Savings from ERP Overrated
As to whether the theory is equally applicable to IT, Quarls gives a qualified "yes", telling CIO magazine that although he does not believe anybody has yet examined the IT portfolio specifically from a behavioural economics perspective, some IT-focused consultants within Booz Allen Hamilton are starting to give the question serious consideration. However, he says in an environment where "huge over-calculation" of savings from ERP implementations is common, there are clearly some neglected systems that might be worthy of such considerations.
"It depends how you measure performance in IT, because while people attempt to measure internal investments on IT, I think most of the analysis that I have seen is very suspect," Quarls says. "People tend to assume the savings could not have been got in any other way, so they bring every saving possible into an IT project, as opposed to saying: 'I could have got most of the savings anyway and it's only the incremental 20 or 30 percent that really require an IT solution'. So especially around ERP you see huge over-counting of savings in those ROI calculations. But clearly there are some that I would call 'neglected systems'."
Systems come in three "flavours" in Quarls's mind: strategic, tactical and transactional. Transactional systems tend to get all the attention because that is where all the money is, yet there are key strategic and tactical systems that could probably thrive and return significantly better value "than you would ever see in a transactional system" if only they were not starved of money and resources. "Systems like pricing systems - you know, systems to optimize pricing, systems to optimize supply change management. Not the big ERP systems; I am talking tactical strategic systems that people tend to starve where you can go in and actually tweak them and spend a couple of million dollars, and see multiple returns on investment for those systems."
However, Quarls also urges caution, noting that the world is full of IT projects in which organizations have invested heavily without gain because the systems proved to be "value destructors".
Still, Dwayne Prosko, principal consultant for Booz Allen Hamilton's IT Strategy Practice, who has given the issue serious consideration, is adamant that there will be cases where corporations are better off short-changing their stars and nurturing their IT dogs. In fact, he says, the consultancy believes IT executives must constantly be making choices about which parts of their IT applications and systems portfolios should be nurtured and which should be starved.
It is all about ascertaining the value levers. For instance, everybody got onto the ERP bandwagon to achieve Sarbanes-Oxley compliance or greater control of transactions, accounts payable and chartered accountants, but moving to ERP drained the budget. While an ERP system may have been necessary, it is not necessarily value adding. So why not ensure a "safe space" in the budget where you can invest in systems that can let you leverage far greater value than a typical ERP system?
"We have seen situations in several industries in which IT applications/systems portfolios are too heavily weighted towards back-office administrative systems that do not add value to the business and are not weighted towards customer-facing value- added systems," Prosko says. "In some cases the customer-facing systems have become 'dogs'. IT managers would be well served by focusing on these dogs of their IT portfolios to get better value out of them."
That would mean devoting greater resources and effort to the customer-facing part of the portfolio, such as upgrading the systems to more modern, open source platforms, improving performance by removing inefficient code and replacing it with rewritten modules, and modernizing the user interfaces by bolting on Internet-based portals.
In another example, Prosko consulted to a financial services company running a number of "shadow IT organizations" - within accounting and finance groups and parts of its claims functions - featuring very inefficient, ineffective use of IT resources, IT labour and IT systems, and extremely "sub-scale" types of operations. Bringing them all into a more centralized, shared services type of organization let the consultants fix some of the inherent problems in their IT organization and processes to bring them up to par with everybody else.
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.