So, you and your company’s executive and management team are considering investments in new or upgraded technologies in order to get to all those improvements promised by the software or hardware salespeople. Of course, all of the sales folks’ claims are firmed backed up by their “Needs Analysis” and the assertions of the “Sales Consultants” and other techies they brought along with them.
Each vendor, in turn, will tell you just how critical it is to your business’s success to find “the right technology” in order to make the “gains in productivity” promised.
These folks are helpful!
Not only are they willing to help you answer the questions. They will even tell you what questions to ask.
This, of course, is to keep you from asking the wrong questions—questions they do not want to answer.
So, we are going to help you by juxtaposing the kinds of questions commonly asked alongside the right question to ask in its place. We will also provide some helpful commentary to explain our rationale.
Business Opportunity Questions
Commonly asked: What is our greatest opportunity to improve efficiency and how will this new technology help us do so?
The so-called “efficiencies” promised by technology vendors through investments in new or upgraded technologies tend to evaporate. This is because the improvements are not focused on the few functions that will really make a difference.
Think of your business as a chain—a chain of dependent events that lead from customer acquisition through to sales and profits on the bottom-line.
In order to strengthen (read: improve) a chain, one must strengthen the weakest link!
Strengthening (or, improving) accounts payable, for example, makes little (or, no) difference to the bottom-line unless accounts payable is truly the weakest link in the chain of events leading to more profit.
If it is not the weakest link, then making it “more efficient” adds not a single penny to your firm’s bottom line.
Here we define Throughput (T) very narrowly:
T = R – TVC
P = T - OE
T = Throughput,
R = Revenue,
TVC = Truly Variable Costs,
P = Profit, and
OE = Operating Expenses
We further note that TVCs are narrowly defined to include only those costs that are truly and directly (not indirectly) variable with incremental changes in revenues.
Put simply—and liberated from any complex allocations of overhead and so forth—this simple formula boils down to this:
Throughput can be increased by increasing revenues or decreasing TVCs, and as long as OE remains unchanged, any increase in T falls directly to the bottom-line of your company.
Going back to our example, using these formulas, we should be able to estimate the impact of improvements in “efficiencies” on the accounts payable link in our “chain.”
CASE 1: Typical
In most cases, so-called “efficiency” improvements in the accounts payable department will have the following effects:
R = No change
TVC = No change
OE = No change (because no one gets laid-off when the efficiencies are introduced)
Therefore, the the values of T and P are not increased and the company derives no financial benefit from the “investment.”
CASE 2: Rarely
In some rare cases, one might find that things are so bad in accounts payable that one FTE (full-time equivalent) can be reduced in the department. In such a case, we can apply the formulas along these lines:
R = No change
TVC = No change
OE = Savings of 1 FTE * $70,000/year (labor and burden)
This results in the following calculation:
delta-P = delta-T – delta-OE
(NOTE: delta- stands for “the change in…,” so “delta-P” is read as “the change in Profit.”)
delta-P = 0 – (-$70,000), therefore…
delta-P = $70,000 (first year)
WARNING: If you are going to use this calculation to justify your firm’s “investment” in technology, however, be absolutely certain that you are willing to cut the $70,000 from your Operating Expenses. If you are not willing to take that step, then your “improvement” will be no investment, at all. It will just an increase in your operating expenses.
Commonly asked: How will the new technology help us generate more revenue?
This is actually a pretty good question, but for the reasons above, a better way of stating the question is like this:
IMPROVED QUESTION: How will your technology help up increase our Throughput while reducing or holding the line on our Operating Expenses?
In subsequent articles, we will take up other questions that should be asked any time a technology vendor throws out rules of thumb about “improvements in efficiencies” and “payback periods.”
You and your management team deserve better information upon which to base any proposed “investment” decision.
Leave your comments here, please, or feel free to contact us directly, if you prefer.