Creating a Realistic IT Spending Plan

Nov 01, 2004 10:30 PM  By

As a major capital investment, enterprise systems play a significant role in the corporate budgeting process for any direct merchant. No matter how you approach it — even if you outsource your operations or your marketing database or, ultimately, your entire information technology department — one way or another you are still going to pay the piper for essential IT-based functionality.

The budgeting process for enterprise systems is fraught with complications. Enterprise systems are software applications whose primary purpose is to support your specific business operations. They are distinct from “office” applications like word processors, spreadsheets, or simple database systems, all of which are examples of generic software designed for a wide variety of purposes.

Using this definition, even relatively inexpensive and specialized systems qualify as “enterprise” solutions if their purpose is specifically related to managing or evaluating your business processes.

THE GOOD OLD DAYS

Not so long ago (until the mid-1990s, in fact), the budgeting process was relatively straightforward, because the range of options and choices for enterprise systems was not as wide-ranging and wide open as it is today.

If you wanted to manage a catalog business, you would most likely select a single, comprehensive “catalog management system” to handle order entry, customer service, purchasing, inventory, fulfillment, customer database, and reporting. The biggest decision you had to make (apart from selecting a system that had the functions you needed to support your business rules) was whether you could afford a high-end mini-computer system or needed to stick with a less expensive package on a microcomputer platform.

If you were a fast-growing company and wanted to invest in a solution that could support your growth, that wasn’t always an easy decision. But it was far simpler than the range of options facing a similar company today. Take a contemporary $3 million direct marketing company that hopes to grow to $10 million in three or four years (ambitious, but certainly possible). Such a company has a number of questions to answer before it can make a reasonable enterprise systems investment. E-commerce options themselves are multidimensional. How will such a company manage its e-commerce site? Who will be responsible for it? Who will keep it updated? How will it be integrated with the call center system? What platform will it run on? How sophisticated will it be? Will it support customer self-service? What customer behavior tracking functionality will it have?

The same company might reasonably decide to turn to an application service provider (ASP) to outsource all of its catalog management system functions, which it would access in its own call center and fulfillment facility. Instead of buying software and the hardware to run it on and investing in staff to maintain it, the company would pay a fee to the ASP for each transaction, based on a sliding scale determined by transaction volume.

If the company wants to manage its own system, should it have a browser interface? Should it support Web services? How realistic is Linux, the freeware operating system, for such a company? And probably the biggest question: Should the system run on the popular Microsoft SQL/Server database, or on an alternative that some consider more robust?

Yet we’ve only scratched the surface of the range of options facing such a company in today’s marketplace. With so many choices and so many decisions to make, multichannel marketers are clearly in need of guidelines to lead them through a frustratingly complex budgeting process.

ESP

The key to determining a realistic systems budget is to develop an enterprise systems plan. The plan will help you to determine the kinds of systems you need to invest in, and how much you should expect to spend to achieve your objectives.

The ESP need not be a complex document. In fact, a two- or three-page outline is sufficient, as long as it specifies your most important operational objectives; the most important “enabling” functions you require but do not yet have; your current systems infrastructure; your IT staffing resources; the lifespan of current IT infrastructure; the types of solutions or functionality required to support the enabling functionality; your timeframe for implementing this functionality; your expected ROI on new systems investments; and your preferences for vendor support, in-house system development, and outsourcing.

There are a lot more elements that could go into an ESP, but these are the basics. The two that deserve further exploration here are the enabling functions and measuring ROI.

Enabling functionality is anything that supports — and enhances — current and planned business processes. Some typical enabling functions include better scripting in the call center, support for more complex offers, more streamlined order entry (reducing average order time), support for a loyalty program, improved management of multiple ship-tos, better B2B customer structure, more flexibility in fulfillment batching, more picking options, better multichannel customer integration, better analysis of Web browsing and shopping activity, and easier updating of prices, products, and data on your e-commerce site.

These are fairly generic examples. You will undoubtedly have more specific objectives related to your own business rules and requirements (such as EDI or other supply chain issues, for example).

BUSINESS REENGINEERING

Before discussing ROI, let’s take a quick look at another wild card issue in budgeting: business process reengineering, or BPR. There is a distinct “push — pull” aspect to BPR. On the one hand, you can take the position that a world-class system will incorporate best practices, and that if you are considering replacing a major enterprise solution, it is better to conform to its methods than to try to impose your own — particularly if you consider your own to be less than optimum.

On the other hand, there is an even more compelling position that no enterprise solution truly qualifies as world-class, and that the functionality for any system is an agglomeration of customized features and enhancements added to address the needs of the vendor’s user base, built around a relatively simplistic functional core. I think you will find that the latter is the almost always the case, although many companies hope that it is the former.

In either case, the chances of any new system meeting your own current needs are directly related to the complexity of your business. Even if you are looking to improve only one area, such as warehouse functionality or gift management (including a multichannel registry), in all likelihood you will be faced with the challenge of coping with some kind of a gap between what you expect to find in a system and what it will actually provide.

From a systems point of view, there are a number of issues involved here. But from a budgeting perspective, the challenge boils down to this: Do you “optimize” or “rationalize” your required functionality with respect to your total business, and independently of your systems search, or do you find the most qualified systems vendor and work with that provider to obtain an optimized solution?

Either way, you will be engaging in BPR. But here’s the rub: BPR done independently of your systems search may be putting the cart ahead of the horse. You may even end up paying outside consultants to design, say, a new and improved warehouse, only to find that no warehouse management systems vendor (or order management systems vendor) can support that design without extensive modifications. Such mods will not only add to the cost of the system, but could reduce its stability, supportability, and upgradability as well.

Of course, the problem is that if you rely on any one systems vendor to assist you in providing the “best” operations design, you have to wonder if what you are getting is only the best that that vendor can actually support.

ROI

Which brings us to the issue of return on investment. A well-chosen system should allow you to significantly increase revenue and/or decrease costs. It is unlikely to do that without some enabling functionality — allowing you to do things differently from how you do them now, or enabling you to do different and more productive things.

Obviously, you want to try to quantify the value of those enabling functions over time. In general, you can expect to earn back the cost of a system through its enabling functions in a reasonable period. For small systems this may be six to 12 months; for larger systems, the period could be three to five years. If it looks like this is possible, then you are making a wise investment.

Besides the software itself, of course, you need to budget for such things as the systems search, hardware, networking upgrades, vendor consultation services, data conversion, and vendor-sponsored training courses. Don’t skimp on training. It is the key to unlocking the treasure chest your new system represents.

And if a system is too difficult to learn, or alters your current methods too radically, it may be difficult to take full advantage of its breadth of functionality. We all know the drill: If you buy a fancy piece of equipment with dozens of features and functions, but only use a few of them, you have overpaid. As with most things, “Keep it simple” is the best advice.

Ernie Schell is president of Marketing Systems Analysis Inc., based in Southampton, PA, and author of The Guide to Catalog Management Software. He can be reached at (215) 396-0660 and ernie@schell.com.