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Measuring ROI from technology implementations

Ease of Doing Business for MSMEs: Digitisation and automation of business processes is no longer a ‘good to have’.  It is a ‘must have’ from the standpoint of ensuring transparency, scalability, predictability and controls over business operations.

Ease of Doing Business for MSMEs: Digitisation and automation of business processes is no longer a ‘good to have’.  It is a ‘must have’ from the standpoint of ensuring transparency, scalability, predictability and controls over business operations.  The best news to emerge on the technology side for SMEs is that these tools are very affordable, offer ‘pay as you go’ terms and most importantly, deliver excellent Return on Investment (RoI). In over 90 per cent of the cases, automation initiatives have paid back their initial investment within the first 12 months. 

ROI, in simplest terms, can be defined as profitability improvement by dividing the cost of implementation. Profitability improvement is the delta between the profits before implementation and profits after implementation. Some companies prefer to take a cash flow view and replace profitability improvement with cash flow improvement. For instance, working capital reduction in the form of lower Days Sales Outstanding (DSO) from automating Order to Cash (O2C) processes in a services company is a good example of cashflow savings.

In the denominator, the cost of implementation includes the cost of software licenses and cost of consultants, if any, used to implement the tool.  Some SMEs, correctly, include the cost of time of the company’s employees involved in the implementation in the denominator as well.

SMEs should be able to achieve 3x to 12x ROI in cash terms, within the first 12 months, that is, payback in 1-4 months’ time. Apart from ROI, the other ways in which returns can be measured on technology implementations are:

1.      Savings in time effort (For instance,12 months rolling forecast achieved with say 15 man-days of effort each month post-automation, as opposed to say 40 man-days earlier)

2.      Savings in timing (For instance, MIS for a month delivered by the 20th of the following month. Post automation of month close and reporting, now delivered by the third of the month)

3.      Net present value (NPV), or

4.      Internal rate of return (IRR), to have a more comprehensive assessment of the investment’s impact

Let’s see some practical scenarios of how SMEs have achieved ROI on their tech implementations.

Vendor Management Automation

A surfactant manufacturer was dealing with >1,000 raw materials, packing materials and service vendors. Vendor invoices were received over email, courier, post, and WhatsApp, in either digital or printed format. The SME was struggling with the timely and complete entry of vendor invoices for month close, resulting in delays in publishing accurate monthly profitability statements.  Around ten per cent of invoices were routinely entered late or inaccurately, resulting in significant time delays in vendor reconciliations and payments. 

Post implementation of a vendor management tool, vendors are now able to upload the invoices themselves and have full visibility into the status of approval and payments of their respective invoices.  Finance has visibility into the accurate cash flow requirements for vendor payments. 

Automation has resulted in 4x ROI from:

·       vendor data entry and invoice processing team reduced from eight to a three-people team

·       Purchase department has single point visibility into comparative rates of all vendors and this enabled them to benchmark, negotiate and reduce purchase rates of some raw materials

·       Faster vendor payments and improved vendor experience helped reduce rates with eight per cent of vendors

Automation of Material Requirement Planning

A Tier II auto component company had implemented an ERP but had not gone live with its MRP module. There were challenges with BOM management, product costing and sales forecasting. As a consequence, on the one hand, there were frequent instances of failure to fulfil confirmed orders but also situations where finished goods inventory had got built up for certain items.  

When the SME implemented MRP, it was able to achieve 20x ROI on its automation investment through:

·     Almost 20 per cent reduction in finished goods and raw material inventory levels, freeing up working capital

·     Over 30 per cent reduction in interest costs arising out of lower utilisation of working capital limits

·     Fourteen per cent improvement in Order Fulfilment Rate, adding ~150bps to Gross Margins

Employee productivity improvement

An IT Services company was having challenges in allocating its employees to projects – some employees were working for more than twelve hours a day, while a few were under-utilised. There were challenges in calculating team member productivity, managing bench capacity, tracking project level margin and billing clients on time. 

This SME was able to achieve 15x ROI on its automation spend in a workday, an employee productivity management tool.

·       Time sheeting provided real-time visibility into project-level costs and profitability

·       Spare capacity tracking allowed for more efficient bench and resource management improving gross margins

·       Milestones on client projects could be tracked better, along with unbilled value for each project, i.e. time booked on a project but not invoiced to a client; this helped in reducing unbilled DSO from 62 days to 23 days, freeing up cash flow

While there are a number of ways to calculate the ROI, the choice of calculation method depends on the specific circumstances, project duration, cash flow patterns, and decision-makers preferences. The most important benefit of automation, however, is not a financial metric but the peace of mind of the SME owner, knowing that his/ her processes are system driven and are not person-dependent.