Remember the good old days when your IT budget was limited to buying a few new PCs and your strategy involved making sure they all switched on in the morning? Today, the IT budget is spent acquiring technology that is both fundamental to the operational running of the business and also an intrinsic part of the business strategy itself.
The challenge for SMEs is delivering and demonstrating the benefit they are getting from their technology investments. There are any number of tools on the market that profess to measure the return on investment (ROI) of technology projects. These use a variety of sophisticated and complicated techniques, from balanced scorecards to applied information economics. Fundamentally, though, ROI comes down to one question: does the benefit delivered by the technology measurably outweigh the costs involved in delivering it?
In many cases, smaller companies don’t have the same technical expertise as bigger companies. This can make shopping for technology projects a minefield, says Mick Hegarty, General Manager, BT Business. “The technology marketplace is filled with jargon, more companies are selling more products than ever before, and everything changes so quickly,” he says. “But at the same time, SMEs know they need technology to enable them to work in new ways and compete more effectively in their markets.”
For this reason, SMEs often purchase products that aren’t quite right for their business and fail to achieve a ROI, adds John Coulthard, Head of Small Business with Microsoft UK. One problem is that SMEs tend to buy technology products piecemeal, and don’t have an overall view of their technology ‘architecture’. This can introduce costs to the business rather than reduce them. Coulthard says, “SMEs often end up duplicating processes or information, or perhaps end up with shelfware, products that are still on the shelf in their boxes a year later because nobody really wanted them,” he says.
So how do you ensure that the investments your company makes in technology are the right ones? The first step is to stop thinking about technology altogether. The key to successfully choosing technology products is to only think in terms of your particular business problems and needs. Do you need more contact with customers? Do you want to reduce the amount of time it takes to process customer orders? Do you need better marketing?
Once you have identified your business goal, map out the existing process and consider how it might be improved. “If it helps, literally draw out the process on a big sheet of paper and look at where steps could be removed,” says Hegarty. “If you need advice, take the sheet to Business Link or to your accountant, ask how they would make the process more efficient. One way may be by using technology – and that’s when you start to think about IT.”
In the very early stages of a technology project, don’t assume that you can only talk to your local advisors and resellers. “A lot of SMEs think somehow they aren’t important enough to talk to someone like HP or Dell,” says David Smith, General Manager of HP’s Small and Medium Business Unit. The problem with relying on local resellers or Internet retailers is that you may end up buying a load of cheap kit, without realising the full benefit of technology to drive the business, Smith says. “Technology is the fastest depreciating asset in a company, and buying a load of PCs isn’t a particularly good way to get ROI. You should be looking for the wider perspective, and vendors can often help with that.”
Increasingly, enterprise technology vendors are scaling down products and prices to meet the needs of smaller customers. IBM, Microsoft, HP and Oracle are among the high-end vendors who now offer scaled-down versions of their enterprise products at vastly reduced prices. You can also take advantage of flexible pricing and leasing models to reduce the upfront cost of new technologies. HP, for example, offers small businesses the opportunity to sell their existing IT systems at book value and lease new equipment at a fixed monthly price based on the number of users. “This enables SMEs to retain their working capital, and benefit from newer technologies,” says Smith. “They also have a fixed monthly cost, which makes it easier to plan financially.”
When selecting technology products, companies commonly confuse lower price tags with lower cost. In fact, the upfront cost of technology products typically account for only a third of the total project costs. In the case of software, pricing is even more deceptive, as licenses account for only 14% of total project costs.
Economies of scale
The most expensive element of technology after the upfront investment is support costs. Many small businesses will need to pay third parties to support their IT systems because they don’t have the resources or expertise to do this themselves. In general, this is a good idea – service providers and resellers benefit from greater economies of scale and outsourcing support is usually cheaper for businesses.
However, don’t sign the first service contract you see, cautions Hegarty. Annual support contracts can easily add 20% to the total licence fee, and companies should negotiate hard for added extras. Consider whether you need all the support your supplier offers. “If the server goes down and you have to wait 24 hours for a repair, ask what it costs the business,” says Hegarty. “If it’s unlikely to happen, and costs only a bit more than the cost of the service, it may be worth cutting it out.”
Once you have calculated the best possible costs for a technology investment, you are ready to look at the returns the technology could deliver. Here, it is vital to include only those benefits that you can measure as delivering a dollar value to the business. Customer service agents may be able to use a new remote access server to work from home, but will this save the company any money? Will a mobile sales rep be able to book more orders or collect payment more quickly as a result?
There are common mistakes that companies of all sizes make when calculating return on investment [see box]. But the most common one for small businesses is assuming that saved time or faster processes are always beneficial. “If you save people 15 minutes and they spend that time having a cigarette break then it isn’t exactly beneficial to the business,” says Microsoft’s John Coulthard. “If you want to see whether your new systems are really delivering, you have to be a bit ruthless.”
Eight points to remember
- Use a consistent metric to measure the benefit of IT. This can be as simple as appending ‘as measured by’ to all your benefit statements.
- Think of return on investment (ROI) in business terms. Refer to projects as the ‘modernising customer service’ initiative rather than ‘the new CRM software project’. This will help educate the company – especially the board – about the reason for the investment.
- Appoint one person who is accountable for each claim made in an ROI case.
- Consider the impact of a technology deployment on all aspects of the business, not just the department where it is being rolled out.
- Incorporate risk into your calculations. It may reduce the benefits of a project by more than 10%.
- Don’t assume that time saved is money saved. This only works if you can usefully fill that time with profit-generating activities.
- Don’t count cumulative benefits. Ten projects which each cut costs by 10% don’t result in 100% cost reductions.
- Don’t build ROI models over 10-year periods. As a rule, three- to five-year analysis is appropriate.
Case study – Paperhat
When a company buys financial software for an office of just 15 people, you don’t expect them to invest in exactly the same technology used by retailing giant Sainsbury. But that’s exactly what Paperhat, a print sales company, did.
Paperhat recently completed the rollout of Oracle E-Business Suite Special Edition, which will manage all its accounts processes. Initially, the choice was surprising even to Paperhat’s Chief Executive, Tim Peppiatt. “We always had to compete with companies using enterprise software but assumed we couldn’t afford it,” he says.
However, Paperhat discovered that the Special Edition Oracle software (which includes licenses, hardware, services and education) was actually cheaper than alternative packages because it was a fixed cost and highly scalable. The company was able to use the money saved on the upfront costs to buy a bespoke front-end portal for the application.
The software has enabled Paperhat to move to web-based ordering and financial management. Return on Investment should be achieved within a matter of months, Peppiatt believes. In the future, the software will pay for itself many times over in scalability, he adds, “We’ve done some sums and this software could scale up to us being a $500 million company,” he says.
However, there are challenges when you’re a small customer. Paperhat found it difficult simply to find out about what products were available and, with only one part-time IT manager, struggled to understand the industry’s jargon. “We couldn’t have found out about this product on the website, we had to go and speak to someone at Oracle,” Peppiatt says.
Although the project has achieved ROI, Peppiatt believes there is always an element of chance for SMEs. “You can estimate things like manpower and time, but you can’t predict how your revenues will change. Anyone who says they have an absolute ROI plan is lying,” he says.
Click here for Part One of the SME supplement >>