Solving the Technology Payback Riddle

posted on 7/8/2011 4:52:16 PM

New technologies and improved accounting methods allow quicker project startup and more accurate ROI forecasts.

Justifying the purchase of software applications can be a major challenge – particularly at companies that have very short payback expectations. While for many 12 months is the standard, I recently heard of a company where it’s 12 weeks! As financial hurdles grow, the good news is that technology is stepping in to help deliver fast payback, and new accounting methods help calculate the real opportunity for return on investment (ROI) as well.

For prompt system payback, you need to get a project off the ground at a reasonable cost, and then deliver value quickly and measure it credibly. A pilot or proof of concept to test a proposed software investment with a smaller-scope problem or data set has long been good practice. Here, we explore some newer opportunities with technology for your team to consider, and an accounting method you can safely encourage the controller to implement.

Open Source: The big benefit to open-source or free software is that you can get up and running without actually spending money on a software license, and you can modify the software to suit your specific needs. We have found a few open-source ERP providers: Consona’s Compiere, ERP5, ERPNext, OpenBravo, and xTuple’s OpenMFG (Wikipedia has a longer list). In MES, Factority and Pinata provide open-source solutions. Aras offers open-source PLM software. Without fully defining open-source here (there are 10 criteria>), it generally provides starter software with source code, as well as rights to distribute and modify at no cost.

Cloud or hosted: In cloud-based or hosted delivery (again, there are technical differences we won’t cover) the infrastructure is managed by someone else, allowing for very quick startup. This is increasingly available in all application areas. While more and more vendors offer this option, some, such as NetSuite and Plex, have been there a long time. Other ERP and supply chain software providers are acquiring or developing specific functional modules designed for cloud-based or hosted deployments, as are MES providers including Camstar and Mestec. Many BI vendors operate in the cloud; a few, including IQity and myDIALS, can correlate operational KPI changes with financial results, which helps measure ROI on investments in operations improvement and IT projects.

Accounting: No matter what technology you use, traditional cost accounting systems are likely to mis-represent or undermine your business case by allocating overhead uniformly, even when those overhead resources may be used very differently in different parts of the business or in different product lines. A relatively new management accounting approach, Resource Consumption Accounting (RCA), can help; as the name suggests, it is focused on quantities of resources consumed for very specific activities. RCA thus overcomes many common overhead allocation issues with improved accuracy and accounting, rather than just randomly allocating those overhead components. The foundation of RCA is to build a model so that a change to one resource is reflected through all aspects of the business, product, and customers. Don’t worry that your controller won’t accept this approach: RCA is now cited as a mature practice by the International Federation of Accountants’ International Good Practice Guide.

Naturally, many projects will pass payback hurdles with traditional implementations and sometimes even with traditional accounting. However, there is a benefit in quick results. More software companies now realize that they can win business with smaller projects and different technology choices. We expect that list of companies with open-source, cloud, and hosted offerings will continue to grow and become the preferred approach to quick-start projects. Couple quick and inexpensive projects with the RCA’s realistic approach to gauging costs and benefits, and you are on your way to justifying software purchases and measuring actual ROI of improvement projects small and large.

Julie Fraser is president of Cambashi Inc., the U.S. arm of the industrial-focused analyst/consulting/market research firm based in the United Kingdom.