How to Evaluate Cloud ERP Investments: Part II
In Part 1 of this series, we introduced a framework for Cloud ERP investment planning and explored the first step in the assessment process: Identify. In Part 2, we will dive into a customer example to illustrate typical outputs of the Prioritize step. We will also explore the Quantify step of the assessment process.
Detailed Prioritization Example: a global payments customer registered a score of 66 out of a total possible score of 80 on the Cloud Adoption Index scale when equally weighting all criteria.
- Organizational appetite for change: (8)
- Desire for simplification and standardization (9)
- Speed to market and ability to scale (8)
- Vendor-led (vs. organization-led) governance (6)
- Continuous innovation (vs. status quo) (10)
- System predictability and consistency of global performance (9)
- Information security and network security (8)
- Cost structure and pricing model (7)
In this case, the customer gave highest priority to (5) continuous innovation and (2) desire for simplification and standardization. These two dimensions are typical leading indicators that an organization prefers the public cloud model to the private cloud model. High scores in other areas including (6) system predictability and consistency of global performance, (1) organizational appetite for change, and (3) speed to market and ability to scale further support a “Public Cloud Ready” decision path. Interestingly, though the customer assumed public cloud would have a more attractive cost profile, of the eight dimensions, it was rated the second least important dimension.
Through further due diligence, we learned that the key driver for a transformation was underlying risk management and compliance concerns which the company believed would be mitigated by standardizing its business processes across disparate business units, geographies and system landscapes.
When collaborating with customers to evaluate prospective software investments, we leverage a set of Business Case Pillars that span the spectrum from easily quantifiable to less quantifiable – often referred to as “Hard Benefits” and “Soft Benefits”.
Figure 2: Business Case Pillars for IT Investment
Again, referencing the customer example cited above, we identified quantifiable advantages supporting the customer’s subjective Public Cloud preference as indicated by its Cloud Adoption Index score.
Some sample relative advantages include:
Pillar I. Cost Reduction: Verdict – Public Cloud
Public Cloud ERP implementation, software subscription and ongoing support of infrastructure determined to provide a 55+% cost advantage over Private Cloud over 5 years.
Pillar 2. Productivity Improvement: Verdict – Public Cloud
Measured in hours saved by standardizing on processes across the organization, the customer determined it could reduce its financial closing process time (hours worked) by 27% by upgrading to a Public Cloud ERP system. It determined it would expect to achieve a similar time reduction with a Private Cloud ERP solution in year one. However, when evaluated over a 5-year period, based on the customer’s documented propensity to build bespoke processes, the customer determined it would likely incur additional short and long-term costs in the Private Cloud where process standardization is more difficult to maintain. Based on historical experience with process degradation, the customer determined the financial closing productivity benefit to be achieved in year 1 would likely be reduced from 27% to 21% in year 2, and possibly down to 0% by year 5. Conversely, a Public Cloud ERP solution would enable process discipline without active governance providing for sustainable productivity improvements over the same 5 year period and beyond.
Pillar 3. Revenue Enablement: this customer did not attempt to quantify potential economic benefits for this pillar.
Pillar 4. Strategy Enablement and Loss Avoidance: Verdict – Public Cloud
Measured by time to value and opportunity cost avoidance. The customer determined it could begin realizing benefits from Public Cloud ERP 8 months earlier than it could in a Private Cloud ERP scenario. This was based on two factors:
- Projected Public Cloud ERP implementation cycle was 6 months shorter than the projected Private Cloud ERP implementation cycle
- Due to a need to build in lead time for additional IT infrastructure setup and systems testing across 3 disparate customer locations, the customer’s benefit realization timeline would be pushed back by an additional two months in the Private Cloud ERP scenario.
In Part III, we will explore the final Validate step in evaluating cloud ERP investments.