Process Is The Main Thing

@ Anatoly Belaychuk’s BPM Blog

ROI of ERP and BPM

BPM advocates like to point out that, unlike typical IT projects, BPM gives a quick financial return. For example, according to Gartner data quoted by Jim Sinur, half of BPM projects demonstrate ROI at 20% or more. He saw wild” numbers of 220% and 360% which he discarded to not skew the average.

Unfortunately this nice picture makes harm rather than contributes to the perception of BPM if not supported by analysis. Potential customers are well aware of reported bottom line numbers value and don’t trust another “silver bullet”.

I guess I can explain why BPM projects ROI is good on average, and why it shows such a large spread: it all depends on the corporate information system.

Let’s consider a company that implemented an ERP system. It may not even cover planning (after all, “P” in ERP stands for “Planning”), just accounting in the areas of finance, customers and suppliers relations and inventory - this seems to be a typical case. With BPM not only users of accounting and finance are engaged into end-to-end business processes but also management, engineering, purchasing, manufacturing, sales and marketing. Traditional corporate systems are ”passive”: it is able to answer almost any question, but only if you know how to ask. BPM makes it active by assigning tasks in accordance with the approved business process scheme, it controls timings, triggers escalations etc. All process activities are reflected in the appropriate records of a single database. As a result, instead of a «corporate data cemetery», we obtain an efficient tool to improve the quality of services, to increase sales and to respond quickly to changing business environment.

As shown by E. Goldratt in his book “Necessary but Not Sufficient” most of commonly declared economic value of ERP - increased transparency and productivity, attractiveness to investors, inventory reduction – is a fiction. The corporate system is necessary but not sufficient condition for achieving the bottom line results. Sure ERP has the potential to improve the economic efficiency of the company but only when supplemented with BPM this potential becomes a reality.

Now let’s suppose that we spent a million to implement ERP and two hundred thousands for BPM project. If we agree that ERP is necessary then the achieved results should be referred to the total costs incurred. But if you take into account only the cost of BPM then you’ll obtain the “crazy” ROI numbers mentioned above. Let me use a telecom analogy: ERP is like the backbone and BPM is like the last mile solution. Does it make sense to improve the ISP bottom line results by ignoring the cost of the backbone?

Of course it’s impossible to be in ISP business without a backbone access. Unscrupulous Internet provider may promise a client 10Mbps connection not mentioning that it’s only the bandwidth to its network and that the actual connection to the Internet will be ten times slower. The same thing happens when a customer says: “I have heard that ERP isn’t cool any more and there are problems with the payback. You say that BPM is such a great thing so isn’t it better to implement BPM instead of ERP?” Sorry, there is no way to do it “instead of”, only “together with” ERP! BPM not supported by the foundation of a corporate information system is like a good old docflow: weakly structured data which can not be processed, found or extracted at the right time and in the right way.

Getting back to telecom analogy: local provider is usually a better choice than global operator when you are looking for home Internet connection. Trying to reach every workplace within your company by ERP is about the same: ERP consultants can do it but basically it’s not their job. They usually recommend adapting your business to ERP rather than vice-versa. Adapting the system to your business turns out to be very expensive. In contrast to setting up Internet connection which is only done once, business processes should be within constant improvements loop so you’ll have to call programmers all over again. Therefore many companies have come to the conclusion that the implementation of business processes within ERP isn’t efficient and opt for BPMS which allows their own business analysts to design business processes.

Now let’s consider perhaps the most common situation: information «zoo», no single corporate system, Excel as the primary manager’s tool. The pilot BPM project is usually successful under such conditions. If the right business process is chosen, then BPM can streamline the process, radically reduce its cycle time, ensure seamless information transfer between functions, reduce costs, improve quality and ultimately provide solid economic results. Yet after the first success the BPM initiative often slows down because BPM team have to deal mostly not with business processes but with integration and accounting automation. The timeframe increases many-fold comparing to pure BPM project and financial performance declines.

You still need a backbone which business processes would connect to but in this case there is no single corporate system for this role. There are two possible solutions: either to implement ERP or to deploy a backbone based on service-oriented architecture (SOA). Both ways are hard, long-lasting and expensive but the alternative is to leave everything as is, forget about consistent business process management and finally become uncompetitive.

Of course it’s impossible to say which way is better - a unified system from a single vendor or the integration of various “best of breed” systems. Yet the recent years’ trend is the growing adoption of the latter approach. One reason is the progress and better affordability of integration technologies - ESB, MDM. Secondly, a unified system turns out to be a mirage: once the ERP is finally implemented you found yourself in need of CRM, PDA software for mobile workforce or software to monitor vehicles via GPS+GPRS. This way you fall back to the “best of breed” situation.

Conclusions:

  1. Economic impact of a BPM project depends on how much the company has spent before on the corporate system: the higher the amount, the higher return on investment can be demonstrated by BPM. But these figures are fiction because you assigned the lion’s share of total project’s costs to ERP and a large share of revenue growth and cost reduction to the BPM project.
  2. In order to really improve the return on investment, one must consider not separate ERP and BPM projects but all investments in management improvements or, if you wish, in business transformation. A chain is only strong as its weakest link: if you invest only in ERP then you will get an information backbone not reaching its consumers. And if you invest only in BPM then the first success will turn into disappointment when information flows from the business users hit into inefficient corporate system.

Please also note that the weak link may be people rather than technology. Implementing even the most sophisticated systems makes no sense if employees are not prepared to creatively reconsider the way they work. How many certified professionals in Theory of Constraints, Lean Manufacturing and/or Six Sigma does your company have? Highly motivated and well-trained professionals are the driving force behind the business processes management and enterprise information systems. Not just IT professionals but also specialists in modern management methodologies. And what is the driving force behind them? Company executives indeed.

08/25/09 | Articles | ,    

Comments (10)

  1. Jim Sinur 08/25/09 04:25 PM

    Well a number of BPM projects that I have seen do not involve ERP or even bespoke IT systems. As BPM support knowledge workers, the trend will increase. I agree having a good application base is definite advantage, it is not the “end all; be all”

  2. AS 08/25/09 05:13 PM

    Generally agree with your conclusiotns - just a few random comments:

    a) historical — workflow was originated within ERP systems to improve their flexibility; but often such a workflow is not visible. Effectively, BPM offers the externalization of workflow, so, BPM and ERP are very complimentary;

    b) methodological — in the absence of an agreed reference model for BPM it is difficult to compare impact of different BPM implementations;

    c) managerial — popularity of ERP is based in the long-term practices of US management to focus primary on the stock optimization. At the same time Japan was developing process-oriented practices;

    d) architectural — re “Of course it’s impossible to say which way is better - a unified system from a single vendor or the integration of various \“best of breed\” systems”. I think, a network effect should be used as a guidance — moving from the former to the latter decreases efficiency and increases effectiveness. So, choose what you need now.

    Thanks,
    AS

  3. Anatoly Belychook 08/26/09 03:10 PM

    Jim

    Thank you for sharing your experience. Well I have seen such projects too. Actually not just seen but performed. It’s easy to be successfull with “greenfield” pilot BPM project (not connected to any application) but our experience shows that you can’t go far this way. However the other extreme - putting application integration upfront - is more dangerous indeed. Many people get catched into this trap: they believe they shouldn’t launch a process into production until it’s integrated to just about everything. Bad, fatal mistake.

    Alexander

    Thank you for the valuable additions. The only point I won’t readily accept is methodology. My current position (it has changed during last year or so) is that BPM should be agnostic to process methodology, it’s an enabling technology for various methodologies. Want to develop the methodology? Fine. But don’t do it under BPM, better join existing schools. Otherwise we are doomed to re-invent the weel, split the efforts and confuse customers. Depending on issues the prospect faces I’d recommend TQM, Lean, Six Sigma, TOC or some mixture of those rather than pretend to introduce a brand new BPM methodology that makes all others obsolete. It seems that I’m a minority if not alone at this point but I can see that people just don’t buy another “BPM methodology” and I believe they are right.

  4. AS 08/27/09 10:35 AM

    Anatoly,

    Did you reach your “Trough of Disillusionment” with BPM? ;-)

    I consider BPM as making business processes the “first-class citizens” within an enterprise (i.e. explicit, systematic, with one master description for all phases in the life-cycle, flexible, etc.). BPM (as a tool for improving enterprise business performance) is an enabler for mentioned old schools — BPM may give them a set of real business processes and the real performance data to apply different improvement techniques. At the same time, BPM requires its own methodology, software products, reference architectures, reference model, etc. to move to “Slope of Enlightenment”.

    Thanks,
    AS

  5. Anatoly Belychook 08/27/09 11:02 AM

    Alexander

    No! Why? I just dive deeper into BPM.

    Why do we always pull everything to our place? BPM people pretend to have their own methodoly. Lean and Six Sigma books devote half of their space to what essentialy is general project managment not even mentioning the term.

    I wonder: is BPM science or religion? If it’s science then we should split the knowledge domain and collaborate with neighbourghs rather then invade into their territory. “Stand on giant’s shoulders”, not beat them or replace. It’s religion adepts who say “abandon wrong churches and come to us”.

    To be successfull BPM should use SOA and corporate applications and get used by process methodologies and methodologists.

  6. AS 08/27/09 01:13 PM

    Anatoly,

    Sure we would like to have BPM as good as an applied science, but as the current BPM is vendor-driven — BPM looks like a religion.
    Again, this is the raison d’être for a BPM reference model as a step toward customer-driven BPM.

    Thanks,
    AS

  7. Oleg Ladizhensky 08/31/09 10:27 PM

    Excellent article! I’m totally agree with the idea that pure standalone BPMS is not more than DMS, and all it’s power is in combination with other systems: ERP, CRM, HRM e.t.c. But I have one addition in ROI calculation: as we know ROI=(Gain from Investment- Cost of Investment)/Cost of Investment, and many BPMS implementers specially understate the cost of there services in pilot projects. Possibly this leverage is one of the reasons of such incredible ROI? And as a result in next projects with usual rates we already get normal ROI.

  8. Anatoly Belychook 09/01/09 07:09 AM

    ROI is an obscure matter indeed. There was a BPM implementations report from BPTrends: they found that every company they studied had their own method for calculating ROI.

  9. AS 09/02/09 08:53 AM

    My experience shows that, in a well-architectured deployment of BPM, next projects show better “ROI” because of the reuse of the same tools, the same services and the same architecture.

    Thanks,
    AS

  10. Anatoly Belychook 09/04/09 12:50 PM

    Scott Francis from bp3 wrote a great responce to this post: http://www.bp-3.com/blogs/2009/08/bpm-roi-and-other-tlas/

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