Archive for category Return on Investment Analysis
Getting the CFO to Pick Up His Bottom…Line: Best Practices in Cutting Costs
Posted by Helene Abrams in Data Quality, Return on Investment Analysis, The Changing Enterprise on February 16th, 2010
In the past, improving business processes was the primary objective of most ERP implementations, and welcome outcomes were cost savings and productivity improvements. When ERP systems were initially implemented, the opportunities and gains in back office operations were considered significant strategic advantages. But although the strategic advantages of having robust ERP systems persist, today’s economy is forcing companies to look for ways to cut costs rather just improve their systems. The good news is that focusing on cost savings and improving ERP can go hand-in-hand and lead to better business processes if they are managed properly.
Because cost savings will continue to be the focus for the foreseeable future, this paper will review best practices in workflow improvement that reduce costs for three key business processes: Procure to Pay, Period-end Close, Order to Cash. At some point when the economy moves out of recession, organizations will begin hiring again. Keeping an eye on our concluding key performance metrics will help organizations better decide when it’s time to flip the hiring switch. Read more…
Show Me the Money: Reduce the Costs of Running Oracle EBS Before Upgrading to R12
Posted by Helene Abrams in Data Systems, Return on Investment Analysis, The Changing Enterprise on January 19th, 2010
Reducing costs is the major strategic focus for most companies. An often overlooked cost is the general operation of financial operations. This paper details a methodology for calculating the costs of running each of the financial modules. The costs are compared against both internal and external benchmarks. After calculating the costs, the paper shows how to reduce costs in two ways: first, by eliminating work that is duplicated across different business units or divisions, and second by determining which operations that are currently distributed across the organization can be consolidated into a shared services center. Together these changes, both to the organization and the Oracle EBS system, can generate significant cost savings. Finally, the paper details how streamlining operations prepares for a better R12 implementation.
Calculating the Cost of Operations
The cost of operations is calculated by breaking down how much time is spent on an activity during the year by each person doing that activity, how many items were processed, and then calculating the cost using a baseline cost of FTE. As an example, for AP, each department would calculate the number of hours in a year spent on each of the following tasks or activities:
- Maintain policies and procedures
- Enter, code, match, and correct payment documents
- Prepare and issue automated checks
- Certify checks
- Process manual checks and special payment requests
- Respond to vendor and internal inquiries
- Perform Reconciliations
- Perform corporate and government reporting
- Create Corporate Chargebacks
- Other A/P Activities
The hours would be translated to a number of Full-Time Equivalents (FTEs) by dividing the hours by 2080 (the number of hours for a person working full time per year). A baseline average burdened (including benefits and expenses) salary is then multiplied by the number of FTEs to calculate the annual cost of that activity. To obtain the cost of an operation, multiply the number of items processed (i.e. number of checks) by the cost of the activity. For each of the finance areas, costs are calculated to measure the performance of each activity. For example, General Accounting would calculate the number of journal entries processed per FTE per year and compare those to an internal benchmark. Travel and Entertainment would calculate the number of expense reports processed per FTE per year. Fixed Assets would calculate the number of unique fixed assets or line items per FTE per year. Accounts Receivable would calculate the number of bills issued per FTE per year. In other words, each area would develop its own internal key performance metric and a way to calculate that metric against FTEs contributing to the process. In aggregate these calculations may uncover significant additional cost savings that could be realized quickly and relatively painlessly by migrating from a distributed services model to a shared services model.
Don’t Walk Away from $15,450,000
Posted by Helene Abrams in News & Articles, Return on Investment Analysis, TECHANGES, Trends & Technology on March 19th, 2009
Yes, the economy is in the tank and will be for some time to come. Yes, the credit market is tight. I am hearing from several customers that all projects in their companies are frozen, even those projects that have a pretty substantial return on investment and a pretty quick cost recovery. There was even one project that was projected to generate annual savings of more than $10 million dollars that has been put off until after 2Q, 2010. The project was to start in January of 2009 and go into production by July of 2009. Let’s break that down a little bit.
The project was to go live in July, 2009, but has been postponed until July 2010. The projected annual savings of $10,000,000 will not begin to show results until the new projected go-live date of January, 2011 (18 months after the originally scheduled go-live date). During the eighteen months, the company could have been recognizing the results of $15,000,000 savings in operations – savings that would have gone straight to the bottom line. Additionally, even with a modest 3% investment, the company would have earned $450,000 on the $15,000,000.
More importantly, that money could have been used for research and development or for marketing activities that would have made the company more competitive. When the economy is down, buyers should think about how to use the money they have so that they get long-term benefits, recognize results quickly, and grow. For some more ideas on how to grow your business during a recession, please see this article.
A Dollar Today Is Worth More Than a Dollar Tomorrow
Posted by Helene Abrams in Return on Investment Analysis, TECHANGES, Upgrade vs. Reimplementation on December 20th, 2008
Making an investment in your E-Business Suite today for a big pay-back tomorrow
Your friend must choose between two offers:
- You offer your friend $1,000 to be paid a year from now.
- You offer your friend a smaller amount today – maybe $900.
Your friend will choose the second offer: A dollar today is worth more than a dollar tomorrow. The old adage rings true in IT organizations. It is difficult to justify a project to streamline your EBS and make it align with business changes when money is tight. An IT department is willing to spend more money over time maintaining current applications rather than making an investment today. It is much easier to continue to spend money and effort reconciling systems with thousands of spreadsheets and custom reports because the money goes out in a slower stream and is less “visible”, doesn’t need approval from stakeholders, and the users have lived with the pain for so long that postponing a solution for a year or two later doesn’t really matter. By investing a chunk up front to change their applications, companies can reduce long-term maintenance costs caused by having different EBS instances, thousands of operating units, and different charts of accounts, but companies choose not to spend the money now and to spend more over the course of a number of years. One large cost today seems bigger than many smaller costs over time, but in reality, making an investment in streamlining systems ends up saving the business money in the long haul.
The cycle begins when implementing Oracle E-Business Suites. To contain costs, and because a company didn’t understand how to utilize all the features of EBS, the original configuration was not scaled to accommodate growth. Companies had already made the investment in Oracle’s E-Business Suite, only to find that with time, the business has changed and the implemented system hasn’t changed with it. Instead, it is much more difficult to recognize a return on their ERP investment because multiple instances or operating units have been configured differently due to requirements that are different for parts of the business. ERP doesn’t represent the “Enterprise” anymore, and the Total Cost of Ownership (TCO) is going up – money is spent on “running” the business, maintaining systems, and developing workarounds to meet changing regulatory and reporting requirements, rather than on innovation and on utilizing the system to get more revenue to the bottom line. It is difficult to perceive the value in spending money on a project now rather than maintaining myriad configurations over a longer period of time.
Political attributes of management can also get in the way – consider when lines between budgets become blurred and spending buckets spill over into others. It is common for companies to dip into other budgets and misuse funds not originally appropriated for maintaining current applications to do just that. One company was spending 40 percent (about $2.5 million) of its application development budget to maintain interfaces between disparate systems, while it could have more aptly used the funds for their original purpose: removing – rather than promoting – silos and disparity. In an E-Business Suite environment, such improvements include consolidating operating units, inventory organizations, or entire instances, or redesigning the current chart of accounts (moving to a single enterprise version) to minimize cross-validation rules, utilize logical ranges, and reduce data entry and spreadsheets.
Let’s return to the original offers and tweak them a bit:
- You offer your friend $1,000 to be paid a year from now, if he is willing to invest $100 today
- You offer your friend $1, 000 to be paid ten years from now if he is willing to pay $80 a year for the next ten years.
In this case, it is much easier to justify spending the money upfront and to go with the first option. A dollar today is worth much more than a dollar tomorrow. Unfortunately, the second scenario is much closer to the situation in IT than the original offers, but IT management fails to see it. Projects to change existing applications invariably get pushed to the back burner. The ongoing costs of maintaining current systems are so much higher than a comparative immediate investment to change systems that it is difficult to understand why so much capital is poured into maintenance. It is wiser to develop an effective plan to change current applications and align them with future business requirements, as well as to use the money and effort saved in maintenance to respond to new opportunities and become more competitive in the long term.
How Much Can You Save Now?
Posted by Chris Busbee in Data Systems, Return on Investment Analysis, TECHANGES, Trends & Technology on December 20th, 2008
If you are able to determine how much you spend with each of your suppliers, you may be able to renegotiate your discounts. Many suppliers will provide volume discounts if you commit to certain spending levels. By looking at your total spend across all operating units, you may be able to reach the thresholds required for greater discounts.
By increasing the number of days a company holds on to cash, additional interest will accrue, whether using a daily sweep checking account or another instrument for cash management. The following calculator analyzes the benefits of extending the payment terms with suppliers and calculating the value of having the cash on hand for an additional “float” period. >>See How Much You Can Save
Leveraging Purchasing in a Multi-Org Environment
Posted by Helene Abrams in Data Systems, News & Articles, Return on Investment Analysis, TECHANGES, Trends & Technology on December 20th, 2008
When companies originally set up multi-org in Oracle’s E-Business Suite, security and control were the primary drivers for separating data into different operating units. Plants wanted to run their own operations, negotiate their own contracts with suppliers, and set up their own invoicing, inventory and receiving practices. Moreover, there was a competitive environment among different divisions, product line operations, and general managers. One part of the company did not want another part to see the transaction detail. Little attention was paid to maximizing the purchasing power of the entire enterprise to negotiate better terms and discounts with common suppliers.
As a result, companies often set up hundreds of operating units, each with its own freight carriers, matching tolerances, approval hierarchies, supplier terms, and contracts. It was difficult to determine how much business was conducted with a particular supplier, difficult to determine the enterprise cost of managing and maintaining different supplier relationships, and the burdened costs of different inventories. >>MORE
Operating a Shared Service Center in R12 with E-Business Suite
Posted by Helene Abrams in Data Quality, Data Systems, Return on Investment Analysis, TECHANGES, Trends & Technology, Upgrade vs. Reimplementation on July 17th, 2008
Multi-National Corporations (MNCs) with widespread global operations must treat separate (usually location-defined) parts of their businesses differently due to local statutory requirements, taxes, accounting methods, languages, and currencies, yet still must comply with corporate standards. The business must manage issues around security, ownership, reporting, and control for all transactions. For a MNC operating in 47 different countries spread across 6 continents, daily operations is a tedious exercise that requires that each business unit operates and supports operations independently while sharing data among other parts of the enterprise to leverage sourcing opportunities, inventory, and back-office transactions. Implementing a SSC enables the company to significantly reduce costs by having a central pool of employees to handle day-to-day tasks such as Procurement, Disbursement, Collections, Fixed Assets, Tax Compliance, Training & Development, and Payroll. Instead of carrying out these tasks in each of the 47 different countries and repeating each operation 47 times, a SSC combines similar tasks carried out throughout the enterprise and shares the overhead cost of providing these services internally. Offering these tasks as Shared Services enables the corporation to capitalize on the economies of scale and scope (in the form of reduced headcount, reduced operating costs, greater service levels, greater leveraging of resources, etc.) that come with the elimination of duplicate efforts. >>MORE
How to Grow Your Business During a Recession
Posted by Helene Abrams in Divestiture, Return on Investment Analysis, TECHANGES, The Changing Enterprise, Trends & Technology on April 20th, 2008
It’s official. A growing number of experts acknowledge we’re in a recession. Although Wall Street has tried to avoid saying the “R word,” the good news is that the U.S. economy will improve. And smart business owners know that by planting the right seeds during the current downturn, their companies can harvest a bumper crop on the other end of the slowdown.
Here are a few time-tested perennials sure to reap big rewards.
Weed Your Garden
This is a good time to focus on your company’s core competencies and eliminate redundancies and underperforming products and divisions. Sell off areas that are not aligned with your core values so that your precious financial and human resources can be used to help drive profitability in the areas that are performing well.
For example, Compton Petroleum Corp.’s three-year projection of its operating plans, which revealed a large funding gap, brought industry speculation that Compton would need to sell significant assets, beginning with non-core assets, to solve cash-flow problems, according to a CNN Money report. In another example, a major U.S. bank saved $30 million a year by cleaning up and consolidating duplicate data following a series of acquisitions, according to an IBM report.
By reducing redundant processes, consolidating systems and sloughing off areas negatively impacting companies, CEO’s will be in a much better position to take on new business in the future.
Start Large Projects Now
This may sound counterintuitive. But during a recession, the sales cycle will necessarily take longer, so companies can turn this into a plus by using the extra time to focus on quality. Additional testing will help ensure new products have adequate time to mature before entering the market.
Buyer’s Market
For those companies that find themselves cash rich, the recession can be a bargain hunter’s dream. Low interest rates and a bounty of distressed companies looking for infusion of cash provide attractive opportunities; but it’s a good deal only when it adds value to the parent company.
In the earlier Compton example, Centennial Energy Partners said publicly that they thought Compton was an “opportunity-rich company” and asked the Compton board of directors to consider selling its company to Centennial.
Stay Connected
Hard times provide exceptional opportunities to build customer loyalty. Make sure you begin the process by keeping your employees and investors informed of any changes. This not only has a calming effect but also ensures that the public receives consistent, accurate messages.
Customers appreciate it when a business is willing to work with them on pricing and flexible financial arrangements. When the economy improves, they will remember how companies treated them when times were tough.
By following these common-sense strategies, businesses can not only survive a recession but actually thrive.
The Bottom Line: Where’s the Money?
Posted by Helene Abrams in Return on Investment Analysis, TECHANGES on November 18th, 2007
Suppliers and consultants regularly make recommendations to their client companies. In many companies, these suppliers of products and services are trusted advisors, often having the responsibility of making a final decision on a project. Even with best intentions, however, the supplier’s decision of what is right for the customer is a difficult decision because there is a potential conflict of interest. The supplier has something to gain as a result of the decision if it recommends that its services or products are included as part of the recommended course of action. The monetary value and type of transaction may determine the severity of the conflict and the course of action that should be taken to deal with it, but in each case the clear potential for a conflict of interest requires a thorough comparison of potential benefits and costs for each party. >>MORE
Doing the Math: Consulting vs. Software
Posted by Helene Abrams in Return on Investment Analysis, TECHANGES on November 18th, 2007
Consulting companies want to sell consulting services; software companies want to sell software. When software can be used to “replace” services, a consulting firm’s first instinct is usually to utilize its people rather than the software, because that maximizes utilization (and of course high utilization leads to a higher compensation). Sometimes, however, a consulting company and its client (and the software company) all benefit when the consulting company employs a software-centric solution. >>MORE