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Systems Must be Introduced for Profit, Not Fashion

Nerius Jasinaviius, partner, TOC Sprendimai consulting firm, Lithuania

The size and cost of an information system do not matter if the technology does not offer a good return on the investment!


There are people who admire information technologies.  Others think about the profits which such technologies can help generate.  If company managers are asked whether their information systems are of use to their companies, most will immediately say yes.  The number who agree would be smaller, however, if we asked whether the systems helped to enhance revenue.  Only a few managers, most likely, would really be able to claim that an IT system helped their company to achieve significantly better results.
The developers and marketers of various systems talk about how the product collects more data, speeds up information exchange among company departments, etc.  The fact is, however, that very few companies make use of these advantages so as to increase sales and to reduce costs and investments.  If the system doesnt have an effect on the bottom line, that means that you never needed the system in the first place.  IT systems are not luxuries.  They are instruments for turning a profit.

ELIMINATING CONSTRAINTS

A technology is useful only if it helps you to get rid of constraints.  This applies not only to IT, but also to production, logistics, marketing, etc.  A chainsaw cuts down more trees than a handsaw does.  A handsaw, therefore, represents a clear constraint in the process of cutting trees, one that can be eliminated with the use of technology.
Basically, all IT systems eliminate constraints on information.  These systems allow users to make decisions based on much more information.  The rules, procedures and evaluation processes which companies had before IT systems were introduced were developed with these constraints in mind.  Product costs were estimated on a quarterly basis.  Sales plans were drawn up on a monthly basis.  That was because it took a lot of time to gather together the necessary information so that the calculations could be made.  Now, however, companies have IT systems which make it possible to get the data in a few hours and yet they still make decisions on a quarterly or monthly basis!
You may recall the story of the man who decided that his work efficiency with a chainsaw was lower than with a handsaw, because the motorised saw was heavier and could only cut backwards.  An IT system is of a bureaucratic nature.  If you simply use it with the same old rules, constraints will remain.  We can widen and pave a gravel road, but if the speed limit remains 40 km/h, drivers wont see any real benefit.

CHANGES ARE NECESSARY

A company can extract benefits from an IT system only if it understands the advantages of the technology that it can be used to gather, process and present certain information.  The company must also identify the business constraints which the system can eliminate expedited ordering, quicker responses to client enquiries, etc.
Third, companies must identify the rules, processes and estimates which related to the constraint.  Lithuanian government institutions, for instance, are still obliged by law to respond to a citizens question in 20 days time.  This legal provision was introduced seven years ago, and since then public institutions have spent millions on various information systems.  Citizens see no real benefit to this vast investment, because the law and the rules did not change.
Once the constraint is eliminated, the next step must be to change the rules.  In this case, that would mean responding to questions more quickly than in 20 days.  The most important thing is to make sure that the new system supports new rules, that the company is not afraid of changes which would mean a better use of the system so that profits can be gained.  Otherwise a new IT system is nothing more than yet another expensive instrument which reinforces the companys bureaucracy.

IMPACT ON THE BOTTOM LINE

Company managers, for their part, need to identify those areas of the supply chain in which the absence of a better system prevents them from earning more money.  If there is centralised stock management, for instance, demand is planned on the basis of production plans and client orders.  This allows the company to avoid excessive acquisitions, and that means less storage.  If the period of time during which orders are filled becomes shorter, then the price of the product can be increased, or a greater market share can be won.  The buyer will clearly prefer the producer which delivers the product in two weeks, not the usual two months.
Furthermore, modern systems monitor demand for goods in real time.  A new item can be produced or delivered immediately after the previous one has been bought.  No longer are quarterly reports and forecasts needed.
The link between product and sales processes in a system allows sales managers to see bottlenecks in production processes.  The queue of orders can be restructured by each sales manager and approved by the production manager.  Shorter queues mean faster delivery, less stock and, therefore, reduced costs and more cash on hand.

OBSESSION WITH FUNCTIONS

I believe that the reasons for or against the purchase of a new system do not depend on the system or on the size or profile of the relevant company.  For one firm, slight software changes might be enough to eliminate a constraint.  Another may need a new module, a third may require an entirely new system.  It is never too late to look for ways of making better use of an existing system.
Vendors of systems are forever going on about data accessibility, wonderful search capacities, flexibility, functionality, etc.  I advise against becoming too fascinated with these claims.  An overabundance of unnecessary functions can even be harmful.  Easily distracted users will waste time.  Too much information can lead to confusion and incorrect decisions.  There should be enough functions, however, to enable the expansion of the system as the company grows.  This means that the forecast development of the business must be taken into account when a system is introduced.
It is obviously far easier to bring in a new system than to reorganise the companys overall processes.  Technical knowledge and the efforts of an IT department are sufficient to implement a system, while change will require brainstorming on the part of managers at every level.  This is a long marathon of questions and answers among company employees, as well.

FROM TECHNOLOGY TO BUSINESS

Projects involving new systems will be successful when system installation and changes all occur at the same time and on the basis of a pre-determined plan.  Companies must review and alter their business processes when introducing resource planning systems.  Proper involvement of managers and IT specialists who know their business and the specifics of the system that is one of the keys to success.
It is not unknown for system developers in the world to install systems free of charge in exchange for a share of the increased profits that result from the system and the resulting reorganisation of processes.  This does not require an up-front investment on the part of the buyer, and it forces the vendor to work much harder, because success will mean more income.
Small companies in the small Baltic markets, of course, are disadvantaged in this regard, because developers of small systems usually lack both capacity and competence when it comes to studying their clients management systems and processes to any great degree.  Thats why they tend to focus on the technical aspects of the IT systems which they sell.  Even if a companys employees use many different functions in a system, however, that still does not mean that the system is being used in the most efficient possible way.

Authors contacts: nerius(at)toc.lt


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eBaltics
28.03.2024


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