Whitepaper: IT investment decision-making with confidence

1. IT investment decision-making
with confidence
A practical guide for medium-sized companies

2. IT investment decision-making with confidence
A practical guide for medium-sized companies
The complexity of business processes, even in small and
medium-sized companies, makes support from information
technology (IT) an essential requirement. IT has become
a key element of almost every cost reduction or efficiency
improvement programme and most business are exploiting
the potential of modern technologies. This explains the
absence of any dramatic downturn in IT investments during
the financial crisis period.
Like any investment offering reasonable returns, software
projects also involve inherent risks. However, in contrast to
many financial investments, negative outcomes in projects
are not simply a question of fate. Medium-sized companies
have the power to influence the success of their IT projects –
simply by making the right decisions.
IT investments
bring returns

3. IT investment decision-making with confidence
A practical guide for medium-sized companies
There are lots of good reasons for investing in modern IT
systems. From an operational point of view, the focus is often
on cost reduction and increases in efficiency. IT investments
can also be part of a long-term business strategy. Another
equally important motivator for IT investments is adapting
internal processes to changed circumstances, for example,
vertical supply chains bringing suppliers closer to their
customers. New legal requirements are another cause of
process changes.
Tip: take time to plan your investments
The most successful IT investments are those that
accompany a company's organisational and cultural
development. So it is important to start planning early.
Take time to work out your strategy and make sure that
technical advances are reflected in staff development.
There is little point implementing a CRM solution if the
concept of "customer focus" is not an integral part of
working life.
Project development checklist
• Draw up a business strategy for the short, medium
and long term.
• Set business objectives for each of these periods.
• Check the feasibility of your strategy and assess
any risks If required, work out alternative scenarios.
• Define actions (sub-objectives) as milestones towards
these business objectives.
• Plan ahead in order to avoid time pressure on decisions.
Project preparation
Early planning is half the battle

4. IT investment decision-making with confidence
A practical guide for medium-sized companies
Task
Homework for IT managers
Planned actions will often have a direct effect on the
IT landscape, encompassing software, hardware,
telecommunications and service requirements.
This explains why IT investments are often very complex.
Which makes it even more important to set clear targets.
However, this tends to be a weak point in practice. Vague
targets, or even no targets at all, make it more difficult to
select suitable solutions and make a precise cost-benefit
analysis impossible. Consequence: project costs and time
scales spiral out of control.
A more useful approach is to use the action plan to assign
specific tasks to IT staff. Their job then is to develop
comprehensive solutions encompassing telecommunications,
services, hardware and software.
Action plan checklist
• Use the action plan to define specific tasks for IT staff
• Break down large, comprehensive processes into
sub-areas in order to assess the details more clearly.
• Illustrate the consequences of IT investment decisions
on the cost structure.

5. IT investment decision-making with confidence
A practical guide for medium-sized companies
Setting priorities
Profitability is key
From barcodes in logistics to mobile solutions for field
staff and integration of machines in production – untapped
optimisation potential exists in many areas of a company.
However, financial and human resources are often scarce.
The solution: set priorities. In the absence of objective criteria
to assess the value of individual investments, decision-
makers are often forced to rely on "gut instinct".
Planned actions will often have a direct effect on
the IT landscape, encompassing software, hardware,
telecommunications and service requirements.
This explains why IT investments are often very complex.
The sequence of IT investments should instead be
determined based on the associated benefit. This means
prioritising those investments promising the highest returns.
Medium-sized companies are, of course, not in a position
to prepare detailed cost-benefit analyses for each potential
investment. However, failing to consider the profitability
criterion at the very start is counter-productive.
A better approach would be to work out at least a rough
estimate of the expected benefits of the investment – process
cost savings, for example, or potential profits in new markets
- and compare these with the anticipated investment costs.
Project selection checklist
• Compare the investment options open to you
and set priorities.
• Investigate any technical constraints and external
factors, such as commercial or tax regulations,
that could influence the sequence.
• In the case of options with equal ranking, base
the decision on profitability criteria, for example,
using a rough cost-benefit estimate.

6. IT investment decision-making with confidence
A practical guide for medium-sized companies
Optimise processes
First the process,
then the investment
After establishing which IT project should take precedence,
the next step takes place at process level. The aim is create
a more linear process organisation. Hardware and software
investments are often interlinked.
Process optimisation involves comparing actual existing
processes with the optimised target processes. These target
processes determine the required investment and are the
basis for the subsequent selection of hardware and software.
Process optimisation checklist
• Identify weaknesses and barriers to efficiency
in the process organisation.
• Develop approaches to eliminate existing inefficiencies.
• Summarise the different actions for new target processes.
• Determine the investment required in telecommunications,
IT services, hardware and software.
Investment costs are a key selection criterion. If the total
costs exceed the anticipated benefits, the project will not
yield sufficient returns. A detailed profitability analysis will
be required to make an accurate assessment. However,
depending on the scale of the project, this aspect is often
omitted. While current process costs can be measured
with an acceptable level of effort, the potential benefit of
IT investments is more difficult to estimate.
Which explains why many companies restrict their
assessment to the cost aspect from the very start. This starts
with an evaluation of current processes. These processes
are then compared with the total investment costs and
the savings in process costs.
However, even this "simplified investment appraisal" involves
a significant workload. As a rule of thumb: the higher the
investment volume, the greater the attention to profitability.
Profitability calculation checklist
• Analyse the costs of the current processes.
• Assess the future workload for the target processes
and any secondary effects.
• Estimate the anticipated investment costs.
• Summarise the results. The report should provide
information on the profitability of the project, the forecast
payback period and the costed upper price ceiling.
Calculate costs
Simplified
investment appraisal

7. IT investment decision-making with confidence
A practical guide for medium-sized companies
Support from the boss
Solid figures are convincing
If responsibility for IT and finance is divided between
different people, the first step is to convince management.
This "support from above" plays a decisive role in enforcing
the reorganisation with staff.
If several projects are to be carried out at the same time,
the cost-benefit assessment plays a particularly important
role. Seeking to implement as many projects as possible
many decision-makers take a "lawnmower" approach to
trimming forecast budgets. Solid figures carry greater weight
and reduce the risk of trying to work with unrealistic budgets.
Tip: profitability counts
When trying to rally support for an IT project, do not try to
dazzle colleagues with technical features. A more effective
approach is showing how the project will help to reduce
costs and turn fixed costs into variable costs. IT investments
should therefore be backed up with sound economic
justification. It is results that matter, not solutions.
Management discussion checklist
• Prepare carefully for the discussion with management.
• Back up your arguments with sound economic facts
rather than technical details.
• Try to present specific examples of the financial benefits
of the proposed IT investment.

8. IT investment decision-making with confidence
A practical guide for medium-sized companies
Employees
Everyone in it together
Introducing new business software is not simply a technical
challenge. Implementing the changes within the company
can be equally demanding. IT projects call for high
commitment from all employees involved for a limited period
of time. However, most people will commit only if they truly
understand the purpose.
This means: Communicating the intention behind the project,
the time scale and associated changes as early as possible.
Another important factor is consulting key users from
affected departments in advance and involving these people
in the decision-making process. They are far closer to day-
to-day operations and often have a better understanding of
processes than management or IT specialists.
Employee checklist
• Inform your employees as early as possible.
• Nobody likes surprises.
• Take time to explain the project and convince
your colleagues.
• Involve key users from affected departments at an early
stage. This will give your project more practical relevance.
• Involve your employees in the selection of the solution and
take the decision together. This will ensure subsequent
acceptance.

9. IT investment decision-making with confidence
A practical guide for medium-sized companies
Framework conditions
System environment
IT is never the solution to a problem, it is simply a means to an end. The selection
of hardware and software is therefore the final step in the decision-making process.
The technical framework conditions must be considered first.
Beware of legacy data
The status of legacy data can become a real stumbling block in the software
sector. Although master data such as address or item information can be migrated
relatively easily, a completely different scenario applies for transactional data.
Different structures and formats often make transfers more difficult. Data quality
presents just as much of a problem, because the data often originates from
a variety of different sources. Data is frequently out of date, duplicated or not
maintained correctly.
It is not possible to eliminate these types of defects during the conversion process.
In this scenario, it is therefore advisable to start data cleansing early, as all
capacities will be used during implementation. Data issues quickly lead to delays
or future restrictions.
Tip: estimate capacity utilisation correctly
IT solutions should accompany and promote the company's growth. This will
be possible only if the solutions are scaled correctly. The system should allow
sufficient scope for increases in transactions and data volumes in the foreseeable
future. Precise knowledge of your own requirements is the key to making the
right selection.
Legacy data & system environment
checklist
• Clarify requirements in relation to
integration of telecommunications,
hardware and software.
• Check the extent of required legacy
data migrations.
• Analyse their structure and options
for export.
• Check the quality and homogeneity
of existing data. Plan ahead for data
cleansing, this can be very time-
consuming.
• Be generous when estimating the
future system load. Hardware and
software should have sufficient
capacity to support the company's
growth.

10. IT investment decision-making with confidence
A practical guide for medium-sized companies
Software
Four steps to the right solution
The safest strategy for IT investments is a comparison of potential solutions as part of
a multi-stage selection process. Allow between three to six months for this step – depending
on project volumes. An explanation of the steps involved in this selection process is
shown below, based on a "business software" example. It is also applicable, with some
modifications, for hardware and telecommunication solutions.
1. Pre-selection – the "good ones go into the pot"
The objective of market research is to reduce the number
of potential candidates to a maximum of twelve. As well
as the scope of functionality, factors such as investment
security, internationality and industry focus also come
into play. Checking existing reference installations is also
recommended.
Pre-selection checklist
• Obtain an overview of the market situation.
• Check the suitability of the solutions using freely available
information.
• Investigate industry experience too by reading references.
• Visit trade shows, roadshows or similar events to find
out more.
2. Intermediate round - invitation to interview
In the intermediate round, the remaining candidates are given
a detailed set of specifications containing core business
processes and project requirements. The candidates use
this as the basis for specific solution proposals and an
initial quotation. This should clarify issues such as required
modifications as well as anticipated maintenance and service
costs. The quotations are then compared. The three to six
most promising candidates are then invited to the final round.
Intermediate round checklist
• If you have not already done so, draw up specifications
based on the results of the process optimisation review
or process analysis.
• Send the specifications to the top ten or twelve suppliers
(maximum) from the pre-selection stage.
• Analyse the submissions and invite three to six of the most
promising candidates to the final round.

11. IT investment decision-making with confidence
A practical guide for medium-sized companies
Software
Four steps to the right solution
3. Final presentation - supplier deployment
In contrast to the intermediate round, this final stage
assesses candidates' actual performance rather than
manufacturers' statements. To gain an insight within
an acceptable time, most companies assign tasks to
the candidates. These tasks require candidates to
integrate complex business processes in the software and
demonstrate the results during a presentation. This approach
obliges the suppliers to work with the company's needs.
This is sometimes followed by additional workshops with
the best two or three candidates.
Final round checklist
• Assign specific tasks to candidates in the final round.
This will allow you to check that the presentations are
company-specific.
• Select key or even business-critical processes for
the presentation to identify any eliminating criteria.
• Involve employees from the affected departments
in the assessment of alternatives.
4. Decision - soft factors play a role too
In order to remain as objective as possible, many companies
use catalogues of points in which weightings are given
to individual criteria according to their significance.
Nevertheless, decisions are not just based on hard facts,
but also on soft factors. These include factors such as
industry experience, service, implementation concept and
investment security.
Decision checklist
• Assess the approaches, performance and competence
of the different applications and suppliers. A weighted
points system ensures the required objectivity.
• Pay attention to "soft factors" as well. For example,
industry experience, procedures or investment security.
• Consult representatives from the affected departments
and involve them in the decision. This will ensure higher
acceptance.
• Prepare for the implementation meticulously during a joint
workshop. Careful planning reduces the risk of unpleasant
surprises.

12. IT investment decision-making with confidence
A practical guide for medium-sized companies
Hardware
Secure but affordable
The key criterion when selecting hardware is availability.
No company can afford to have emails going unanswered
or employees unable to access business software.
Availability levels of up to 99.999 per cent are possible,
reducing the annual failure risk to just five minutes.
However, how expensive would such a solution be to
implement? A similar conflict of objectives arises in relation
to performance. Over-dimensioned systems may be fast,
but they tie up a huge amount of capital.
The IT manager's task is to find a compromise between
performance, availability and technical sophistication,
on the one hand, and the available financial resources,
on the other. In situations where both hardware and software
investments are being made, the software decision should
come first. The hardware can then be tailored immediately
to the changed requirement.
Hardware requirements checklist
• Calculate the future system load (for example, transaction
volumes, memory requirement).
• Make the required decisions with regard to data security
and availability.
• Determine requirements for integrating operational
hardware (barcode scanners, point of sale systems, label
printers, etc.) in business processes and expectations for
the equipment.
• Check whether and to what extent external access is
required (for example, by field staff, distributed subsidiaries
or branches).
• Identify other relevant criteria influencing the hardware
selection, for example flexibility, upgrade possibilities or
power consumption.
• Summarise the individual requirements in a profile.

13. IT investment decision-making with confidence
A practical guide for medium-sized companies
Telecommunications
IT and telephony
Email aside, the telephone remains an important
communication tool. Most medium-sized companies
operate separate infrastructures for IT and telephony,
often failing to fully exploit the potential of today's modern
telecommunication systems.
In particular, connecting these two separate "worlds" using
the Telephony Application Programming Interface (TAPI)
could reduce the burden on employees. Voice over IP (VoIP)
offers even greater potential for rationalisation. This brings
IT and telephony together within the same infrastructure,
allowing deeper integration. The decision as to whether to
use traditional or IP-supported telecommunication solutions
depends on the the company's needs and existing IT
infrastructure.
Telecommunications checklist
• Define your company's actual requirements for
telecommunications.
• Determine how you can meaningfully connect IT and
telephony.
• Check the existing infrastructure and, if applicable,
determine the total costs for the transition
to IP-based systems.
Service
Greater security
for investments
Whether telecommunications, hardware or software: returns
on investment take time. Medium-sized companies are
therefore entering into a long-term relationship with their
technology partners. Which means that the right solution
is not dependent on technical aspects alone. Service plays
an equally important role. This applies in particular if the
company's own IT is not smoothly integrated and certain
tasks are outsourced.
Services checklist
• Define specific requirements for services. To avoid
dependencies, keep core processes within the company.
• Establish service needs at other company locations,
where applicable, and determine whether the supplier
can cover these.
• Clarify what kind of service level agreements can be
concluded for outsourced areas of responsibility.
• Specify the required emergency response times to
ensure business continuity. Not all companies need short
response times at weekends and during the night.
• Do not rely solely on statements from manufacturers
and probe more deeply into service structures, number
of service employees and service quality.

14. IT investment decision-making with confidence
A practical guide for medium-sized companies
Conclusion
In medium-sized companies in particular,
IT investments are often under high time
pressure. At the same time, staff capacities
are limited.
There is simply no time for complex profitability
analyses. Consequence: Many companies find
it difficult to even approximately quantify
the economic benefit of their business software.
This is questionable from a business point
ofview, but technical imperatives often take
precedence over number crunching.
However, there is always a risk of taking
the wrong decision. A structured and carefully
planned procedure helps to reduce the risk
of errors.

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