The information technology industry has a great fondness for enterprise-class solutions and TLAs (two or three letter acronyms): ERP (Enterprise Resource Planning), DW (Data Warehousing), BI (Business Intelligence), MDM (Master Data Management), DG (Data Governance), DQ (Data Quality), CDI (Customer Data Integration), CRM (Customer Relationship Management), PIM (Product Information Management), BPM (Business Process Management), etc. — and new TLAs are surely coming soon.
But there is one TLA to rule them all, one TLA to fund them, one TLA to bring them all and to the business bind them—ROI.
All enterprise-class solutions have one thing in common—they require a significant investment and total cost of ownership.
Most enterprise software/system licenses start in the six figures. Due in large part to vendor consolidation, many are embedded within a consolidated enterprise application development platform with seamlessly integrated components offering an end-to-end solution that pushes the license well into seven figures.
On top of the licensing, you have to add the annual maintenance fees, which are usually in the five figures—sometimes more.
Add to the total cost of the solution the professional services needed for training and consulting for installation, configuration, application development, testing, and production implementation, and you have another six figure annual investment.
With such a significant investment and total cost of ownership required, can enterprise-class solutions ever deliver ROI?
Should I refinance my mortgage?
As a quick (but relevant) tangent, let's use a simple analogy from the world of personal finance.
Similar to most homeowners, I get offers to refinance my mortgage all the time. A common example is an offer that states I can reduce my monthly payments by $200 by refinancing. Sounds great, $200 a month is an annual cost reduction of $2400.
However, this great deal includes $3000 in refinancing costs. Although I start paying $200 less a month immediately, I do not really start saving any money for 15 months, when the monthly “savings” break even with the $3000 in refinancing costs.
Of course, saying only 15 months is ignoring possible tax implications as well as lost interest or returns that I could have earned since the $3000 likely came from either a savings or an investment account.
Additionally, refinancing might not be a good idea if I plan to sell the house in less than 15 months. The $3000 could instead be invested in finishing my basement or repairing minor damages, which could help increase its value and therefore its sales price.
How does this analogy relate to enterprise-class solutions?
The Business Justification Paradox
Focusing solely on the technical features and ignoring the business benefits of an enterprise-class solution isn’t going to convince either the organization's executive management or its shareholders that the solution is required.
Therefore, emphasis has to placed on the need to make the business justification, where true ROI can only be achieved through tangible business impacts, such as mitigated risks, reduced costs, or increased revenues.
However, a legitimate business justification for any enterprise-class solution is often relatively easy to make.
The business justification paradox is that although an enterprise-class solution definitely has the long-term future potential to reduce costs, mitigate risks, and increase revenues, in the immediate future (and current fiscal year), it will only increase costs, decrease revenues, and therefore potentially increase risks.
In the mortgage analogy, the break even point on the opportunity cost of refinancing can be precisely calculated. Is it even possible to accurately estimate the break even point on the opportunity cost of implementing an enterprise-class solution?
Furthermore, true ROI obviously has to be at least estimated to exceed simply breaking even on the investment.
Given the reality that the longer an initiative takes, the more likely its funding will either be reduced or completely cut, many advocate an agile methodology, which targets iterative cycles quickly delivering small, but tangible value. However, the up-front costs of enterprise licenses and incremental costs of the ongoing efforts and maintenance still loom large on the balance sheet.
Even with “creative” accounting practices, the unquestionably real short-term “ROI high” of following an agile approach could still leave you “chasing the dragon” in search of at least breaking even on your enterprise-class solution's total cost of ownership.
A Call for Debate
My point in this blog post was neither to make the argument that organizations should not invest in enterprise-class solutions, nor to berate organizations for evaluating such possible investments using short-term thinking limited to the current fiscal year.
I am simply trying to encourage an open, honest, and healthy debate about the true ROI of enterprise-class solutions.
I am tired of hearing over-simplifications about how all you need to do is make a valid business justification, as well as attempting to decipher the mystical ROI and total cost of ownership calculations provided by vendors and industry analysts.
I am also tired of being told how emerging industry trends like open source, cloud computing, and software as a service (SaaS) are “less expensive” than traditional approaches. Perhaps that is true, but can they deliver enterprise-class solutions and ROI?
This blog post is a call for debate. Please post a comment. All viewpoints are welcome.