Cindy Jutras: What gets measured does get managed
The primary business drivers impacting ERP strategies have been—and probably always will be—growth, customer service, and cost reduction. In the past, growth and customer service jockeyed for position at the top of the list, with the need to reduce costs playing an important role, but taking a back seat to a more outward-facing, revenue-driven focus.
Not so anymore. Over the past year the need to reduce costs clearly has emerged as the primary driver behind all technology investments.
The struggling economy is causing many to look to their ERP implementations to help them cut costs. A well-managed ERP implementation can significantly reduce cost while improving other aspects of the business. Aberdeen’s annual benchmark of ERP in Manufacturing found Best-in-Class (top 20 percent in terms of aggregate performance) reduced inventory levels by 20 percent, operational costs by 14 percent, and administrative costs by 15 percent. In fact, even Laggards (the bottom 30 percent) reduced these same costs by 4 percent to 6 percent.
But sometimes you need to spend money to save money, and as companies brace themselves in this down economy, ERP projects—e.g., upgrades, extensions, new implementations—run the risk of being delayed just when they are needed the most.
The focus for the past decade by both ERP solution providers and their customers has been on reducing the total cost of ownership (TCO) of ERP. But focusing exclusively on TCO is no longer enough. The focal point must now expand to include the return-on-investment (ROI) of ERP projects to justify continued investment and maximize business benefits.
As belts tighten, it will be hard—and perhaps even foolish—for companies to lay out cash without a quantified expected return.
More companies are beginning to understand the importance of ROI. A recent Aberdeen survey on the ROI of ERP found only 11 percent of companies never use estimates of ROI to cost justify ERP projects—down from 32 percent two years ago. Furthermore, the percentage that never calculates the ROI of a project after it is completed also is down from 33 percent to 24 percent.
Although the old saying, “What gets measured gets managed” might appear to be a tired, worn-out statement, it is definitely worth repeating. Aberdeen finds 100 percent of Best-in-Class companies use ROI estimates as a means of cost-justifying ERP projects, either always, or at least for more capital-intensive and/or discretionary projects. Of these top performers, 94 percent follow up and actually measure the ROI of projects. As a result, they almost double the cost savings achieved by those not Best-in-Class.
The Best-in-Class also are able to get those benefits faster. This elite group had 33 percent more aggressive plans for realizing the ROI, yet was 150 percent more likely to actually achieve ROI within the projected time line. In fact, 61 percent of Best-in-Class achieved ROI of ERP within two years at a divisional level, and 42 percent achieved ROI within two years at a corporate level. Compare these percentages for all others—not Best-in-Class—of only 32 percent and 9 percent respectively.
Yes, it bears repeating: “What gets measured gets managed.” To read the full report on keeping ERP projects alive just when you need them the most, click here.
|Cindy Jutras who oversees research and client development related to manufacturing at Boston-based|