“We can’t afford to do that. It’s too expensive.”
In my travels as an independent consultant, I am often told that certain undertakings or purchases cost too much money for the client and, therefore, the client wishes to maintain the status quo for that particular service.
Obviously, the final decision is up to the client. When I see a better way, my job in these scenarios is not to push the client into doing what I want him to do, but to make sure that he has the full set of facts and figures before him so that, before he votes down a particular direction, he truly understands:
- His current environment or situation: Many times, organizations have a hard time looking at themselves objectively. To ensure objectivity, they ask people like me to come by and spend some time figuring out the true state of things. The end result is a report that is comprehensive and complete and provides a full, defragmented picture of the environment. Organizations can only make quality long-term decisions when they have objective information. The fact that I'm there in the first place is a good sign that the client knows or at least suspects that something is amiss.
- The options he has before him: In most cases, the client have many options on how correct a particular issue. One option is to do nothing, which may be perfectly viable, unless the issue is a compliance or legal one. However, often more action-oriented options are available as well.
Yes, ERP's are still out there
I was recently with a client doing an analysis on its core ERP. The client in question was using an ERP that was essentially home grown and that ran on an IBM mainframe. CICS, COBOL... the works. While nothing is inherently wrong with these legacy solutions, in this case staff could not work fast enough to bring new and needed functionality to the system. As a result, the organization was missing key and critical functionality. In most cases, this required staff to replace that functionality with shadow systems and/or to do duplicate data entry into another system so that the need could be met.
This is not to say that the IT staff were incompetent. Not by a longshot. Given what they were tasked with doing, I was suitably impressed with the quality of the staff. In this case, it was not IT holding the organization back but the organization itself. Given the extremely low cost of what they were paying for their mainframe-based solution (sub $100K, which included everything), when they started looking at costs for new systems, they were having difficulty getting past the big number.
In short, system limitations were causing massive inefficiencies. Further, because this was a homegrown system, the client was effectively locked out of what is a robust ecosystem in its particular space. Nothing out there could be directly integrated with its system.
But, what it had was really, really cheap (to a point that my jaw hit the floor). And, while inefficient, it got the job done (eventually). Further, it was the devil they knew and staff had become comfortable with the product and its quirks and had learned to work around some of the limitations.
Cheap can be bad
In this client's case, the low cost masked the true cost of the system. For the sake of illustration, let's assume the following:
- Total payroll for this client is $8 million per year.
- The company is losing, on average, 5% to 10% of employee time due solely to limitations in its current system and that these limitations are not present in modern systems in its industry. Frankly, based on what was observed, 5% to 10% is extremely conservative.
- The full implementation cost for a new system is $1.5 million.
- Ongoing maintenance costs for a new system are around $250,000 per year.
With some simple math, we can calculate:
- "Waste" in the existing system is costing this organization $400,000 to $800,000 per year.
- Payback for a new system will happen within 2 to 4 years.
- After the payback period, the organization "saves" $150,000 to $650,000 due to a reduction in wasted activities.
Fortunately, these figures opened the client's eyes. While not every client counts soft costs (time savings, for example) in ROI calculations, smart ones do.
But there's more
In addition to what could amount to direct savings, by moving to a new ERP the client will be able to leverage that robust ecosystem that I mentioned earlier. Hundreds of services are out there intended to solve specific problems in the client's market vertical. The ability to leverage this ecosystem is a major value-add for the client and, while there may not be a specific metric to which I can point, it's clear that there is potential for savings and efficiency.
Action Item: The clear takeaway here for CIOs is that inefficiency has a real and direct cost to the organization, particularly when that inefficacy is essentially baked into the very systems and processes upon which the organization operates. By having the will and the means to take significant corrective action, CIOs can help their organizations reduce this waste so that employees can focus on job outcomes rather than constantly battling job limitations. While direct, dollar-based cost savings may not be present, calculations should always include soft costs. In many cases, corrective actions can also avoid some costs. For example, if inefficiency is so bad that the organization has to hire more people to handle a process, there is clear upside opportunity to correcting the situation.