Prepare Now or Pay Later

Friday Nov 2nd 2001 by SmallBusinessComputing Staff

Paying attention to potential return on investments keeps tech spending under control

By Michael Grebb

The pitch that Bike Friday gives to its customers is simple: Buy our bike, ride it, then fold it up and put it in your suitcase. Recently Michael Calabrese, manager of information systems at the Eugene, Ore.-based manufacturer, had to argue a more complicated case.

The company needed a new way of keeping track of all its sales, it needed to improve its e-commerce system, and it wanted to upgrade the Web site in general. It was still using databases created with popular-but-basic Microsoft Access, and it needed a more sophisticated system. He had to find the right system, justify its cost, and explain how it was going to pay off for the company. 'I knew we weren't going to be able to hold all of this data on Access and keep it over time,' Calabrese says. 'For more complex things, it's not the best programming environment in which to work, so I started running all of the calculators.'

The task was daunting but necessary. 'A lot of small businesses don't have the cash to put up for these systems,' he says. Even when they do, they may not feel they have enough to undertake the sort of return-on-investment analysis they should. ROI is the all-important question for any tech project; it's also frustratingly difficult to answer. In more pessimistic circles, ROI is known as 'risk of investment' because an inaccurate ROI estimate can fuel capital-spending sprees that have no end in sight, causing companies to throw good money after bad. They get halfway through a project only to find out that it's more complicated than they originally thought.

Often, such surprises can be avoided with careful analysis from the outset rather than cutting corners to save money in the short term. 'A technology change is fraught with peril for small businesses because they don't have the resources to do it themselves,' explains Mark Ballard, president of CyberServ, an IT consultancy. 'Sometimes, they're looking for love in all the wrong places, hiring the $35-per-hour guy who works out of his garage. Then, he goes off to a big company, but he didn't leave the network passwords or anything else. Often, small businesses don't realize the true risks involved.' Technology upgrades, after all, should ultimately make a business more money, not become cost centers.

While failure is easy to identify, success is more difficult. When the project's finally done, it may take years to make back a large initial investment, and frequently it's far from clear just how much of those returns can really be credited to the new technology. Though you may never know if your initial ROI projections were correct, the analysis itself will help your company plan more plausible and productive technology projects. Ask yourself these key questions beforehand - then don't look back until the job is done.

The Total Cost of Technology
So what's the magic number? What's the perfect balance? If only it were that simple. Business owners should start by asking the question: When, exactly, do we hope to see these returns? Some businesses are satisfied with a five-year return while others might desperately need to recover the investment within a year. Others might have to hire the guy in his garage for a brief period because money is short. The challenge for all businesses is to strike that balance between coping with near-term needs without risking long-term health.

Another simple step that can help avoid mission creep is to establish firm spending limits. 'ROI is murky and nebulous,' says Steven MacLaughlin, chief knowledge officer at Expidant, an Indianapolis-based interactive services firm. 'But every company has a money pit somewhere. When you start to look for where the money pit is, it's easier to look at the ROI.' Then, he says, a business has to stick to its budget. 'You have to know that's it, and we can't go beyond that,' he says. 'You have to have those stakes in the ground.'

To get a good idea of how much a project really will cost, you need to take into account every associated cost. In the case of technology, these usually include the cost of the hardware or software itself, the cost of support, and the cost of retraining the employees who are going to use it.

An Open-Source Answer?
Today, Calabrese is in the middle of a major project to upgrade the bike seller's sales database, e-commerce system, and Web site. At first, he favored an Oracle system but found it would entail expensive computers and service. 'For a small company with 30 people to spend $20,000 on a database system is very expensive,' he says. 'And one of the biggest drawbacks was support.' Calabrese says it would have cost Bike Friday $10,000 to $15,000 per year just to pay for Oracle's technical-support services. 'So I really had to start researching it again,' he says.

He eventually deployed a system based on Linux, the free 'open-source' operating system. 'Open source is leveling the playing field for small businesses to have the same tools [as big competitors] if they're willing to put out the manpower for it,' he says. 'There are as-good products that are open-source and just as powerful,' he says. Calabrese says Linux has actually been more reliable than other proprietary systems he has tried and has already saved the company thousands of dollars.

Such open-source solutions can scare small businesses. While they vastly reduce the cost of software, they often result in higher support costs. Small companies often don't have the expertise to figure out its quirks and fear relying on enthusiasts' posts on Internet message boards to figure it out. Others warn against relying too much on freeware, especially for companies who don't have a firm helping them support it. 'There's freeware that does a narrow set of functions, but that's not the only tool you will use on a network,' says Michael Marks, director of service provider product marketing for IT vendor Concord Communications. 'You're going to use all of your time troubleshooting software that's not supported.'

Calabrese admits that businesses must always take a 'calculated risk' when choosing such options over other proprietary software. Those that lack an IT guru like Calabrese may want to measure the risks involved before trying to integrate shareware into their systems. 'I've always done a lot of my own self support,' he says. 'In that, I might be kind of unique, but a lot of small businesses don't have the cash to put up for these expensive systems.' Calabrese also contracted with Great Bridge, a company that supports Linux and is more suited to small firms than many large database firms.

Calabrese just began 'phase two' of his project to upgrade the front-end of the internal systems and the Web site, eventually merging them with the back-end fulfillment systems. He says he has been 'quite pleased' with the money he has saved so far using open-source software.

What's the Blip?
Like many other software companies, Concord provides an 'ROI tool' to convince prospects that they will save more money in the long run by not cutting corners now. 'We show how our customers can get a payback if they buy our software,' he says. 'A good ROI tool enables a vendor to sit with the customer and understand the business and how to make and save money. I can show how they can get six hours more per week out of IT people. That's six more hours for other projects.'

It's safe to assume that no company will consider a technology investment unless they see at least the potential for greater returns through improved efficiency or cost savings. Just the same, it's often difficult to assess whether all of the capital spending will actually result in better margins. 'There's not a magic answer, especially for a small business,' notes Jim Nalli, vice president of IBM's America's Small Business unit. Nalli says one challenge is getting through the project with minimal disruption. After all, it's hard to start calculating ROI when employees still aren't fully trained to efficiently use the new equipment - one of many factors that can disrupt the normal flow of business.

Be realistic about the cost of training employees, about the schedule for completing the work, and about the total potential payoff. 'You always have to balance ROI with what's the blip?'' Nalli says. 'Can I do this in a parallel manner so there's no blip? There are some businesses in which this is impossible, but the key here is the planning. It has to all be measured by some return.'

How Many Happy Returns?
Indeed, for those who have gone through a project (and lived to tell about it), one of the most difficult tasks is to assess whether those rosy ROI estimates were right or wrong. Each project can yield intangible savings, the undisputed evidence of which might not surface for years, if ever. After all, how can you prove that outfitting the sales staff with wireless-ready laptops resulted in a fatter bottom line? If sales went up, maybe it was because of other factors, such as the economy or an usually odd-volume season. Alternatively, lower sales might stem from similar outside factors rather than a failed technology upgrade.

Then again, a well-planned project may yield clear results. Two years ago, Jim Workman, the CEO and founder of BFW Advertising in Boca Raton, Fla. (and a member of the last year's SBC 100) tore out his old PBX phone system and installed Nortel Networks' Business Communications Manager product, which integrated office communications with his Windows NT server.

'It was costing me hundreds of thousands of dollars to get my PBX programmed and upgraded,' Workman says. 'Just to keep it alive was horrendous.' Workman notes that the older the technology, the fewer vendors who are able to fix it. Not only does that make it harder to maintain equipment, but the lack of competition drives up prices. 'Every time I had a problem, it was costing me fifteen hundred or two thousand dollars.'

Workman and his sales staff now stay constantly in touch. Workman can even route his voice-mail messages into e-mail attachments (they're converted into .wav files) and forward them along to colleagues from his laptop on the road if necessary. And when he's not traveling, Workman says the technology upgrade has cut down on everyday hassles. He also managed to cut service costs.

'It's ten times more reliable than the old system,' he says. 'I have saved forty to sixty thousand dollars already. But more than anything, we have saved a lot of time, and time is money in my business.' Workman says he still can't be sure that his earlier ROI estimates were correct. 'It does make everyone a lot more efficient,' he says, 'but how do you put a number to it?'

As Workman discovered, sometimes holding on to old systems can result in increased costs. Even when ROI models suggest the opposite, businesses may feel an upgrade is still needed simply to remain competitive. ROI planning can be precise or intuitive, encouraging or daunting, educational or seemingly boring, but the end result of a good ROI plan is increased productivity and a long-term reduction of time, effort, and/or money spent toiling over old technologies.

Whether that 'R' in ROI stands for risk or return is, ultimately, up to you.

What's The Value of a Technology Investment?

Figuring out how a technology project will affect profits is one thing, but small business owners may want to ask at least one other question: Will it add value to the company? That question is especially important for someone who plans to sell his or her firm in the near future. 'One of the biggest risks for buyers is the technology integration,' says Paul Dippell, vice president of the IT services segment of USBX's mergers-and-acquisitions group. 'When acquisitions fail, that's very frequently where they fail, but if the selling company has a good technology plan, then it's reducing risk for the buying company and making it that much easier.' For example, Dippell says automated systems can cut down on headcount. In addition, Dippell says outsourcing IT services 'makes it an expense rather than a fixed salary cost.' In the end, buyers are most impressed when sellers can show them an organized and coherent technology plan, even if it doesn't directly prop up the sale price. 'It's kind of like redoing the bathroom when selling your house,' Dippell says. 'It may not add value, but it adds salability.'

Save Money and Time - No, Really!

The mantra of technology companies is that their products will help you save money and time - if it works. And while you won't be able to tell that from their Web site, very often companies will provide you with suspiciously convenient 'ROI calculators' to help inform your buying decision. One purpose of these is to help you think through how the technology is likely to affect your business; another, clearly, is to convince you to buy the company's product.

Playing around with such calculations certainly won't hurt. If you decide that an investment looks interesting, you can then begin a more detailed study. (For that, you may want to try a product like CIOView's $149 ROI Consultant application, which provides you with working estimates of typical expenses of companies in your field.)

Tech companies' own ROI calculators contain implicit promises about what these technologies will do for you so feel free to take issue with the assumptions built into the company's calculations and to revise your estimates accordingly.

Most such calculators are simply fancy Web pages that take the following form:

1. How much do you currently spend? FaceTime Communications, which offers an instant-messenger-like system for handling customer service, uses a study from Forrester Research to place a company's cost-per-phone-call at $33. It then asks you how many calls you receive each month. In some cases, companies let you put your own dollar estimates on such cost variables.

2. What are your goals? ECopy, a company that provides a service for digitizing and transmitting paper documents (rather than sending or faxing them) provides a staggeringly ornate form for calculating potential fax, phone, and courier savings. Near the bottom, they show how much money could be saved if 10, 20, or 30 percent of all communication was successfully converted to their system. (They don't even bother predicting higher success rates - and they're right not to do so.)

3. What are the potential savings? Here, you have to take the company's word for it. They'll have a rosy estimate, which you may want to revise downward once you've researched some other sources.

4. What other opportunities will those open up for you? If the product is an e-commerce suite, the payoff may be in terms of new revenue. Still, there's no point buying an expensive system to increase your efficiency, if you have to spend all your free time figuring out how to pay for it.

Michael Grebb wrote about international sales in the September issue.

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