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Investment in IT has always been looked as an 'expense'
and not an 'expenditure' and the IT department as a cost head to
the organisation. One of the most misleading facts of traditional
software project management/Enterprise Applications is that the
company expects to gain value from the application as soon as it
is installed and starts working.
The traditional way of looking at Enterprise Applications are as
those which work across the organization. It may be an ERP (Enterprise
Resource planning), SCM (Supply chain Management) or a CRM (Customer
Relationship Management) application. They work towards profit maximization
for the organisation.
Following are the various ways in which the CTO (together with
the CFO) usually performs the 'Operating analysis' for any
application which is deployed enterprisewide. The primary objective
of this analysis is 'To make a decision'.
1. Return on Investment
2. Cost Benefit Analysis
3. Return on opportunity
4. Total cost of ownership
5. Economic value added
6. Internal Rate of return
7. Net Present Value
The Returns on the Investment for any Enterprise Application can
be classified as:
Or
According to Pareto's priciple (80:20 rule), Tangible and Quantitative
returns covers 80% of the returns of the total Returns on Investment
on Enterprise Applications.
Factors for evaluating Enterprise Application
Enterprise Applications can generate more accurate demand forecasts,
speed up production cycles, and greatly enhance customer service,
drastically reduce the inventory & so on. It also helps the
organization move up in the value chain (in technological terms).
Following are the factors with the help which organisations can
evaluate the 'Fitness' of any 'Enterprise Application' in the organisation
Required investment
Investment, which includes capital expense (Hardware/Software),
planning and deployment, application development, and ongoing management
and support required for the application.
Financial benefits
What are the expected financial benefits of the project, measured
according to established financial metrics, including ROI, net present
value savings, and payback period?
Strategic advantage
What are the project's specific business benefits, such as operational
savings, increased availability, increased corporate revenue, or
achievement of specific corporate goals and objectives?
IT operating efficiency
How will the project improve IT, such as simplifying management,
reducing support costs, boosting security, or increasing IT productivity?
Risk
- What are the 'potential risks' associated with the
project?
- How likely will risks impact the implementation schedule,
proposed spending, or derived target benefits?
- How can the risk be mitigated, monitored and managed?
- What are the factors, which will contribute to the RMMM
(Risk mitigation, monitoring and management) plan?
Competitive impact
How does the proposed project compare with competitors' spending
plans?
Accountability
How will we know when the project is a success? How will the
success be measured (metrics and timeframes)?
ROI Thought Process
- What and how much would be the improvement in 'customer satisfaction'
of the organisation?
- How much contribution will the EA make in increasing the companies'
'market share'?
- What % of decrease in 'operating expenses' would happen
and when would it happen?
- What % of decrease in 'inventory expenses' will be achieved
and in what time frame?
- How would the EA shorten the 'order-to-delivery' cycle,
in how much quantity and in what time frame?
- What would be the strategic advantages over the competition
and how soon would they be achieved?
- How will the EA shorten 'time-to-market', to how much
extent and when?
- What are the metrics for measuring performance improvements
in both tactical and strategic areas?
- Will the company be able to reduce material cost through
better SC planning? How much and when?
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