ROI on software
Price is not the cost of ownership
Companies should not focus on the cost of purchase enterprise
applications and concentrate on ROI. It's important to create a plan and budget
in advance to avoid dissatisfaction later. by Yash Nagpal
When companies buy a new software system the question that
immediately arises is the Total Cost of Ownership (TCO) of the new IT solution.
From there begins a journey for the company to tackle a host of issues, which
will eventually determine the cost of ownership.
Unfortunately, many companies in India are still obsessed with Return on Investment
(ROI). They want to know how soon they will recover the cost of investment on
the IT package. And in the process they make all the wrong assumptions.
Avoid Focus On Price
It is important to assume that the cost of a good IT package will be recovered.
But companies in India attribute too much importance to the price. They ignore
the numerous benefits their company will accrue due to the investment.
The companies should focus on additional benefits as a result of implementing
an IT package. They should look at the efficiencies the package will create.
It is important to look at the value proposition and attach weightage to various
benefits to decide the cost of ownership. It is necessary to take into account
things like additional revenue that will be generated as a result of implementing
Issues like user friendliness of the package must be considered. The simpler
the package the better it is. If users are unhappy using the package it is unlikely
to help the company a great deal. Conversely, if the package helps to capture
information quickly, it is probably of great use. If employees are able to finish
their assigned tasks faster than before, it will add to the company's productivity.
A good package would be able to help the company pinpoint its profitable and
non-profitable divisions. It will thus play a role in determining future strategies
and plans. A good package should give a company's management greater control
Variable Costs Are Important
While companies consider various packages they should look at various variable
costs such as implementation cost, support cost, upgrade payments over a period
of five years. In that case the comparison is among similar packages, since
you can't compare apples with oranges.
Companies often end up buying an IT solution that is not suitable for them or
becomes unsuitable after a while as the company expands. The company realizes
that the IT solution has become obsolete because it cannot be used for a larger
At times the package is obsolete almost from the beginning. This becomes a wasted
exercise because the company must replace the entire system and buy a new one.
The company may also end up investing in additional hardware.
Create A Budget For IT Solutions
Any company which plans to purchase an IT solution must first make a plan and
budget for it. Many companies do not have a budget for IT but they decide to
buy an ERP anyway. Since they have not made plans and budgets, the price of
the package becomes a major concern. And therefore problems begin to surface.
A company must decide what its future objectives are and then look for a package
that meets all its demands and targets. It is useless to assume that all ERP
packages will bring in the same benefits. This assumption often leads to looking
at the price of the package.
Not in isolation
The price of the package and cost of implementation cannot be considered in
isolation. A company that plans to purchase an IT solution must decide whether
the package will help in future growth, bring down interest payments, help retain
existing customers, reduce debt cycles, and open more revenue streams. All these
things will eventually improve the company's bottomline.
When deciding the cost of ownership, the companies must look at various components
like annual upgrade fee, application maintenance cost, recurring hardware costs,
networking maintenance costs, and internal support costs.
Sometimes vendors can hide these costs but the buyer ends up paying eventually
because he has no other option. Companies must guard against hidden costs and
also take into account the future expansion of the systems. If they are scaleable,
they will save the company money in the future.
Internal support costs are important but may not be clear right at the start.
For instance, a company recently found that if it bought an ERP solution from
a particular company it would have to employ 200 consultants to run the system.
And the vendor had kept this information from the user company right from the
beginning. The company discovered it accidentally and decided to buy an ERP
solution that did not require a huge staff to run the system.
Guide To IT selection
It will help companies and their CIOs if they took the following steps before
deciding on an IT solution:
1. Create a budget for IT solutions. Companies are well advised to create a
budget. Without a proper budget companies get focused on price rather than quality.
2. Take advice if necessary but decide in advance what you want from the IT
solution now and in the next five years.
3. Create a roadmap of growth over the next five years. Set targets for sales
and profits. If profits are going to double or treble in five years, today's
cost of implementing the IT solution will look cheaper.
4. Examine the whole range of IT solutions. All IT solutions are different.
Depending on your growth plan, pick the solution that is best suited to your
present and future needs.
5. Focus on the big picture. It is common sense but companies often lose direction
examining the small picture rather than keep an eye on the big picture.
6. To calculate real ROI take into account future growth of the company. Give
high weightage to value proposition while calculating cost of ownership. Look
at the cost of ownership over a five-year period.
Ask yourself if the product will give you emotional satisfaction. If the product
is easy to use, the company's employees are comfortable with it, and it meets
all the demands of the company it should lead to emotional satisfaction.
There have been numerous cases where companies have installed a solution that
employees are not comfortable with. It can have disastrous consequences. Employees
may begin to dread the thought of going to the office.
Yash Nagpal is Managing Director of Navision Software India Pvt. Ltd.