Business CaseClick here
for an article published in the CAmagazine in November 2005. Business
is Back in the Driver's Seat It wasn't that long ago when companies
invested in Information Technology (IT) just to remain competitive. From an IT
textbook taught at a Canadian University today, you would find "Boards of
directors have finally realized they have to bite the bullet and fund these huge
multiyear projects just to remain competitive" Those days are over. Business
is back in the driver's seat. As IT projects have a bad reputation for being over
budget, not on time and not generating the expected results, senior management
is not going to proceed with IT projects unless there is a compelling business
case. Independence is Key Sometimes the compelling business
case is you don't have a choice. For example, your existing system is no longer
supported or your business has changed. Still, there could be a big spread between
the low and high end of the potential solutions. How do you justify the higher
end solution if that is the one you think is best for your company? You will often
find the vendor/solution provider willing to help you with a business case. But
do you think you are getting unbiased help? So you ask the same people
that will be involved in the project to prepare the business case. Although their
lack of independence is not as glaring as the vendor/solution provider, it is
still a big problem as they may have lots to gain if the project goes through.
They are unlikely committing fraud in developing a business case, but they are
likely to be overly optimistic in their eagerness to proceed. Confusion Another
big problem is that there is a lot of confusion about how to do a business case.
Many of those building the business case don't have relevant training or experience.
Further, even if they do have the experience, it's tricky. The basic calculations,
such as ROI and NPV, are not difficult. But how do you convert the intangible
benefits into numbers? It's not just the benefits you need to worry about. Some
costs are very easy to identify but there may be missing costs from the calculations
which would include the internal costs related to the project. You need to include
what is often called the Total Costs of Ownership. Tangible Benefits Let's
start with the easy benefits. You need to understand the bottlenecks in your organization
and how much time will be saved if the IT project proceeds. This requires a careful
review of business processes. In some cases, there may be savings because there
are fewer employees. However, that does not often happen. More frequently, these
people end up doing their work more efficiently and can focus on other activities.
The results are usually that the company can grow at a rapid rate without hiring
additional administrative resources. If the investment is in an ERP system,
you will often hear about significant reductions in inventory. This provides not
only a one time reduction in assets (and improved cash flow) but also provides
on-going savings in the carrying costs associated with the inventory which would
include interest, warehousing, handling, obsolescence, insurance and shrinkage.
A good system has the computing power to reduce inventory by recommending purchases
only when necessary based on factors including inventory levels, customer demand
and lead times. However, these inventory reductions are not always realized because
the computer system will not work properly unless there is the discipline to set
it up right and maintain it properly. You should talk to other companies about
their experiences to see whether the numbers are realistic. You should ensure
that your employees agree to the targets and you should also be conservative.
Intangible Benefits When it comes to the intangibles, you
need to be especially careful. For example, a new system may be able to reduce
the time between an order is taken and is shipped (called cycle time). This could
lead to increased sales and a reduction in unsatisfied clients who might have
gone elsewhere for their business. However, you need to do some research before
throwing numbers on the spreadsheet. How many clients did you lose last year and
why? Could their loss have been prevented due to improved customer service? Ask
a few customers whether an improvement in cycle team would lead to more orders.
Talk to your salespeople and see whether they are prepared to agree to an increase
in commission and reduction in base salary based on the increase in customer service
and ability to generate more sales. The point is that you need to think like an
auditor, who trusts no-one and wants something to back-up the numbers. An
Alternative Return on Investment (ROI) is the key number used to calculate
a Business Case, but the numbers may be based on assumptions that can't be verified.
An alternative would be to evaluate investments on the basis of whether it enhances
a company's ability to achieve CSF metrics (Critical Success Factor - what a company
must do well in order to be successful). Why not set a budget for IT and then
evaluate investments based on which ones contribute most to CSFs at the least
cost? Don't Forget About It Let's pretend that a reasonable
business case is prepared for the investment in an ERP system. Too often, the
business case gathers dust, when it should have been used through-out the implementation
as a beacon to ensure objectives are met. Before starting, any IT project, including
an ERP implementation, you should have established measurements of success - for
example a reduction in cycle days from 10 to 5 days. These measurements of success
should relate directly back to the business case. | 
