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BPM Has ROI Priority

  • September 01 2004, 1:00am EDT
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Many companies acknowledge the benefits of business performance management (BPM), but get stuck at the starting gate when trying to initiate their project. In some cases, they can't get funding for the project or are unsure how to leverage or tie in existing systems. Others are simply confused and aren't sure how to proceed.

To cut through the obstacles, a strong case for ROI should be made. In the case of BPM, it can be a strong case indeed. At the senior levels of the IT department, BPM will need to win a face-off against other projects such as customer relationship management (CRM), supply chain and data warehousing. In our experience, BPM usually fares well in the ROI competition.

We'll advance the argument here that most companies larger than 50 employees should do what it takes now to undertake a BPM project correctly. The key words here are "now" and "correctly."

You need this to stay ahead in an increasingly competitive marketplace. Don't you wish you had a dollar for each time you have heard that? In the case of BPM, however, the sales pitch goes beyond the cliché about staying competitive and includes the need to avoid trouble with the SEC and shareholders. These are among the reasons why, in a recent survey, META Group found that 85 percent of U.S. companies plan to begin some form of BPM initiative before the end of 2004.

One consideration with BPM is that you can start small, go for an early, if modest, payoff and build your systems incrementally. You don't need to fund the entire scope at the outset. Moreover, it's likely that you already have several elements of BPM in place at your company. In part, this is because BPM is built on existing ideas that make good sense and have good ROI. Examples are consolidation systems, existing data warehouses, analytic applications and budgeting systems.

If executed well, each of these initiatives has a good potential ROI and value to shareholders on its own. Together, they can deliver more than the sum of their parts and improve the ROI by orders of magnitude. For a first example, let's look at consolidation systems. For companies that grew through acquisition, consolidation can be quite valuable. In addition to reducing the need for clerical staff, cutting the closing time from weeks to days and eliminating embarrassing errors in financial reports, consolidation can protect the company's value. To highlight the importance of this issue, consider the case of MasTec, a Nasdaq-listed company that lost roughly half of its market value this year when it was unable to deliver its financial reports on time. To quote a recent Street.Com article, "MasTec spent many years rolling up competitors, but never invested in a computer system that would tie all its parts together. The company paid for that recently when it failed to file its 2003 annual report and first-quarter 2004 financial report with the SEC, and said it would have to both restate earnings and renegotiate loan covenants." More than one dozen class-action lawsuits were filed against MasTec this spring.

On the positive side, Lockheed Martin implemented a sweeping BPM project in which consolidation was a centerpiece. According to a Lockheed Martin senior executive, by automating the consolidation of data from hundreds of systems and legal entities within the company, the aerospace giant was able to reduce head count in its finance staff by more than one thousand. Assuming an average total cost per employee of only $40,000 per year, you can extrapolate an average personnel savings of $40 million per year from a project that probably did not cost more than $10 million from start to finish.

To generalize from the Lockheed Martin example, a BPM system may demand between 10 and 200 IT man-months during implementation and needs ongoing maintenance, but it can sharply reduce the need for junior number crunchers to do rote work on budgets and reports.

Another ROI example comes from the Winn-Dixie retail chain. After upgrading its budgeting and reporting, Winn-Dixie's finance group tallied up the time, paper, printing and mailing costs of the previous budgeting and reporting methods and found that over five years, more than $1.1 million would be saved, easily paying for its first BPM initiative. The broader benefits of this project will come in several forms, such as better planning and greater accountability at the store level.

From these examples, you can see that some of the more concrete benefits from BPM can be reduced closing times, shifting personnel from number-crunching to analysis, and chopping the time spent on budget-building. These points alone may actually sell the project more effectively in its early stages.

Although it can be more difficult to attach a concrete ROI number to other less tangible BPM benefits - such as linking execution to strategy or identifying your more profitable products, clients or branches - we can see that the smaller, more tangible benefits can return a strong ROI. Consider this while you successfully take advantage of some of the larger, more strategic, benefits of BPM.

In this column, we have repeatedly noted that BPM is complex and somewhat risky. It is fairly easy to make a wrong step and squander the ROI that a BPM initiative can deliver. The risks, to mention a few, include not assessing needs correctly, choosing the wrong metrics, failing to involve the needed sponsors and stakeholders, and establishing a project team and leader based on habits carried over from typical ERP projects.

Many do their initial homework on BPM, get some familiarity based on the similarities to past projects and then embark on their own because they see enough that looks familiar. It can be a mistake because the differences from other software projects are subtle and important: BPM initiatives involve high visibility, wide scope, linkage to numerous data sources and potential change of the work culture for many employees to more of a real-time, responsive mode.

When you are seriously considering a BPM project, that is a good time to recruit employees or consultants who have already guided these kinds of projects from start to finish and who are not beholden to the agenda of any software vendor. You should work with people who understand the degree of customization that a BPM system can offer for your specific industry. For example, there are already software vendors that have begun to encase "best metrics" and industry-specific practices in their BPM systems, most visibly in the dashboards used to present information. There are other vendors who may instead emphasize that you should build your own metrics from the ground up - which may cost you unnecessary time and money, not to mention hamper the effectiveness of your system.

To do this correctly, don't overspend on consultants' advice. Figure on two percent to five percent of the total project budget. The payback in meeting goals and timelines in your BPM project is almost assured.

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