When a large IT or omnichannel system is proposed, we always get two immediate questions from management: How much will it cost, and how soon can we get a return on investment?
Both are critical questions requiring serious study and consideration before proceeding with committing to these projects. The magnitude of the investment, the project management required and the time to implement should all be detailed.
In our experience with hundreds of omnichannel system projects, more than 50% of them cannot be cost justified based solely on headcount reduction. After detailed studies on the ROI, companies often still proceed based on a variety of needs including scalability; sunsetting prior IT systems; positioning for growth and future functionality; and integration across departments.
We’re not saying “just do it” because other companies are. A thorough ROI study will help you understand current vs. annual costs, total cost of ownership, implementation and what organizational changes will be encountered. These considerations can be applied to any information system (OMS, WMS, ecommerce, etc.) or technology project.
All omnichannel system project stakeholders should be involved in the ROI study and be committed to its benefits and savings. It should be headed up by the CFO or someone else in upper management, as it’s not solely an IT responsibility.
In its simplest terms, ROI is calculated by dividing the total gain (net savings) over a time horizon by the total investment. As you will see, there are many details that go into itemizing the tangible savings, intangible benefits and investment. ROI involves a payback period where the cumulative savings over time equals the total investment.
Identifying Project Costs
In this portion of the study, identify the hardware and related costs such as replacement or additional servers or hosting services, desktop equipment and handhelds or other wireless equipment for barcoding, shipping and manifesting.
This also includes all related software licenses and any third-party software, training, support and annual maintenance contracts and professional services. By far the largest category of expense is professional services for consulting and programming (implementation, conversion, configuration setup and integration).
These are the actual savings that can be expected from completing the project, and quantified when independently audited after implementation. Current business operational costs should be contrasted with new business costs using the new system. How do these costs change in each major area or department? A simple illustration of one area, IT department cost changes, is shown below:
Internal IT Department Costs
|Current||New System||Annual System Cost||Cost Savings|
|New hires with IT skills|
|Replace user workstations|
|Annual vendor support|
Here are some general examples where hard savings might be quantified. Some other questions to consider:
- What actual labor savings will be realized once the system is installed?
- How will operations costs decrease?
- How will inventory accuracy improve?
- Will the system result in improved inventory turns?
- How will errors be reduced and what are the savings?
- How will capacity be increased?
- Will there be greater throughput in terms of orders shipped per hour?
- Is there a one-time cash flow improvement?
Intangibles Easier to Identify
Intangibles are the many benefits that can be expected from an omnichannel system implementation that can’t be neatly quantified. Most ROI studies have a long list of intangibles. But just because you can’t put a dollar savings on the benefit doesn’t mean it doesn’t add business value. Examples include ease of use for associates, improved customer service, better marketing analysis and improved integrations or interfaces with other systems.
Can You Get Benefits Another Way?
Through your ROI study, you may find problems that can be solved in a number of ways without the desired new application. Management will want to make a decision about pursuing these projects in advance of the new system to gain benefits, vs. including them in the implementation.
When Will Savings Materialize?
Build an objective audit of the project costs, savings and intangibles into the project plan. Secondly, recognize that after a lengthy implementation like an ERP for instance, it often takes six months or longer for the organization to fully utilize the system and reach productivity, which will lengthen the payback period.
Performing an ROI study takes time and effort. But its value lies in giving management a clear vision of the tangible savings, intangibles and organizational benefits and ultimately, whether the project can be cost justified.
Brian Barry is president of F. Curtis Barry & Company