All the right stuff

Somewhere in the world right now, an enterprise software salesperson is pitching a prospect for one of the vendor's products. Talking points likely include ROI, proof points, and references.

But for each manufacturing site, this doesn't just happen once, but many times a day—adding up to hundreds of opportunities a year. While all of these opportunities sound good, prospects are in the same dilemma that a gourmand faces when asked to visit countless four-star restaurants: Where to go?

Companies have many metrics—typically financial—that surround what to buy. They also have tried-and-true best practices (see Top 10 for vendor selection). While helpful, financial metrics and best practices should be complemented by two other criteria: customer value, and corporate risk.

To stay in business, every manufacturing company has a different type of value beyond the basics. Perhaps the best way to correlate customer value to technology investments is to follow the model created in the early 1990s by consultants Michael Treacy and Fred Wiersema in their classic marketing text, The Discipline of Market Leaders.

The discipline for manufacturers is to define their businesses by three types of customer value—high product performance, personalized service, overall cost—that will ultimately correspond to the emphasis—product leadership, customer intimacy, operational excellence, respectively—that should be placed on technology investments.

When these values are overlaid with demand and supply networks, you get these areas of concentration (see Figure 1):

• Product leadership: Companies well known for product leadership include Apple, Nike, Hewlett-Packard, and 3M. Investments in product leadership bridge the demand and supply side of manufacturers dealing with both the product planning function, as well as the physical design around the product. Investments in this area include solutions for product data management, product life-cycle management, and product planning. Their purpose and focus is to facilitate more accurate product creation around the desires and needs of the market, and speed the product-design process.
• Customer intimacy: Companies well known for their leadership in customer intimacy include Proctor & Gamble, Nokia, Harrah's, and Disney. Investments in customer intimacy fall squarely in the realm of demand networks, and forecasting, marketing, and selling. The focus of these investments is ensuring that the right products are available at the right price, and are being sold and marketed to customers to maximize sales and satisfaction. Solutions include forecasting systems, price management, call-center management, and sales force automation (SFA).
• Operational excellence: Companies exhibiting operational excellence include Dell, IBM, Toyota, and Johnson & Johnson. Investments in operational excellence fall squarely in the realm of supply networks with a focus on sourcing, and the make and deliver processes. The focus of investments is to wring out all unnecessary costs and wasteful operations from the physical creation of a product. It is a continuous process that uses a combination of process and technology innovations deployed over time. Software investments include planning & scheduling systems, spend management, transportation and warehouse management systems, and distribution.

As one might imagine, there are investments that cross over these areas of concentration. For example, an order-management system takes a customer order and checks/debits inventory before confirming a completed transaction, among other tasks. However, the focus of any order-management system is primarily to service the customer—e.g., customer intimacy—rather than deal with operational excellence, although order management can provide a key inventory management and planning function.

This structure is not to imply that companies should not invest in all three areas, but rather understand the priority of ongoing investments in context with corporate goals and strategies. For example, if a company competes in an industry that is insensitive to price, one of the last investments to make would be in a cost-related area such as sourcing. On the other hand, if success is all about better understanding your customer, then companies should double down on investments for customer data management and analytics, and call centers.

While many companies consider a variety of risk factors—e.g., vendor viability, product functional match—they should add a more holistic view of risk that contrasts and compares different types of applications.

As can be seen in Fig.2, various investments have different types of risk profiles that can be put into four main groups. It should be noted that sellers often focus on the benefits of successful implementations rather than potential failure, or problems caused by use of the solutions.

• Foundation (high reward, low risk): These are applications that can deliver strategic advantage to a company. Often they have a very low risk of failure with a disproportionately high reward. The good news about these types of applications is they don't usually cost a great deal of money, and an increasing number of them are being delivered via software-as-a-service (SaaS), which dramatically lowers upfront risk and failure. According to Boston-based AMR Research, two core applications in this group are demand forecasting and procurement/sourcing.
• Advantage (high reward, high risk): This set of applications is for companies looking to gamble a bit and roll the dice. They have a similar high reward as do foundation applications, but carry a commensurate high-risk quotient. Their reward is in the usage of new and advanced processes not executed by many companies. Their risk is that they tend to cross departments and companies, and necessitate extensive collaboration and internal process change. Often they require difficult and expensive enterprise software from multiple vendors or custom-written solutions. As might be expected, process strategies such as available-to-promise and collaborative product design, rather than product families, are high on this list.
• Tactics (low reward, low risk): These applications are the operational blocking and tackling that might be needed by any company. They are not investments that companies often get excited about, but they are a bit of an extra edge that most organizations want to have. The lack of reward and risk varies by company and market. For example, low reward in some areas, such as bar coding, is due to the fact that most every company has implemented such technology extensively. In fact, not having bar coding represents a competitive disadvantage at this point in time.
• Compliance (low reward, high risk): These applications and investments are necessary, but provide neither strategic advantage nor competitive parity. Like the base of a structure, they are a necessary evil—though some of their respective proponents may not want to think in those terms because they are either mandated by a government body, or there is fear of the unknown. They generate low rewards—if any—for those reasons, and they are high risk because if they fail, the fallout can be catastrophic.

Unfortunately for many companies, the last category—compliance—is the area where many of the major IT investments of the last 15 years have been made. It started in the 1990s with ERP as a proxy for global financial system replacement that was facilitated by a technology change to client/server technology and turbocharged by Y2K mania. After that, in the U.S., there came a focus on regulatory compliance such as with Sarbanes-Oxley. Today there is ongoing emphasis on broad security investments to ensure that the openness generated by the Web will not be corrupted or compromised. No one would argue over the importance of such investments, but no one would claim they deliver a strategic advantage.

By melding these two approaches—customer value and risk—buyers can use the best of both to rethink how and when they should invest. Figure 3 shows customer relationship management (customer intimacy) investments by AMR Research, detailing how these two concepts are combined, and the popularity of certain investments decisions today.

For example, hosted SFA solutions as sold by salesforce.com and other vendors are ranked as foundation, or "no-brainer" investments—a fundamental reason this sector is doing so well in the market today. Other areas of heightened interest are customer data management, which is a bit more risky but delivers more reward than SaaS-based SFA; and price management, a maturing space that has even more reward, but a higher risk of failure.

In conclusion, investments in compliance applications should be carefully considered since overinvestment in this area has led many business groups to question the value—and cost—of IT. As a result, companies need to reconsider all of their investments using more of a portfolio approach by balancing investments in different types of risk alongside different investments that apply to the three legs of customer value: product innovation, customer intimacy, and operational excellence.