BearingPoint Finland blog
Every investment in a company requires justification. The larger the investment is, the more comprehensive the justification needs to be. As identified also in our recent study, ERP investments are always substantial in relation to the size of the company and need to be well justified in terms of their strategic alignment and financial feasibility. Business case, the compilation of the investment justification, has however a much wider role to play than only support the initial decision making. Ultimately, the business case should commit the organization to the change and guide the program and ERP usage throughout the whole system lifecycle.
Business case forms the basis for the ERP implementation. It includes both the functional and technical targets as well as the benefits of the program and translates them to financial gains. It also details the investments, both external and internal, against which the benefits are to be measured. Business cases ultimately culminate in an investment calculation considering the net present value against the required rate of return. Every company manages their business case differently, following their company guidelines, and have varying requirements in terms of the required level of seniority for approval, extending all the way to the board of directors.
ERP investment is typically somewhere in between replacement investment and strategic investment. Replacement investment in a sense that no company can operate without an ERP system, and when the lifecycle of the current system comes to an end, it needs to be replaced. Strategic investment in a sense that typically it aims for improving the company’s ability to execute its strategy and to improve its operational efficiency. While the replacement investment might have a low NPV target, the ERP investment should be designed also to provide a solid strategic investment case due to its transformational nature. Once the undertaking is started, you should aim to gain the maximum benefit out of it.
Business case serves in three main functions over the ERP program life cycle:
Business case helps to identify the potential benefits of a new ERP system, as it forces the company to analyze its operations thoroughly. Typically, gains are received from improved process efficiency, better productivity, new business models and automation, among others. The value of the benefits analysis does not only come from the calculation itself, but to a large extent, it comes from a process where the different stakeholders are involved in the analysis work and through that, build ownership and commitment to the program.
As the initial business case has been built and approved, it provides a baseline for the program steering and management. All the prioritization and steering decisions in the program need to be done in a way, which aligns with the business case and maximizes the impact and value of the solution. This is a continuous process, which takes place throughout the whole program implementation phase. Governing the business case is a core function of the program governance, and it needs to be built into the program governance processes and structures.
Finally, when the solution is deployed, the operational business organization needs to take the maximum benefit out of the system as guided in the business case calculations and as committed by the management when approving the program. It is essential to stress that only at this point the benefit realization starts and without a structured approach the targeted benefits might never be achieved.
To conclude, a business case is not just a way to calculate the financials and benefits of the renewal. It is a core tool to ensure the commitment to the program, to steer the program and to guide the realization of the benefits once the new system has been deployed to production.
Senior Manager, ERP Advisory