A short introduction to enterprise systems investments.

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Johan Magnusson
Centre for Business Solutions
School of Business, Economics and Law
University of Gothenburg
Investing in Enterprise Systems
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Agenda
After the lecture, you will be able to:
1. Describe the context of IT-related investments and how this is
currently changing
2. Explain different methods for evaluating IT-related investments ex-
ante and ex-post
3. Describe the ES Procurement process and evaluate how this can be
managed
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Prioritization and the investment process
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Hypothesis: Changing patterns of spending
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Degree of Corporate Cost Control
(IT Budget/Total IT Cost)
Time
100%
0%
1980’s 1990’s 2000’s 2010’s
Decentralized investments
Strive for integration synergy
CIO: “We don’t know”
Decisions: Semi-grand decisions
Scope of control: Network
Centralized investments
Costs move to corporate IT
CIO: “We know”
Decisions: Grand decisions
Scope of control: Everything
Centralized investments
Formalization
CIO: “We know better”
Decentralized investments
Decentralized cost
“cost of operations”
Consumerization
Shrinking grasp of Corp IT
CIO “We don’t know all”
Decisions: Micro
Principles, Integration, Backbone

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From Efficiency to Productivity: Changing patterns of IS
• Supporting functions are cost-centers
• Cost should be minimized
• Efficiency as KPI
• Supporting functions are profit-centers
• Relationship between cost/revenue
• Profit as KPI
• Supporting functions are investment-centers
• Effectiveness in use of resources
• Productivity as KPI
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Questions raised by a governance perspective
• Should IS be involved in the prioritization process?
• Should the CIO be responsible for IT-related investments?
• Should IT be regarded as a cost?
• How should costs related to IT be allocated?
• Should the CIO report to the CEO or the CFO?
• Which costs should be controlled by IS?
• How should micro-investments be treated?
• Should the CIO be involved in the strategic dialogue?
• Who should be responsible for the benefits realization?
• Who should prepare the business case?
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Food for thought: The case of SaaS at Skandiabanken
• Software as a Service involves a pay-
as-you-go principle
• Each key-stroke generates a cost…
• Question: Should we treat SaaS as a
cost or an investment?
• Pro Cost: Cost of doing business, each
activity is associated with direct costs
• Pro Investment: Long-term
commitment before break-even
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The investment evaluation ex-ante/ex-post
• Ex-ante
– Guess-works on cost and benefits
– ROI, TCO, EVA, PP, PENG et cetera
– How do we find the cost of something that is
dependent upon our own input across the
entire enterprise?
– How do we identify the benefits across the
entire enterprise?
• Ex-post
– 20% of IT-projects employ ex-post financial
assessments
– The reasons why not…
– Issues of causality and instrumentality
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Food for thought: What does the vendor want you to use?
• The battle between ROI and TCO
• ROI: Return on Investment
• TCO: Total Cost of Ownership
• Assumptions:
– The per item size of the investment is
decreasing
– The switching cost is decreasing
• Question: Which method should you use
in your business case?
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Example of evaluation
• Small team working together with consultant
year 1, doubling costs year 2, ready year 3
– BPR analysis and formation of training team
• Software costs 3 M €
• Hardware costs 500.000 €
• Operating costs from year 4 (2 M €) annual
increase 10%
• Needs for futher development year 4/5
• Cost of Capital 20%
• Benefit year 4 is approximately 4 M € with an
annual increase 10-30%
• IRR: 25/5%

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Net Present Value
Year Investment Operations Benefit(30%) NPV30 Benefit(10%) NPV10
1 1,200,000 -1,000,000 -1,000,000
2 7,500,000 -5,208,333 -5,208,333
3 5,000,000 -2,893,333 -2,893,333
4 3,000,000 4,000,000 482,253 4,000,000 482,253
5 2,500,000 5,200,000 1,085,069 4,400,000 763,567
6 2,420,000 6,760,000 1,453,457 4,840,000 810,453
7 2,662,000 8,788,000 1,709,654 5,324,000 742,915
8 2,928,200 11,424,400 1,975,945 5,856,400 681,006
9 3,221,000 14,851,720 2,254,108 6,442,040 6240225
10 3,543,122 19,307,236 2,545,992 7,086,244 572,234
NPV 2,404,627 -4,425,168

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Payback
Year Investment Operations Benefit(30% Netto (30% Netto (10% Ack.30% Ack. 10%
1 1,200,000 -1,200,000 -1,200,000 -1,200,000 -1,200,000
2 7,500,000 -7,500,000 -7,500,000 -8,700,000 -8,700,000
3 5,000,000 -5,000,000 -5,000,000 -13,700,000 -13,700,000
4 3,000,000 4,000,000 1,000,000 1,000,000 -12,700,000 -12,700,000
5 2,500,000 5,200,000 2,700,000 1,900,000 -10,000,000 -10,800,000
6 2,420,000 6,760,000 4,340,000 2,420,000 -5,660,000 -8,380,000
7 2,662,000 8,788,000 6,126,000 2,662,000 466,000 -5,718,000
8 2,928,200 11,424,400 8,496,200 2,928,200 -2,789,800
9 3,221,000 14,851,720 11,630,700 3,221,020 431,220
10 3,543,122 19,307,236 15,764,114 3,543,122

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Examples: ROI and Business Case
• Gartner Toolkit CPM Investment 2008
• Gartner Business Case ERP
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Investing in ES
• Identification of demand and requirements
• Identification of potential solutions
• Building your business case
• Managing the vendors
• Planning the project
• Negotiations
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Identification of demand and requirements
• What do we really want to achieve?
– Improved efficiency through rationalization
– Improved control and agility
• What are the motives for our (re-
)investment?
– Political, esthetic, control, disgruntled
• What is the time-line for the project?
• What can we hope to free in terms of
resources?
• What should the scope of our ambitions
be?
• Should end in a process-based
requirement analysis but rarely does…
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Identification of potential solutions
• Objective: Find the right solutions
• Determined by the scope of the
requirements
• Talking to competitors, friends etc
• Potential use of external consultant
• Results in a “long-list” of potential
solutions
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Building your Business case
• Objective: Win support and priority!
• Specify and market your investment
idea
• Find the costs (not only direct)
• Trace the expected benefits and
quantify
• See what you are up against…
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Example of a Business Case
1. Front (summary)
2. Executive summary
3. Introduction and background
4. Recommended solutions and
alternatives
5. Cost and benefit and risk analysis
6. Project plan
7. Appendixes
– Cash flow analysis
– Details of alternatives
– List of identified risks and planned
mitigation actions, auditing etc
– Detailed project schedule and resource
plan
– List of sponsors, participants and
organization
– Plan for post-implementation review
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Source: Gartner Bizcase template
2007

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Managing the vendors
• Objective: Gain friends and influence people
• What do we want from the vendors?
• What do we want to pay?
• When do we want it?
• What do the vendors know about us?
• How much do we want them to know?
• How should we act to make sure we get
what we want?
• Ends in a short-list of equally good solutions
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Negotiations
• Objective: Secure the correct pre-
requisites for a successful implementation
• What should we pay?
• How should we pay?
• Who do we get?
• What do we get?
• How should we control the project
outcome?
• How should we plan for failure?
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Planning the project
• Objective: Find the time, scope and
budget of the project and secure the
internal resources (staffing)
• When do we want to Go Live?
• How do we wish to Roll out?
• What are the key factors we need to
relate to?
• Will be dependent upon the choice in
solution and vendor
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Recapitulation
1. Describe the context of IT-related
investments and how this is changing
2. Explain different methods for evaluating IT-
related investments ex-ante and ex-post
3. Describe the ES Procurement process and
evaluate how this can be managed
2013-08-29Centre for Business Solutions