Saturday, 7 February 2009

The cost of doing business

I've been busy the past week - out of the country at a remote site. This is the first chance I've had to add anything more.

The company has several sites, some are quite distant, a couple outside of the country. When I first joined, I was astonished at the amount of travelling that was going on. No-one has ever kept specific details, but I did a (very rough) calculation that among the staff at my site, they were spending an average per month of about 75 -100 days travelling. Some of this was by car, some by plane - very occasionally by train. (This does not include those staff whose job is specifically travelling - sales, trucking etc.)

It's difficult to get any kind of accurate figure, but for travel, hotel & hospitality alone, we were probably spending around a quarter of million dollars for my site alone (which is one of the bigger ones). It seems likely that the company was spending a little over $1 million a year. At the time, gas prices were still stable, but everyone knows what happened there. I dread to think what our costs would have been. This also created issues with staff time wasted.

So one of the first things that I did was to set-up a process of remote access working - this allowed those that were travelling to be able to get on with some work whilst waiting around airport terminals or in hotels. This went down well with almost everyone - productivity went up after an initial period of getting used to it, and now it is seen as absolutely essential. We did have a slight issue a few months ago with some people unable to get access (one of the guys making some modifications and blocked access for about an hour) and the reaction to this showed just how used to it everyone has become.

The next step was to introduce video conferencing -I've worked with it before and know just how good it can be. There were of course a few initial teething troubles (people will play about with the settings) but now it works almost seamlessly. I think that there is at least one VC between sites per day and it is now seen as just another tool. Almost all of the staff have had the opportunity to take part in a VC session. The cost saving to the company cannot be overestimated. The equipment cost around $7,000 per site and we saved that much per month in the first year alone, probably twice that now.

So where does this link to SAP - quite simply, the cost of installation has been enormous and without the VC facility, it would have been a whole lot more. At the initial launch meetings, I estimated that the cost of the 4 meetings were around $35,000. After that, almost all other meetings were conducted over the VC - at one stage, 4 a week and they generally lasted all day.

We still had to have some travelling - there was no getting away from that. However, we have kept some figures that make me feel that I can justifiably say we saved $300,000 last year. Of course, this had never been factored into the calculations for the project which really only ever showed the cost of the software and the consultants. We've had to provide them with office facilities, and at the beginning they were expecting us to provide them with lunch etc. (That soon stopped!)

Now I may sound like I'm being a bit hard-assed about this - and I probably am. Before starting to work in IT, I had a long background in other areas of management; and one thing that I know is that as a manager, I have 3 main areas of responsibility. "To increase sales, to cut costs and to improve margins". This applies to all managers, whatever their title and whatever sector they work in.

The reason for buying SAP is quite simple; we need to improve the way that we do business to make us able to supply our customers with a better and more cost effective product. It should allow the flow of information between all areas of the business that will allow this to happen and make it easier to getter better business decisions. This should also allow us to cut production costs, and lead times.

However, there is a very fine balancing act here. I think it likely that SAP will provide some of those savings and increase our ability to streamline the process from order thru production to sale. However, the cost of implementng it is very high - we have to factor that into our production costs. Essentially, will there be an ROI? I have my doubts - current sales in this country of around $30 million, for the group $75 million. With the current economic conditions, this could contract further - we are still OK at the moment, but are already having to make plans to lay off some staff.

I did some numbers with the FD before Christmas; we would normally expect any project to have a payback of 3-5 years tops. Of course in some cases, it is actually better to set costs off over a longer period, such as for capital plant, but they would still want to see a payback in under 5. For SAP, we cannot see a payback in that period - our estimates make it closer to 12-15 years. That of course assumes that we stay with it that long and that prices only increase by an amount anticipated.

Ultimately, with all the additional costs, is it likely that we would ever see a return? I can't say for certain, but I know that we would have to see some huge savings.


I also note that there are a couple of people following this blog now; thanks guys for the kind words. I promise to keep writing and hope that you continue to enjoy it.


  1. In your post, you mention the high cost of implementation (software, consultants, meetings, etc). Another point that you did not yet experiment is the cost of running the system when it will be in production. This might have an impact on the payback that you estimated (and in my opinion this makes the payback longer).

    SAP is a black box. When a problem occurs or when you need to understand what's happening or when you need to activate a new feature, you can't just dive into the code and perform an analytical activity (except for your own ABAP codes). Not to mention that the documentation is esoteric and the available books are not satisfying (I'm talking about CRM, not ECC that I don't know).

    What you have to do is to play with the whole thing, run different functional cases, until you figure out what is wrong or how the system is supposed to work. This is time consuming. And when you don't understand, and believe me, sometimes you can't, then you have to pay consultants. In Europe, where I'm working, SAP consultants are rare (despite SAP is European) and even the inexperienced consultants are far from being cheap (not to mention the consultants that deliver missions without even being trained).

  2. "This applies to all managers, whatever their title and whatever sector they work in."


    Too often forgotten!

  3. Domino Dev, I know what you mean and it will be part of some later stuff. At the moment, I'm concentratig on some of the earlier issues. I wanted to try to do in a sort of chronological order - however, I may well jump ahead. I appreciate your comments