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" As the world's leading provider of business software*, SAP delivers products and services that help accelerate business innovation for our customers. "
Source : SAP
New-World Value: The Strategic Impact of Business Application Suites in Today's Corporate Environment
Business Application Suitesis also known as :
Enterprise Resource Planning (ERP),
Service-Oriented Architecture (SOA),
Integrated ERP Software,
ERP Solutions,
MRP Systems,
ERP Software,
Software as a Service (SaaS),
Enterprise System,
Customer Relationship Management (CRM),
E-procurement,
ERP Modeling,
Supplier Relationship Management (SRM),
Information Technology Management,
Supply Chain Management (SCM),,
Management Information System,
Product Lifecycle Management (PLM).
Table of Contents
- Executive Summary
- Methodology
- Introduction
- Expanding Traditional Formulas
- Accounting for the Intangibles
- Higher Value Releases
- A SOA Vision
- Business Process Innovation
- Extending ERP
- Conclusion
- Sponsor's Statement: Software for Every Business and Every Process
Executive Summary
- Traditional formulas are no longer sufficient to calculate the payback of integrated enterprise resource planning
(ERP) application suites, especially given new delivery platforms such as service-oriented architecture (SOA)
and new release strategies.
- Integrated enterprise application implementations provide an entre'e into business process transformation,
resulting in innovations that need to be entered into the return on investment (ROI) equation.
- Any ROI accounting must take into consideration modular release strategies, which provide substantial new
functionality at a modest cost.
- Ability to change processes quickly and eliminate maintenance costs frames the business case for application suites.
- Enterprises are supplementing traditional measurements with a more holistic view to establish a better
framework for recognizing the business value of ERP investments.
- This more holistic view maps business application investments to business goals such as growth, business
transformation, customer acquisition, optimized business processes and innovation.
- Use of the total cost of ownership (TCO) metric will diminish because it ignores the opportunities afforded by
increased flexibility, agility, process innovation and process reuse.
Methodology
BusinessWeek Research Services (BWRS) launched a research program in early 2008 to determine the views
of C-level executives-CEOs, CFOs, COOs, CIOs-at large and midsize companies on how to calculate the value
of ERP investments, especially given new technologies such as SOA, software as a service (SaaS) and modular
upgrades that provide less easily measured business opportunities. Traditional formulas need to be supplemented
with additional measures of value to expand the understanding of what an investment in an integrated business
application suite means. These suites can be a foundation for creating new business models, serving new
customers, optimizing processes and innovating both inside and outside the four walls of the enterprise. As such,
it's especially important to map business goals to the promised benefits of the investment.
This report is based on interviews with C-level executives, consultants and industry analysts who are considered
to be the leaders in determining the financial and strategic value that ERP makes possible. These discussions also
covered the new frameworks these experts use to measure that value. In addition, various documents and other
credible sources were part of the research effort.
The organizations included in the research for this report are:
- AMR Research Inc.
- Freescale Semiconductor Inc..
-
- BearingPoint Inc. b ICW Group
-
- Eaton Corp. b Keen Innovations
-
- ebizQ b Red Door Spas
-
Triangle Publishing Services Co. Inc. supported BWRS in the in-depth telephone interviews and the writing, editing
and production of this report. BWRS and the author of this report, Lauren Gibbons Paul, are grateful to all of the
executives who provided their time and insights for this project.
This research project was funded by a grant from SAP but was written independently of this sponsor. The editorial
department of BusinessWeek Magazine was not involved in this project.
For more information about this project,
please contact the associate director of Primary Research at BusinessWeek
at
marc_scheer@businessweek.com
Introduction
When senior executives at ICW Group were examining a potential ERP investment in 2007, they considered the
usual financial metrics: internal rate of return, net present value, "all the different financial plays," says Kevin
Harris, CIO at the San Diego, Calif.-based full-service insurance provider. Although important, none of those
traditional measurements was able to capture the value of the opportunity ICW's executives knew they would
reap from adopting an integrated business application suite that enabled the company to run its multiple lines
of business on a single platform. As COO David Hoppen noted in a recent article, it was important that the
system support ICW's business transformation strategy as well as its SOA technology strategy.
Flexibility and low-cost ways of changing processes on the fly were a big part of
the decision, Harris agrees. In fact, ICW originally looked just at replacing its
claims system. But as executives started digging into the process, "we realized
that claims touches everything we do," he says. "So rather than looking for a
point solution, we began looking for one that would allow us to have business
transformation, but in an integrated fashion."
In the end, ICW's business case for investing in the suite, which includes seven
modules, rested largely on the fact that it provided a framework for improving
the company's operational efficiencies, reaching its customer satisfaction
goals and achieving its growth expectations, according to Hoppen. "When
you're working on antiquated systems, all you can think about is, Wow, this
just doesn't work,'" Harris adds. "When you take that out of the equation, you
have freedom to think and innovate. We can't measure that yet, but the ability
to innovate is huge."
By widening the lens through which ICW viewed its ERP expenditure, Harris
and Hoppen have joined other executives in believing that they have a much
richer understanding of how their enterprises are positioned to benefit from
investments in a business application suite, rather than simply sticking with
traditional formulas. In addition to using tried-and-true ROI approaches, these
executives are:
- Working on ways to measure the top-line benefits that these systems
enable, including business growth, customer acquisition and capabilities
that enable competitive advantage.
- Considering the new modular release strategies offered by large business
application suite vendors that provide their companies with new
capabilities without the high costs of a complete upgrade.
- Understanding the substantial opportunities SOA offers.
- Focusing on the business process transformation that suites of enterprise
applications enable and accounting for the resulting strategic innovation
(see Figure 1, "ERP and Innovation Drive IT Budget," at right).
Case in point: Hoppen considers ICW's new system a lynchpin in its
comprehensive five-year growth and transformation strategy.
Expanding Traditional Formulas
The concepts of ROI and TCO have been used for decades in enterprise evaluations of IT investments, including
ERP systems (see Figure 2, "The Formulas," below). What has changed, however, is that with the emergence of
important new technological advances, executives at leading companies are now expanding these traditional
formulas so they can account for new opportunities that are not reflected in a classic ROI/TCO analysis.
These executives have decided that it's time to inject additional measures of value. Such measures expand their
understanding of what an investment in a business application suite means, particularly because enterprise
applications can be a foundation for building distinguishing capabilities. They have discovered new ways to
measure payback, and they are using the results to reach strategic business objectives.
Progressive senior executives have been factoring into their investments the greater flexibility afforded by SOA
and other new platforms for quite a while now. But it's time for a formal, institutional recognition of this practice,
especially in the context of integrated business applications. Enabling growth may entail a less concrete ROI
picture. But in the long run, this type of investment can have the most dramatic ROI impact.
Not that traditional ROI analysis should get short-shrift, warns Michael Fillios, a CFO for many years and currently chief
solutions officer at BTM Corp., a business technology management consulting firm in Stamford, Conn. What's changing
is the criteria and the weight placed on them: "Voodoo ROI is out, and real accounting is in," he says.
"Although ROI has been the go-to metric that is most
understood by CFOs and CIOs, it's a very internally focused
point of view, and that can be myopic," Fillios says. "They
need a more well-rounded analysis."
TCO is another popular metric that should not be taken alone.
"That metric is not very meaningful here," says Beth Gold-
Bernstein, chair of ebizQ, a Web portal for information on the
topic of business and IT agility. "It doesn't take into account
all of the upside. SOA is all about upside, and you have to
account for that somehow."
Peter Keen, chairman of Fairfax, Va., consulting firm Keen
Innovations, agrees that focusing too heavily on TCO is
shortsighted; it makes IT expenditure all about cost. By
concentrating on efficiency and cost reduction, the danger
is that you completely overlook the capability of integrated
enterprise application suites to reach business goals such
as creating new business models, serving new customers,
optimizing business processes and innovating both inside and
outside the four walls of the enterprise.
TCO and efficiency gains are important; however, a
new measurement is needed to account for scale and
organizational dexterity. The question is, what are these
worth to you? What would you pay to be able to change your
business process flows without changing your underlying
systems? To react faster? To respond to changes quicker?
The new reality for business leaders is to account for these
attributes when making their enterprise software decisions.
Figure 2
The Formulas
Traditional metrics used to evaluate IT investments at a glance.
- Return on Investment: Also known as rate of return (ROR) or rate of
profit, ROI is the ratio of money gained or lost (realized or unrealized)
on an investment relative to the amount of money invested. The
amount of money gained or lost may be referred to as interest, profit/
loss, gain/loss or net income/loss.
- Total Cost of Ownership: This is a financial estimate designed to
help managers assess direct and indirect costs commonly related to
software or hardware. It's a form of full-cost accounting. TCO takes
into account the cost of supporting the IT asset or project as well
as the initial outlay. TCO should not be used to judge bottom-line
benefits, because it does not account for upside or return.
- Payback Period: This refers to the period of time required for the
return on an investment to "repay" the sum of the original investment.
Many senior executives now require payback periods of one year or
less for major technology investments.
- Net Present Value: Defined as the total present value of a time series
of cash flows, NPV is a standard method for using the time value of
money to appraise long-term projects. Used for capital budgeting, NPV
measures the excess or shortfall of cash flows, in present value terms,
once financing charges are met. NPV is often not a good measure for
technology projects, because it's artificially low.
- Internal Rate of Return: This is a capital budgeting metric used
by firms to decide whether they should make investments. It's an
indicator of an investment's efficiency, as opposed to its NPV, which
indicates value or magnitude.
Accounting for the Intangibles
Freescale Semiconductor Inc., a $5.7 billion maker of embedded electronics solutions based in Austin, Texas,
uses a standard framework to analyze all of its potential IT investments. According to Freescale Vice President
and CIO Sam Coursen, every technology project must prove that it will further business objectives, or funding is a
no-go. "Everything we do has to drive more business value," Coursen says. "If not, why would we be doing it?"
For example, Freescale is currently migrating its supply chain applications from a legacy mainframe platform to
its enterprise ERP system. Coursen expects that the process improvements enabled by this project will pay off
quickly, by reducing costs and improving efficiencies. "We are changing our supply chain planning processes from
end to end and, at the same time, we are getting rid of those mainframe systems. That has an additional cost
benefit to it," he says. The order-to-cash process is next up for migration.
Though most of Freescale's IT projects generate speedy positive return, not every project needs to show tangible
benefits such as cost reduction or revenue generation. Intangible benefits also drive business value and can be
every bit as compelling, according to Coursen. "The process of selecting the projects is not totally science; it's art,
as well," he says.
Non-quantifiable benefits might include reducing risk, making the company more flexible and increasing customer
satisfaction, Coursen says. "Unlike some companies, we don't try to put dollar figures on those," he adds. "But
when you do that, the number doesn't have a lot of credibility."
Coursen is recognized in the industry as being a leader in using technology to create value. He was recognized as
one of the 100 top CIOs of 2008 in CIO Magazine for Freescale's implementation of an enterprisewide business
intelligence system. This system, which connects
to the ERP platform, is expected this year to
generate cost savings of $1.2 million in the
finance department alone.
Higher Value Releases
A development that executives would do well to
consider when calculating ROI is the new release
approaches offered by some large vendors of
enterprise application suites that enable new
functionality without the need for a monolithic
upgrade. These approaches enable customers
to upgrade systems gradually, "without the kind
of massively expensive and disruptive projects
that have traditionally characterized [ERP]
releases," says Ray Wang, principal analyst at
Cambridge, Mass.-based Forrester Research, in
a recent article.
According to a recent Forrester report,
companies that use business application suites
say that more frequent software updates,
delivered in smaller doses, are increasing the
value of the ERP platform. Customers can use
fewer resources in terms of time and money to deploy the new functionality, notes Wang, and they can get increased functionality in more frequent intervals than
every two to three years.
This approach presents a big change to the ROI picture, considering that 50 percent of customers upgrade their
ERP systems every three years, according to Boston-based AMR Research Inc. It poses a severe detriment to ROI,
notes AMR President Tony Friscia, in a recent article. "By constantly upgrading for new functionality, they are
forever adding cost and chasing an elusive ROI rainbow," he says.
In contrast, the prebuilt integrations and vertical modules delivered around an enterprise application suite are
raising value, making for a quicker return on investment.
ICW's Harris says the option of being able to leverage modular releases in the future was a factor in his firm's
selection of an enterprise application platform. "We knew we'd have the option of utilizing [the modular releases]
down the road," he says. "The integration of those solutions into our new [ERP] backbone would be an attractive
option for us."
A SOA Vision
The widening lens is even apparent at companies that have a culture grounded in hard numbers and tangible
benefits. At Eaton Corp., for example, traditional accounting metrics carry the day. But the $16.5 billion
Cleveland-based diversified power management company has begun its SOA journey. Eaton usually just relies
on tangible cost reduction and revenue generation for all its investments, including technology, explains CIO
William Blausey. Now, Eaton is taking a tiny leap of
faith on the benefits of SOA.
"We're developing some applications with SOA
concepts, using Web services," says Blausey, who
reports to Eaton's CFO, Richard H. Fearon. These
preliminary SOA forays are not core or customerfacing
applications, which are based on packaged
solutions. "We depend on our software providers to
deliver those applications under a SOA architecture.
We believe the moves they are making to build their
applications as components will benefit us down the
road," he says.
As a massively diversified corporation, Eaton stands
to benefit greatly, Blausey believes, if the vision
of SOA openness comes to fruition. The company
currently runs more than 30 different ERP systems
and versions, a result of many acquisitions in recent
years. "We could plug in components from different
ERPs without ever having to switch to a single
platform," he says.
Indeed, most industry analysts and a growing
number of senior executives now consider SOA to be
the conduit to an impressive list of business benefits
(see Figure 3, "SOA Drivers," on page 7).
Business Process Innovation
Today's modular enterprise application platforms also carry a lower TCO than past systems. They require just one
skillset to operate, no matter what module is being used. This can be a launching point for cost-effective growth.
Red Door Spa Holdings of Stamford, Conn., for example, is leveraging its business application suite to aggressively
expand its retail footprint without skyrocketing headcount. In a recent report, CIO Paul Kaczmarek says technology
is the driver for Red Door's growth of about 20 percent per year. Red Door uses a retail industry-specific application
built on a SOA platform.
With its previous system, Red Door would have had to add IT staff to expand, with rising personnel costs eating
into growth. Not so with its current system, which is designed to allow retailers to be nimble in exploiting business
processes throughout the enterprise while creating compelling customer experiences. The overall return on
investment picture for this solution is, therefore, more advantageous.
Some companies are innovative in the way they evaluate ongoing investments into enterprise application suites in
the context of SOA. For instance, John McMahan, managing director at BearingPoint Inc., a management consulting
firm in Atlanta, endorses quantifying SOA benefits as options.
According to McMahan, some of his clients use an options pricing framework-comparable to a financial option-
where they can buy or sell at a future time, when better information is available for decision-making. These
companies use this approach to quantify intangible benefits, such as flexibility, around changing the business
model and providing different service lines for customers. Think of these benefits as flexibility options, growth
options or innovation options, he says.
"Having the ROI/TCO number is helpful," McMahan
says, "but it has to be balanced against a more
strategic view of the options that you're creating,
based on executive judgment."
While not yet in wide usage, these additional measures
of value go far toward a more holistic view of seeing
business application suite investments provide a
foundation for growth. Distinctive capabilities-those
things that separate a company from the rest of the
pack-spring from enterprise applications, now more
than ever. Senior executives must learn to view their
investments through this broader lens.
Extending ERP
The focus on cost reduction can be traced back to
the early days of ERP, when initial investments were
often cost-justified in this way. Today, however, when
companies look to extend their enterprise application
systems, the goal is often to improve service levels or
make process changes to improve customer service,
McMahan says.
Figure 5
When measuring ERP value, it's important to align functionality with stated
business goals.
Legend:
ERP: enterprise resource planning,
CRM: customer relationship management
SCM: supply chain management,
SRM: supplier relationship management
Analytics: algorithm-based tools, also known as business intelligence, that process
transaction data into patterns, insights or trends
| Business goal |
Importance
(according to
CEO rating on an
ascending scale
of 1 to 10) |
ERP or IT
functionality |
Relative
business value
impact on this
goal from the
functionality |
| Sales/Revenue growth |
8.50 |
CRM |
High |
| Reach new customers |
8.43 |
CRM, Analytics |
High |
Improve customer
service |
8.36 |
ERP, CRM |
High |
| Increase profit margins |
8.10 |
ERP, SCM, SRM |
High |
Sell more to existing
customers |
7.92 |
ERP, Analytics |
High |
| Increase market share |
7.85 |
ERP, SCM, CRM |
Moderate |
| Manage budgets |
7.62 |
ERP, Analytics |
Moderate |
Bring new products
and/or services to
market faster |
7.42 |
ERP, SCM |
Moderate |
The good news is that technologies such as SOA and new release strategies enable enterprises to extend the value
delivered by their existing investments in an efficient way, says Keen of Keen Innovations.
But there's a downside: Corporate measurement and management systems have not caught up with these new
technology developments, BTM's Fillios says. "Companies that want to look at the possibility for top-line growth
still have measurement systems that look at costs," he says. "That creates a paradox-the measurement systems
are conflicted, and the management processes don't honor that."
Because measurement systems are sometimes lacking, many companies proceed with SOA-based enterprise
application suite projects without the benefit of a traditional business case. This happens simply because
executives view the resulting functionality as a must-have, says Gold-Bernstein of ebizQ. "They are doing this
to enable agility, or they want to enable functionality they don't have now," she says. "These are new levels of
functionality and capability."
But it's important to establish the business case as part of the overall analysis, she says. Along with ROI, payback
period is a critical measure. It indicates when a company can afford to reinvest in other projects that will drive
more value.
The conflict between establishing a realistic business case and simultaneously recognizing potential top-line
benefits can be seen in a survey of C-level executives conducted by BWRS. Respondents say they are more focused
on developing new uses of technology than on developing new metrics of IT ROI (see Figure 4, "IT Innovation
More Important then ROI," on page 8).
It's important to establish an agreed-upon understanding and prioritization of business goals before embarking
on a framework to better recognize the business value of SOA-based business application suite investments, even
when modular enhancements provide substantial new features at modest cost. Mapping business goals to benefits
can indicate the largest financial opportunities.
When it comes to business objectives, C-level executives today are concerned with top-line goals, according to
a January 2008 study conducted by BWRS. This is true despite the fact that a bottom-line focus on profitability
and cost-cutting measures is typical during economically soft times. Over the past seven years, BWRS has polled
C-level executives at large and midsize companies for their annual business goals. This year, the 350 executives
surveyed are mainly concerned with increasing revenue growth, in part by attracting new customers from new
and existing markets.
It's clear that adding incremental functionality that directly contributes to achieving these stated business goals in
a cost-efficient manner would have the highest business value. Indeed, ERP and other IT functionalities in a SOA
environment offer tremendous business value opportunities (see Figure 5, "ERP Value Contribution," on page 9).
Conclusion
Adopting this new, broader view of the value of enterprise application suite investments is an essential first step
in positioning enterprise applications as a source of distinctive capabilities and business process innovations.
Forward-thinking senior executives have been factoring greater flexibility and business agility into their investment
decisions for quite a while now, but it's time for a formal, institutional recognition of this practice.
For ICW, the SOA-based system was a critical investment, whether the numbers were there or not. "We had
underinvested over the years," Harris says. "That was making it challenging for us to be innovative and offer the
same types of services that our competitors are offering. Even if we did all the analysis in the world and we were
not going to make any money, we would have had to do it anyway."
Sponsor's Statement Software for Every Business, Every Process
With an objective of understanding more about how
organizations are evaluating investments in enterprise
applications during these tough economic times and to
support its own findings and experience, SAP partnered with
BusinessWeek Research Services to reexamine the role that
return on investment (ROI) and total cost of ownership (TCO)
play in these decisions. The findings indicate that leading
companies base their decisions on how well an enterprise
application can support them as they adapt new business
models, create optimized processes and sustain competitive
advantage during the toughest of economic times.
The overall goal for organizations today is to be able to quickly
adapt to a changing business environment. It is critical that
they have the flexibility to respond quickly-sometimes
overnight-to business change. Increasingly, SAP's software
design goals are oriented to support the customer's need to
respond to business change. For example, developing solutions
based around flexible frameworks such as service-oriented
architecture (SOA) and enabling customers to implement
business process innovation through "The Enhancement
Package" rather than a wholesale software upgrade provides
customers with the flexibility to adapt and innovate.
What will be some of the key characteristics of the next
generation of successful companies?
- Innovation inside and outside the traditional walls of the
company. Business networks will become increasingly
important, in stable and turbulent times.
- Quick development of new business models and the
ability to implement them effectively using software
tools and technologies.
- The ability to leverage best practices through prebuilt
integrations and business processes and the agility to quickly
meet the needs of a changing business environment.
- Continued focus on lower TCO while increasing business
continuity as a result of ongoing innovation, not bigbang
upgrades.
- Use of software to embody and present distinctive
capabilities to existing and new customers, business
partners and, last but not least, employees, as well as
the ability to retain high-performing employees.
SAP Business Suite: Software for Every Business and Every Process
Businesses large and small have discovered that SAP Business
Suite is the world's most comprehensive family of adaptive
business applications, providing best-of-breed, industryspecific
functionality for your enterprise. Our software is built
for complete application integration, unlimited scalability and
easy collaboration over the Internet.
Individually, SAP Business Suite applications help you
manage your most critical business processes. Collectively,
they form a tightly integrated business application suite that
adds value to every facet of your organization-and your
external value chain.
SAP Business Suite applications are based on the SAP
NetWeaver platform, an integration and application platform.
This reduces TCO across the entire IT landscape and supports
the evolution of SAP Business Suite applications to a servicesbased
architecture. The SAP Business Suite includes:
- SAP Enterprise Resource Planning (ERP)
- SAP Customer Relationship Management (CRM)
- SAP Product Lifecycle Management (PLM)
- SAP Supply Chain Management (SCM)
- SAP Supplier Relationship Management (SRM)
SAP Enterprise Resource Planning (ERP)
b SAP Customer Relationship Management (CRM)
b SAP Product Lifecycle Management (PLM)
b SAP Supply Chain Management (SCM)
b SAP Supplier Relationship Management (SRM)
SAP, the world's leading provider of business software,
offers applications and services that enable companies of
all sizes across more than 25 industries to become best-run
businesses. With approximately 75,000 customers, including
those from the acquisition of Business Objects, located
in over 120 countries, SAP is listed on several exchanges,
including the Frankfurt stock exchange and NYSE, under the
symbol "SAP."
For More Information
SAP's Web site offers an extensive collection of information
about how customers, analysts and others are looking at
topics like TCO and ROI. For more information about SAP
Business Suite go towww.sap.com.
Traditional formulas for calculating the value of integrated application suites
are expanding as enterprises discover a need to better account for the
upside growth potential and flexibility afforded by new technologies.
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