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Issue of October 2004 

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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 the package.

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 over sales.

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 setup.

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.

Emotional Satisfaction

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.

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