Points of Agreement
I fully agree with the article that database should be meticulously chosen because a lot depends on it and the choice of the database affects the performance of the ERP system. I also agree that while choosing ERP packages such solutions should be chosen which can address the undergoing changes in the business world like merger, acquisition etc.
I also agree with the authors concern about the security module of ERP packages. Finally I would support the author that the new ERP provider should be able to convert the existing ERP data to its new system with minimal effort, that is, by using data translators, scripts and useful programming techniques.
Points of Disagreement
This article left little to disagree with; it contained very few opinions and has left some major questions un-answered. The article was mostly focused on giving a glance about ERP systems to the IT managers and fails to address some major issues.
In addition the article says that only a two-member team is required for generating reports and solving minor problems that surfaces up when a lot of varied data is in the database, which is true in case of a small / mid-sized company. However if ERP is implemented in a big company a team of two members shall be too small unless some outsourcing agents or ASPs are hired.
Finally I feel that the article has been written with the assumption that organizations implementing ERP are already equipped with all the other factors which are responsible for successful implementation of ERP. With this assumption the article did not make an attempt to address the issues related to it. My contention is that such important factor should not be assumed.
Article # 2: Successful ERP Implementation the First Time
Author: R. Michael Donovan
Publisher: www.rmdonovan.com.
Companies have spent fortunes on ERP software and implementation only to find that business performance has not improved at all. These large investments and negative ROIs have created a whirlpool of controversy, rampant company politics and even a number of lawsuits. Much of the time, ERP software vendors are the targets for blame when anticipated results do not materialize.
It is often argued that ERP system logic is sometimes illogical, functionality is missing, and functions perform poorly and so on. But accountability for ERP software selection and implementation usually lies to varying degrees with internal personnel and often with external consultants. Selecting and implementing a new ERP system, and the process changes that go with it, is unquestionably a complex undertaking. Regardless of the size and perceived resources, an ERP implementation is not something that should be approached without a great deal of careful planning. Among companies that have been through a less-than-fully successful ERP implementation, five reasons for poor results show up consistently:
• Operating strategy did not drive business process design and deployment.
• The implementation took much longer than expected.
• Pre-implementation preparation activities were done poorly, if at all.
• People were not well-prepared to accept and operate with the new system.
• The cost to implement was much greater than anticipated.
The purpose of ERP technology is to support the business processes that support the company’s strategic opportunities. No amount of advanced information technology can offset the problem of a flawed business strategy and poorly performing business processes. Business strategy that would give a competitive advantage should be defined after analyzing the current business process. Once this step is done, ERP software selection and implementation can support the strategic and process objectives better. In addition, Flexible ERP information technology should be acquired that can accommodate rapidly changing business conditions. Finally the implementation should be led by a senior executive who has the authority to make changes happen quickly.
Management generally has a limited knowledge of what to expect from ERP. Often, there is a misconception that the skills necessary to select and implement ERP already exist in the organization. That may be partly true, but few organizations have the skills they need to implement ERP effectively within a reasonable timeframe. Consultants may be able to fill some of the skills gap, but given the high risk involved, it’s important to make sure they’re genuinely qualified.
Another commonly overlooked area is the issue of information technology change. Often, the IT infrastructure changes required to implement a new ERP system are not given the high priority these technology issues deserve. Certainly, implementing ERP should be driven by business issues, not technology. But it is IT’s understanding and skills that support the technology that improves business processes. Ignoring the preparation and education new information technology requires is asking for trouble. Further, IT personnel often must make the technology transition quickly. If the technology and infrastructure transition are not done well, the project, at the very least, will be delayed.
Evaluating and selecting ERP software is a complex task. The process requires an objective and comprehensive methodology to guide you through the selection process. It means a thorough evaluation and selection process based on the company’s own strategy and business process model. In some companies, management is so preoccupied with other, seemingly more important activities that ERP is delegated completely to the IT department. The idea that this is strictly a technology project because software is involved is wrong and, in fact, is one of the leading causes of ERP failure. The IT function is not well-positioned to evaluate the business implications of various tradeoffs or to determine their impact on day-to-day operating results versus strategic intent. Certainly, this shouldn’t be the case as operating decisions belong with senior operating management and not IT. The ERP software search, evaluation and selection process must be done right to minimize this risk.
Successfully implementing ERP the first time requires a structured methodology that is strategy, people and process-focused. This is the only way to manage the risk effectively. One very common mistake is not having the employees prepared to use the new processes and support system. The consequence here can range all the way to total failure, but they are avoidable. Evaluate your business strategy and ERP plan before you commit to software acquisition and installation. Doing it right the first time is the only cost-effective way to go. Looking forward to answer the following questions shall help companies in successful 1st time ERP implementation:
• How do we want to run our business?
• What business problems need to be solved?
• Do we know and understand our priorities?
• Do we fully understand our as-is condition versus our could-be/should be processes?
• Have we carefully defined an action plan for pre-implementation preparation activities?
• What tasks will be accomplished and when?
• What are the missing links in our current system and our software of choice?
• What are the real costs, benefits and timetable going to be?
• Do we have an executive-level ERP champion to provide the necessary link to top management?
• Who will implement ERP and make it work?
Potential Value to Managers of IT
ERP implementation in a company is a costly and time consuming affair. This article emphasizes that a company can gain substantially if its ERP implementations are successful at the first time.
The article brings out some potential questions which the managers should address satisfactorily in order to make the ERP implementation successful at the first time.
While making selection of ERP software the IT managers should ensure that the process people in the organization are involved and all the issues with regards to the objectives of the ERP implementation are addressed.
Questions Left Unanswered
The author looks at ERP implementation from the point of view of Supply Chain Management but fails to address the impact of ERP implementations on the other functions of an organization. When an ERP solution is implemented all other functions of the organization are affected and the issues and concerns of those functionaries are not addressed at all. The major purpose of implementation of ERP is its ability to integrate all functions of an organization under a common database.
This article fails to address the areas of concern with regards to other departments like Finance, Control etc.
Points of Agreement
I fully agree with the author that the purpose of ERP technology is to support the business processes that support the company’s strategic opportunities. I also agree that companies need a well thought-out, comprehensive process to help plan, guide and control the entire ERP implementation effort otherwise the ERP implementation is likely to be a potential disaster.
I feel that the author is correct when he says that no amount of advanced information technology can offset the problem of a flawed business strategy and poorly performing business processes.
Finally I agree with the author that while choosing an ERP system not only the IT should be involved but all the entire organization should take part in the decision as to which software will accurate address the missing links between the current ERP package and the proposed solution.
Points of Disagreement
The article is quite concrete and has addressed most of the area of concern with regards to the process of achieving success in the implementation of ERP from the point of view of Supply Chain Management.
Article # 3: Getting Your ERP Implementation Back on Track
Author: Frank R. Parth & Joy Gumz
Publisher: Project Auditors
Summary
The variety of software we call Enterprise Resource Planning (ERP) systems, which includes PeopleSoft, SAP, Oracle, and others has its own history of failed implementations. Companies have spent millions of dollars on installing these systems and have thrown then out when they realized it was not going to give them what they wanted. In some cases companies have spent so much money on failed implementations they ended up in bankruptcy. A high percentage of ERP implementations have resulted in litigation and in seriously damaged reputations of the major consulting firms that implemented them.
Many of the technology solutions implemented by state governments end up overrunning their budgets, delivering late, and not providing the results expected. These are just symptoms of the root causes, however, and we will discuss the causes themselves later. Combine the complexity of the environment with the complexity of the technology and it’s an almost guaranteed disaster.
The results of a survey done by the Standish Group in 1996 illustrate that 30% of technology projects done by government were failures and were killed before they were completed.
Another 52% finished but were over budget, behind schedule, or delivered fewer features than were originally contracted.
People at all levels of government tell that a major reason for failure is that it is a very complex environment. There are multiple agencies, each with their own priorities, budgets, personnel, and strong determination to ensure that their requirements are met. Any time there is competition for limited resources political battles are to be expected. Another reason is the technology itself is moving faster than the cumbersome processes for purchasing and implementing it. A state process designed for buying mainframe computers can easily break down when it’s asked to install a 3-tier client/server system at twenty five separate field offices and tie them together with a dedicated network.
Commonly cited reasons as to why ERPs don’t meet project objectives include:
- Unclear business objectives & Lack of engaged, visible leadership at executive level
- Lack of project methodology, or poor adherence to the methodology used
- Resistance to change within the organization
- Failure to prepare the organization for change, including inadequate training
- Failure of user departments to take ownership
- Lack of experience of project team
We cannot change the complexity of the state government, nor can we make complex software trivial to install. But we can modify the process to identify problems early. Part of the process must be a completely independent audit of the project throughout its delivery cycle.
The project manager cannot audit the project because he is far too close to the details and cannot give an objective assessment. The consulting company, no matter how big, can not provide resources that are truly independent of the project. Similarly, the state cannot audit the project in a truly independent fashion because they have a vested interest in the outcome of the audit.
Only a truly independent, objective review of the project can identify whether the project will deliver the results expected, or recommend an unbiased action plan. Although the facilitation and planning processes for such a review may be done internally, the quality assurance activities often are best performed by expert resources external to the project. These expert resources should be familiar with performing quality reviews, whether technical reviews or user reviews. They should be independent of the project’s organization and report to upper management, usually the Board of Directors, the Executive sponsor for the project, or to the state auditor or a high-level committee.
Finally the author recommends solutions to some of the major causes of ERP failures:
1) Problem - Projects rarely fail due to only one party being incompetent and the other blameless. Both participants in the project are typically responsible for problems. Hence any audit done by one side or the other is going to have a bias.
Solution- The initial contract with the implementation partner and/or software vendor should include a section allowing independent evaluation, inspection, and testing to address performance. This clause many never be exercised but it protects the customer by alerting the supplier that their work will be potentially subject to a quality review by an independent third party. In the event the purchaser elects to invoke this option, the contract sets expectations of both parties regarding the quality review and subsequent action plan.
2) Problem - Because the environment of the state government, or even a part of it, is so complex any simplistic recommendation to gather requirements or to plan better is simply not practical. Each part of the government is behaving the way it should – it is looking out for its own best result. However, the end result is an environment where no single solution is likely to make everybody happy.
Solution - The best solution for this is to set up a governance committee composed of a single representative from each group affected by the system being installed. The representative should have the power to commit their organization to the solution. They don’t necessarily have to be happy with the solution, but they must be willing to live with it.
3) Problem - Many projects are so large that the complexity of the projects almost certainly guarantees failure. Breaking them into smaller independent projects just means managing more projects and does not reduce the overall complexity. You’ll just have more project teams and a wider variation on the results.
Solution - Break projects into phases, with each phase delivering a subset of the overall features. The project will have a longer planned schedule before the full feature set is delivered, but will deliver usable functionality earlier and the end result will be completed in less time because less rework and integration will have to be done.
4) Problem - People who are assigned to the project often don’t have all the knowledge and skills they need, both on the implementer’s side and on the organization’s side. The results are that project plans don’t reflect the realities of implementing such complex systems and the end users are often disappointed in what they get.
Solution - Provide adequate training for the contractors implementing the solutions as well as for the users who will have to support the project and live with the results afterwards. The training should include: project management training, change management, process design, and ERP-specific training.
Potential Value to Managers of IT
Implementation of ERP Solutions in an organization is very expensive and involves a tedious process. Moreover after all these efforts if the ERP Solutions fail to deliver its required output it leads to a massive problem and wastage of resources. This paper brings out some of the potential causes for the failure in the implementation of ERP Solutions. The paper also highlights some problems which are commonly cited as the cause of failure and recommends solutions towards the same. Thus the article highlights certain areas, which if taken care of by IT managers especially in the government organizations, will enable them to bring the future ERP implementations back to track.
Questions Left Unanswered
The authors did not address some of the important reasons for failure of ERP Systems:
- Changing Technology – ERP projects generally take considerable time to implement. What happens if one year into the project if the organization has to revise the entire project plans at the middle of the project due to a change in technology?
- Another cause of ERP failure is skipping of SDLC Phases. This particularly happens when a project runs behind schedule and there is a tendency among the project managers in skipping SDLC Phases. How will this issue be dealt? Should the implementation be delayed till all SDLC phases are performed?
- Another major cause of failure for ERP systems is due to the lack of understanding of process and wrong choice of the solution? This article does not address these issues.
Points of Agreement
I agree with the author that only a truly independent, objective review of the project can identify whether the project will deliver the results expected, or recommend an unbiased action plan. In addition the initial contract with the implementation partner and/or software vendor should include a section allowing independent evaluation, inspection, and testing to address performance of the ERP Solution.
The company should ensure that adequate training is provided to the contractors implementing the solutions as well as for the users who will have to support the project and live with the results afterwards.
Points of Disagreement
This article left little to disagree with; it contained very few opinions and has left some major questions un-answered. The article was mostly focused on the failure of ERP Solutions in the environment of government organizations and universities where significant regulations and constraints create a huge complexity in implementing these solutions. The article did address some of the issues but failed to address other major issues, which is my only point of disagreement.
Article # 4: Managing ERP Applications for Strategic Advantage
Author: Julian Bossong
Publisher: USI
Summary
In this economy, there’s simply no room for mistakes. Even a small error can have a large, lasting impact on a bottom line that’s being watched more closely than ever. That’s why robust enterprise applications have become necessities for mid-to-large companies. As these organizations strive to meet cost-cutting initiatives, they look to ERP applications to deliver the accurate information needed for sound decisions about both financial and human capital.
But managing ERP applications in a way that unleashes their full potential and ROI requires an enormous amount of time. In fact, companies are spending more time on application management and support than on any other activity involved in ERP implementations. Research from firms such as META Group indicates that ERP implementations require IT departments to spend the vast majority of their time and budgets on application management. In fact, during a typical three-year ERP application lifecycle, the implementation stage could represent as little as 10% of the total period. The remaining 90% is taken up with "post-go-live" activities: on-going management.
The closer ERP applications mirror the flow of business, the greater their value and ROI. But, by nature, business is fluid. Product lines change, companies are bought and sold, new management enters the scene, and new initiatives come into play. All of these changes can have a drastic impact on business processes. That's why it's imperative for the ERP applications that support these processes to adjust with them. But IT staff is pressed for time as they try to implement the application changes while attempting to keep up with daily management tasks. The job becomes increasingly difficult if the ERP applications have been heavily customized to meet specific needs. The higher the customization level, the harder and more time-consuming are the changes.
Both business managers and IT have the best intentions: They want to give senior management the information they need to make informed decisions. Very often, neither of these sources are familiar enough with the applications to extract the necessary information, nor do they have the time to find out. At that point, the applications have lost their strategic value to the company.
The problem is this continuous commitment draws an organization’s attention away from realizing the strategic goals of ERP applications. Companies are so caught up in managing and supporting the applications, they have no time or resources left to fully leverage them for true business advantage. Hiring more internal help is hardly the answer, as the sophisticated level of ERP application expertise needed to do the job right is in short supply.
In an effort to concentrate efforts on what matters most, many companies are outsourcing application hosting and management to an ASP. Under the traditional ASP model, ERP applications are hosted, managed, and supported at the ASP's data center and users access the solutions over a secure Internet connection. More recent options allow customers to run the applications at their own site, while the ASP manages them remotely. Under either scenario, customers can readily leverage ASP expertise, management, and support services, releasing them from the burden of managing the applications themselves. By providing services for a predictable, flat-rate monthly fee, ASPs also allow enterprises to avoid capital expenditures, amortize IT costs over several years, and enjoy the advantages of cost reliability when unforeseen problems arise, such as the need for emergency data restores.
Since ASPs have proven technology, methodology, and ERP application expertise already in place, ASP customers can move attention away from the day-to-day management of applications and technology and divert the same towards more value-added activities that turn the promise of ERP into profits.
The IDC studied 54 enterprises that were utilizing ASPs for enterprise applications, like ERP. The IDC concluded that those enterprises using ASPs were achieving tremendous returns on investment because of (1) technology related savings, (2) productivity benefits, and (3) business process enhancements.
The ASPs focus not only on cutting costs, but also on improving their clients' use of the applications which truly help their customers maximize ROI. With the right ASP, author determined that enterprises will be able to:
- Focus on core business
- Implement ERP Solutions more rapidly
- Scale up or down more efficiently
- Improve system performance, reliability, and security
- Access the latest technology
- Benefit from greater peace of mind and credibility
- Achieve a more predictable expense structure
- Increase employee satisfaction, both inside the IT department and throughout the organization
- Transfer risk of the project's success
- Achieve greater discipline within their organizations
Potential Value to Managers of IT
These on-going management activities after ERP implementation greedily consume the time and efforts of IT resources charged with supporting ERP applications. IT and their business counterparts know the information is "in there." However, bogged down with troubleshooting problems, assisting users, and maintaining performance, IT staff can't see beyond their day-to-day management responsibilities to help business managers get the information they need.
In an effort to concentrate efforts on what matters most, many companies are outsourcing application hosting and management to an ASP. From an IT manager’s the company can readily leverage ASP expertise, management, and support services, releasing them from the burden of managing the applications themselves. By providing services for a predictable, flat-rate monthly fee, ASPs also allow enterprises to avoid capital expenditures, amortize IT costs over several years, and enjoy the advantages of cost reliability when unforeseen problems arise, such as the need for emergency data restores.
The article also provides the IT managers with a guideline in preparing the RFP for ASP Services and the level of services a company could expect from an ASP.
Questions Left Unanswered
Although the ASP trend has created a new model in delivering applications to businesses, it has also raised several unresolved issues. This article did not make a point to address some of those issues leaving the following questions unanswered:
- In the ASP model the sensitive data of various organizations are stored on remote servers on ASPs control, thereby forcing the organization to rely on ASPs integrity and reconcile themselves to a loss of control over valuable data. The article fails to address this issue.
- ASPs require many alliances with various other players to offer single window services. If by chance these alliance run into trouble client cannot afford to get caught in a feud between ASP and its alliance partners even if it is for a day or two. How can this issue be addressed?
- Another major area of concern with ASPs is the development of trust and many times it is seen that the same ASP is serving two companies which are competitors of one another. How should ASPs address this area of concern?
- What will happen to the contract between the user company and the ASP in case the ASP goes bankcrupt?
Points of Agreement
ASPs that add the most value are those that go the extra mile to understand the unique needs of the people who use the applications every day, as well as the underlying customer-specific business processes the applications support. Combining this keen understanding with a high level of application expertise, ASPs can help companies unleash the power of ERP data captured within the applications to leverage it for true strategic advantage.
I fully agree with the author that the customers can readily leverage ASP expertise, management, and support services, releasing them from the burden of managing the applications themselves. Moreover the customers have the added benefit of being relieved from making huge investment in building the IT infrastructure in lieu of which they have to pay pre-determined fees to the ASP.
Points of Disagreement
This article is a white paper published by USI, one of the most experienced ASP in the world and thus is focused on putting the industry in a very positive light. The author recognized some of the issues in the ASP model and has suggested a couple of ways by which the ASPs have taken care of those issues. However the article fails to address many of the other issues concerned with the ASP model mentioned in the questions left un-answered.
Article # 5: Outsourcing ERP Support
Author: By Mascot Systems
Publisher: Mascot Systems
Many businesses have invested in ERP products seeking business benefits in terms of cost efficiency and productivity gains. Organizations now demand the return on their investment in ERP systems and are cautious about investing further in ERP. Consequently the demand for ERP consulting and implementation and support services has also undergone considerable change. The challenge that IS organizations face is to demonstrate the business benefits of the ERP systems at a reduced cost of ownership.
ERP applications have a direct relationship with the business process and hence are mission critical in nature. When the ERP system is unavailable or under-performing productivity is impacted—employees, suppliers, and customers are all on standby until it is resolved. Depending on the impact of the application and the number of users who rely on it, this can be a significant cost. Outsourcing the maintenance of ERP system to service providers with pre defined service level agreements (SLA) that mandate metrics would ensure that the ERP system is managed with maximum efficiency.
Implementing an ERP is only the first step. However the real challenge lies in the successful execution of a quality assurance plan, otherwise known as a post-implementation optimization plan. To obtain the full benefits, operational synergies and an optimal on investment (ROI) from the system, organizations look beyond going live and focus on improving performance. Performance optimization should be planned and executed with the same diligence and accountability that was accorded to the initial system implementation Too often this is an area that is not given due diligence because of shortage of internal IT staff. External service providers with experience, strong methodology and proven expertise can help organizations to fine-tune their applications thereby ensuring optimal performance.
It is accepted wisdom that ERP success depends on staffing the project with the best and brightest from the business and IS divisions. Losing key ERP personnel in the volatile IT market is a major threat for smooth continuity of operations. The maintenance of ERP applications poses challenges in scalability and retention. ERP applications require flexibility to scale resources to meet the changing business requirements as the organization’s processes evolve. When an ERP application stabilizes it is possible to maintain it with fewer resources. This implies that the resources that were initially maintaining the task might not be required for a continuous period if there is high productivity efficiency and hence need to be re-deployed into other initiatives.
Maintenance is an extremely demanding and very mundane activity that requires constant vigil, and a service driven approach. ERP resources having hybrid of cross- expertise across industries, functions and technologies look for high value add challenges that is beyond the scope of maintenance.
This results in a scenario where an organization invests in high cost IT staff, which is relatively scarce to get and deploys them in mission critical but low end work which could result in losing the resources! The solution is therefore to balance the availability of internal resources for business critical and higher value-add work. Service providers with teams of specialized and experienced professionals would be able to meet the fluctuating demands without compromising on the service levels needs and also guarantee continuity.
The maintenance phase of any ERP system unlike the implementation faces specific issues due to its recurring costs. Maintenance expenses are usually underestimated, and often end up costing far more than the initial purchase. Cost escalations really hit home when and after implementing enterprise resource planning (ERP). According to a research, licensing represents only 17% of ERP TCO. The rest is split between related hardware upgrades (14%), internal staff costs (23%) and professional services for implementation and maintenance (46%).
ERP outsourcing relieves the cost pressures from organizations by weeding out unnecessary recurrent costs. By negotiating with outsourcing service providers for fixed charges that are lower than the internal IT costs, organizations can not only efficiently reduce costs but also effectively create the time and money needed for the projects they really need or want to put in place. Many companies that have implemented ERP have realized that the high level of customization of the product blocks support from the ERP vendor. This makes maintenance an extremely expensive affair. Performance problems in online/ batch processes that are a result of basic ERP design and implementation issues detected in post-implementation scenario make it difficult and time consuming for the maintenance team to support the ERP.
By outsourcing to an external vendor organizations can free themselves of addressing continuous requirement and version changes and instead focus their efforts on new initiatives. Outsourcing ERP maintenance provides peace of mind as it is entrusted in the hands of specialists who have invested in a comprehensive security, backup, disaster recovery and advanced technology.
Today there are multiple delivery and business models such as onshore outsourcing, proximity model and offshore outsourcing. Choosing the right model and service provider to outsource ERP maintenance is an important step.
The success in achieving these benefits lies in identifying the right service provider. Both the organization as well as the service provider need to invest time and efforts to establish a smooth transition and management as it involves managing business critical system. This requires for a partnership approach rather than a vendor management model.
Potential Value to Managers of IT
This article helps IT managers to realize that the resources that were initially maintaining the task might not be required for a continuous period if there is high productivity efficiency. Hence by outsourcing the ERP maintenance activities organization can save substantial resources which can be diverted to some fruitful purpose. The article helps the IT managers realize that by outsourcing to an external vendor, organizations can free themselves of addressing continuous requirement and version changes and instead focus their efforts on new initiatives.
The article also provides the IT managers with a guideline with regards to the factors to look for during the manager’s search for an efficient outsourcer.
Questions Left Unanswered
- Outsourcing reduces technical know how for the organization leaving the organization to completely depend upon the outsourcer. Can the organization afford to loose this competency?
- Outsourcing means giving up control, and depends upon another organization for the function which is vital; can the organization give up such control over ERP systems and depend upon a vendor?
- Outsourcing ERP maintenance lets another organization have access to your strategic information and secrets; can the organization afford to live with it?
- It is true that staffing is a key success factor for successful ERP implementation and the organization has the risk of loosing its key people after implementation phases; well the outsourcer also is at similar risk of loosing its key people. How does the vender ensures that it will not loose its key team for ERP implementation?
Points of Agreement
I do agree with the article that post ERP implementation, it is the maintenance that consume significant resources and a considerable amount of the same can be saved by outsourcing the same. The authors give a guideline in choosing the right ASP whose core competence is maintenance ERP systems.
I also agree with the author that by outsourcing to an external vendor, organizations can free themselves of addressing continuous requirement and version changes and instead focus their efforts on new initiatives.
Points of Disagreement
This article is a white paper published by Mascot Systems; a provider of ERP outsourcing services and thus is focused on putting the industry in a very positive light. The author recognized some post ERP implementations facing organizations and has suggested that outsourcing is probably the best way to deal way with those issues. However the authors fail to realize that there are a lot of questions unanswered related to outsourcing of such vital functions like the ERP and before adopting the process an organization should satisfactorily address those issues.
Rather than what the article says, I believe that before outsourcing a vital function like ERP maintenance, an organization should look at its processes and try to figure out how vulnerable the organization is with respect to the questions unanswered. Only after addressing the above factors an organization should proceed for outsourcing.
Article # 6: Justifying Data Warehousing Investments
Author: By Ram L. Kumar
Publisher: University of North Carolina – Charlotte, USA
Summary
Organizations are increasingly realizing the importance of the importance of Information Technology. Many IT projects in the area of data warehousing and data mining have been taken up in the last few years. While data warehousing and data mining projects have resulted in interesting business benefits, there are also many examples of cost and schedule overruns and dissatisfaction regarding the results from these projects. Recently the organizations are carefully scrutinizing the returns from large data warehousing projects. This makes it increasingly important for IT professionals to articulate business benefits of data warehousing and other ERP projects in terms that senior managers in general and finance executives in particular can relate to.
This article outlines an approach to justifying data warehousing investments that is based on the concept of options in finance. This approach to justifying investments is being recognized as being superior to traditional methods.
A person who buys the option stands to gain an intermediate (potentially large) amount of money if the value of the underlying asset increases. However losses are limited (IT investment) even if the value of the underlying asset drops significantly.
It is being increasingly recognized that the logic and techniques of financial options pricing are increasingly relevant to real investment projects or investments in non-financial assets such as information technology projects.
Investments in data warehousing can be considered as similar to buying a financial call options. The cost of the projects is analogous to the cost of buying the option or the value of option. In other words an organization acquires an option by investing in a data warehousing project. This investment results in the option to get the business benefits of data warehousing on the date of completion of the project by using sophisticated OLAP and/ or data mining techniques. The value of this option can be calculated by using techniques based on financial option pricing. This method of valuing of investment projects results in a higher value than traditional financial techniques such as net present value (NPV). Also using option pricing methodology recognizes the investments can be more valuable when there is a high degree of uncertainty.
For example consider a data warehouse for an organization engaged in marketing products over the web. Investing in data warehousing allows the organization to run sophisticated queries and data mining algorithms and thus uncover changing customer preferences. This scenario can be visualized as buying an option (by investing in a data warehouse) to run to run sophisticated queries in turn could result in the option to modify the price (in response to customer preferences) or the option to quickly change the product mix in a response to market shifts. Investment in data warehouses could create a new option (for decision making) that was not envisaged earlier. These options when there is a degree of uncertainty or when the market conditions change more frequently. Frequent market changes mean that OLAP based queries are more frequently required in order to understand consumer behavior. And take appropriate action. In other words investing in a data warehouse/ ERP provides a variety of options such as option to quickly change pricing in response to customer preferences, or the option to quickly change the product mix in response to market shifts. The data warehousing technology adds value by facilitating quick response to changing conditions. Option pricing theory allows the (approximately) calculation of the value of quicker decision making.
Potential Value to IT managers
It is important for IT managers to look beyond traditional financial evaluation methods such as net present value (NPV) and the return on investment (ROI) in justifying sophisticated IT investments such as data warehouses. Finance managers are increasingly becoming aware of option based arguments for justifying investments. These arguments used in this article can be uses to build a stronger case for information technology investments.
Questions Left Unanswered
- The value of an option varied largely even with a slight change of volatility. While considering the IT investments as Call Option on what basis do you calculate the volatility?
- While considering IT investments as put option do we value them as European options or American Options? The values of American Options differ significantly from that of European options.
- With IT investments we are uncertain about the life cycle of the project so on what basis do we consider the time to maturity?
Points of Agreement
I agree with the article that IT investments should be valued as a call option since both of them have a potential to provide the investor with huge returns whereas on the downside the maximum amount an investor might loose is the amount invested or the value of the call.
I also agree with the author that if IT investments are valued on the basis of traditional approach it would be undervalued and considering the same as a call option would be the correct way to value this option.
Points of Disagreement
While comparing the IT investment with a call option the author has considered that the time to maturity as the day in which the solution is completed. However I do not agree to this because the entire return on the IT investment cannot be expected on the day when the implementation is complete. The return is spread over the life cycle of the solution, but it is difficult to predict the actual life of particular software, which in turn makes the option difficult to evaluate.
