APRIL 18, 2013 Building a Business Case for Industrial Software Projects Helps Ensure Success By Ralph Rio Keywords EAM, CMMS, Business Case Overview To get executive support for your next project, tie the benefits to executive metrics this Insight shows how. One hundred thirty-four individuals involved in 15,000 sites participated in a recent ARC Advisory Group end user survey related to enterprise asset management (EAM) and Those involved in asset management need guidelines to develop a business case to upgrade EAM software. The field service management (FSM) applications. The primary objectives of maintenance tie to answer to one particular survey question goes beyond EAM and applies to nearly all industrial the C-suite metrics in the P&L statement and balance sheet. This report outlines projects. Survey respondents rated project justification as the top reason for a successful EAM an effective business case that gets executive support. This support software implementation. A good business case provides the resources to help assure gains executive support, which, in turn, drives resource allocation to help assure project the project s success. success. Establish Your Next Software Project s Success Even though the economy is growing, revenue growth remains challenging. As a result, C-suite (CEO, CFO, etc.) executives continue to focus on costs to improve profitability. Attention has moved from outsourcing, towards improving internal manufacturing productivity - including maintenance and asset management. As a result, many organizations are upgrading their EAM systems and modernizing business processes. ARC s recent survey on asset management software provides insights for setting a strong foundation for success with a new or upgraded EAM system. Most of the 134 participants are involved with multiple plants, and VISION, EXPERIENCE, ANSWERS FOR INDUSTRY
ARC Insights, Page 2 their responses represented input from a total of more than 15,000 facilities worldwide. This provides a substantial body of knowledge for assetmanagement-software applications, much of which can also apply to other software application areas. What Drives Software Project Success? Business Case for Justification 73% The survey included the question, What affect did these factors have on EAM/CMMS implementation or improvements? For each factor, those surveyed chose one of these responses: Management Support Tech Support from Supplier Support from IT Selection Process Project Management 65% 54% 40% 36% Big Negative Detriment Neutral Benefit High Positive The chart contains a weighted average response for each factor. Each factor has a net positive rating. Contracting with an Integrator User Training Allocated Budget While creating possible selections for this question, ARC included technical support, IT support, 33% selection process, project management, integrator, training, and 31% budget as obvious choices. We assumed these would receive a high ranking. The survey tool had room for additional factors, so ARC included business case and management support, almost as an afterthought. 0% 20% 40% 60% 80% Factors Affecting Project Success Source: Survey with 134 Respondents, Jan. 2013 To our initial surprise when we reviewed the survey results, both business case and management support were at the top of the list. However, upon further reflection, the reason for the high ranking became obvious to us. A good business case The survey tool had room for additional factors, so ARC added business case gets management s interest and support. According to management guru, Peter Drucker, the key and management support. To ARC s surprise, both obtained high rankings. function of management involves allocating re-
ARC Insights, Page 3 sources - financial and others. With management support (based on a solid business case), the project gets the needed resources, which helps ensure successful project implementation. Improve Uptime (MTBF, MTTR) Extend Asset Longevity Maintenance Cost Control Improve Quality or Yield Visibility to Manage Safety and Risk Mgt. Limited Previous Software Capital Project Plan & Execute Project Cost Capitalization 22% 19% Making a Business Case for an EAM System Executives in the C-suite respond to their metrics just like the rest of us. The C-suite s metrics are very public: the quarterly reports containing the P&L statement and balance sheet that financial analysts and potential investors carefully scrutinize. A good business case connects the benefits of an EAM system (or any other industrial software application) with the 67% 25% 92% financial metrics in those reports. 29% 51% 46% 43% 57% 54% 28% 40% 44% 37% 34% 34% 43% 57% 62% 63% 80% 88% 86% 89% High Medium Total Business Drivers for EAM Source: Survey with 134 Respondents, Jan. 2013 93% 0% 20% 40% 60% 80% 100% ARC s survey also contained the question, Please rate the drivers for having an EAM application. The survey offered respondents four choices for each of the business drivers: high, medium, low, and not a factor. The chart contains the high and medium responses to emphasize the key drivers. Impact on the P&L Statement The key business drivers for EAM address the basic goals of uptime, asset longevity, cost control, quality, and safety. These directly affect C-suite metrics of revenue, cash conservation, profitability, and risk management. Improved uptime for production scheduling: Good maintenance reduces the chance of equipment failure and the resulting unscheduled production downtime. Unscheduled downtime causes losses in direct labor and, often, work-in-process (WIP) materials. Obviously, these losses have a direct negative impact on the P&L statement.
ARC Insights, Page 4 With today s tight scheduling with minimal inventory, a production interruption often results in missed shipment dates, customer satisfaction issues, and reduced revenue. The lower revenue also negatively impacts P&L. Cost control with maintenance: The demise of an inexpensive component often cascades into other, more expensive system components (just as the loss of $20 of engine oil causes your car s engine to seize for a $5,000+ repair). Without appropriate preventive maintenance, repair costs can escalate dramatically. Maintenance managers have significant Financial EAM KPIs Report Affected C-Suite KPIs budgets with labor, contractors, Uptime materials, and competing priorities. P&L and Balance Revenue increase, Sheet and less inventory They need a modern EAM system to Asset Longevity Cost Control Balance Sheet P&L Cash Conservation Profitability schedule and deliver a preventive maintenance strategy, while also controlling costs. Safety Annual Report Risk Management Comparing Key Maintenance and Executive KPIs As an additional benefit, upgrading the EAM system usually lowers IT costs by rationalizing applications and focusing on one EAM instance. Impact on the Balance Sheet Extend asset longevity: First, maintenance extends the useful life of assets, delaying the need for costly capital projects for replacement or refurbishment. Proper maintenance reduces capital expenditures and conserves cash. Second, the increased uptime provides additional production capacity and avoids procurement of more equipment as the business grows. Avoiding capital expenditures conserves cash. With more cash, metrics used by financial analysts improve, and the stock price goes up. Improved uptime for production scheduling: This benefit also affects the balance sheet. Materials are queued between operations to buffer interruptions - including equipment failures. Better maintenance and higher equipment uptime reduces uncertainty and allows a reduction of inventory. Again, the added cash improves stockholder value. Impact on Risk Mitigation Safety and risk management: Catastrophic equipment failure can put nearby people in danger. Also, failure of a major system can cascade into
ARC Insights, Page 5 other systems, representing a significant business risk. Governance, including Sarbanes-Oxley compliance, necessitates good maintenance. Modern EAM Systems Help the C-Suite Businesses have many complex and critical pieces of equipment and maintenance often involves thousands of assets. How can Asset Information Management a maintenance manager determine the most important Work Order Management item to work on next? EAM systems provide visibility for MRO Materials Management priorities and help managers execute maintenance including labor, inventory, service contracts, and reports. Labor Management Service Contract Management Businesses require EAM to successfully execute maintenance, which improves their P&L statements and balance Financial Management sheets. Particularly in asset-intensive industries, a modern EAM system helps the chief financial officer (CFO) Reporting and Analytics EAM Functional Groupings sleep well. Recommendations Well-executed maintenance makes nearly everyone look good. This must be communicated in terms that allow others to see the connection. Otherwise, executives will want to optimize (reduce) maintenance costs with less-than-optimal results. Here s what we recommend: First, read the Chairmen s Letter that typically appears at the beginning of your company s annual report. This provides the key concerns, and outlines major business strategy. Finding an association to your project provides a good start for getting C-suite attention. Second, connect the specific benefits of your project with profitability in the P&L statement and assets in the balance sheet. Good asset performance enables good financial performance. Good maintenance management improves many of the financial measures of a business to increase shareholder equity. Maintenance departments need a modern EAM system to improve financial metrics like Quick Ratio and ROA that affect shareholder value. For further information or to provide feedback on this Insight, please contact your account manager or the author at rrio@arcweb.com. ARC Insights are published and copyrighted by ARC Advisory Group. The information is proprietary to ARC and no part may be reproduced without prior permission from ARC.