How To Maximize Roi For An Epls

Transcription

1 80/20 Rule in ERP System Implementation - a Case Study on Maximizing ROI Przemysław Lech, University of Gdańsk, Department of Management, Sopot, ul. Armii Krajowej 101, Poland, Przemyslaw.Lech@lst.com.pl phone: (+48) Abstract: It is possible tso observe the following rule in ERP implementations: 80% of effort goes into developing functionality supplying 20% of business value. One of the possible ways of achieving positive ROI ERP implementation is to reverse this rule by concentrating on those areas where business value is high and minimizing work in other areas by using standard functionality. This paper describes a practical approach to the ERP implementation process that leads to significant business effects. It is followed by a case study. Keywords: ERP implementation, 80/20 rule, maximizing ROI, project business value, ERP project success, case study 1. Introduction There is evidence that up to 60% of ERP implementations are a failure (Hiliam, Edwards 2001). Such a high failure rate should lead to the development of a set of rules that allow enterprises to avoid such situations. Although complying with formal methodologies supplied with most ERP packages lead to successful project development in terms of time and functional scope as well as budget (Murphy 2002), (Lech 2003), achieving business success is not so obvious (Ashurst, Doherty 2003), (Murphy 2002). This paper is a description of a practical approach to the ERP implementation process that leads to significant business growth. It has proven successful in implementation projects led by the author, one of which is described in the case study part of this paper. 2. Implementation success definition Most enterprises assume that the implementation of an IT project is a success if it is done: on time, within the budget constraints, and supplies the specified functionality. 1

2 These measures reflect the technical success of the implementation project, but there is consensus among IT researchers as well as practitioners that IT should contribute to the enterprise productivity - it should provide business value (Bannister, Remenyi 1999), (Remenyi 1999), (Renkema 2000). The economic success of the IT project will thus be achieved when the ROI of this project is positive. Measurement of IT project benefits and costs is difficult and there are various methods of doing it (Remenyi, Money, Sherwood- Smith 2000), (Bannister, Remenyi 1999), (Schell 1999), (Kumar 2003), but there is no doubt that enterprises implementing IT solution should work on maximizing their benefits and controlling costs. 3. Critical factors of ERP implementation success The technical success of an IT project, including ERP system implementation can be achieved by applying formal implementation methodology and complying with a few rules of thumb (Lech 2003) like: development of clear project vision and targets, top management commitment to the project, high project rank, dedication of the best staff to the project, tight cooperation between the company s own staff and consultants. The way of achieving economic success is not so well structured and thus not many organisations develop and apply a clear set of rules to achieve it (Ashurst, Doherty 2003). Literature study as well as practical experience gained during implementation projects in Poland has led to the following conclusions concerning the practical achieving of substantial economical benefits: 1. Benefits are high in those business areas where IT changes the way work is done. Automatization of currently performed business processes does not create substantial benefits (Davenport 1993), (Hammer, Champy 1993). In other words: if IT enables critical process change the benefits within this process are likely to be substantial. 2. The overall impact of a certain IT enabled process change on the whole enterprise performance is related to the importance of this process in value creation for the customer. The benefit will thus be substantial if IT changes key processes for value creation. 2

3 4. 80/20 Rule Implementation A case study survey conducted among Polish enterprises implementing ERP suites (Lech 2003) led to the conclusion that in many implementations 80% of effort was put into obtaining functionality that supplied 20% of business value. This was mostly due to the fact that many adjustments were made in accounting and controlling areas that do not contribute much to the value added. By reversing the above mentioned sentence one can reach the conclusion that 20% of effort necessary to fully adjust ERP suite to the enterprise s requirements give 80% of business value. Based on this argument the general rules for implementing positive ROI ERP installations were formulated: 1. Put effort into supporting innovations in key processes. Key processes are those processes that contribute to the value delivered to the customer. The most important of the key processes are those that create competitive advantage processes that differentiate an organization from its competitors and make customers choose its products. 2. In the areas that do not contribute to value delivered to the customer use the standard functionality. If standard functionality does not suit existing processes, change them rather than attempt to adjust software. If the above mentioned is not possible leave these processes out of the project scope and perform them manually. These rules were successfully used in several implementations. Methodology applied during implementation works is briefly described in the following section. Case study on one of the projects is included in section Methodology To be able to apply the above mentioned rule in practice a straightforward methodology was developed. It is based on management information systems development theory as well as on the author s original concepts. 3

4 5.1 Determining project value areas In order to determine optimal project scope it should be divided into separate value areas for which ROI can be calculated separately. This division should be done according to the enterprise s main processes or functions. For each area an estimation of ROI value is then made. The solution should be developed for the areas with positive ROI. This can be achieved either by maximizing benefits for a given cost level or by minimizing costs of obtaining specified benefits. 5.2 Value search The most crucial issue is to determine possible benefits from IT implementation. Two approaches can be applied to do this: from business concept to technology, from technology to business concept. The first approach assumes creation of the ideal business model first and identification of IT elements supporting this model afterwards. The second one is based on active IT usage to determine possible value creating changes Business concept to technology approach Business concept to technology approach origins from software development methodologies. It assumes that one should first determine WHAT the enterprise should do to achieve competitive advantage and deliver value to its customers and then HOW should this be done in terms of technical infrastructure. This means that while using this approach one should perform strategic and operational analysis, determine optimal business processes model and then develop suitable IT environment to facilitate these processes. Following steps should thus be performed to determine possible value-added areas: 1. Value for customer identification. According to (Kaplan, Norton 1996) a value for customer consists of product, customer relationships and company vision while product main features are price, performance and service, time and quality. A clear vision should be developed of what, how and at what price should be delivered to the customer. Comparing this ideal model to the existing one results in improvement suggestions and uncovers value added areas. 2. Process analysis and reengineering Process analysis and reengineering should be applied to both external and internal processes. 4

5 External processes are those which are customer oriented. They are tightly connected to the customer value described above and determine some of its attributes like service, time or customer relationships. Their improvement will thus result in bigger revenues. Internal processes improvement at the other side usually results in cost reductions. The value of process improvement will be equal to revenues increase and/or cost reduction resulting from the change. 3. IT infrastructure project After determining what are the possible value adding changes one should analyze possibilities of supporting the newly designed processes with IT. The result is a full concept of IT supported optimal enterprise model Technology to business concept approach It is also possible to reverse the above mentioned methodology to effectively determine value-added areas. In technology to business concept approach one examines existing IT examples and determines how these could create benefits by adding value to the customer or by enabling business process redesign. The steps to be performed are then as follows: 1. Identification of available information technology elements, 2. Analysis of possible IT impact on the value for customer, 3. Analysis of possible process redesign options existing from new IT opportunities, 4. Preparation of new business model based on IT infrastructure The result is the same as in the preceding approach: a business model supported with suitable IT elements /20 rule project strategy After determining project value areas and assigning possible benefits to each of these it is necessary to define implementation strategy: For those areas where possible benefits are high it is reasonable to adjust IT solution to the business needs, For low benefit areas the goal should be to minimize costs. This can be achieved by using standard functionality even if it does not exactly suit the business needs, 5

6 In those areas where achievement of positive ROI is doubtful it should be considered if any IT support is justified. If exclusion of these areas does not have negative affect on the solution integration it might be reasonable to keep them out of the project scope. 6. Case Study J.J. Darboven has been on the coffee market since It offers high quality products to upper market segment customers. Its best known products are Alfredo Espresso, Idee Kaffee, Mövenpick and Eilles. In Poland J.J. Darboven focuses on delivering complex solutions for the preparation of hot beverages for the catering business. During the IT based business solution development the approach from business concept to technology was used. Value drivers that could be improved concerned mostly service and delivery. Some of them were: long delivery time, difficulties in fast purchase order placing, incomplete product information during order placing, lack of cross-selling, lack of coffeemakers service information. Additionally there were several internal factors such as high stock level, high employment and low effectiveness of the delivery staff that required internal process reengineering As a response to the above business needs a concept of radical reengineering of sales and the delivery process was developed. In the opinion of the J.J. Darboven CEO the solution should have been based on central customer, sales order and stock management. A key element of the reengineering plan was the creation of a teleservice unit responsible for sales order and customer info acquisition as well as coordination of the local delivery units activity. The obstacle in putting the reengineering plan into action was a lack of suitable IT solution. In 2001 J.J. Darboven Holding AG made a decision to implement MBS Navision ERP suite in its Polish subsidiary. The consulting enterprise chosen to help in the implementation process in which the author of this paper was the project leader, found out that using 80/20 rule implementation guidelines it is possible to create a solution supporting the reengineered sales and supply process without significant budget change. The implementation was set up as follows: 6

7 an attempt was made to develop functionality supporting central customer, purchase order and stock management. This resulted in the creation of a teleservice pulpit gathering information about previous customer orders, payment history, payment conditions and allowing the creation of new purchase orders, invoices and delivery notes. Sales documents are then sent by to the salesman who delivers them to the customer together with the purchased items. non value adding areas such as accounting were supported with standard system functionality. Some requirements regarding these areas where thus ignored and either are performed out of the system or changes were made to adjust the organization to the system s requirements. In this way despite delivering standard functionality a value adding solution was developed. It was possible because IT was used to enable process change. J.J. Darboven reports following benefits from the described implementation: stock level decrease by 15%, average receivables overdue decrease by 10 days, employment in sales department decrease by 6 persons, project payback period of 24 months. The other area where IT could add value to the business was machine supply and service. J.J. Darboven Poland has several ways of supplying customers with coffee makers. One can buy the machine or borrow it and pay a higher price for the coffee. The price is then related to the volume of purchase per month. Before system implementation the following problems were identified in this area: there was no easy way of checking if the amount of coffee declared by the customer was really purchased each month, there was no clear evidence what machines each customer had, service costs were not known. An additional functionality showing machines lent, service costs and a coffee purchase summary was developed and added to the teleservice pulpit. In this way J.J. Darboven Poland came up with an effective way of solving all the critical issues concerning customer service and control process within a budget about 20% higher that the standard ERP system implementation. 7

8 Focusing on critical value adding processes has led to low cost, high benefit implementation which was considered by the J.J. Darboven Holding AG as exemplary for the whole group. 7. Conclusions To achieve positive ROI on ERP implementation one has to maximize benefits at a specified cost level or minimize the costs of obtaining certain benefits. Maximizing benefits can be achieved by concentrating IT development efforts on those areas where it enables significant change in processes crucial for creating value for customers. Minimizing costs can be achieved by abandoning the temptation to develop non value adding software functions merely to automatize activities being currently performed. Use of 80/20 rule in ERP implementations led to significant business effects which was documented by the above case study. 8. References Ashurst C., Doherty F. (2003) Towards the Formulation of a Best Practice Framework for Benefits Realisation in IT Projects, [online], EJISE, issue2/issue2-art1.htm Bannister F., Remenyi D. (1999) Value Perception in IT Investment Decisions, [online], EJISE, Davenport T. (1993) Process Innovation. Reengineering Work through Information Technology, Harvard Business School Press, Boston Hammer M. (1990) Reengineering work: Don t Automate, Obliterate, Harvard Business Review, July August 1990, s Hammer M., Champy J. (1993) Reengineering the Corporation. A Manifesto for Business Revolution, HarperBusiness Hiliam C., Edwards H. (2001) A Case study approach to evaluation of Information Technology/Information systems (IT/IS) investment evaluation processes within SMEs, [online], EJISE, Kumar R. (2003) Understanding the Value of Information Technology Enabled Responsiveness, [online], EJISE, issue1/issue1-art1.htm 8

9 Kaplan S., Norton D. (1996) The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press Lech P. (2003) Zintegrowane Systemy Zarządzania ERP/ERPII, Difin, Warsaw Murphy T. (2002) Achieving Business Value from Technology, John Wiley & Sons, Chichester Remenyi D., Money A., Sherwood-Smith M. (2000) The effective measurement and management of IT costs and benefits, Butterworth-Heinemann, Oxford Remenyi D. (1999) The Elusive Nature of Delivering Benefits from IT Investment, [online], EJISE, Renkema T. (2000) The IT Value Quest, John Wiley & Sons, Chichester Schell G. (1999) Evidence of Information System Value, [online], EJISE, 9