Jim Maholic, Business Value Services, Oracle, wrote about how to align ERP Cloud benefits with business drivers when building a business case for why your organization should implement ERP Cloud.
When building a business case for ERP Cloud, project managers should look beyond the standard ROI and TCO calculations that IT teams have historically relied on. One of the biggest challenges for project managers is thoroughly identifying all of the benefits of a proposed project and ascribing credible, tangible, financial and business value to those benefits. This is critical to a successful business case.
4 Major Business Drivers
It is crucial that your business case shows that your ERP Cloud project will produce benefits in excess of the cost. Maholic explained that there are really only four compelling business drivers:
- Increasing top-line revenue or sales
- Decreasing expenses
- Optimizing assets
- Mitigating risk
Identifying and categorizing these business benefits doesn’t have to be difficult if you align your thoughts with an age-old graphic called the DuPont Model, which is shown below.
The DuPont Model was created in 1917 by F. Donaldson Brown of DuPont as a way to better understand business drivers.
When using the DuPont Model as the basis for your benefit alignment, you can easily see how things flow. Starting on the left-hand side, the ultimate goal of any capital (or large operating expense) investment is to increase shareholder value. Using this diagram, you can see how much each of these business items favorably influences shareholder value by looking at the arrows.
Maholic tied the DuPont Model into the discussion of the four major business drivers that he identified and how to align ERP Cloud benefits with those business drivers.
Increasing Top-Line Revenue or Sales
All businesses want more top-line revenue, but how do they generate more?
Typical commercial businesses can generate more revenue in two ways:
- Sell more of their products
- Charge more for the products that they sell
Local governments increase revenue by raising taxes or offering fee-based services to the community. Nonprofit organizations can also increase revenue by offering fee-based services.
If your project drives additional revenue to the business, you would align those benefit items in the sales area on the right-hand side of the graphic.
Controlling expenses is another goal for every organization. No organization can generate an endless stream of revenue, so they must spend less than they earn. There are many ways to control expenses. To be effective, your business case must explore those options and articulate the ones that are the most compelling and relevant to your proposal.
Many projects cut costs in the sales, general and administrative (SG&A) category. Other projects cut costs in manufacturing and production and would align to cost of goods sold.
Another great way to show value is by improving working capital. Working capital involves things that are either cash or can quickly be converted to cash. The three most common working capital items that might be impacted are:
- Accounts Receivable (amounts owed to the company by its customers)
- Inventory (materials that the company has purchased by may or may not yet have been converted into sellable finished products)
- Accounts Payable (amounts the company owes to its suppliers)
Optimizing Accounts Receivable is a fancy way of saying that your company collects its cash sooner. There is a specific value in collecting your cash sooner. Maholic explained that investors track a metric called “Days Sales Outstanding” or DSO. Likewise, there is value in converting your raw materials into sellable products sooner. This metric is called “Days in Inventory” or DII. The third working capital improvement area deals with vendor management and vendor payment. Prompt payment of trade payables (routine business purchases made on credit) is a good business practice, but there is a balance between paying too promptly and being delinquent. Your company might be able to benefit from delaying payment to vendors a day or two without injuring the vendor relationship. This metric is called “Days Payable Outstanding” or DPO.
These three working capital items are often combined in a calculation called the cash conversation cycle (sometimes called the cash-to-cash cycle). This cycle refers to the number of days in which you can convert your purchased items into cash. The equation is DSO + DII – DPO.
This is the most difficult benefit to monetize. It does align itself directly with the DuPont Model, but mitigating risk is a concern for all businesses.
A classic example is a security break. Obviously, no business wants a breach, but what is the value of protecting against it? The costs associated with a security breach – customer confidence, associated bank fees, possible litigation, increased investment in security protocols, and potential loss of business – can be quantified. Research from the Ponemon Institute shows that the average cost of a security breach is $3.92 million.
Security is a top-of-mind issue, and it would be a mistake to not include the potential cost in your business case.
For more information about ERP Cloud benefits and how to align them with business drivers, check out Maholic’s article and the additional Quest resources attached below.
For more Oracle ERP Cloud resources, case studies, best practices, etc., check out Quest’s Oracle ERP Cloud Content Center. There are resources and training available for all aspects of ERP Cloud, including risk management, financials, extensions, and more!