Establishing ERP and IT Performance Measures

Our last posting gave on overview of how to build and ERP or IT business case. That is one big step toward achieving a healthy Return on Investment for the millions of dollars required to implement any large system. However, to truly realize the benefits of ERP, you have to go one step further and develop performance measures at an operational level.

Most business cases develop high-level corporate performance measures that define potential areas of an IT or ERP project's business benefit. Examples include reduced inventory, reduced sales order processing time, reduced headcount, etc. The problem with these high-level measures is that the associated benefits will not transpire unless the metrics are pushed from the executive down to the operational levels of the organization. This helps drive accountability and visibility to achieve the benefits outlined in the business case.

Let's use reduced sales order processing time as an example. Perhaps it was determined that an ERP system could potentially reduce sales order processing by 30% and an annual savings of $1 million in reduced headcount company-wide. This is a tangible benefit, but it means nothing to mid-level operational managers of a global conglomerate that will need to contribute to this benefit. So if you have a Director of Sales and Marketing in charge of Western Europe, that person should be given a specific target to contribute to this $1 million savings so they are held partially accountable for the project's overall ROI. The same should be done for the directors in charge of other areas of the business until the full $1 million savings target is assigned to the appropriate people.

Obviously, this process is easier said than done. In order for this performance management approach to succeed, effective communications along the way will be crucial. Ideally, these operational managers that will ultimately be accountable for project results on the business side should be involved in helping define the business case and potential savings of an ERP system. In addition, they should also be given support to help identify root causes of anticipated benefits that are not realized. This will help ensure buy-in to the established targets.

In short, the only way to achieve the ROI defined in a business case is to cascade target improvements and accountability out of the boardroom down to lower levels of your organization.