In today's tough business environment, companies are more focused than ever on the bottom line. There are really only two ways to improve bottom-line performance and meet or exceed Wall Street expectations increase revenue or reduce costs. In a market where consumer and business spending are being minimized, it has become exceptionally difficult for most companies to grow their revenue base. For this reason, many organizations are turning to the concept of cost takeout in order to improve the bottom line. However, as with any improvement efforts, maximizing return on investment (ROI) is key.
Most investments that organizations are currently making in business are in the area of attempting to streamline the overall processes and capabilities of the business to minimize excess capacity and improve the organization's overall efficiency. To drive this effort, many companies are undertaking functional benchmarks from organizations such as the Hackett Group, which maintains the world's leading repository of enterprise best-practice metrics and business-process knowledge. Hackett benchmarks help companies determine the overall costs, value and efficiencies within their current organization and also identify opportunities for cost takeout and savings. These opportunities are defined during the overall benchmark process and become apparent to the organization and its management when Hackett data enables them to compare their overall process efficiencies and costs against companies of similar size and complexity, and against other companies in their industry.
For example, during a finance-process benchmark, an organization might find that its overall cost of operating the finance function is approximately 1.5 percent of revenue. By comparison, the Hackett database shows that at average companies, the cost of the finance function is approximately 0.7 percent of revenue, and first-quartile companies (world-class performers) achieve finance costs of only 0.5 percent of revenue. Additionally, the benchmark might determine that the organization has more than 50 different finance applications per billion dollars of revenue. The Hackett finance benchmark has determined that the best practice is at 31.9 finance applications per billion dollars of revenue for an average company and 2.8 finance applications per billion dollars of revenue for a first-quartile, world-class organization.
From this, the organization could draw the conclusion that the benchmark and analysis have highlighted the following opportunities for cost reductions:
Streamlining the finance function and the processes contained within this function.
Reducing the number of applications required to support the finance organization.
A more detailed look at the results would identify the specific areas in the business function whereby these opportunities would exist. However, here we will focus on these two areas as examples.
In the hope of initially reducing costs, the benchmark has defined a specific anticipated savings that would result from attacking this problem head-on. The organization determines that the best move to reduce costs would be to first rationalize the number of finance applications that exist and consolidate them or potentially migrate to one enterprise resource planning (ERP) solution for the organization. The company now moves forward and generates a business case for approval by the executive team, receives the approval and attempts to meet the business-case cost reduction goal through the implementation of a "pure" technology solution.
Will this aid the firm in meeting its initial business case goals? Hackett Group research says complete success is not likely. According to Hackett research, companies receive only 22 percent of their defined business-case goals through a pure technology implementation approach. Therefore, the company would be likely to generate only slightly more than one-fifth of the anticipated ROI.
Alternatively, the organization could approach a solution of implementing the technology solution while separately executing some process redefinition, organizational change and a focus on the information being generated by these applications. According to Hackett, this disconnected and independent approach will yield better results, at best helping the organization receive approximately 78 percent of its business case. While this approach might generate more than three times the ROI, it still leaves significant business value on the table.
What is the best way to address this problem? According to Hackett, a coordinated strategy is required in order for an organization to achieve the maximum return on its investments. This strategy must simultaneously take into account the areas of people, process, technology and information in a holistic manner to achieve the results required. This is the way organizations can achieve the full benefits defined in the business case and actually reduce the costs on the business as much as possible.
It is recommended that the organization deal with any cost takeout initiative or investment initiative that is critical to the business in a coordinated manner that addresses all areas across the organization to obtain the forecasted and anticipated benefit.
Let's look at an alternative way of addressing this problem which takes a more coordinated, holistic approach. Based on the results of the Hackett benchmark, the organization determines that the best initial approach is to address the process issues followed by the implementation of a technology solution such as the single ERP system mentioned previously.
The organization decides to take an approach driven by best practices keyed to a coordinated strategy that maximizes process efficiencies. This results in a more efficient, lower-cost operating environment. Simultaneously, the organization begins the process of configuring the ERP through a best-practice implementation approach. This approach looks at those processes that are deemed best practices processes that communicate insight in the application of a process or the performance of a task, improve the outcome, diminish the risk, increase the reliability or improve the understanding of the process or task. Configuring the ERP system in such a manner involves determining if the base-level implementation of a process within the ERP meets a best practice, or if the ERP can be configured to implement the best-practice process within the system.
Now the organization has addressed two critical issues in a coordinated fashion: the issues of process simplification and automation, and of application implementation based on proven best practices. Will this approach enable the organization to achieve 100 percent of the ROI identified in its original business case? One would assume the answer to be yes because it involves a coordinated strategy addressing issues around people, process, information and technology, and the use of a best-practice mechanism for the implementation.
While this may be the possible result, there is one flaw in the approach. No technology application is "100-percent best-practices enabled" or capable of being configured to achieve best practices in every case. In fact, every major ERP system has gaps in meeting the functionality required as defined in the best practice. For example, none of the leading ERP systems can currently be configured to support the following Hackett best practices:
Drill-down/across to source transactions available from G/L to data warehouse or subsystems;
Reports available online or distributed electronically by e-mail or through a Web application;
- Customer payments accepted via the Internet.
However, each of these gaps can be met through the use of enabling technologies, which are solutions that deal with the process, people, information and technology to minimize the gap provided by the base-level application solution. The technology enablers to meet these needs can be as simple as any of the following:
A financial data mart or data warehouse that would be used by the organization to meet the ability to drill-down/across the transactions;
The use of the data mart/warehouse as the report-generation tool for financial reporting and to distribute the reports through the role-based portal;
The integration of an electronic bill presentation and payment or electronic invoice presentation and payment solution that is available from specific software providers.
These final steps complete the "process reengineering" which is at the heart of this effort.
Without a doubt, the comprehensive approach described here is a complex task, as it involves process simplification and automation, business package implementation driven to best practices, and the use of enabling technologies and information to address gaps in best-practices implementations. However, if an organization is truly committed to improvement or simply quite serious about doing whatever is necessary to weather these tough economic times, this approach can enable it to reap tremendous rewards which will potentially translate into lower cost of operations, an improved bottom line and accolades from the investment community.
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