Progressive Distributor - Plan before you spend

Plan before you spend

Factor in total cost of ownership for a successful technology implementation

by Michael Croxton

Imagine this scenario. The president of a well-known nationwide distributor that has been operating for more than 30 years decides to make sweeping changes in the companys information systems. After reading the latest issue of a popular computer magazine, he makes what will turn out to be one of the most strategic business decisions his firm has ever made. His company is going to finally move from its outdated legacy systems and manual processes to a client/server distribution management and financial system that promises to improve productivity, competitiveness and most importantly profitability.

He decides to replace his primarily paper-based sales order entry and inventory management system with a distribution management application perceived as leading edge. He also wants to upgrade the companys outdated financial system. His goal is a seamless environment that allows his organization to automatically manage an order from the first customer contact through arrival of the shipment at the customers door.

For the first time, he hopes to base warehouse inventory levels on customer and product activity rather than gut feel. The president also envisions leveraging the latest in electronic commerce technology through effective use of EDI and an interactive Web site that allows customers to execute transactions on the Internet.

As part of the presidents technology decision-making process, he hires a consultant to help determine high-level system requirements and ultimately select a software vendor. He subsequently confers with the controller and determines what expenditures to allocate to this task. He also meets with his systems manager and informs him of his ambitious technology plans for the company. Optimism abounds.

As part of the implementation, he completes a requirements document. Next, a parade of vendors present and demonstrate their solutions to the president and the consultant. Two are selected to develop a prototype system. Then, the company checks the software vendors references and makes a final decision. The consultant departs; the systems manager is later informed of the presidents decision. The systems manager now has the dubious responsibility of implementing a solution that he did not take part in selecting. Good luck!

Six months later, the project is abandoned after a cost of more than $350,000.

Why? It was not because the application failed in performance requirements. Rather, it was due to underestimating the additional costs associated with the technology. For instance, training was not effectively factored in to the cost. Customization costs escalated beyond projections. Hardware implementation did not include network and additional server expenses or the cost of additional technical support staff to maintain the systems. No one considered the impact of time and resources needed to transition the current systems and staff. Finally, there was no buy-in from departments outside of the president himself.

The organization was left weaker than when it started. What went wrong? Who was to blame?

The presidents greatest fault was underestimating the Total Cost of Ownership (TCO). TCO is the total cost to the organization to design, implement and maintain new technology.

Road map for success
This president and his company are not alone. More and more distributors are investing in new technology to remain competitive, increase their channel velocity or simply make the company more efficient. For many distributors, new technology means software (and the conundrum of which to buy). The bigger issue, however, is the impact new technology will have on an organization. Measuring the impact, or TCO, is at the heart of a successful implementation. Overlooking this key issue will doom a companys technology initiative to failure.

The process of a technology implementation is ultimately fundamental. It involves assessing all areas within the company to be touched by the new technology. It means addressing how a new system will affect sales, marketing, finance and warehouse operations. Can existing hardware and software systems be utilized or should they be replaced? Most importantly, the implementation process requires involving all areas within the company, from the sales team to the warehouse.

The process
The decision to invest in new technology can be a blessing in disguise. It
gives companies the opportunity to re-evaluate the way they do business. It also allows them to look at how each employee, from the president down, can perform their jobs more productively.

This evaluation process sets the stage for developing a TCO plan that assures a successful implementation.

In developing a TCO plan, remember there is a cost attached to each step in an implementation process. There are not only consulting costs, but productivity costs when employees involved in the implementation are taken away from their usual revenue-generating activities. This cost is difficult to measure. The solution may be finding part-time help or paying overtime until the implementation is complete. Or, it may mean losing orders. Factor all these costs into the Total Cost of Ownership assessment, including the time it takes to train employees in the new technology.

Here are additional questions to address in a TCO analysis:

Who will be affected by the technology?
Who owns the project (plus, who is the executive champion)?
Who is on the implementation team that brings this solution forward?
How do we augment both internal communications (among the staff) and external communications (among customers and suppliers)?
Who will be involved full-time in the implementation ?
What is an appropriate transition strategy for the new technology?
Who will be involved in ongoing enhancements and support?

Its a good idea to include someone from the finance department on the implementation team. This representative will act as the financial conscience for the company, raising the red flag when expenditures get out of control or stray from the original plan.

Once this part of the process is complete, a company should document its findings in 1) a process model that defines how the company will do business in the future and; 2) a detailed requirements document that outlines how technology supports the process model.

The requirements document serves as the companys road map through the implementation process. In this requirements document, include the type of methodology (i.e. Gordon Graham) to use in the implementation. Methodologies are documented processes that include best practices used by organizations in a variety of industries. Several methodologies are being used in the industry and consultants can generally help in selecting one appropriate for your business. The important thing is to commit to one and follow it through to completion. All of this should be agreed to prior to looking at software and hardware vendors.

Choosing the right software is obviously the lynchpin in a successful implementation, but there are other critical issues, including determining what business processes to automate. Depending on how a business is structured, not all business processes require automation. How do you determine which processes to automate? Addressing these questions will help:

What processes are critical to the companys operations? What processes directly touch the customer such as order-taking? Customer support?
How does the company define the business process?
What are the current costs of the manual processes from a hard (actual costs) and soft (employee productivity) savings perspective?
What processes can be automated? How will automation make the process more efficient in terms of hard and soft savings?
Can primary processes such as order fulfillment, inventory management and sales analysis be sped up? How much faster?
How will you implement, maintain and audit new processes?

After defining which business processes to automate, complete a detailed cost/benefits analysis, which may include a return on investment (ROI) assessment. This analysis is critical for organizations to understand the actual costs associated with an implementation project. It also provides a greater understanding of the financial benefits and risks that are part of this transition.

As the project moves forward, review the TCO plan on a regular basis. That way, you can identify problems early and correct them. Regularly revisit and scrutinize the financial investment analysis of the TCO plan during implementation. Some companies use project-based P&Ls in order to effectively manage expenditures during the implementation process. The company illustrated in this article only identified the chaos during its standard monthly reporting. By then, it was too late.

Finally, analyze the costs of ongoing maintenance and support. The single most important activity in this project is not the implementation itself, but taking steps to ensure its continued health and longevity. Ensure that support fees, ongoing training and appropriate internal resources are available.

Consider every new system as a living, breathing entity that keeps the organization operating efficiently. As such, requirements continuously change; hardware becomes faster, software and related technologies get more sophisticated, and people change jobs. A company must be committed to continuously improving its systems so it can maximize productivity. If not, then refrain from implementing new technology.

For most organizations, implementing a new technology is an exciting, vibrant time. They talk about it internally. They discuss it with their customers. Most employees want to be part of it.

Understanding the Total Cost of Ownership is crucial to successfully implement new technology. Defining all costs associated with design and implementation and ongoing technical and human costs is an essential process in a TCO plan. New technology means changing business processes and the business culture of the company. Theres always a price associated with a change of this magnitude. The challenge is to identify the costs, understand them and justify them. t

Michael Croxton is vice president of marketing, strategic alliances, for Software Solutions Inc., Duluth, Ga.