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Technology and Business Profitability

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IT today consumes more than half of the capital investments around the world and software alone consumes more than ten percent of global capital investments.

The investment pattern seems to be on the rise, a phenomenon that drives different people in different directions. Obviously, the rigor that goes into traditional investments would begin to get applied in future IT-related investments.

With the exalted status that IT enjoys with business, that was probably the case which is why IT got away with liberal treatment. While SAP routinely claims that companies that run SAP are 32% more profitable, Nicholas Carr points to a to-be-released report assessing the relative profitability of SAP customers from Nucleus research with key findings therein –“SAP customers are 20% less profitable than their peers”. Carr writes, “Nucleus Research looked at the 81 public companies that SAP lists as customers on its own website. It determined the return on equity (ROE) earned by each company, based on formal financial filings, and then compared that number with the average ROE for the company’s industry, as calculated by Hoovers. The upshot, as stated in Nucleus’s research note:

Nucleus found SAP customers had an average ROE of 12.6 percent, compared to an industry average ROE of 15.7 percent. It is interesting to note that three areas of significant focus for SAP, customer relationship management (CRM), enterprise resource planning (ERP), and supply chain management (SCM), had customers who fared quite poorly, with CRM customers achieving profitability 18 percent lower, ERP customers achieving profitability 32 percent lower, and SCM customers achieving profitability 40 percent lower than their peers.

I just hope that this is not meant to be a prerelease hype for the report –that’s just one case of a report being talked about before release, but I do know that it is a normal practice to have draft reports circulated ahead before final publication This is a reflection of changing times!

I also hope that Nucleus’ report captures the objectives behind the SAP implementation, the budgets spent, the integrators employed therein and a snapshot of their SAP implementation story, to take a look at the qualitative dimension of the report. Geoffrey Moore once said,

” There was a time when people thought getting an ERP system would give them a competitive advantage – but that’s long gone. Then it was all about getting a CRM system to gain competitive advantage – but that’s pretty much gone. Next it was supply chain, and that kind of fell in the Chasm with the bubble. So these new categories of software all come along and offer the customer a competitive advantage. For a while, it’s true but as more people buy the product, it stops being a competitive advantage because now every company has the same thing.”

Needless to say, I disagree with him that all implementations across enterprises would yield similar/identical results ( a combination of factors would matter -ranging from management strength, organization culture, consultant expertise, budget etc..) but accept his point of view that upon stability and optimization, the functioning of such software are more or less assumed to provide standard vale to enterprises.

It would be interesting to watch the report as ROI methodologies recommended by several product vendors are, in general, subjective – if not anything it can be used against software vendors who think that they can sell licenses at huge prices and charge super premium maintenance charges. To me, just as aircraft manufacturers can not claim helping airlines to be profitable – Singapore Airlines vs. Amercian Airlines , Southwest or Delta – all may use similar aircraft – but business models and operational efficiencies may matter a lot in determining their profitability (The examples are just indicative – SIA is just a top of mind recall).

I am quoting it not for being just a customer of SAP but in the context of being counted as amongst the most profitable airlines in the world for several continual years running.

I am not trying to restrict the theme here to SAP alone – it would apply to most of the software vendors). Clearly, it’s time to demand more from IT – not for damning IT but for finding better business models for IT companies and, more importantly, to make user organizations optimize better to get better yields.

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  • Bliffle

    When I was a lad my father was Quartermaster of his VFW post for a few years and one of his duties was to enter dues payments every month into a ledger book. He did that with a fine Spencerian hand and a steel nib pen dipped in a small ink bottle. I suppose it took him an hour each month. I watched because I admired his beautiful script. And I remember thinking to myself at the time “gee, there’s probably a good way to do this with a simple machine that will save dad that hour each month”. Well, how many hours do you think the VFW quartermaster spends each month on his computer toting up dues and generating reports in 2006? 3, 4 probably 10, I would guess.

    Where did we go wrong?