Don't rest your case

Anyone Involved in selling high-value capital items - enterprise software, for example - knows that life can be a rollercoaster. One day everyone is on a high when a major deal is in the bag. The next

Losing out to another vendor is an accepted part of the game. More annoying is the situation where you have been told you are the preferred supplier and then, after all the euphoria, nothing happens. Any inquiry typically reveals that the project is "still with the board" or has been "put back until next quarter". The reality is that it's a dodo; kicked out because the project team in question failed to build a compelling business case for the investment and the money has gone elsewhere. But the vendor still has only itself to blame. It should have identified that funding for the project had not been authorised, and it should therefore have helped the project team to improve its case.

In the 1990s organisations invested heavily in enterprise resource planning (ERP), and customer relationship management (CRM) systems. Now the focus of much IT spending is predicted to switch to corporate performance management (CPM) suites that integrate previously stand-alone application areas such as budgeting, scorecards and costing to provide better insights into current and future financial performance. But a lot has happened in the past decade. Many organisations invested heavily in ERP and are still not convinced of the benefits. The Meta Group recently researched the total cost of ownership of an ERP system over the first two years of implementation. The IT analyst surveyed 63 firms of all sizes in a wide range of industries and found the average bill to be $15 million. But there was a payback: the study found median annual savings of $1.6 million after 31 months. On that basis, it would still take nearly a decade for the investment to break even.

Such experiences, together with the downturn in most western economies, have depressed companies' IT spending. Boards are right to be sceptical about further investment opportunities. This puts the onus on project teams seeking to secure funding for CPM initiatives to develop a credible business case with a break-even point that comes sooner rather than later.

Step one is to identify the total cost of ownership year by year over a suitable period. Apart from including the obvious cost of software, hardware, professional services and training, it is important to take the cost of internal staff into account.

Step two is to quantify the benefits. For instance, most of the quantifiable benefit of implementing a new budgeting application is likely to come from a reduction in resources needed by the finance department. If budgeting is done using spreadsheets, it's likely that there's an inordinate amount of work involved in preparing schedules, chasing submissions and re-keying data. A new system will remove much of this work, and these savings should be eosted and included in the business case. The cost saving of one part-qualified management accountant over five years will put you well on the way to breaking even.

At the same time, implementing a new budgeting system is likely to reduce the amount of time it takes line managers to prepare and review their budgets. The opportunity cost of saving three working days a year for 200 cost-centre managers with an average benefits package of 40,000 is sizeable. I calculate this to be a saving of more than 500,000 over five years. Once the annual costs and benefits have been identified, they can be discounted at an appropriate cost of capital to give a net present value (NPV) and a break-even estimate.

Your vendor can put you in contact with other organisations that have made similar implementations. They will be able to give you some idea of the potential savings. Alternatively, if your firm subscribes to an analyst group, it will have a specialist in CPM who can provide guidelines on the likely benefits.

The results can be impressive and investments can break even in a matter of months rather than years, even when some of the more questionable cost savings are excluded. But be transparent with your assessments, presenting a range of scenarios showing a good outcome, a poor one and the most likely result. It will help your credibility, especially if your most pessimistic scenario is still positive.

If you have clearly demonstrated the potential cost savings, all the other less quantifiable reasons for implementing a new budgeting application are likely to win the day and help to secure the funding. For instance, implementing a budgeting system that allows the organisation to reforecast more frequently is likely to result in more accurate forecasts. It's also likely to allow managers to realign resources more rapidly to suit changing patterns of trading. Showing the board exactly how implementing monthly rolling reforecasts will enable line managers to manage their capacity better may be more compelling than simply demonstrating a positive NPV.

Once the implementation is complete, the costs and benefits should be reviewed fully to check that the forecast savings are being achieved. Giving this feedback to the directors will reassure them that they made the right decision and make it easier to secure funding next time around. Don't forget to include a review of other benefits, such as the way your firm can now reforecast every month, and include cases showing how this has directly benefited individuals. Once the cost savings have been identified, the other benefits suddenly become much more important.