Monday, March 10, 2014

From the IT Buyer to the CFO to Your Order - Three (Not-so-easy) Pieces (Part 1/2)

I am fiercely loyal to those willing to put their money where my mouth is.   [Paul Harvey]

It’s a common experience. You've convinced everyone in IT that your solution is the best and most cost-effective and been assured that a Purchase Order is on the way. Then sudden silence, followed by panic, building toward anger, and ending with that sinking feeling. Your order never appears and you don’t know why. Perhaps your customer tells you, “It got killed upstairs”. What happened?

Most major technology purchases must be approved by the Chief Financial Officer; if they’re big enough, often the Board must sign off as well. This is not a rubber-stamp process. There are usually competing priorities, and then there’s risk. Picture the following scenarios and try to put yourself in the position of the person who has to place the best financial interest of the company foremost.

Acme Widget’s production department has a proposal for eight new computer-driven milling machines. Each machine costs $500,000 and will displace 4 hourly employees at $45 per hour, paying for itself in 17 months. In addition, the machines will allow Acme to produce jobs quicker and can produce more intricate parts than can be made with today’s equipment. The sales department estimates that this will generate an additional $1,500,000 in annual sales. The machines come from a reputable supplier that Acme has worked with in the past, and a major competitor recently installed the previous (slightly inferior) version successfully.
Acme’s IT department has a proposal for $2,400,000 for a new IP-based unified communications systems. The old PBX systems are functioning, but are really past their end of life.  If one failed, an office might have no service for a few days. The old systems cost $150,000 per year to operate— costs that will be eliminated. Unified communications will make everyone’s work life simpler. Based on a national survey, the IT department estimates that it will save each sales person 30 minutes a day of currently unproductive time. The UC system comes from a reputable supplier, but the CFO has heard stories about similar projects encountering problems with voice quality that required additional network upgrades and took much longer than anticipated to get properly working.
The first case is clearly superior – the return on investment (ROI) is almost immediate even without the additional revenue. The second case represents an increase in costs with no significant cost reductions to offset it. Now consider the cases with slight revisions.

Acme Widget’s production department has a proposal for eight new computer-driven milling machines.  Each machine costs $500,000 and will displace 2 hourly employees at $45 per hour, paying for itself in 34 months. In addition, the machines will allow Acme to produce jobs quicker and can produce more intricate parts than can be made with today’s equipment.  The sales department estimates that this will generate an additional $1,000,000 or more in annual sales. The machines come from a reputable supplier that Acme has worked with in the past, and a major competitor recently installed the previous (slightly inferior) version after a few months of shakedown and rework.
Acme’s IT department has a proposal for $2,400,000 for a new IP-based unified communications systems. The old PBX systems are functioning, but are really past their end of life.  If one failed, an office might have no service for a few days. The old systems cost $250,000 per year to operate; costs that will be eliminated, plus reductions in long distance, traveling for meetings and other small items. Taken together, the savings will repay the investment in 30 months. Unified communications will make everyone’s work life simpler.  The IT department estimates that it will save each sales person 30 minutes a day of currently unproductive  time. The VP of Sales predicts that one sales manager position will be eliminated as a result, saving $220,000 annually. She further expects that a more responsive sales force will improve Acme’s reputation and lead to a higher (although unquantifiable) sales closing ratio. The UC system comes from a reputable supplier. The IT team includes a plan of implementation that specifically addresses potential problems and proposed workarounds, with costs.
This is a much closer call. 

What is different between the two cases? In the second instance, the ROI is about the same with the edge going to the UC system. This is because the possible avoided cost of a sales manager ($220,000 per year) is worth more to the company than the potential $1M+ in additional revenue (which equates to maybe $125,000 to the bottom line, depending on Acme’s net profit percentage). Neither benefit is assured, but if the CFO gives both an equal likelihood of happening, the IT proposal has more “extra” benefits.

The second instance has slightly more risk in the milling machine proposal due to the competitor’s less-than-perfect experience. Actual risk for the IT proposal is the same in both cases, but in the second instance, IT has addressed the risk head-on and offered a mitigation plan.
Finally, in the second instance the IT proposal has critical sponsorship from the Sales department that was lacking in the first example.

Approval of major technology decisions hinges on three elements: the numbers, the perceived risk, and the credibility of the case.


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