By Jim Maholic, Business Value Services, Oracle
When building a business case for cloud ERP, project managers should look beyond the standard ROI and TCO calculations that IT teams have historically relied on. Business is about money—making more than you spend and spending effectively so that you are good stewards of what you have. One of the big challenges for project managers is thoroughly identifying all of the benefits of a proposed project and ascribing credible, tangible, financial and business value to those benefits. This is critical to a successful business case.
Your business case must show that your ERP cloud project will produce benefits in excess of the cost. There are really only four compelling business drivers:
Identifying and categorizing these business benefits need not be difficult if you align your thoughts with an age-old graphic called the DuPont model (shown below). This excellent and simple understanding of business drivers was created in 1917 by F. Donaldson Brown of DuPont.
Using the DuPont Model as the basis for your benefit alignment, you can easily see how things flow. Starting on the left-hand side, the ultimate goal of any capital (or large operating expense) investment is to increase shareholder value. Using this diagram, you can see how each of these business items favorably influences shareholder value by looking at the arrows.
For this article, we are concerned about aligning our benefits by business driver. In an upcoming article we’ll look at specific calculations to drive that value. For now, let’s explore these four business drivers a little deeper, beginning with top line revenue.
All businesses want more top line revenue. How do they generate more revenue? Typical commercial businesses can generate more revenue in two ways: sell more of their products or charge more for the products that they sell. Local governments increase revenue by raising taxes or by offering fee-based services to the community. Nonprofit organizations can also increase revenue by offering fee-based services. If your project drives additional revenue to the business, you would align those benefit items in the Sales area on the right-hand side of the graphic.
Controlling expenses is another desirable goal for every organization. No organization can generate an endless stream of revenue, so they must spend less than they earn. There are many ways to control expenses. To be effective, your business case must explore those options and articulate the ones that are most compelling and relevant to your proposal. Many projects cut costs in the Sales, General and Administrative (SG&A) category. Other projects cut costs in manufacturing and production and would align to Cost of Goods Sold.
Another excellent way to show value is by improving working capital. Working capital involves things that are either cash or can quickly be converted to cash. The three most common working capital items that we might impact are accounts receivable (amounts owed to the company by its customers), inventory (materials that the company has purchased but may or may not yet have been converted into sellable finished products), and accounts payable (amounts the company owes its suppliers).
Optimizing accounts receivable is a fancy way of saying that your company collects its cash sooner. There is specific value in collecting your cash sooner. Investors track a metric called “Days Sales Outstanding” or DSO. Likewise, there is value is converting your raw materials into sellable product sooner. This metric is called “Days In Inventory” or DII. The third working capital improvement area deals with vendor management and vendor payment. Prompt payment of trade payables (a term that refers to routine business purchases that were made on credit) is a good business practice. But there is a balance between paying too promptly and being delinquent. Your company might be able to benefit from delaying payment to vendors a day or two without injuring the vendor relationship. This metric is called “Days Payable Outstanding” or DPO. These three working capital items are often combined in a calculation called the cash conversion cycle. The cash conversion cycle (sometimes called the cash-to-cash cycle) refers to the number of days in which you can convert your purchased items into cash. The equation is DSO + DII – DPO.
This is the most difficult benefit to monetize. It does not align itself directly with the DuPont model, but mitigating risk is a concern for all businesses. A classic example is a security breach. Obviously, no business wants a breach, but what is the value of protecting against it? The costs associated with a security breach—in lost customer confidence, associated bank fees, possible litigation, increased investment in security protocols, and potential loss of business—can be quantified. Research from the Ponemon Institute (sponsored by IBM) pegs the average cost of a security breach at US $3.92 million. And according to a KPMG survey, 75 percent of executives said they plan to allocate 3 to 10 percent of future ERP budgets towards security and controls. Security is clearly top-of-mind for the C-Suite, and it would be a mistake not to include the potential cost in your business case.
There you have it: four compelling business drivers that drive all large financial commitments. By aligning your prospective benefits along these specific categories, you increase the likelihood that your proposal receives your requested funding.
This post is the third in a series of articles adapted from my award-winning and Amazon Top 10 book, Business Cases that Mean Business. The next article in the series will address giving executives a reason to approve your proposal.