Did You Get What You Paid For?

Ten Steps to Ensure That Improvements and Software Pay Off

By David Meyers, CSCP, Director, Tompkins Associates

Capital improvement projects and software system installations are successful when businesses focus on the reasons for the implementation and the anticipated benefits.

Best practices dictate that a Return on Investment (ROI) study be conducted before implementation of any software solution or other capital improvement initiative. One half of the equation is “investment.” The other and likely more important side of the equation is “benefit.”

To determine if your project will be or was successful, establish goals and key performance indicators, set and agree to these expectations, measure results, and evaluate the outcomes of the implementation immediately following the process and continuously thereafter. Once your challenge has been identified and assumptions regarding future direction have been accepted, take the following steps leading up to, throughout, and following any capital project:

1. Identify alternatives
2. Perform detailed ROI analyses of alternatives
3. Establish goals and Key Performance Indicators (KPIs)
4. Create project charter for the best alternative
5. Develop the implementation plan and communicate it to team members and constituents
6. Prepare contingency plans
7. Monitor performance throughout implementation
8. Adjust in changing climate
9. Test, train, test and train
10. Perform a post-implementation audit

1. Identify Alternatives

Is there only one right answer to your given challenge? Maybe. But one thing is relatively certain—there is usually one best answer. To determine which path will lead you to success, it is important that all viable alternatives to achieving the stated goals of the corporation and project are clearly defined.

One of the best ways to accomplish this is to hold a leadership roundtable with the executive group of your organization. This group should be comprised of the leaders of various disciplines within your organization, including manufacturing, sales, customer service, supply chain, information technology, finance, human resources, and other key leaders. Typically led by a trained facilitator, the roundtable seeks to identify future trends in your industry, corporate goals, current and pending business initiatives, customer needs, systems limitations, and other metrics. Out of the leadership roundtable, various viable alternatives to improve shareholder value will likely be identified along with baseline assumptions under which the alternatives will be evaluated. Senior executives must agree on these alternatives, and then a plan to investigate these alternatives will be developed.

2. Perform a Detailed ROI Analysis of the Alternatives

Once the alternatives have been identified and financial analysis metrics (e.g., cost of capital, labor burden, and depreciation method(s)) have been approved, weigh the alternatives identified in the previous step. And be sure to answer the important question, “Which investment will give us the best return, meet our customer service goals, and best position us for the future?”

On the investment side of the equation, input factors such as:
Implementation Costs

• Plant, property and material handling equipment
• Software license fees
• Professional services
• IT hardware
• Internal labor costs of project team
• Other implementation costs (travel and training)

Total Cost of Ownership

• Annual lease costs
• Building and equipment maintenance
• Software license and maintenance
• Internal IT support
• Operations support

These costs are not all-inclusive but provide a general framework for determining how much your project will cost in the short and long term.

On the benefit side of the equation, include other input factors such as:

• Labor savings
• Higher throughput – higher utilization
• Tax savings
  • Potential R&D tax credits
  • Potential local training grants
• Increase in inventory turns (decrease in inventory carrying costs)
• Increase in inventory accuracy – lower annual shrinkage write-off
• Order fill rate increases – increased sales
• Increase in order accuracy – lower returns and processing costs
• Space savings (translates to lower property and building costs)

Likewise, these benefits are not all-inclusive, and the financial impact is not always easy to define. Many of the savings, such as “higher levels of customer satisfaction” are typically identified as “soft.” What dollar figure can be assigned to this benefit? It is certainly more than $1, but how much higher? Certain assumptions must be made and agreed upon by the executive group in order for the ROI analysis to be complete. It is always better to err on the conservative side as each alternative is weighed against the others, with the alternative of “doing nothing” being the baseline assumption against which the others are measured.

3. Establish Goals and Key Performance Indicators

Along with the ROI analysis, KPIs must be established and agreed upon by the executive group. Some KPIs will already have been determined based upon the “benefit” side of the ROI analysis. It is important to keep these KPIs in mind as you implement the project and/or system and after you go live. KPIs will form the basis of any post-implementation audit as well as serve as guidelines when certain components of the project implementation or system functionality come into question or as modifications to the originally envisioned improvements develop. Most importantly, KPIs and improvements over your baseline alternative are what you are paying for.

Some examples of typical KPIs are:

• Inventory turns
• Inventory accuracy
• Order fill rate
• Order accuracy
• Orders shipped on time
• Return rate
• Labor cost per order shipped
• Cartons shipped per direct labor hour

KPIs, like any goals, must be specific. To say that “We want to increase inventory turns” is not acceptable. A goal must be realistic and measurable with a time frame for accomplishment. A better way to communicate the new goal would be to state that “We want to increase inventory turns from 7.2 to 8.4 by December 2008.” Again, KPIs should be tied directly back to your ROI analysis to make sure that the capital you invest is returned back to you by way of the measurable and timely improvements in the KPIs.

4. Create Project Charter for the Best Alternatives

After identifying the most attractive alternatives and completing the financial analysis to determine the best path forward, create the project charter. The project charter is the “playbook” by which the implementation project team will be led. A typical project charter incorporates the corporate vision regarding the initiative, the rationale behind the selection of the alternative, the KPIs that will be measured, the expectations, the makeup of the project team (e.g., executive sponsors, project managers, and full-time project resources), the timeline in which the project will be executed, and the reporting mechanisms that will be used.

One of the primary purposes of the project charter is to ensure adherence to the organization’s stated directives and to ensure that team members have the full support and consent from executive leadership to implement the project or system. Some organizations see the project charter as a contract that establishes a link between the funding approved by the executive leadership and the return on the funding by way of improving KPIs.

Keep in mind that funding represents more than the cash outflows to procure equipment or pay for contractors or professional services. The concept of funding should also extend to the allocation of internal resources needed to implement the project. An understaffed project, or one in which key team members are too frequently pulled away to attend to their “day jobs,” can fail as readily as one that has run out of money.

5. Develop the Implementation Plan and Communicate to Team Members and Constituents

The implementation plan is a detailed outlook which addresses the major and sub-project activities, expected durations of these activities, any predecessors and lead times, and the resources and required allocation to effectively execute the project. Depending upon the size of the project, planning can be a project unto itself and is often considered a major phase of the larger project being implemented.

One of the key factors in measuring success is employee understanding, acceptance of the project plan, its directives, and/or use of a new system. A set of new processes, building layouts, operational changes, and/or new systems can be frustrating to an employee, especially if the company moved from a manual process to a fully automated process. The education of employees on the project/system, the implementation plan, and the end results will allow a successful outcome for all.

Communication is a key tool in obtaining the acceptance from the team members and the employees at-large. The reason for changing today’s processes or selecting the new software needs to be explained along with the need for the change. Obtaining acceptance from the employees will be a challenge, especially if they are accustomed to a manual process. But without acceptance, implementations can be difficult and costly. Gaining the acceptance of the organization in general will help ensure that you will get what you paid for.

6. Prepare Contingency Plans

Consider that you have now begun your project, and the implementation is progressing smoothly as per your schedule. What if some assumptions in the original ROI analysis have changed and you now have to increase your processing capacity even more? What if a key team member (or two or three) leaves the company? What if other corporate initiatives impact and/or supersede the objectives of your project?

No matter how much planning you do, undoubtedly something will not go according to plan. The effort spent in brainstorming about what can go wrong, the likelihood of the occurrence, and the potential financial impact due to the problem will better prepare you to respond to any challenge that may arise during the course of the project.

It is critical to account for these challenges early in the project charter funding and planning stages. Any project typically requires three essential and finite things to get it done: time, people, and money. “We only have so much money, we only have so much time, and we only have so many people.” One or more of these comments may be uttered or muttered during the course of the project. By effectively planning for an array of contingencies, the impact of these things running short can be minimized. Every project budget should include a contingency line-item amount. Every project plan should include a buffer in and between each activity. Every project team should be staffed with the right resources and percent allocation to the project, along with assigned backups to keep things running on the right track.

7. Monitor Performance throughout Implementation

Communication is the key to monitoring performance throughout all levels of the team up to the executive sponsors. Team members in leadership and management positions need to stay in continual contact with the other team members across the array of disciplines. A typical project team might consist of people from internal business operations, information technology, customer service, the software vendor, contract programmers, third-party integrators, and hardware and material handling equipment providers,. The left hand must know what the right hand is doing and one foot must be put in front of the other. Without the team members acting as parts of a cohesive whole, the mission is doomed.

Now that we have established communication is key, how do you measure actual performance? Three primary methods include the project plan, an issue-tracking database, and weekly status reports. It should be relatively easy to see if you are ahead or behind schedule from looking at the project schedule, provided that the schedule is maintained and communication occurs effectively. The project plan can be created and maintained by using MS Project, which is a very powerful tool. Unless you have been trained or have experience using this application, it can become quite cumbersome. Depending upon the size of the project, an Excel spreadsheet could meet your needs.

The issue-tracking database can be as simple as an Excel spreadsheet or can be provided by a commercial off-the-shelf (COTS) package. The main point is that every issue, whether related to process, software, or hardware, gets logged. Once a detailed description of the issue is logged, an owner assigns a priority (high, medium, low), and a completion date is estimated. At a minimum, a weekly review of the issues log should be held to ensure that team members are aware of the issues and updates can be provided. Once a resolution to the issue is provided, it can be closed along with a detailed description of how and why it was closed.

Finally, hold a weekly project status update meeting and use a weekly status update report as the agenda. The status update report should include an overview of the major milestones and deliverables with target completion dates for each. For every major project aspect (e.g., construction, process improvements, software delivery, hardware, testing and training), the team leader in charge of that area provides input to the agenda for their area of responsibility. Each section should include accomplishments, upcoming activities, and challenges. Once again, this provides visibility regarding the health of the project to all team members and to executive sponsors.

8. Adjust in Changing Climate

Remember the contingency plan? Hopefully you’ll never have to use it but since Murphy’s Law is alive and well, the possibility may occur. Let’s look at one common challenge. Inevitably at some point during the project, usually during the testing and/or training phase, someone will realize that a new process is not supported by the software as expected. What to do? If you have allowed for additional software costs in the budget and for some buffer time in the plan, the solution may be as simple as modifying the software to accommodate the desired process. If there is either not enough money or time to make changes to the software, then the process may need to be modified from the way it was planned. A combination of each may be possible by making a smaller change to the software to get part of the way to a new process.

Whatever challenge you face and whatever contingency action plan you need to execute, remaining positive and focused is critical. If small challenges are allowed to dampen the spirit of a project team member, the word will get out. This small problem will become a major catastrophe by the time it runs through the rumor mill. Make it a priority to ensure a positive attitude on your project team.

Again, the importance of support from the executive sponsor cannot be undervalued. If the project team and the organization at-large get discouraged, distracted, or are on the verge of giving up, the executive sponsor may need to be called upon. Once again, it may be time to stress the importance of getting what you paid for.

9. Test, Train, Test and Train

The testing component of a systems implementation project is an environment rich in training opportunities. It is equally true that a training room can provide for another level of testing as well as process and software validation. And it can be argued that testing and training activities are essentially inseparable in practice and both activities should be used to enhance each other. At the very least, team members responsible for these two deliverables must have frequent communications to share challenges and opportunities.

Prior to any detailed, keystroke-level system training, hold a basic introductory class with employees to review the overall changes in processes, the new functionality of the software package including “help” functions, system navigation, and how all these things work together to allow them to better perform their day-to-day job functions. More advanced classes can then follow and continue after the implementation to increase employee knowledge and obtain feedback.

Never underestimate the value of training in your implementation effort. Training should be comprehensive and tailored to your workforce. It cannot come “out of a can” and should include training in the new system as well as in the new operational flow of the facility. And more importantly, training should ensure that:

• Employees are learning and not just being taught.
• Efforts are resulting in a workforce that has clearly defined objectives.
• Employees understand why the system has been implemented and that it needs to be used asprescribed (much like a prescription from your doctor).
• There is encouragement and support for development of your workforce.
• You listen to feedback from the employees and ask for suggestions.

Usage of the system will only be as good as the employee training. Improper training can lead to system integrity issues. Guidelines should be established and adhered to on the proper use of the system. Mock Go-Live or Day-in-the-Life testing helps to prove that testing and training have been effective before throwing the switch and putting everything into play. These dress rehearsals for real life validate (or disprove) that both testing and training are effective.

Training cannot stop once implementation has been completed. There is always opportunity for improvement. Monitor your associates and assess the root cause of any substandard performance. Sometimes the problem lies with an employee not actually knowing how best to do the job. Allow this person the opportunity to improve and help your organization to improve by providing him or her with some remedial training. All of this comes together once again to ensure that you are getting what you paid for.

10. Perform a Post-Implementation Audit

The only proven method to determine if your system is delivering what it was intended to deliver is to conduct a post-implementation system audit. By this point, you think know what you have paid for. Now the question remains, “What did I actually get?”

In preparation for these audits, review key operations areas to ensure that you obtain a complete overview of the benefits. The audit will serve as:

• Formal documentation of the actual systems benefits
• Identification of problems and development of actions plans to correct those problems
• Identification of opportunities for improvements such as increased operational or systems functionality
• Identification of “lessons learned” for future strategic planning, detailed planning, and/or implementation efforts

Continue to conduct audits every six to twelve months to allow management to monitor how well the organization is performing and meeting the goals and KPIs as outlined prior to the implementation in the ROI study.

The results of audits should trigger questions such as, “Did we get what we expected from the installation of the new software? What have we learned from this upgrade? How will we use this information to improve?” Realize that what you expected to happen may not have actually happened. You should also be ready, willing and able to react to the outcomes. Set action plans to resolve issues and continue to evaluate the factors that may have created difficulties during the implementation. The action plans must include feedback provided by management, employees and customers.

Recommendations

The topics presented here are critical to a successful capital initiative. Although the main points and several keys to success have been touched upon, remember that there is real work—
hard work — in getting it all done effectively. A dedicated project team with an experienced professional leader must be engaged in all of these processes.

Ensuring that you get what you paid for is even more critical for businesses in the world post Sarbanes-Oxley. Shareholders expect it and the government demands it. The bar has been raised, and it is no longer just about sound financial stewardship.

Outcomes from a capital improvement project and/or a software installation effort are only positive if organizations are receptive to change and want to move to the next level of excellence. Continue to review ROI, challenge processes, examine benchmarks and best practices, and proactively contribute to continuous business process improvement. Successful results come when you evaluate the total operational impact on a continuous basis. Only then can you expect to get what you paid for.