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Do you know the way to SAP ROI?

Getting a return on IT investments is an obvious goal, but the route to ROI is not always so clear. We asked site expert, ROI specialist Tom Pisello, CEO and president of Orlando, Fla.-based consulting company Alinean, to tell us how NetWeaver, xApps, and gut-level instincts factor into the SAP ROI equation.

Do you have any last words of advice to cash-strapped decision makers?
Avoid gut-level decisions. Measure everything. Apply due diligence before taking action. You will probably have to rationalize your decisions to the rest of the organization, and doing your homework so that you can present your reasons for going with project A and B while postponing project C will help a lot.


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Are there any areas where SAP still has work to do?
The biggest challenge is that every business is unique, yet SAP must try and tackle issues with a generic set of tools. This means there's still a lot of customization that has to get done. I've seen implementations with strong business cases that soured because of excessive customization costs. The solution is due diligence. Implementation teams should verify that initial benefits are fully realized before taking on further projects. This ties in with another trend, where projects are broken down into smaller pieces for a specific group of users, and the solution can be optimized before moving on to the next piece. This approach cuts implementation time and enables customers to see a real payback in as little as three to six months. What are the major trends in the SAP world as it pertains to return on investment (ROI)?
I think SAP's new initiatives, NetWeaver and xApps in particular, center around helping companies maximize return on their investments. SAP projects have historically been relatively long and expensive to implement, which makes them fairly risky. NetWeaver and xApps are less costly, and make it easier to leverage the process automation from one part of the process to other parts.

The solutions are no longer a number of isolated islands; everything is going the way of cross-people, cross-process and cross-organization solutions. Another important trend is intelligence, where you put the new technology to use, not only gathering the information, but also to make it more accessible to people outside specific business processes. Isn't this a big shift from the late-'90s mentality?
It is. We still see business cases where three to four pieces are justified together, but the trend is to have the first piece fully completed and proven beneficial before moving on to the next step. It used to be a market-share race, where companies bought big platforms only to realize they couldn't do everything they wanted in the time frame they had. They simply bit off more than they could chew and ended up with serious resource constraints. In addition, when you're trying to change everything at once, you end up with all sorts of adoption and process-engineering problems. What can vendors do to help customers improve their ROI?
Vendors should help customers understand the different aspects of the implementation, establish key measurements, and then go back to verify that the customer did indeed realize the promised benefits. Vendors have become pretty good at pre-sales support, but there's still room for improvement on the post-implementation side.

What we'd love to see is the concept of an ROI service-level agreement, where vendors actually guarantee a certain level of ROI. If the implementation does not deliver the promised benefits, the vendor gets less money, but on the other side, if the customer gets all it wants, the vendor gets more. It's an ambitious concept with many details that need to be hammered out, but I believe the vendors who step up to this level of accountability will be the ultimate winners.

Are there any common misconceptions about SAP ROI?
I have read reports lately where customers claim they have not gotten a positive ROI from SAP implementations. My experience is that many companies have no clear idea of where they stand prior to their implementation, nor have they gone back six months later to review the realized benefits.

In that scenario, how can you accurately tell how things worked out? Statistically, only 30% of companies know the cost of any given project, and I'm guessing only 20% of companies actually go back and measure the outcome to determine whether the goals were achieved or not. This indicates the real issue is lack of accountability, rather than whether SAP delivers on its promises or not. Companies need to get handle on the before and after situations to properly evaluate the impact of any implementation.

What are the differences between NPV (net present value), ROI and other terms?
Many of these terms are used quite loosely, so I'll try and straighten things out. The main process is called cost benefit analysis, which looks at the big picture. Once you have the costs and the benefits on a timeline, you can run some financial calculations on the cash flow to analyze and summarize the project using certain key terms. The four key terms are ROI, NPV, payback period and internal rate of return.

1. ROI is the net benefit of the project -- benefits minus costs divided by the total cost. A $1 project with 200% ROI means you get your original $1 back, plus another $2.

2. Net present value (NPV) looks at money spent today against future return. An outlay of hard cash today is not equivalent to cash earned five years down the road, so the NPV discounts the future benefit to provide a more accurate comparison to today's cost.

3. Payback period is the point when the cumulative cost is outweighed by the cumulative benefit.

4. Finally, the internal rate of return is the most financially complex calculation. It means the effective interest rate that the project is earning for the company.

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