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Making technology pay.

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EXECUTIVE SUMMARY

Every day, companies invest in new technology with the belief that financial benefits will result. And every day, managers' hopes are shattered by the reality of implementations that don't positively affect the bottom line. Change your understanding of how to determine financial value and how technology enables it, and you'll understand how to get the benefits you need.

We have heard the line before. Some of us have even spoken it, believing it to be true. The line suggests that significant financial benefit will result directly from technology implementation. From the largest software vendors to the one-person consulting firm, promises of cost savings ranging from many thousands of dollars to billions are made by the individuals revolved with the technology and its implementation.

Have the savings been realized? Mostly, no. Of course, investments in ERP systems, supply chain solutions, and CRM solutions have made operational impacts. Companies can manage their resources much more effectively, they have visibility into their supply chains, and they are better at interacting with customers. But they are not reaping the anticipated millions of dollars in savings from improved operations.

The primary reason they miss out on the value is that they don't calculate financial value properly. They use cost accounting-based approaches to calculate savings, but the techniques are not aligned with the bottom line and cash flow. The secondary reason is that they don't go far enough with the implementation to achieve financial benefits. They re-engineer processes and implement the solution then stop short of performing the additional tasks necessary to achieve financial benefits from technology.

Value-centered technology is an approach designed to ensure the financial value expected from technology implementations. The first part of appreciating value-centered technology involves understanding in some detail how technology creates financial savings. The second is a five-step process that will lead to the creation of financial value from the implementation of technology.

Achieving financial savings

Seldom does financial value come directly from technology. Financial value defined here is cash flow because it is the net present value of the cash flow that is the basis for determining the market value of companies. Free cash flow, an important period measure, is generated from profits after all payments have been made to investors and all monies have been collected from non-operating sources. The cash flow at the end of a financial analysis period is equal to the cash flow at the beginning of the period with the free cash flow of the period added to it.

The problem is that the techniques typically used to calculate profits are not aligned with free cash flow. Cost accounting approaches such as activity based costing, standard costing, and absorption costing, predict cost dynamics that are not aligned with the bottom line. These approaches are often used, for instance, to determine the cost of an activity or of the output of a process such as purchase orders.

A "purchase order cost" can be obtained by allocating the cost of all people involved to the cost of creating a PO. But whether approximate allocated values are used or an extensive activity based costing study is performed, this allocation process to create a PO cost is incorrect. Upon creating the PO cost, one assumes that the cost is aligned with the bottom line, but it's not. The...

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