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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