How to Establish a Budget and Buy New Information Technology

The traditional approach to purchasing technology may be stated as follows (with minor variations):

1. Create a budget

2. Create a requirements list

3. Review technology demonstrations

4. Get proposals from the technology providers

5. Buy from the lowest bidder if they meet the basic requirements

What’s wrong with this picture? Let’s drill deeper beginning with “Create a budget.”

Typically the budget is predicated on what the organization thinks they want to spend on their new technology. This is precisely the wrong starting place. The enterprise ought first to determine what strategic and tactical benefits they want their new techology purchase to deliver. They should determine, in advance, how they expect their new investment in technology will help them increase throughput, reduce inventories and other investment demands, and hold the line or cut operating expenses. These goals should be quantified and they should be rational. For example, the organization might say:

INCREASING THROUGHPUT – Investment in CRM will help us segment our market in ways that will allow us to make more targeted win-win offers to our existing customer base while simultaneously giving us opportunity to make offers to new customers that will grow our market share. Combined, we expect these two effects to add $4 million in revenues over two years and an estimated $260,000 to net profits before taxes (NPBT).

REDUCING INVENTORIES/INVESTMENT DEMANDS – Investment in improved warehouse, inventory management, and inventory replenishment (supply chain) technologies will allow us to reduce overall inventories by an estimated $2.5 million over two years. By reducing inventories, this will relieve pressure on demands for new warehouse and production floor space. Thus, demands for new capital investments are also attenuated. The forecase $2.5 million reduction in inventories should save the enterprise an estimated $72,000 in carrying costs in year one and $136,000 in carrying costs in year two after go-live.

HOLDING THE LINE ON OPERATING EXPENSES – The improved accuracy and enterprise-wide data visibility provided by the new ERP (enterprise resource planning) system should reduce the requirements to add personnel as revenues increase. Our expected benefit would be 4.2 FTEs (full-time equivalents) over the coming two years at an average FTE cost of $78,000 per year for a total estimated benefit of $3.28 million over two years.

Summary of Net Estimated Benefits Over Two Years:

INCREASED THROUGHPUT $ 260,000

REDUCED INVENTORIES/INVESTMENTS $ 208,000

REDUCED OPERATING EXPENSES $3,280,000

TOTAL ESTIMATED BENEFIT (2 YEARS) $3,748,000

Having completed this kind of analysis, the organization has now quantified what it hopes to gain from its investment in the new techologies. More than that, the management team is in a far better position to determine “requirements.” The requirements list will no longer be the 300 or more mostly meaningless items garnered from current users that do little more than reiterated things like “Must be able to print a check.” Instead, the team is ready to focus on that relatively small handful of things that a technology provider might show them that will really help them achieve the enterprise’s goals for meaningful improvement. Equally important, the management team is now prepared to set a meaningful budget based on realistic expectations and forecasts of return on investment (ROI).

SUMMARY

Business owners, executives, and managers that assume that buying information technology is best done by setting a budget, considering the options, and then buying from the lowest bidder are likely to be disappointed. This is especially true if their budget amounts to nothing more than a guess-timate of what they think their “new system” should cost. If they have not set strategic goals for their investment in new technologies, then their purchasing process will lack focus and it is all too likely that their acquired technology will not be fully integrated with their corporate strategies. Furthermore, using the traditional approach will mean that it is less likely — not more likely — that the new technology will not deliver the return on investment (ROI) that stakeholders wanted.

(c) 2008 – Richard D. Cushing

Innovative Solar Companies Must Be Ready to Dump Their Current Technology at Any Time

Let’s say you are a start-up company in the alternative energy sector, most would agree that you are in the right place at the right time. Next, let’s say that you have a new solar company that is about to take the market like an X-flare Sun Spot! Great, it’s all good, tax credits waiting for the buyers of your product and venture (vulture) capitalists and angle investors lining up to get in on the action. It’s all good right?

Well, sure it is if you get moving right away, get your product to market, sell a ton and have a quick exit strategy to pump and dump so to speak. No, I am not suggesting that you blatantly make forward looking projections in violation of SEC laws, rather I am saying that you’ll need to be ready to sell and get out of the business at a moment’s notice. Why you ask?

Simple, since these types of technologies are receiving boat loads of research funds, someone out there somewhere, maybe MIT or maybe someone in China, Japan, Germany or somewhere on this planet will come up with something better and get ready to take that to market to compete against you. Thus, they’ll leap frog your technology before your sales even reach maximum velocity and everyone will choose to wait to buy until the next newest solar tech hits the shelves.

Each new innovation is bettering the one before almost like Moore’s Law, those who install solar panels might get a fast ROI with your product in 10-years, but if they wait 2-years from now, then they can get a better ROI of 3-5 years. So, with this known, you have to be ready to get your product to market at the speed of light and then get out of dodge when someone else comes and does the same thing. Think on this.

** Cite: An Overview for Innovation 1986 by Stephen J. Kline and Nathan Rosenberg published in the National Academy of Sciences