just as processes need to be evaluated and changed to enable forthcoming technologies, job descriptions, reporting relationships, and work accountabilities all need to be evaluated and redesigned to support new technologies. Often new information technology will require workloads to shift on to new work groups, and this type of change needs to be identified early in the project. Copyright 2007, Page 3 of 8

4 Detailed Process Design Once the high-level process modeling is complete, which identifies who will do what type of work at a high level and how that work will be completed, it is important to take this process modeling to the next level and develop more detailed Level 4 to 6 process models to ensure that individuals are able to clearly understand their roles, responsibilities and individual processes pertaining to them. Many companies effectively model their high-level processes, but they more often than not fail to develop detailed processes to identify and document how individuals will complete their work with the new technologies. In addition, developing more detailed processes based on the high-level processes ensures that use cases and other technical activities are closely aligned with the intended business processes. Often, process modeling is performed independently of key software development activities. This detailed process design activity also helps direct training courses developed further downstream during the technology rollout to end users. Individual Metrics, Processes, and Benchmarks While operational and departmental metrics are useful to hold managers accountable for contributing to the potential benefits of technology, they in turn must then be translated to individual metrics so individuals understand how their performance contributes to the success of the project. For example, if I am a customer service manager, how does my day-to-day work and performance add to the overall benefits identified in the business case? Organizational Job Design Implementation Once the organization and related jobs have been designed, it is time to implement the necessary changes. Simply documenting how jobs and structures will change as a result of new technologies is not enough; those ideas must then be translated to reality to ensure that the changes become a part of the new organization. End-User Training Using the detailed process models developed above, it is important to then develop end-user training that not only helps end users understand how to use the new technologies, but also how to perform their new processes and job functions. Many training programs underestimate the value of the latter. Reward Design and Implementation Unfortunately, designing new processes, establishing metrics and targets to identify potential benefit areas, and conducting traditional change management and end-user training is not enough to ensure that people are motivated to make the project succeed. Companies must also incorporate reward systems to ensure alignment between individual performance and project benefits achievement. Establishing new Key Performance Copyright 2007, Page 4 of 8

5 Indicators (KPI)s as part of an annual review process is an effective way of ensuring this level of alignment. Benefits Measurement Here is where the real value of benefits realization comes into play. As mentioned, most companies do not measure actual benefits after implementation, but a comprehensive benefits realization approach does. It is imperative to compare actual results to projected departmental and individual results to identify any potential benefits gaps. It also enables managers to understand what they are doing well and ensure that they continue to realize the benefits in these areas. Unfortunately, no matter how well managers have incorporated the subsequent activities (discussed above) into their project plans, there are almost always areas where full benefits are not achieved initially. Root Cause Analysis of Benefit Gaps Based on the post-implementation measurement, it then becomes imperative to understand why certain gaps exist. Root cause analysis, such as understanding why people are not becoming more productive with the new technology, helps clarify the reasons for the gaps. A common example of a root cause of less than 100 percent benefits realization is that end users understand how to use the technology but they don t understand the importance of doing so, so they often resort to workarounds and perform their jobs as they did prior to the new information technology. Implementation of Corrective Action Once the root cause of benefit gaps have been ascertained, it is then time to implement activities to address the root cause analysis for the problem areas. In the example of not having a thorough process understanding of how an end-user s work contributes to downstream activities, it may be appropriate to develop and conduct some follow-up training to address these areas. Engineer Phase Business Case/Corporate Metrics/Benchmarking OCM/Cultural Assessment Cultural Change and Communications IBPM/BPR (Level 1-3) Operational Metrics/Benchmarking Org/job design planning Detailed process design (Level 4-6) Individual/Dept Metrics/Benchmkg Org/job design implementation End-user training Go-Live Reward design/imp Benefits measurement Root cause analysis of benefits gaps Implementation of corrective action Copyright 2007, Page 5 of 8

6 Figure 1: IT rollout activities Many of these activities are included to some degree as part of overall project plans. Benefits realization in and of itself does not offer any groundbreaking activities that have never been done before. The challenging aspect, however, is ensuring that all of these activities are implemented effectively and in alignment with the technical aspects of the project. This is where benefits realization provides real value by ensuring that all of the activities are completed in an integrated fashion and that post-implementation activities measure and ensure benefits are actually realized. The activities prior to implementation are intended to establish a foundation for benefits realization potential, while post-implementation activities are intended to measure and ensure that the benefits come to fruition. Benefits Realization Tools While benefits realization focuses on an integrated set of activities, it also entails a number of tools that can be used to effectively perform the tasks: Business Case and Metrics Traditional financial and cost-benefit analysis is a useful tool for outlining and documenting the high-level benefits to be achieved by the proposed technology. In addition, it is useful to also examine industry benchmarks to gain a more accurate understanding of the potential benefits of technologies. Consulting and benchmarking firms are often invaluable sources of data regarding the impact of information technology on actual performance and metrics. OCM Tools In order to measure a company s cultural gaps, it is helpful to conduct an Organizational Culture Inventory (OCI), which measures the current and ideal culture in 12 different areas. This tool helps identify the biggest gaps to enable these areas to be address as part of the IT project. If the large gaps continue after go-live, there will be significant end-user resistance to the associated changes. Process Modeling Tools There are a number of approaches that can be used to model and document processes, but the most effective approach used by our clientele has been to use a best-of-breed model as a starting point and then tailor it to fit a company s unique operating conditions. This approach is more accelerated and time- and cost-effective than undergoing complete business process reengineering from scratch. Copyright 2007, Page 6 of 8

7 Skills Gap Matrices As part of the job and organizational design activities, it is helpful to develop a matrix that identifies the required skill set for each major job type as a result of the new technologies and processes. This matrix can then be used to compare required skills to actual skills, which can then act as a catalyst for developing training requirements. It is important to capture both technical skills as well as business process skills in these matrices. It is also important to evaluate every major job area that will be impacted by the upcoming changes. Process and Organizational Change Implementation Plans While organizational design and process models are nice to conceptualize and document at a high level, it must not end there. It is equally, if not more, important to identify the changes that are necessary to arrive at the to be process and organizational states and to develop corresponding change implementation plans to make the changes actually happen. For example, how might you change the role of customer service representatives to ensure they use the new technologies? Will we need to work with HR and/or labor unions to implement the job changes? How will we roll out new rewards and measurements aligned with the project? These are the types of questions that need to be answered and addressed with specific timelines and ownership for each task. Benefits Realization Scorecards Once projected organizational and individual target performance metrics have been identified, it is useful to develop scorecards to track actual benefits performance after golive. These scorecards serve as an effective communication vehicle to disseminate performance results throughout a company. The Value of Benefits Realization Why should a company implement this type of benefits realization approach? This paper identified some of the challenges organizations are facing in terms of measuring benefits, which is one primary reason for including this type of approach as part of a project plan. However, there are several other reasons that justify the need for these activities: Reduced Project Risk Benefits realization focuses on ensuring that the full benefits of technologies are achieved, which reduces the risk of the project failing. In addition, pre-implementation activities all focus on establishing the foundation for realizing benefits by addressing process and organizational change management issues that would otherwise undermine a project s success. In short, the approach is focused on achieving quantifiable business value. Copyright 2007, Page 7 of 8

8 Close Alignment Between Business and Technical Activities This approach ensures that processes, jobs, metrics, and organizational structures are designed to support the technical aspects of the project, and vice versa. More often than not, business and technical activities are done in isolation of one another and are significantly misaligned. Even among business activities, such as organizational change management and process modeling, there is often a disconnect when in fact they should be very closely aligned. The most successful projects have a core group of individuals that perform all of the benefits realization activities discussed above with involvement from other subject matter experts as needed. Proactively Identifies and Addresses Obstacles to Realizing Benefits Since this approach focuses on measuring actual results and addressing benefit gaps, it inherently ensures that potential obstacles are identified and addressed early in the post-implementation project lifecycle. Provides More Thorough Understanding of Lessons Learned Since a benefits realization approach measures results, identifies benefits gaps, and implements corrective action to address the gaps, it serves as a wealth of knowledge for future IT projects in terms of what the project struggled with, what went well, and what can be improved in the future. Better Justification for Future IT Project Approvals With the actual benefits measurement that occurs as part of this approach, it is far more reasonable to gain funding for future projects when IT managers can point to previous successes in terms of actual financial results. CFOs and other financial managers who are likely to approve such projects are much more likely to give the green light to other projects when one can point to exact costs and benefits of previous projects. This knowledge and apparent financial discipline also conveys a great deal of invaluable credibility to key decisionmakers. Clearly, there are a number of ways that an effective benefits realization approach can create value for IT managers and companies in general. Conclusion Given the above discussion of current IT challenges, it is clear that there is a need to ensure that companies more fully realize the potential benefits of technology. Unfortunately, investing millions of dollars in new information technology without a compelling justification and validation of this justification is not acceptable in today s increasingly competitive environment. By understanding and integrating a comprehensive benefits realization approach into IT implementations, managers will ensure that their projects are rolled out successfully and that the projects translate to wise investment decisions for the company. Copyright 2007, Page 8 of 8