ROI: Fact or fiction?

Today`s economic climate demands that corporates watch their IT spend carefully and install systems that either save them money or make them money. Looking after their bottom lines means they simply have to spend time focusing on that dreaded three-letter acronym - ROI.

In the past, many vendors have been guilty of claiming their products and services will all produce a measurable return on investment (ROI). But the fact of the matter is that some technologies won`t.

However, some IT initiatives do lend themselves to a ROI. One example is taking purchasing online through an e-procurement initiative. This will, if approached correctly, produce a measurable financial ROI to justify the investment. In fact, not only does it make financial sense for companies to begin buying components online, it also makes the entire purchasing process - to coin an advertising payoff line from a well-known SA bank - simpler, better, faster.

Simpler because it presents buyers with online catalogues that list the right components for their requirements, which removes the need for a possibly lengthy decision process. Better because it cuts back on ad hoc purchases that end up costing more as they are not covered by existing purchasing contracts with preferred suppliers. And faster because it moves buyers from a "pick up the phone and try and find the right person" mode to "log onto the intranet and point and click" mode.

Before getting involved in an e-procurement project, you need to do a proper procurement spend analysis.

Wilhelm Greyling, a professional services consultant, Commerce One

Just the process of preparing to move from a paper-based procurement model into an e-procurement environment can provide an ROI for corporates, through identifying how and where money is being spent.

Says Wilhelm Greyling, a professional services consultant at e-business solutions provider Commerce One: "Before getting involved in an e-procurement project, you need to develop a solid business case considering all factors in the sourcing and procurement processes, underpinned by a complete ROI exercise. Based on this, you can then go through all the current processes and procedures, and decide which ones are efficient and which are not."

Adds Cathy Stadler, head of marketing at Commerce One: "Very few companies have a thorough global view of their spend."

Commerce One`s ROI model initially uses industry-specific data to get an initial view on possible areas that will benefit, including financial and operational. If this view makes economic sense, industry benchmark data is then replaced with company-specific data which includes proper spend analysis. In the process, it identifies areas where inefficiencies are taking place. For example, often a company`s biggest area of inefficiency is on "unauthorised" purchases or off-contract spend. These are items normally supplied by preferred providers at prices governed by previously negotiated contracts. Due to lack of compliance around these contracts and inefficiencies in the purchasing chain, almost every single corporate`s procurement spend shows evidence of buyers sourcing these components through suppliers not bound by the conditions of existing agreements.

The Commerce One ROI model kicks off by looking at all the main procurement spend areas. Then it drills down into details - breaking procurement processes down into specifics, for example looking at total cost of ownership and operational processes.

Very few companies have a thorough global view of their spend.

Cathy Stadler, marketing director, Commerce One

This establishes where savings can and should be made. Given that every rand spent has a definite impact on a company`s bottom line, this in itself is a powerful motivator to spur companies on to do better than their competitors. Yet another major benefit of this ROI model is that it forces companies to collate their historical purchasing information, which allows them to map purchasing trends and, in turn, improve process efficiencies.

In addition, as both Greyling and Stadler point out, simplifying the purchasing of commonly-used commodities within any company frees up its strategic sourcing personnel to concentrate on the more complicated requirements - allowing them to concentrate on getting better deals on what usually turn out to be really big ticket items.

Stadler says Commerce One`s ROI model came to market earlier this year and that local companies are showing considerable interest in it. "At the very least, it starts to give companies a real sense of the benefits of e-procurement in a quantified way."

One large corporate that invested in one of Commerce One`s e-procurement solutions is Sasol, an international producer of chemicals, fuels, gases and lubricants. Ian Rademeyer, Sasol`s procurement and supply technology centre of excellence manager, says the company installed the solution two years ago. After initial roll-out, Sasol built a ROI or benefit model from scratch. The model is used to investigate procurement processes at business units wanting to take some of their spend online to ascertain whether doing so would deliver a measurable ROI.

The solution is now running across about half of Sasol`s local business units and has in the region of 1 700 active users. Savings in overall stock expenditure are expected to run into seven figures during the next few years and it is hoped the solution will have paid for itself by 2007. In the past two years alone, the company has bought components worth R100 million through the online system.

Rademeyer says the savings may not seem significant when compared to Sasol`s total annual procurement budget (which tends to be counted in billions). Yet the savings incurred in rendering procurement processes more efficient (the query rate on purchases has dropped from 66% to under 5% and the number of steps attached to order fulfilment has dropped from 27 to an average of 19) is proof enough that this is an extremely worthwhile undertaking. Efficiencies are also continuing to rise as users get more comfortable with using the solution. "Last year we battled to do 3 000 line items a week. Now we`re sitting at 5 000-plus."

If automating processes doesn`t deliver an ROI, then don`t automate.

Neill Hart, CTO, Dimension Data`s Connectivity Services.

Rademeyer believes that one of the major success factors when introducing an e-procurement solution is to do so where it makes sound business sense - from a financial perspective as well as an operational point of view. He points out that depending on what type of industry a company plays in and the type of supplier relationship required, it may not always be possible to do every purchase online. So there needs to be a solid understanding that e-procurement process optimisation is more suited to high volume, less complex goods and service, while strategic sourcing tools may be used more widely in the strategic goods area.

Neill Hart, CTO at Dimension Data`s connectivity services, puts it more bluntly. "If automating processes doesn`t deliver an ROI, then don`t automate. A lot of IT doesn`t fall into the ROI mode. People tend to get tripped up when they try and apply a blanket ROI approach to their IT infrastructure."

He cites IP telephony as an example of a technology that can deliver a significant ROI, depending on the circumstances.

The main point is to determine where you can deliver a measurable ROI to a client and not to be embarrassed about saying you can`t when you can`t.

Neill Hart, CTO, Dimension Data`s Connectivity Services.

Hart`s company has installed an IP telephony network at its new premises in Johannesburg. The move into the new building will see 16 business units using the new system for their computing and telephony requirements.

"When you measure what this will mean in terms of spend compared to what it has cost to run PC and telephone networks for these different units in different places, we`ll certainly be paying considerably less. But it doesn`t make sense to go on about the cost savings that can be achieved through installing an IP telephony solution to a company that isn`t moving premises in the foreseeable future and already has a PC and a telephone network in place.

"The main point is to determine where you can deliver a measurable ROI to a client and not to be embarrassed about saying you can`t when you can`t."

For example, he says: "People love going on about increased productivity. There`s an advertising campaign running in the UK that says if you can get your staff to work an extra minute a day, it will have a significant impact on your productivity. Maybe - but who`s going to measure whether all the employees are working that extra minute?

"Also, the other thing people love is the whole concept of lost opportunities - the whole `if I don`t do something to my IT infrastructure now, then I won`t be able to do something else business-wise later on`. But how do you measure the value of a `lost opportunity`?"

He warns that measuring a return on any IT investment often involves quite a lot of extra work. "Some ROI initiatives fail simply through apathy, as the people involved simply couldn`t be bothered to track whether any measurable returns are happening and if these aren`t, they don`t put in the effort required to find out how to tweak the installed solution to make sure any returns are measurable."

Mark Ehmke, MD of Staffware, is also a proponent of the "if it ain`t broke, don`t fix it" line of thought. Staffware is a business process management (BPM) and workflow technology and solutions provider. He says ROI has moved from being a buzzword introduced by vendors, to a deliverable demanded by corporates. In other words, fumbling through vague promises about possible returns is definitely not the way to go these days.

"IT departments buy on functionality while business teams buy with their eyes firmly focused on their company`s bottom line. With about 75% of IT spend now being handled by the business teams, ROI will continue to be a major determining factor when services and solutions are being decided on."

Ehmke says the use of paper in corporate environments is still growing by about 30% per annum, which implies considerable inefficiencies in so far as improving operational processes and procedures is concerned. By introducing workflow projects on a departmental level and implementing BPM solutions on an enterprise level, much of these inefficiencies can be successfully addressed and deliver definite returns.

"Companies generally evolve through three cycles - they learn how to run their businesses, then they improve them and then they transform them. We fit perfectly into the improve cycle.

"We`re certainly not battling to convert companies to our ideas. However, when we go in to talk about streamlining processes on a company-wide level, then we generally pitch to the executive committee. Because of the current state of the economy and cut backs on IT spend, no executive committee will look at any new purchases unless a vendor can provide it with a solid business case showing a measurable ROI," he says.

We`re certainly not battling to convert companies to our ideas.

Mark Ehmke, MD, Staffware

"When looking at a BPM implementation we tend to get involved with the architects and the business team. Here we`re discussing an initiative that will fundamentally change the way the company does business and in these situations there are kudos to be won and careers to be lost. In some cases this can get highly politicised."

He agrees that using an ROI model here definitely serves to de-emotionalise the situation.

Ehmke states that the benefits of a successful BPM implementation include a significant drop in process times, a cut in head counts, less expenditure on paper-based storage facilities, a decrease in instances of fraud, and the ability to get new products, services and solutions to market quicker. Staffware, he says, works on a risk and reward basis, offering discounts to companies upfront on the basis that these are refundable when it delivers on its ROI promises.

Among other vendors also confident of their ability to deliver measurable returns is Smartstor, a local open systems data storage solutions and services group.

Noel Northcott, executive director at Smartstor, says: "If you look at the IT infrastructure in most organisations, the requirement for storage continues to grow. Storage is also one area where significant savings are possible. However, many people remain unaware of the functionality available out there that can save them money.

"The main cost components in the storage arena include the original Capex outlay, maintenance and management costs, human resources costs and physical costs related to where servers are located. Typically maintenance costs initially run at 15% of the original purchase price of the server, depending on the level of service required. If one escalates this at 10% per annum over five years, it becomes a significant cost component. This, together with management, staff and location costs over a five-year period amount to a significant investment - against which the original purchase price of the equipment is relatively low. Yet very few people look at TCO [total cost of ownership] issues when fulfilling their storage requirements. Instead, purchasers are typically incentivised to buy storage equipment on the basis of its purchase price.

`In storage, the differences between the various solutions available today are immense. And yet people often make their buying decisions based on brand names and acquisition costs. Organisations don`t always develop a solid business case before making investments, especially in terms of TCO. The most important thing about storage today is that if it can`t justify itself in terms of a positive impact on your revenue streams, then you haven`t chosen the best solution for your business."

Northcott advocates doing a proper analysis of a current storage solution and consolidating all the servers. "For example, in the majority of traditional storage solutions only 35% of the disk capacity is being utilised. This is due to the fact that in a server-attached storage environment, servers cannot share disk space with one another - meaning disk usage is seldom optimised.

Storage is also one area where significant savings are possible.

Noel Northcott, executive director, Smartstor

"Yet another factor that often plays a big role in this environment is that IT departments often buy servers based on projected storage requirements over the next two to three years. This exacerbates the problem."

Smartstor`s solution, says Northcott, is disk consolidation and virtualisation, which enables data to be centrally stored and made available across all the disks. This, he claims, can result in disk utilisation increasing up to levels in the region of 90%. Other benefits here will include reduced acquisition costs, a decrease in administration and management costs, and a reduction in downtime.

Moving into the outsourcing arena, CS IT Solutions MD Johann Kunz says delivering a return on investment on a project involving extensive systems integration is never as simple as it may at first appear. He concurs that the only possible point of departure of any success story in the ROI space is for a company to have a clear understanding of what its direct spend on IT actually is.

"Companies also need to understand that achieving an ROI is never a quick win, especially if they are attempting to factor non-tangible issues, such as productivity levels and customer satisfaction levels, into the overall equation.

"The best results," says Kunz, "are usually achieved in organisations that typically employ large numbers of people, have numerous processes in place and interact with several suppliers. For an optimal return, these organisations need to do a full outsource."

It would appear then that many vendors would now agree with Hart`s comment that "these days, buying technology simply because it`s `cool` is just not on".

These days, buying technology simply because it`s `cool` is just not on.

Neill Hart, CTO, Dimension Data`s Connectivity Services.

"ROI wasn`t a big deal a few years ago when the big IT boom was on," says Hart. He believes that this could be due to the fact that companies were changing their business systems at least every three years, despite whether these changes were strictly required or not, simply because "that was the norm then. Now the pressure is on to decrease IT spend and get maximum value out of new investments."

However, he warns corporates that believe vendors are there to deliver an ROI that they need to realise it must be a team effort. "It`s something we all have to work towards."

Picking the right vendor to deliver the goods is the first step.