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Business Solutions with SAP

Where do you Start with SAP Return on Investment or SAP ROI?

July 19th, 2010 by

SAP Return on Investment or ROI

See PART 1SAP Implementation is an Investment NOT an Event

How much is it going to cost and how long is it going to take?  That is the classic approach to SAP implementations.  Today it’s not enough and the marketplace is demanding more from their IT dollars.  Now there are questions about measuring cost reductions, process improvements, as well as customer retention and customer acquisition. These are all important discussions.

Your money has to work for you in your business and it should work for you in your SAP investment as well.

If you’re looking to buy a new stock, or mutual fund, or some other investment you do your homework.  If you’re looking at a capital purchase in your business you want to understand the justification and the payback so you build a business case.  If you’re looking to implement SAP then define the business reasons for the implementation and do your homework! 

Take the time and do some research to understand how to avoid many of the sales scams, pitfalls, and ridiculous system integrator tactics.

SAP Cost Based Indicators, Total Cost of Ownership, and Return on Investment

Lagging Indicators and SAP Supported Process Cost Reduction

Using the stock investment analogy, the cost-based ROI component can be seen as the dividends paid by a stock–, generally known, stable, reliable payback, quantifiable and tangible.   In an SAP implementation the “dividends” would represent lagging indicators of performance.  There is a fairly reliable history to consider for the dividend payout. You have a pretty good idea of a number of your costs (or can find out what they are), such as:

  • current legacy systems cost,
  • you know what your man hours are (staffing, personnel, benefits, overhead, etc., etc., etc.),
  • process cycle times,
  • per transaction costs for things like purchase orders, sales orders, production orders, etc.,
  • competitor transaction cost benchmarks,
  • current application license and maintenance costs,
  • etc., etc., etc.

These are all lagging indicators and they are all cost based, cost improvement focused portions of an SAP implementation.

Same Old, Same Old, Everyone at Least Pays Lip Service to Cost Based Process Measures

EVERYONE tries to do this to some extent.  It is not always structured, clearly defined, and then measured after the system is live, but there is a general expectation of improvement.  Even for those companies who buy into this paradigm during the sales process but never see it realized, it is still part of the system integrator pitch.  You are always promised “improvements” by the system integrators.  You always expect processes to speed up and process costs to go down.

The process improvement, automation, and cost reduction approach is no different than everyone in the marketplace who does SAP or some other ERP application–, it is the old “operational excellence” model of business.  It does little or nothing to address the key components that grow business or improve revenue.  And after an initial cost reduction boost it does little to increase profits.  

Leading Indicators, SAP Value Proposition and SAP Value Realization

Unless you are in a commodity market, or have clearly “broken” or significantly inefficient processes, the cost reduction or operational excellence approach to ERP should not be your only focus.  Considering your SAP implementation as an investment for ROI purposes you would understand that this is the first step in a long term system investment program.  After you get the system in, you should press your IT organization to move from an operational excellence paradigm into how to use the system to support corporate innovation and sales growth.

If you want value realization from your SAP or other business application implementation it takes a more rounded and tangible business centered approach or, a real SAP value proposition.  Using the stock analogy, the value realization comes from stock appreciation together WITH the cost saving dividends that are paid.  In your SAP implementation both lagging and leading indicators are used to finally realize value.

This new investment paradigm must focus a significant amount of attention on the end state after the business has started operating in the new SAP world.  And that “end state” focus on value realization from your SAP implementation should begin  before you write your RFP.  This entire site is dedicated to help you transfer critical knowledge needed for success from SAP value proposition all the way through value realization.

Marketplace Winners and Losers in SAP and ERP Investment

Innovation is one of the key and critical value proposition areas that separates winners from losers in the marketplace.  And even though your initial implementation may only consider the initial operational excellence areas that is just the beginning of the journey.

Does your system integrator have any ideas or methods for improving engineering, design, and delivery collaboration efforts?  Maybe you are not there yet, and that is fine, but it must be considered as part of your initial assessment of the path you are on with SAP.

Ask your system integrators how to use your SAP implementation to improve concept to market cycle times and for other innovation methods that will impact your marketplace.  Drill into the details, don’t accept “sales fluff,” ask for specifics and don’t settle for less. 

SAP Implementation Measurement of Return on Investment

To this day I am still surprised by how few companies define success criteria for their SAP implementations.  Fewer still do the up front due diligence to determine where they will have business benefit in terms of cost based lagging indicators:

  • process improvements,
  • cost reductions,
  • automation,
  • reduced transaction processing costs,
  • reduced licensing for legacy systems,
  • reduced system maintenance for legacy systems,
  • improved cycle times,
  • etc.

Even if there is some consideration of these categories or classes of cost savings, few companies quantify them and try to understand current costs and how they might be improved BEFORE bringing in a system integrator. 

During the selection process few companies ask the tough questions and demand the details of their integrators to validate their saving assumptions, and then even fewer hold the integrator accountable for them.  Few businesses attempt to tie incentives, compensation, or other means of achieving these results to their system integrator contracts. 

Talk about caveat emptor, or buyer beware!

Some companies consider legacy systems, and the cost savings for eliminating them, but beyond that there is not a lot of due diligence done to support long term cost reductions.  Key details are generally lacking.

Few companies, and fewer system integrators ever consider leading indicators of business performance such as:

Customer retention

  • service processing
    • reducing overall service requests / requirements,
  • repair and response turnaround times,
  • first time fixes,
  • solution databases,
  • interactive response forums,
  • etc., etc., etc. (come on, you didn’t expect me to tell you ALL the secrets of an ERP customer retention program did you?)

Customer acquisition

  • target markets
    • by geography,
    • product line,
    • customer strata,
    • customer segment,
  • promotion options
    • special product mixes,
    • offers,
    • promotion execution,
    • promotion cost tracking,
    • buy “x” get “y” at a discount or free,
    • buy “xyz” product mix and get “abc” mix at discount or free or both,
    • etc., etc., etc. (again, feel free to contact me if your system integrator has NO IDEA how to do all of this in the BASE SAP ERP system ;)  It is possible!)
  • Customer analysis
    • stratification,
    • buying analysis,
    • product mix / popular combinations,
    • promotion integration,
    • segmentation
      • by region,
      • dollar value,
      • product mix,
      • product line,
      • customer group or product line profitability
    • overall profitability,
    • etc., etc., etc.  (again, feel free to contact me if your system integrator has NO IDEA how to do all of this is the BASE SAP ERP system ;)  It is possible!)
  • And MANY more options…

Why is this lacking?  Because you, as the customer, do not demand it of the system integrators.  As a result the system integrator develops technicians.  And the cheaper they can develop those “technicians” rather than experts the greater their margins are. 

System integrators generally have little interest in promoting the idea that you should actually see a genuinely measurable business improvement.  If they did, those system integrators would be forced to bring in more competent, more highly skilled, and more seasoned veterans who understand business as well as the technology.  See for example, CRM, ERP, BI, and IT Investment — Where Do You Find the Business Benefit?  Using mostly a CRM example for illustration, that post helps you gain some insight on the types of consultants and insight you need for business success.

Short Term (operational excellence), Mid-Term (innovation), Long-Term (customer focus)

Relying on the investment analogy, your SAP portfolio should include several items or components of the application to implement.  And just like stock market investments, there must be some short-term, mid-term, long term, and business hedges built into a healthy implementation. 

Some items, such as “Wave II” or add-on functionality may be planned for at a later date but should be considered from the beginning.

For a long term successful SAP implementation it must become part of a business program, not just a system installation.

What does this mean?  This means that your thinking about SAP and its role in your enterprise must change.  As I’ve written before, Change How You Look at SAP to Create ROI.  SAP must be seen as a tool that enables the enterprise to change, to grow, and to spot opportunities and execute on those opportunities sooner than your competitors.  To do so requires a change in culture and thinking that companies often struggle with, however, SAP can enable these changes when SAP is seen as a business investment requiring regular adjustment, focus, balancing and change.  Just like your stock portfolio.

Use a Business Focused SAP Implementation for Business Transformation

If you want to see true competitive advantage it will take adding a real business imprint, real business insight, and key success metrics to create a long term business program.  That long-term business program is business transformation with SAP enabling the enterprise to be more competitive, more agile, and more robust.

At the the end of the day if you do not define what you want from SAP to consider it a SUCCESS, and if you do not have a focus on business drivers you will NEVER see the success you want from your implementation.  Worse still, if you don’t focus on these items from the beginning you will not have a good baseline to evaluate your system integrator or SAP implementation partner in the early RFI or RFP project stages.  Without that critical evaluation you may end up sinking your budgets in a “money pit” where you will NEVER see a return on investment.  Worse still, without these critical measures you may end up having a long term negative return that is dangerous for your long term prospects.  And it is NOT a shortcoming of the software!




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ERP vs. ERP II vs. ERP III Future Enterprise Applications

May 31st, 2010 by

ERP vs ERP ii vs ERP iiiERP I, ERP II, & ERP III Abstract

ERP applications integrate enterprise operations within and across enterprise legal entities, or company codes.

ERP ii (or ERP 2) applications extend supply functionality to external enterprises (generally vendor-affiliated companies or enterprises) to reduce cost, improve supply chain efficiency, and to perform collaborative innovation. 

ERP iii (or ERP 3) enterprises go to the next level of integrating the ERP and ERP ii functionality to include customers and the sales side of the marketplace into enterprise operations.  Your customers become active participants in your business.

Moving To the Border-less Enterprise

I’ve heard and read lots of material about the enterprise applications and what the next generation of ERP is.  Some have suggested that ERP systems were just manufacturing tools (see e.g. ERPwire article on major differences between ERP vs. ERP ii).  Some suggest ERP ii systems were little more than an extension of ERP functionality to new industry sectors.  In my opinion this is a completely misplaced assessment.  Changing industry sectors does not change what an ERP application does so a broader definition is more appropriate.

Before we go into the details and background of each of the 3 generations of enterprise applications here are my definitions for ERP, ERP ii, and ERP iii systems:

ERP Definition

An ERP (Enterprise Resource Planning) system integrates virtually all operational business functions and processes and automates entries to finance and reporting within the enterprise (the legal entity or entities that make up an entire company no matter where its operations are).  ERP systems focus almost exclusively on operational excellence value propositions of process efficiency and automation.

ERP II (or, in other words second generation ERP, ERP 2) Definition

Through collaboration, SOA, and other interface, data exchange, or interaction methods the ERP ii systems move beyond Enterprise boundaries (or a basic ERP system) and into the vendor space including the supply, design, and engineering collaboration areas. ERP ii systems continue to enhance operational excellence and start to introduce a measure of the innovation value proposition.

ERP III (or, in other words third generation ERP, ERP 3) Definition

Through collaboration, direct contact, social media, and various data streams within and outside of the enterprise ERP iii integrates marketplace fans and critics into the extended ERP and ERP ii organizations.  From this integration of the customer and vendor a constructive dialog and exchange of information is created to innovate, produce, and then sell / distribute better products or services.  This closes the value proposition loop by going outside of the enterprise boundaries and finding ways to bring customer input, needs, wants, and insight into the enterprise.  ERP iii system create a strong synergy between innovation and customer focus.

ERP System Definition or ERP Defined

The acronym ERP literally stands for “Enterprise Resource Planning.”  And this is exactly where I disagree with the ERPwire definition proposal.  Just a manufacturing system is not an “enterprise” system at all.  It is merely a manufacturing system, or an MES (Manufacturing Execution System).

As the university studies and academic literature note, ERP systems are “a single instance of data, a full process chain of dependencies” (see Change Management Strategies and Knowledge Transfer Processes for a Successful SAP Project citing Kallinikos, 2004).

In the ERP industry we (consultants and integrators) frequently refer to any ERP system as a type of “back office” application or system.  By “back office” we are referring to company centered business functions into a single database, or, a single “system of record.”  “Back office” processes are fully within the border and boundary of the enterprise.

In 2000, in an article addressing ERP ii, Gartner noted that they had defined ERP in 1990:

In 1990, Gartner defined ERP, establishing a new vision for the resource planning domain. That vision centered on resource planning and inventory accuracy, as well as visibility beyond the plant and throughout the manufacturing enterprise, regardless of whether the enterprise was a process manufacturer, discrete manufacturer or both. ERP has since appeared in different “flavors.” Extended ERP reflected the fact that many nonmanufacturing industries turned to ERP systems for “backbone” financial transaction processing capabilities (Bond, et. al., 2000 pg. 2, note 2).

That article went on to note that the accepted definition (in 2000 and beyond) had become:

Despite [the] original definition, ERP has become the accepted term for back-office transaction processing systems, regardless of the industry or region (Bond, et. al., 2000 pg. 3).

The definition I have provided is as comprehensive as the original Gartner proposal and includes the later understanding of the application to more industries and business functions.

ERP Focuses on the Operational Excellence Value Proposition

To understand the operational excellence perspective see the more detailed explanation of the functions and operations of an ERP system like SAP under the section “What is SAP?” ( http://www.r3now.com/define-sap ).

I generally try to categorize all system efforts and business functions into one of three “value proposition” buckets:

  • operational excellence (ERP),
  • innovation (ERP ii),
  • and customer focus (ERP iii).

The ERP context is almost exclusively focused on the “operational excellence” portion of business “back office” transactional processing.

ERP vs. ERP ii — What is ERP ii?

The next generations of Enterprise applications, or ERP ii systems, extend the “back office” ERP system processing to the extended supply chain.  They extend the enterprise into the supply chain outside of their legal entity borders as an active participant. This would include VMI (Vendor Managed Inventory) processing and KANBAN type demand and supply signals to vendors for JIT (Just In Time) stock management.  But it goes far beyond that, it is the “innovation” portion of the value proposition that is addressed here.

SAP includes ERP ii type extended supply chain applications like SRM (Supplier Relationship Management), APO (Advanced Planning and Optimization), and PLM (Product Lifecycle Management) to help move the supply chain beyond the enterprise borders.

ERP II Creates Collaboration Hubs Beyond Planning and Distribution Functions

Together with the extended supply chain applications there are a number of various exchanges such as common catalogs that are published to the web and integrate with their customer ordering.   Some examples of external exchanges can be seen in initiatives such as “Covisint” for the automotive industry, or Grainger’s online catalog system (although it is not a competitive based platform like Covisint), and many others.

One of the key functions or features of ERP ii systems is supply chain or vendor collaboration, which extends to engineering design and development.  Most enterprises using SRM systems use this to focus on cost reductions, vendor competition, and supply chain efficiencies.  They are generally geared to the operational excellence system domain but there is a LOT of untapped possibility.

The highest and best use of ERP ii functionality includes active collaboration with vendors to reduce cost, improve quality, reduce extended supply chain cycle times, and even co-engineer (or co-develop) better products and services.

Many ERP ii solutions now include some type of built-in “reverse auctions” where companies can place requirements out for competitive bids in various formats.  These exchanges might include data interchange methods such as EDI (Electronic Data Interchange) or other standards compliant communication protocols, but they are much more, they are active collaboration hubs.  Together with these collaboration hubs, SOA extensions are being used to extend collaboration and engineering design work to the extended supply chain.

How Has SAP Implemented ERP ii System?

SAP has created an entire collaboration network called the SAP Community Network or SCN (http://scn.sap.com) where customers, vendors, consultants, and any interested party can exchange information, ideas, or dialog.  SAP has implemented ERP ii systems internally through the development of specialized vendor partnerships it calls an “Ecohub” (http://ecohub.sdn.sap.com/).  This is a place where vendors, partners, or other firms with specialized SAP solutions can integrate and promote their offerings to enhance SAP’s various software offerings.  Along with that there are code exchanges, “how-to” articles, discussion forums, and many other types of collaborative information exchanges.  This is similar to what I proposed a few years ago when I wrote “SAP, ERP III, SOA — Learning Organizations through Social Media Collaboration.”

Operational Excellence and Innovation Value Propositions

ERP ii systems integrate the external vendors and suppliers into enterprise processes so that they can directly impact productivity, cost, and efficiency.  Some elements of ERP ii include engineering staff augmentation, free or at a very reasonable rate to the “customer company,” and as a value added service from vendors.  For vendors the ability to augment engineering functions can mean customer retention; for the customer companies this may mean higher quality and lower cost products or services.

SAP’s ERP offerings include PLM (Product Lifecycle Management) with CAD integration for several off the shelf CAD programs.  Although the PLM functionality is primarily used for internal engineering processes it can be pushed out into the extended supply chain for collaborative engineering and design.  That collaboration can be used for innovation if it is properly structured and implemented.  This is in conjunction with other integrated application offerings such as SRM and APO.

By extending engineering or collaboration functions outside of the enterprise, but still within the supply chain, innovation can be introduced into the ERP ii enterprise (see the entire series on Process Execution of Business and IT Innovation).   However, the primary feature of ERP ii systems is the additional operational excellence that is brought about by extended supply chain processing.  Very few companies have succeeded at collaborating with the extended supply chain by introducing extended engineering capabilities, or vendor insight to produce significant innovation.  Most ERP ii systems only work to extend the supply chain beyond the boundaries of the enterprise for cost savings and efficiencies (operational excellence).

Using SOA (Service Oriented Architecture) for Creating ERP ii and ERP iii Enterprises

The promise of ERP ii system success that moves toward ERP iii (discussed in a moment) is SOA or Service Oriented Architecture.

In layman’s terms, SOA is the ability to create a set of “talking points” from any internal system to external systems. 

They are the data structures and data schemas that are published for other systems to interact with and begin to create the framework for the “borderless enterprise.”

ERP iii Defined, What is ERP iii and How Does it Go Beyond ERP ii?

ERP iii addresses the final domain of enterprise class applications by addressing the customer focus value proposition.  It is the extension of technology capabilities which brings collaboration with customers and the broader marketplace into the enterprise system.  This goes way beyond what we currently refer to as CRM (Customer Relationship Management) systems of today.  Today’s CRM applications still operate within the walls of the enterprise and are generally used for managing the sales force rather than moving the enterprise out into the wider marketplace and to direct interaction with customers.

ERP iii from a high level is fairly easy to define, however what it looks like in a few years is difficult to predict.  The areas that ERP iii touches are in a rapid state of change because of the dynamic nature of social media and the global marketplace.

ERP iii Defined

  • ERP applications integrate enterprise operations within and across enterprise legal entities, or company codes.
  • ERP ii applications extend supply functionality to external enterprises (generally vendor-affiliated companies or enterprises) to reduce cost, improve supply chain efficiency, and to perform collaborative innovation.
  • ERP iii enterprises go to the next level of integrating the ERP and ERP ii functionality to include customers and the sales side of the marketplace in general.

The end state of the ERP iii enterprise would include a dialog between customers (and potential customers), the ERP organization, and the extended supply chain so that even suppliers would participate in the sales side of the marketplace.  Because there is little or no information in the marketplace about ERP iii direction and design I am offering a more detailed definition here:

Through collaboration, direct contact, social media, and various data streams within and outside of the enterprise ERP iii integrates marketplace fans and critics into the extended ERP and ERP ii organizations.  From the integration of customers and vendors beyond the enterprise boundaries a constructive dialog or information exchange is created to innovate, produce, and then sell (or distribute) better products or services.

ERP iii will create the “borderless enterprise” by bringing together a host of technology sources such as:

  • Collaboration tools (within the enterprise and across the supply chain and marketplace)
  • Social media
  • Internet technologies
  • SOA
  • Smart information integration and synthesis (specialized search with analytics or within specific information domains).  An early example of this type of search is a web service called “Lijit.”  Lijit allows you to manually assign searchable information sources for a customized, high value “search engine.”
  • Extended marketing analytics that are “like” tracking cookies but less invasive and use additional sources of information and research beyond the web (a good example is like grocery store checkout programs that automatically print coupons on the back of your store receipts based on what you just purchased).
  • Direct customer collaboration (we see early examples of this in the Dell “designed by me” and “I made Windows 7” television commercial marketing campaigns).

The Future of ERP iii Systems

Within the extended SAP enterprise (which is my area of expertise) I see many of the seeds of ERP iii germinating and beginning to grow.  Even though the initial “green shoots” are there for an ERP iii revolution I don’t anticipate that occurring for several years within SAP.

Today SAP has:

  • Very active, country specific SAP User Groups (xSUG, in America is it ASUG) with “influence councils”
  • Community forums (previously mentioned)
  • “Mentor Groups” within the community network.

While these all contain the seeds of ERP iii outlets I do not see a lot of the raw material being converted into application enhancements to directly address business marketplace demands.  There are still way too many technical solutions and not enough for genuine business needs.

ERP iii integrates marketplace fans and critics into the extended ERP and ERP ii organizations to innovate, produce, and then sell (or distribute) “customer-centric” products or services.

I doubt that the integration of more social media will move the ERP iii needle much further.  SAP like any other company that embarks on this type of transformational exercise must begin to use their well established outlets to drive innovation and to meet marketplace requirements (see the entire series on Process Execution of Business and IT Innovation).

Social Media and ERP iii

Social media outlets like Facebook, Twitter, and other resources will need to become more sophisticated to produce meaningful differences in business-centered innovation or customer focus.  That sophistication for business will mean finding a means to use those outlets for genuine business competitive advantage.

It will take business some time to find new ways to tap into the collective marketplace consciousness through social media in spite of the massive number of what I refer to as “snake oil” salespeople.  Social media in the enterprise will not be useful until the snake oil sales finally align actual business needs to areas of the enterprise (sales, marketing, HR recruiting, etc.) that align with business goals and directions (see Social Media Fads and the Risk to the Enterprise).

Before ERP iii systems are ready for the extended marketplace and for customer interaction it will require “back office” integration with social media (see ERP III – Is the Integration of Collaboration the Future of Enterprise Applications).

As social media and collaboration tools mature over the next 10 or more years then corporations will finally build the ERP iii systems for integration into the wider marketplace.  By then the ERP ii systems will have finally matured to the point that some of them can provide meaningful integration between the enterprise, the entire supply chain and the sales side of the marketplace in general.

ERP, ERP ii, and ERP iii Conclusion

Considering this specialized class of business systems through the lens of the high level value propositions of

1) operations,

2) innovation, and

3) customers;

here is my summary:

ERP (Enterprise Resource Planning)

Primarily focused on the “back office” with a heavy emphasis on operations, automation, cost control, financial activity, and lagging business indicators of performance.

ERP ii (the second generation of Enterprise Resource Planning)

Extends “back office” processing functions and operations into the extended supply chain with a heavy emphasis on supply chain automation, additional efficiency, more cost control, and some vendor collaboration for limited innovation.  This area of the application moves into the “last mile” of improvements that can be more expensive to implement and yield lower returns.  However, carried out properly with significant supply chain collaboration and joint engineering or development efforts this can provide new / innovative products or services addressing both lagging indicators of cost control and efficiency while exploring leading indicators of new products or services.

ERP iii (the next generation of Enterprise Resource Planning)

This will encompass the integration of social media with new marketplace intelligence and analytics into the ERP ii enterprise.  With a very simply “hub and spoke” idea, the enterprise will constitute the “hub” and the extended supply chain vendors, engineers, and designers, together with customers and market analysis as some of the “spokes.”  This will be enabled by the ERP application that is extended with collaboration and social media tools.  The ERP, ERP ii, and ERP iii functions will all be integrated with new analytics and “smart source” search methods to integrate and synthesize trend, market, and product or service information.  This will close the loop on the ERP ii innovation and will bring a new customer focused business paradigm into the enterprise that goes far beyond today’s CRM applications.

ERP iii state companies will be marketplace disrupters who are agile, nimble, and global.  They will be able to spot emerging trends and unmet customer demands (needs or wants) far more quickly and with greater ability than their peers.  From those trends and customer needs these companies will be able to quickly execute innovation programs to develop new products and services to quickly fill those customer demands.  The most advanced of these new “disruptive innovators” will be the companies who can intelligently synthesize all of the various data points to understand customer demands that are not even articulated.

======================

Bond, B., Genovese, Y., Miklovic, D., Wood, N., Zrimsek, B., and Rayner, N. (2000). ERP Is Dead — Long Live ERP II; Gartner Publications.

Kallinikos, J. (2004), “Deconstructing Information Packages. Organizational and Behavioral Implications of ERP Systems.” Information Technology and People, Vol. 17, No. 1, pp. 8-30.




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IT Outsourcing, Off Shore Support, Cost Cutting and IT Department Changes

March 23rd, 2010 by

cost savings


Businesses everywhere are looking to shore up their bottom lines by cutting costs.  As a result, cost centers, like IT departments, are prime targets for outsourcing and off-shore maintenance.  The typical business script is that as the IT organization moves into maintenance mode that cost center with high overhead becomes a prime target for reducing costs.   

However, in spite of how things might appear, cost is NOT the real driver of IT outsourcing.  The real driver of IT outsourcing has more to do with its function than its cost…

IT departments generally have not focused on customer acquisition, customer retention, profitability or revenue generation and have become commodities to be outsourced. 

How Should Your SAP Support Department Differentiate Itself?

Imagine a presentation to the Board of Directors about how much money the company could save by outsourcing the sales and marketing functions.  I mean come on here, look at the massive budgets dedicated to sales and marketing!

If you were making that presentation I would suggest you have your resume in order and already have another job lined up. 

Can you imagine outsourcing discussions with that same Board of Directors if IT were seen as a strategic business partner, a business partner integrated with and indispensible to the revenue side of the business.  What if IT were actually considered a very real or even a pseudo profit center?  Not only would outsourcing be off the table for the IT functions that are directly related to revenue generation, but budget discussions and project ideas would be much easier to navigate. [FN1]

Why Has IT Become Nothing But An Expensive Cost Center?

The typical IT script has created an environment where it is seen as an expensive and expendable cost center.  For too long Information Technology departments have focused on applications, programs, and business support to address process improvement, operations, and quality.  These are all the cost side of the business and only look at “operational excellence.”  Once the bulk of the business processes are set up, running, and stable all those significant IT labor costs make great targets for reducing cost and overhead.  And from there the next step is to outsource, reduce staff, or off shore.

Is “operational excellence” important?  Of course it is.  But after integrating and automating the “back office” functions or operations of the business IT must then move on to product or service innovation and also revenue.

Without a move to the key revenue generation functions of the business IT will forever remain an expendable cost center rather than a key business partner.

Why Won’t CRM Applications Work to Change the IT to Business Dynamic?

A few of the applications in the market have tools and resources to help structure the customer acquisition and customer retention processes.  And some of them have some decent rules-based tools for automatically evaluating, and then stratifying customers.  There is application functionality in a number of major applications, and several niche applications for handing special offers, marketing programs, or other incentives focused on customer retention or increasing sales conversions. 

What is the CRM Problem, Why Isn’t it Delivering? 

There are three primary reasons:  1) clueless “CONsultants” who may have some exposure to a CRM application but little or no business knowledge (they lack an entrepreneurial perspective) [FN2]; 2) there are few applications, if any at all, which integrates and then actively engage customers in the business they are buying from [FN3]; 3) sales and marketing programs are poorly structured and designed and do not allow for good sales process analysis. [FN4]

In the SAP CRM space a lot of the benefit that is lacking is because of the number of frauds and fakes in the marketplace.  They entered the market when the applications were immature and experience requirements were low.  They came in droves with fake resumes, fake credentials, and little or no concept about sales and marketing.  [FN4]

Nearly all CRM applications are focused on sales processes, measuring conversion or retention, and all of the other sales process areas.  Software and IT applications do not directly engage the customer in the new product or service development cycle, quality management, marketing, feature or benefit development, or in working with them to address their product or service frustrations.  Archaic customer service centers serve as a “touch point” to the customer but beyond that customers are not intimately involved in, or incorporated into the business product or service lifecycle. 

Conclusion on IT as a Cost Center and IT Outsourcing

Until IT starts to more aggressively focus on the business side of the equation (like revenue, profitability, customer retention, customer acquisition, product development and engineering, etc.) then IT is little more than a dispensable cost center.

This model shows the IT application landscape of the future. It also shows the CIO role as a bridge between the CFO and the CEO, or between lagging and leading indicators of business performance and success. 

source: Future Technology Landscape Alignment for the CIO, IT Director, or Key IT Decision Maker

Once again I will reiterate one of my opening paragraphs here;

Can you imagine outsourcing discussions with that same Board of Directors if IT were seen as a strategic business partner, a business partner integrated with and indispensible to the revenue side of the business.  What if IT were actually considered a very real or even a pseudo profit center?  Not only would outsourcing be off the table for the IT functions that are directly related to revenue generation, but budget discussions and project ideas would be much easier to navigate.

This model shows IT in precisely this way.  Application alignment is focused on the customer–, customer retention, customer acquisition, revenue generation and profitability.

Footnotes and Resources about IT Strategic Alignment with Business – Customer Retention, Customer Acquisition, and Revenue Generation

[FN1]  See these additional resources about business to IT to customer alignment:

Changing the Direction of SAP, ERP, and IT Applications to Focus on the Customer and Innovation
http://www.r3now.com/changing-the-direction-of-sap-erp-and-it-applications-to-focus-on-the-customer-and-innovation

CIO, CFO, and CEO Alignment – Why ROI is Lacking from Today’s System Landscape
http://www.r3now.com/cio-cfo-and-ceo-alignment-why-roi-is-lacking-from-todays-system-landscape

[FN2]  Many businesses and Corporate IT departments have been sold a “bill of goods” with little to show for their investment

CRM, ERP, BI, and IT Investment — Where Do You Find the Business Benefit?
http://www.r3now.com/crm-erp-bi-and-it-investment-where-do-you-find-the-business-benefit

[FN3]  See the customer integration model for the IT landscape of the future which integrates the customer into the business process.

Business and IT Alignment – Integrating Technology and IT Spend with Business
http://www.r3now.com/business-and-it-alignment-integrating-technology-and-it-spend-with-business

[FN4] There is a fundamental change needed in how performance is perceived and measured to understand how to make a difference.

Designing Startup Metrics to Drive Successful Behavior
http://www.r3now.com/designing-startup-metrics-to-drive-successful-behavior

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