Analyst David St Onge of technology analyst Enterprise Management Associates says that, in the current tight market, companies are practically demanding to see return on investment (RoI) figures for any prospective IT purchase. “IT purchases are subjected to a degree of scrutiny that has not been seen for a decade,” he says.
The idea is that evaluating a project’s RoI should provide an effective accounting method for verifying IT expenditure and give hard data about benefits. However, for RoI to give a true picture, multiple steps must be covered. These include totalling the cost of purchasing the software, installing it, integrating it and training personnel to use it – and, after that, calculating the new system’s impact on revenue generation.
“Gone are the days when it used to be good enough to talk about the fact we have a great product and wouldn’t it be fantastic to become an e-business,” says Norman Green, Oracle UK vice president and finance director. He argues that customers look for information on how a product will help their company develop.
In the past, Oracle has found that even some of its large customers have difficulty in understanding the sort of savings possible using its technologies.
To combat this, Oracle uses an in-house team of consultants to help prospective customers build a business case and calculate their RoI. The key to the exercise is understanding exactly what the customer is trying to achieve with the project and to work out not just the cost of the software and any savings in pure process terms, but also to look at some of the indirect costs and intangible savings and put a value on those as well. “We look at the total cost of ownership (TCO) of our software and developing it forward, then help the customer work out his pay-back or discounted cashflow from there on,” Green says.
Similarly, enterprise resource planning (ERP) vendor Intentia has recently introduced a “value-based sales model” in response to what it says is now a much more mature market for its products. Wim Jansen, the company’s president of Northern Europe, says that, not only are businesses now looking at the out-of-pocket costs paid to IT suppliers, but also at the internal cost, to produce a realistic TCO figure. What’s more, as part of the RoI, customers increasingly expect suppliers to deliver value-add in the form of business knowledge – and they want IT suppliers to show that they can support the company in its strategic approach.
“We looked at these things and said, if we believe our products add value, then we need to put a number on a piece of paper, a number that combines quality cost, efficiency cost and hopefully some expansion cost,” Jansen says.
He argues that RoI is not an off-the-shelf concept, but one that should vary between all IT purchasing companies and should be determined by their culture, organisational model, business principles and the trends within them and their industry. It should include surveys of the prospective customer using key performance indicators (KPIs) relevant to its industry and covering areas such as financials, logistics, and production, and it should provide an overview of the company’s performance compared to competitors.
NO CURE NO PAY
Alongside its RoI sales pitch, Intentia offers customers a range of pricing models for its systems. These range from traditional time-to-material through to no-cure-no-pay models, as well as fixed pricing and target pricing, in which Intentia is not paid until the customer’s receives some tangible return from the project.
According to Jansen, the fixed-price model is a tool for those who want a very stringent method for measuring IT pay-back. Intentia makes it clear exactly what it will do for a price and the purchaser knows what should be delivered. Target pricing is a method of pricing in which Intentia and the customer work as a team towards a designated target. They share the risk and the responsibility of reaching that target – but Intentia asks for a percentage of the improvement made as a result of implementing its software. This can put companies off – if the implementation goes well, they pay more than they would under other arrangements.
Jim Kent, director of Compaq Global Services, maintains that it is only by making discretionary investments in selected projects now that companies will obtain pay-back later when the economy recovers. “What’s clear in the analysis of IT spend is that infrastructure spend can’t create new revenue or new profit – it simply maintains the status quo. However, selectively investing in a discretionary spend allows you to create new revenue in new markets,” he says.
Kent believes that future winners and losers will be defined in large part by the speed at which enterprises can change their business models.
Reducing IT infrastructure spend can provide the funding for companies to make discretionary investments and then use technology to develop new services and products that will generate income. Compaq has devised an “Innovation Quotient”, which is calculated in terms of the discretionary spend as a proportion of the whole IT budget and is used as a metric to build its business case. It says that, if discretionary spend falls below 30%, an enterprise is vulnerable and may struggle to recover.
SAP Portals, which needs to convince a sceptical world of the value of its portal technology, believes traditional RoI does not go far enough. Consequently, it has developed a metric it calls “Proof of Value” (PoV).
“Proof of Value uses several economic indicators to demonstrate to customers that the solution we offer can align with their businesses in three ways,” says Joseph Zarb, SAP Portals vice president in charge of PoV. “It can strategically align with businesses, which means it can help them complete their strategy. It can technically align with businesses, that is it ties into their existing technical infrastructure. And, since we have a portal approach, our solution can align with businesses from a collaborative point of view – which means that our products not only work within a customer’s business but also work with the customer’s trading partners.”
One driver that sent SAP Portals down the path to PoV was independent research of nearly 200 corporations that revealed 44% were not considering a portal simply because they believed there was no business case. “We had no choice,” says Zarb. “We could either ignore this data and continue to discount our software until somebody gave us money – or we could invest in the skills and practices that help our clients realise the benefits of the technology.”
Using Proof of Value, SAP Portals entices the potential customer with what it calls its “pre-engagement services”. These involve analysing the client and its business even before the first meeting. “We do a background check on the customer and benchmark it against its top-five competitors across a number of financial metrics,” says Zarb. These include revenue growth, per cent of cost of goods sold, days sales outstanding and fixed assets against revenue.
The result is that from its first meeting with a potential client, SAP Portals can focus on business value. “As much as we are enamoured by our technology, projects don’t succeed unless they solve a problem. So we use pre-engagement to help the customer and ourselves focus on the same business problems,” says Zarb.
“Engagement services” are the next step for Zarb’s team. “That happens when the customer is very interested in buying, and typically the customer says to us, ‘We want to understand the costs and we want to understand the benefits … we want you to quantify the benefits associated with those costs,'” says Zarb.
To do this, SAP Portals has developed a top-down methodology, which first of all quantifies a company’s corporate strategies. Then, for each strategy, SAP Portals documents the key department roles, and looks at the tasks and decisions of each employee. These are then mapped to the customer’s existing IT infrastructure. SAP Portals then looks at what other human capital is involved in delivering on that strategy: for example, other employees, external suppliers, customers or distributors. Finally, it uses its collection of benchmarks to build a base-line of how select business processes work within the customer account.
Having moved from the SME league to target the large enterprise sector, ERP and customer relationship management (CRM) vendor Frontstep introduced RoI into its sales approach after losing out in the final stages of one sales pitch because it lacked any such measurement, says managing director Andy McNay. The version of RoI it came up with looks at the business processes of each department surveyed, concentrating on customer services, project management, inventory, engineering, and production, to identify how those processes can be improved.
Although companies may welcome the efforts of all these IT suppliers to quantify RoI in advance, a study released by Jupiter Media Metrix warns companies not to rely too heavily on in-house RoI measurements. It found that 59% of do-it-yourself RoI studies generate a positive result. When coupled with the finding that only 5% of them turn up negative results, Jupiter argues the “fudge factor” needs to be closely watched. “You can fudge on definitions of how IT investments build customer loyalty, lifetime value and brand positioning,” says Jupiter analyst, David Taylor.
As a result, Taylor recommends companies stick to hard metrics, such as revenue per customer or cost of acquiring customers. “I wouldn’t say anyone’s good at measuring e-business RoI yet,” he said. And, he notes, the big consulting firms cover RoI – but no one specialises in it.