Measuring the ROI on business software isn't easy, but limited financial resources and tough competition from hungry rivals mean it must be done. Here's how.

By Jennifer L. Baljko EETimes Supply Network (04/01/2004 9:00 AM EST)

Ed Knab remembers the chaotic days at chip maker Conexant Systems Inc., when the supply chain system at his company"like so many others"consisted of software of all shapes and sizes, stitched together. One application handled back-end functions, juggled advanced planning activities and managed communication with offshore facilities. As IT execs added each piece, the prospect of hefty financial returns and increased operational efficiencies glimmered a bit brighter.

Those benefits never materialized, though. Truth be told, the company's level of integration did not improve much after it purchased all sorts of supply chain management tools. Now, however, Knab"a little bit older and a whole lot wiser"again has the chance to improve the supply chain process, this time at a different company and with a much smaller budget. Knab is director of

customer satisfaction at Skyworks Solutions Inc., formed in 2002 after Conexant spun off its wireless division and that entity merged with Alpha Industries to become Skyworks.

The new company lacks the luxury of expensive IT fixes afforded by a boundless budget. Yet, as a midtier but fast-growing company, Skyworks needs capabilities that support supply and demand changes in today's cutthroat market. "When we were at Conexant, we had every kind of supply chain tool possible," Knab said. "Since becoming Skyworks, we have simplified our systems."

For the Woburn, Mass., company, which booked $618 million in revenue for the fiscal year ended Sept. 30, 2003, the act of simplifying its processes meant overhauling the legacy IT systems and retraining employees. With strict rollout deadlines haunting his days, Knab and his team are working feverishly to bring up the systems and make sure employees feel comfortable using them.

"The main problem we run into is getting people to use the tools," he said. "People never want to let go of what they already have."

The changeover is a time-consuming venture"Knab is two years into the four-year project"but one that Skyworks is counting on to meet the challenges of managing a rapidly expanding portfolio in an industry marked by quick product turnover. Executives at other midsize electronics companies understand the challenges Knab faces, since they too compete against bigger rivals trying to muscle in on their territory. All of them must find ways to ensure that their supply chains function as efficiently as those at top-tier rivals, despite their constrained budgets.

It is a difficult juggling act. For the past several years, IT vendors have targeted multibillion-dollar entities that could afford simultaneous software rollouts across all segments of their operations. Complex supply chain tools were all the rage, with a price tag much too dear for the average midmarket business. Still, the reality is that return-on-investment (ROI), a key value financial supervisors use to approve IT expenditures, has been hard to quantify, according to observers.

Elusive ROI

In many organizations, ROI remains the rule of thumb for IT project funding decisions: If a company can glean more savings from a particular process using a software platform than it could without it, higher-ups are more likely to give the go-ahead.

Although ROI is the most widely used metric applied in software-selection analysis, it comes with its own set of problems. The inevitable lag between installation and the payoff impedes analysis. In fact, most companies don't go back to compare prerollout ROI projections and real data, according to industry observers.

"We have done ROI studies in the supply chain planning area and [have] asked companies what kind of ROI analysis they did before picking a vendor," said Steve Banker, service director for supply chain management at ARC Advisory Group Inc. (Dedham, Mass.). "Often, they don't know the ROI."

While large enterprises may be able to produce piles of documentation proving their diligence in tracking ROI"and thus justifying their investment"small companies lack the resources to do so. "When [enterprise resource planning] started to gain traction, people were showing big ROIs to justify investments," said Bob Moncrieff, director at Pittiglio Rabin Todd & McGrath (PRTM; Mountain View, Calif.). "The midsize companies can't do that. Operationally they may need these tools to survive, but the focus on identifying ROI [afterward] is not so great."

Capital Consulting and Management Inc. (Alexandria, Va.) discovered similar findings in a study released in early 2003. CCMI's survey of 200 executives from several manufacturing industries, including midtier companies, revealed that less than 20 percent of respondents found that their supply chain-related IT purchases have shown a clear and favorable ROI.

The problem may stem from the fact that companies appear to have difficulty measuring ROI. Only two-thirds of the survey respondents said they had the capability to calculate the return. There's also a delay between the completion of the implementation cycle and when a company should realistically expect to cash in, said Scott Elliff, CCMI's president.

Businesses must tie ROI to several factors, including a calculation of how much time has been saved by operating with instead of without the software; how much faster the organization responds to customer requests; how quickly employees can move products through the order, manufacturing and delivery process; how much cycle time has improved; and how many redundancies have been eliminated, analysts said.

Searching for a cure

Companies trying to balance supply chain improvement requirements while tallying uncertain IT ROI have to acknowledge certain truths. Foremost among these: IT is not a cure-all, and several elements have to fall into place before a software rollout succeeds. To help boost the reach of their existing software, companies are cleaning up data from back-end systems, re-examining processes and aligning practices with the users' capabilities.

"We try to tell smaller companies to avoid new software at all costs, unless it's truly critical to the growth and profitability of their company," said Al Delattre, an El Segundo, Calif.-based managing partner of electronics and high-tech at Accenture Ltd.

Acma Computers Inc. (Fre-mont, Calif.) is following that advice to the letter. The PC maker, which last year posted sales of $100 million, uses only three systems to run the bulk of its operations, president Allen Lee said. The company operates a 10-year-old PeopleSoft enterprise resource planning (ERP) platform, with which Acma handles inventory management and accounts payable functions. Acma also has a sales management and manufacturing platform that it built in-house.

"Our core sales management tool is attached to PeopleSoft and exchanges information with the ERP system. Our manufacturing software helps us with production controls, interfaces with PeopleSoft and exchanges scheduling and warranty information," Lee said. "There is always room to improve, but this is adequate for what we need."

The idea of leveraging systems already in place and extracting sleeper functionality from existing tools is emerging as a popular strategy. "The truth is, most companies don't use all the functions that are embedded in a piece of software," said CCMI's Elliff.

"People are looking at supply chain applications to improve operations and sustain the growth they are starting to see without adding more expenses," said Vinay Asgekar, an AMR Research analyst.

Uncovering unused applications in its systems is a priority for Long Beach, Calif.-based NYK Logistics (Americas) UWDC division. NYK, a $73 million unit of Japanese-owned NYK Logistics, services companies like A-list OEM Pioneer Electronics and wants to drill down into its J.D. Edwards back-end system and its warehouse management software from Provia Software Inc., said manager Carol Davenport. "This year part of the emphasis is on exploiting the technology we have in place," she said.

Two areas the company will focus on are improving task management workflows and reorganizing the way warehouse employees pick orders, she added.

NYK is also tapping Provia Software (Grand Rapids, Mich.) for software applications and IT support. "We help our customers understand the system so they can take ownership and can configure it" to their satisfaction, said John Clark, Provia's marketing manager.

Make mine vanilla

Other companies are maximizing their software investments by using out-of-the-box solutions rather than expensive customized programs tailored to their every need and whim. Such one-size-fits-all programs help businesses keep IT projects simple and affordable, said PRTM director Shoshanah Cohen.

"It may sound boring, but there are tons of things companies can now do with the vanilla functionality," Cohen said.

Skyworks heeded that advice. The major component of the company's simplification program was to use out-of-the-box software. "We are pulling out piece after piece of software and going with the basic tools from SAP," Knab said. To date, Skyworks has purged about 12 applications from its IT infrastructure, including the ERP backbone, two forecasting systems and three data warehouses, and is now running them off SAP modules.

Although it's difficult to put a dollar amount on them, the savings so far have come in the form of lower costs associated with bringing up next-generation software, easier retrieval of data and improved process efficiency. The company has had problems determining its actual cost savings because it is in the midst of revamping some legacy systems and aiming to scrap others.

"Going with the generic format was the easiest way to adapt to changing requirements," Knab said. "The whole idea of customizing software is a no-win situation."

Vendors, though, disagree on whether out-of-the-box solutions can tackle all the problems companies face. For example, Oracle Corp. (Redwood Shores, Calif.) adds as much functionality to its base products as it can, because customers demand it.

"We want our customers to start [solving their supply chain problems] where they want to start," said Jonathan Oomrigar, Oracle's vice president of high-tech business solutions.

Managers at i2 Technologies Inc. (Dallas) subscribe to a similar ideology. "If you are looking for ROI, installing vanilla applications is the worst way to go," said Adeel Najmi, director of supply chain management solutions. "You will only get connectivity from those tools."

i2's tools let users configure the parameters in which they want to work. "If you want more bang for the buck, you have to look at what specific business processes you want to solve," Najmi said.

However, critics say companies that advocate the adoption of custom solutions by midsize companies forget that these smaller firms often cannot afford such solutions and, more important, that they lack the IT resources to support the projects in-house.

Since vendors have aligned themselves more closely with customer expectations, opportunities for quick-hit programs have emerged. CoCreate Software Inc. (Fort Collins, Colo.), for one, licenses software aimed at improving communication and collaboration.

CoCreate's low-cost tool, a cross between Web conferencing services and product and document management, lets managers invite members to online meetings, track discussions, generate action items and share documents.

"What's driving people today are projects. Projects have an ROI, and they can be measured," said Irv Christy, director of strategic alliances at CoCreate.