Investing in enterprise systems

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2023-04-13Centre for Business Solutions

Johan MagnussonCentre 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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2023-04-13Centrum för Affärssystem

Prioritization and the investment process

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Hypothesis: Changing patterns of spending

Degree of Corporate Cost Control (IT Budget/Total IT Cost)

Time

100%

0%

1980’s 1990’s 2000’s 2010’s

Decentralized investmentsStrive for integration synergyCIO: “We don’t know”Decisions: Semi-grand decisionsScope of control: Network

Centralized investmentsCosts move to corporate ITCIO: “We know”Decisions: Grand decisionsScope of control: Everything

Centralized investmentsFormalizationCIO: “We know better”

Decentralized investmentsDecentralized cost“cost of operations”Consumerization Shrinking grasp of Corp ITCIO “We don’t know all”Decisions: MicroPrinciples, 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%) NPV101 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

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

Investing in enterprise systems

Business

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