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"Sage provides business software, services and support to small and medium sized businesses. Whilst our heritage
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and larger organisations."
Source : Sage
Realizing Enterprise ROI through Sage MAS 90, 200, and 500
Sage Software
ROI is also known as :
Return On Investment,
ROI,
Rate Of Return ,
ROR,
rate of profit,
ROP,
return,
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validation ROI,
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What is ROI?,
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measure return on investment,
Total Cost Of Ownership,
TCO,
IRR,
Internal Rate Of Return,
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TABLE OF CONTENTS
- Sage MAS 90, 200, and 500 ROI Study in Distribution Companies
- About the Gantry Group, LLC
- Abstract
- Methodology
- Business Benefit
- Industry Sector Overview
- Customer Challenges
- Sage MAS 90, 200, and 500 Address These Challenges
- Sage MAS 90, 200, and 500 ROI Scorecard
- Total Benefit
- Total Investment
- ROI Methodology
- ROI Scorecards
- Benefit Analysis
- Overall Analysis
- Notes
Sage MAS 90, 200, and 500 ROI Study in Distribution Companies
About the Gantry Group, LLC
The Gantry Group is a strategic advisory and custom market intelligence firm. They
apply primary market research to help companies cost-effectively accelerate the
successful market adoption of their products and services'both online and offline.
Gantry Group has helped over 165 client companies drive sales, acquire new
customers, increase brand equity, and increase customer lifetime value through our
market analysis, marketing testing, and ROI/TCO benchmarking service suites.
Gantry Group creates customized market research studies to better understand
customers' needs and experiences. They use both qualitative and quantitative
techniques, including online and traditional surveys, focus groups, and one-on-one
interviews. Gantry Group benchmarks a client company's opportunity and competitive
landscape, and their offering's ROI impact on its target market. The result is a
quantified value proposition that is crisply differentiated within a receptive market.
Today more than ever, companies are looking for near-term return on investment in
this overall budget-constrained climate'and the sooner, the better. Successful
solution vendors must now use a much more analytical approach to selling.
Customers want assurances that an investment will pay for itself over an acceptable
time period'either by increasing the top line, decreasing operating expenses, or
both.
The Total Cost of Ownership, or TCO, is a vital ingredient to any rigorous ROI
calculation. TCO informs prospects and customers as to the economic benefits an
offering brings AFTER they subtract out the cost of an offering. A TCO calculation
requires a vendor to work closely with customers to discover underlying cost drivers
that may not be apparent on the surface. A technology product for example, may
require new infrastructure investments and the hiring of new skills that its operation
may require. New business processes that must be put in place to accommodate a
new system may require training and support. The lifetime of some technologies must
be factored into TCO to reflect the replacement cost of new units when old ones fail.
The Gantry Group designs custom TCO and ROI studies to help companies
communicate factual quantified value propositions to prospects and customers.
Based on in-person interviews, Gantry Group first designs custom ROI and TCO
calculators to comprehensively profile the impact equation of a company's offering.
Using such tools, Gantry Group then conducts online and in-person studies to
consistently profile ROI/TCO across a carefully selected sample of participating
companies. Gantry Group has equipped many product and service firms with credible
TCO and ROI models that communicate value in the terms of the business metrics
that customers and prospects use to access the performance of their own companies.
Their executive team of experienced business executives combines deep operations
experience with proven strategic planning, research methodology and market
intelligence to grapple with the most challenging business goals and problems. Gantry
Group works with CEOs, senior marketing and sales executives in technology,
financial services, health care, and retail sectors. The company can be reached at
978-371-7557 or www.gantrygroup.com.
Abstract
Sage Software, a leading provider of business information management solutions,
has known for several years that implementation of our Sage MAS 90, Sage MAS
200, or Sage MAS 500 ERP software systems results in significant enhancements in
productivity, efficiency and streamlined business processes. The net benefits of the
deployment and use of these products in distribution businesses has been
documented in numerous case studies (www.sagesoftware.com), which illustrate both
increased revenues and cost reductions, or even cost eliminations. These benefits
significantly over-shadow the investment in the software solution itself and are
typically realized in the first year of deployment.
Sage Software engaged the Gantry Group to conduct an objective ROI study to
quantify the net business impact of Sage MAS 90, 200, or 500 solutions. Gantry
Group has developed definitive ROI tools that address the unique business benefits of
software to wholesale goods distributors. This white paper explores experiences of
Sage MAS 90, 200, and 500 distribution customers.
Methodology
By conducting objective interviews with Sage Software's distribution customers, the
Gantry Group developed a realistic, payback-modeling tool that measures the ROI impact
that a deployment of Sage MAS 90, 200, or 500 has on key business metrics and cost
drivers. Nine distribution companies contributed to the development of this quantitative
cost/benefit tool.
To ensure that the ROI model is conservative and credible, the Gantry Group
identified only tangible costs and benefits that can be directly measured. No estimate-
based assumptions of intangible benefits were included in the model. Customer input
was thoroughly crosschecked to protect against "double-counting" and inclusion of
cost savings that were theoretical but not realized.
However, non-cash benefits were captured and are included as a line item in the ROI
Scorecard, although they were not used in the ROI calculation.
Business Benefit
The companies profiled in this case study realized, on average, actual ROI of 7,000
percent over a three-year time period, with payback occurring in less than eight
months. These organizations shared a common set of challenges, which drove the
adoption of one of the three Sage Software solutions:
- Inconsistent, questionable data in various business units
- Costly manual data entry into systems
- Duplication of data entry for non-integrated systems
- High inventory overstock
- Lengthy inventory reconciliation and end of month closing
- Inability to scale legacy systems
- Frequent errors and delays between customer order and customer
shipment
- Delays in action and problem resolution
Deployment of Sage MAS 90, 200, or 500 resulted in direct, tangible benefits derived
from:
- Seamless data flow due to integration of systems
- Reduction of staff or re-utilization of existing resources
- Improved sales and repeat sales
- Increased transaction volume through the business
- Reductions in inventory overstocks and increased inventory turns
- Reduction in payments to third-party accounting firms
- Reduction in payments to outsourced IT firms to handle data loss and
down time incidents
- Reduced average days outstanding of receivables and shorter collection
times
- Decreases in returned merchandise and inventory scrap costs
- Decreases in redundant IT infrastructure
Industry Sector Overview
Wholesale distribution includes a broad range of businesses, from consumer goods to
the recycling of business assets. However, distribution companies all have some
common operating characteristics. These include:
- Sales through various distribution channels ' There are two main
sales channels for wholesale distributors: direct-to-consumer or business-
to-business. Not all distributors have both sales channels. While sales
processes can vary between the two, there are also many similarities.
- Maintaining inventories ' Inventory asset management is a primary
focus of operations. In a highly competitive market, distributors are
constantly looking for low-cost suppliers. Inventory turns are also a
concern, as is maintaining accurate costing and pricing for a complete
profitability picture.
- Real-time decision making ' Throughout a given day, customers
frequently need immediate access to historical or current data concerning
the company's operation. As a result, there is a pressing need for fast
generation of reports or online inquiries.
Customer Challenges
No matter what specific items are being distributed, businesses are typically faced
with a set of common challenges that drive the costs of their business activities.
These include:
- Inconsistent, questionable data across the business ' when multiple
software systems are being run for different business processes in the
workflow, companies often find it difficult to reconcile inventory, or
shipments do not align with sales orders.
- Costly manual entry into systems ' for those businesses that have not
automated all their information systems, doing manual entry is costly and
time-consuming. Many hire temporary staff to do this task while others
outsource.
- Duplication of entry for non-integrated systems ' even companies
with automated business systems sometimes are running multiple
software packages that are not interoperable. As a result, some data
must be entered in duplicate, which creates delays.
- Unreliable processes to transfer sales orders to shipping ' many
companies still post sales orders on a board in shipping area. These
processes are inherently unreliable and result in missed customer orders
or inaccurate shipments.
- High overstock in inventory ' without visibility into the inventory
systems, companies do not know the status or availability of finished
goods. As a result, purchasing personnel often overstock to avoid
shortfalls. This results in overbuying and unnecessary inventory-carrying
costs.
- Lengthy inventory reconciliation and end of month closing '
inventory reconciliation is a lengthy process in a non-automated
company. As a result, period-end closings can require that the entire
business information system be frozen until all accounts are reconciled.
- Inability to scale the volume of existing MIS systems ' some
companies find that they cannot scale their automated information
systems to meet the demands of their growing businesses. As transaction
volume increases, many software systems grind to a halt or have
unacceptable delays to accomplish everyday tasks like generating
reports.
- Customer satisfaction issues ' delayed or incorrect orders can mean
customers will quickly go elsewhere for product. The ability to fulfill orders
accurately and on time is highly correlated with repeat sales.
- Delays in action and problem resolution ' without immediate access to
historical and current customer data throughout the business, customer
service representatives are challenged to resolve customer queries fast.
This is true not only for customers but for any employee or manager with
a question about the business.
Sage MAS 90, 200, and 500 Address These Challenges
The implementation of Sage MAS 90, 200, or 500 can have an immediate effect on
many of the challenge areas listed above. Once staff members are trained and the
data migration from a prior system has been completed, businesses can begin
benefiting right away. Areas of benefit include:
- Seamless data flow due to integration of systems ' when software
systems are consolidated into a single solution, business processes are
interconnected with data that is reliable and consistent. Data is timely and
easily accessible so businesses are able to take on more transactions
than with previous systems.
- Reduction of staff or re-utilization of existing resources ' businesses
find that increased productivity and elimination of the need for manual or
duplicate data entry enables them to reduce staff, reshuffle employees to
other needed positions, or to hire fewer additional staff to support growth.
- Improved sales and repeat sales ' with dependable, streamlined
business processes, businesses can process more transactions.
Additionally, repeat business increases as customers realize the
distributor is dependable. Finally, there are some customers who require
unique reporting, notification, and reconciling procedures from their
distributors.
- Improved sales due to better stocking ' some companies are able to
remove products that do not sell well and replace them with goods that
sell faster. With new visibility into their inventory, businesses can track
and reduce slow-moving products, enabling them to increase sales.
- Reductions in inventory costs due to more accurate purchasing '
when companies have an accurate view of current stock and forecasted
demand, they can purchase only what they need when they need it. The
resulting increase in inventory turns means less cash is tied up in
inventory at a given time. The benefit to the company is equivalent to the
cost of capital of that cash.
- Reduction in payments to accounting firms ' because Sage Software
products fully integrate distribution operations with accounting functions,
there is less need to outsource bookkeeping. That allows companies to
leverage their accounting partner for strategic financial advice rather than
daily transaction processing.
- Reduction in outsourced IT ' without scalable business process
software, companies have often lost critical data or experienced crashes
as systems attempt to keep pace with business transactions. These
companies usually end up hiring expensive IT experts to help them
recover data. The Sage MAS 90, 200, and 500 software solutions help
businesses avoid these costs.
- Reduced receivables ' another benefit of an integrated, automated
business information solution like Sage MAS 90, 200, or 500, is that invoices
can be processed faster. With accounting personnel freed from wrestling
with the system, they can stay up on outstanding receivables and make
timely collection calls, all of which act to reduce the number of days
outstanding for receivables. The benefit to the company is the increased
interest on the cash as it comes in sooner.
- Decreases in returns and waste ' for some companies, returned goods
equal waste or scrap. Increased accuracy of customer orders due to the
integration of business processes from Sage MAS 90, 200, or 500, can
reduce the number of returns (i.e. waste) from incorrect order fulfillment.
- Decreases in redundant IT infrastructure ' many companies have
been running automated information systems on multiple software
platforms and multiple hardware servers. With Sage MAS 90, 200, or 500,
they can consolidate their systems and eliminate annual software and
hardware maintenance fees from redundant systems.
Sage MAS 90, 200, and 500 ROI Scorecard
There are key determinants that are common to any company implementing Sage
MAS 90, 200, or 500. It should be noted that business metrics used to determine an
ROI Scorecard vary somewhat with the particular industry.
This model uses textbook algorithms for measuring ROI and ROI as a percentage for
a given time period:
ROI = Total Benefit ' Total Investment
ROI (%) = Total Benefit/Total Investment
This model measures ROI over a three-year time period, paying particular attention to
the returns realized the first year after Sage MAS 90, 200, or 500 deployment and the
cumulative effect after three years.
Payback Period computes the time period required for the enterprise to recoup its
software solution investment.
Three-year ROI is calculated by taking the Net Present Value of the three-year net
cash flows, using a discount rate equal to the 30-year T-Bond rate (3.46%).
Total Benefit
Total Benefits realized by the implementation of the Sage MAS 90, 200, or 500
solution are calculated as follows:
Total Benefit = Increased Revenues + Cost Savings (include avoided costs)/
- Increased Revenues are sales directly attributable to the application
implementation and are derived from the following factors:
- Increased transaction volume due to the acceleration of the
business process following the software deployment
- Sales dependent upon enhanced reporting capability that
would not otherwise have been closed
- Higher capacity utilization resulting from fewer delays and
streamlined business processes
- Cost Savings are derived from savings that directly result from the
application deployment. In addition to reductions in existing expenditures,
the implementation of Sage MAS 90, 200, or 500 also leads to elimination
of some costs. Note that labor cost reductions that do not result in staff
eliminations are not included in the ROI calculations as the affected
employees are simply redeployed within the organization (i.e. there is no
net increase in cash to the company).
Cost reductions that result directly from the use of Sage MAS 90, 200, or 500 are
numerous and generally not all quantifiable within a given company. Key categories
for cost reduction include the following:
- Increase in inventory turns per year after implementing the Inventory
Management module of Sage MAS 90, 200, or 500, results in a net cash
increase to the company because purchasing staff are no longer over-
buying to avoid out-of-stock delays. The net cash benefit is equal to the
saved cost of capital outlay.
- Reduction in inventory carrying costs including pricing, storage, and
counting, results in cheaper cost of capital on the money the company
would have otherwise spent on these activities.
- Reduction in average days receivables and a shorter collection cycle
can be achieved once the Accounts Receivable module of the software is
implemented, giving the company an opportunity to earn interest on
money deposited sooner than it would have been before the
implementation.
- Decrease in returns and waste results from an increased accuracy of
picking and shipping.
- Reduction in staff required (or avoidance of need to hire more)
affects both direct and indirect labor costs and is a direct result of the new
efficiencies that are created with implementation of the software.
- Reduction in accounting fees stems from the reduction in need for
accountants to be as closely involved with operational accounting issues.
Post implementation in-house staff can handle many of the outsourced
accounting activities.
- Elimination of redundant IT infrastructure will result in savings on
maintenance charges made to the software or hardware provider that is
eliminated due to consolidation of systems post-implementation.
- Cost savings from manual or duplicate entries converts into direct and
indirect labor cash savings if these tasks are performed by temporary
employees or outsourced. However, this item is not used in the ROI
calculation if staff members perform the tasks in question in-house.
Time savings are quantified non-cash benefits derived from reductions in general
productivity improvements, efficiency in accounting activities, and other components
of the workflow resulting from the software deployment. Time savings are very
important benefits but as they do not result in measurable cash benefits to the
company, they are not included in the ROI calculation. They are, however, captured
and entered as a line item on the ROI scorecard. Sources of time savings include:
- Faster resolution of issues due to transparency, resolving issues
much quicker due to advanced querying capability of the software. This
effect can also be measured through the more general overall indirect
labor time savings from transparency, integration, and ease of use of
the software.
- Faster closing of accounting periods and other reporting requirements
can be achieved after the implementation of the General Ledger and
Accounts Payable modules.
- Faster order processing can be attained if the Sales Order module is
implemented.
- Faster payroll processing may result after installation of the Payroll
module.
- Faster inventory reconciliation can be achieved if the Inventory
Management module is implemented.
- Decreased time to reconcile bank statements can follow after the
implementation of the Bank Reconciliation or Cash Management
modules.
Total Investment
Total Investment is calculated as follows:
Total Investment = Software License Costs + Training/Support Costs +
Customization/Implementation Costs + IT Costs
- Software license fees include the initial capital outlay for the user
licenses.
- Training and support costs include the training and support services
provided to the company by either Sage Software or the reseller. At
times, companies may choose to buy technical support packages from
both the reseller and Sage Software. Annual maintenance fees from Sage
are also included to support upgrades and FAQ access.
- Customization and implementation costs include annual fees charged
by resellers. The customization fee comprises the cost of customizing the
Sage solution to fit the unique needs of a given client. The fee for
implementing the software is usually a one-time installment in Year 1.
- Additional IT costs include the costs of any additional servers and/or
hardware required for implementation of the Sage solution. This charge
varies greatly from client to client based on their internal setup and
infrastructure. These IT costs are usually charged in only Year 1.
ROI Methodology
Sage Software retained the Gantry Group, LLC to develop an ROI Scorecard Tool
tailored to the deployment of Sage MAS 90, 200, and 500 in companies in the
distribution business.
Gantry Group employed a structured methodology to collect quantitative ROI metrics
via interviews with companies implementing Sage MAS 90, 200, and 500 applications
as part of their business process automation solution. The ROI Scorecard focuses on
direct and indirect quantitative ROI components; qualitative, intangible components
were not modeled due to the possible inaccuracy they might introduce.
The ROI Scorecard is based upon data prior to software implementation as compared
with the same business metrics 12 months, 24 months, and 36 months following
deployment. The ROI calculation considers the costs associated with one, discrete
deployment within the enterprise. If additional modules were purchased and deployed
in the three time periods following initial deployment, costs and benefits associated
with follow-on units were not included. Therefore, the ROI calculation has a single
start date upon which the three future time periods are based.
For each of the three future time periods, the ROI tool calculates ROI as the
difference between the investment and benefits for the period. The ROI, expressed as
a percentage return, is calculated by dividing the total benefits by the total costs for
each of the three time periods. The three-year ROI is calculated by taking the Net
Present Value of the three-year net cash flows, using a discount rate equal to the 30-
year
T-Bond rate (3.46%).
ROI Scorecards
Benefit Analysis
The data collected from the ROI scorecards of the 10 respondents gives a clear and
relatively consistent picture with regards to the benefits derived from the
implementation and utilization of the software. As was mentioned above, the study
captured the total benefits for the next three years; thus, the average benefit analysis
presented below is the average net present value of the derived benefits for the next
three years across the 10 participating companies.
The bulk of the total benefit of Sage MAS 90, 200, and 500 is realized through cost
savings. As the graph below indicates, the cost savings account for an average of 64
percent of total benefits. Increased revenues comprise an average of 23 percent.
Furthermore, on average, 13 percent of the total benefit is attributed to the non-cash
time savings. It is important to note that one interviewed company was able to achieve
IT savings after the implementation of the solution. However, this kind of benefit was
an exception, and was not included in the overall analysis.
Note: While non-cash savings from productivity enhancements is included in the
benefits pie chart, that figure is not included in the calculation of the ROI.
Cost Analysis
Consistent with Benefit Analysis, the net present value of cost considerations of a
Sage MAS 90, 200, or 500 deployment is calculated summarizing the costs to be
incurred by interviewees over the following three years. After comparing the average
costs associated with the purchase and implementation of the software, the Gantry
Group discovered that on average Software Cost and Customization/Implementation
Costs each account for some 29 percent of total average expenditures, $37,487 and
$37,302 respectively. Training/Support and IT costs account for the other $24,152
and $28,438 respectively.
Overall Analysis
The summary of the key findings is presented below. Based on the research data,
Gantry Group found both the increased revenues and cost savings effect of the
software deployment are spread out almost evenly across Year 1, Year 2, and Year 3,
after implementation. As mentioned above, cost savings comprise the bulk of the total
benefits experienced by the companies studied. On average, interviewees
experienced a $223,809 reduction in costs in Year 1, $232,158 reduction in Year 2
and $241,256 in Year 3. In addition, the companies' revenues increased by an
average of $85,000 in Year 1 comprising approximately 1.5% of the total projected
revenues for that year. Respondents accumulated $73,650 and $83,529 in increasing
revenues in Years 2 and 3 respectively.
An analysis of the investment required to deploy Sage MAS 90, 200, or 500 shows
that the bulk of the costs associated with the implementation occurs in Year 1. This is
consistent with the front-loaded investment structure of any business software of this
type. The average total investment in Year 1 was $105,458 across the nine
participants of the study. It is important to note that the costs faced by the companies
in Year 2 and Year 3 were as little as $12,490.
In monetary terms, the Return on Investment in Sage MAS 90, 200, or 500 across the
respondents, averages to $203,350 in Year 1 and remains relatively steady at
$293,319 in Year 2 and $312,395 in Year 3. Therefore, the firms recouped an
average of 501 percent ROI in Year 1, 3,641 percent ROI in Year 2 and 3,828 percent
in Year 3. While the average payback period is around 7.4 months, the periods varied greatly based on the
individual company in the study. The shortest payback period among the
interviewees is less than 1.4 months, while the longest is 19.8 months.
The Net Present Value (NPV) 3-year ROI based on this study is $759,794.56.
Notes
It is important to follow the ROI guidelines described below in order to calculate an
accurate ROI analysis. It should be noted that this ROI model is tuned to specific
business metrics for distribution companies.
- The ROI model discussed in this document is highly quantitative and
focuses on actual, tangible business performance metrics. These
performance metrics are specific to distribution companies implementing
Sage MAS 90, 200, and 500 software solutions. Every effort to maintain
the integrity of the calculation and rigor of the model has been made to
protect against "double counting" of benefits and incomplete assessment
of total costs.
- Users of this ROI model should exercise caution when providing data on
labor savings. Only those labor savings that actually result in staff
reduction should be included in the model.
Other tangible, but non-measurable business metrics, should also be
input with care. In particular, increased inventory turns means that
materials have less risk associated with sustaining unexpected damage
and incurring unknown liability. Unless users can actually track liability
data and have quantified risk, these factors'though significant if
incurred'should not be included in the ROI calculation.
- When using this model, managers are encouraged to carefully assess
each of the ROI components'whether costs, savings, or revenues. In
many cases, the business metrics listed in the model will not all be
applicable, while a given company may not even measure others.
- The software investment section is divided into four cost categories:
- Initial per license software cost
- Training and ongoing support costs
- Custom software development and implementation costs
- Hardware and other infrastructure costs
In this study, The Gantry Group conducted personal phone interviews with
representatives from nine (9) companies that have already deployed Sage MAS 90,
200, or 500. While every company is involved in distribution, they represent a wide
range of industries. Below is a summary of the study participants. Please note that
each company is at a different stage of the implementation process.
56 Technology Drive
Irvine, CA 92618-2301
800-854-3415
Sage Software