New ROI for a New Economy

This isn't your father's ROI anymore. Nor is it the ROI of last month, for that matter. Your company can no longer expect to measure its return on Web investments by traditional click-and-mortar standards.

[From iSource Business, June 2001] At first glance, it would seem Ryder's decision is a no-brainer. Several months ago, executives at the global transportation and logistics company were contemplating two e-business initiatives. One was a project that would help Ryder improve the strength of its brand, especially as it continued to offer more and more e-business services. Another was a Web billing project.

Admittedly, both projects had merit, says John Wormwood, group director of Commerce Solutions for Ryder, but the Web billing project in particular offered a very clear value-add to Ryder's bottom line. "We had specific requests from customers for this service," she says. In essence, customers outsourced their transport management operations to Ryder, which would establish and manage carrier contracts, audit the bills, and send the client one, consolidated invoice. "What we had been doing was sending the details electronically but faxing their invoice. The customers wanted to see the summary online and be able to drill down to see costs of specific functions."

The rebranding initiative, Wormwood says, was important as well. "We were a consumer truck rental company at one time, and there are still some companies out there that don't realize we are a global logistics provider now. Spending money on a rebranding initiative would make sense because Ryder is completely redeveloping its digital brand," she says.

After carefully weighing the potential benefits of each project, Ryder decided to go ahead with both, despite the Web billing project's clear payback and despite Ryder's hyper consciousness about unwarranted costs these days.

It was not a decision made lightly. "Justifying Web related investment is hard," Wormwood says. There is not a long history of empirical benefits you can point to and, oftentimes, the value is around enhancing competitiveness, rather than decreasing costs." Unfortunately, she adds, "we found that traditional ROI [return on investment] analysis really wasn't sufficient."

To aid in the decision making process, Ryder developed a new set of metrics that would be used in tandem with the traditional ROI measurements. Called ROWI (return on web investment), these measurements "complement traditional ROI by allowing us to evaluate qualitative factors as well as quantitative ones."

These are not the last e-business projects Ryder will want to implement, Wormwood says. "But business resources are scarce," she says bluntly. "We have to have some kind of framework to ensure we are making the right investment."

Open Wallets?

Business resources are scarce these days and will probably become even more so over the next few months. "Its obvious the economy is slowing and that is affecting the way companies do business," says Jon Ekoniak, senior research analyst with U.S. Bancorp Piper Jaffray. "Companies are reprioritizing spending patterns in order to adjust. That includes IT [information technology]investments."

For supply chain managers, that means hard choices lie ahead. Global competitiveness dictates that companies can't skimp on IT investments, especially as new applications that promise to automate some new link in the supply chain are developed seemingly every few months. And, while there are clear, strategic advantages to these applications, many of them only offer a hazy promise of greater productivity.

Yet, as shareholders and Wall Street and their own Board of Directors begin to view every expenditure with an increasingly critical eye, supply chain managers find they have to make the case that financial benefits will be realized as well -- and soon. In a recent Forrester Research survey, 40 percent of respondents complained that a lack of objective data and worse, e-business hype, forces them to make investment decisions based on soft information.

In many ways, the arguments are not that hard to make -- depending on the application, Ekoniak says. "Project management software, procurement applications, and customer self-service and retention applications clearly help companies operate more productively," he says. The latter category -- customer relationship management software (CRM) -- has actually become something of a sleeper application for companies.

"We are seeing a concrete value in the integration between CRM and supply chain management, in a number of areas," says Bob Trine, member of the leadership team of the CRM practice at Cap Gemini Ernst & Young. But unless there is a sudden return to the heady days of 1998 and 1999, it's clear that supply chain applications will be put through a more rigorous vetting process. The question is what and who will define that process?

Measuring Value

Not too long ago, companies that wanted to implement a new supply chain application or service or strategy had some well-defined measurements to rely upon to make sure the investment would be sound.

The Supply Chain Council's Plan, Source, Make and Deliver model, otherwise known as SCOR, is widely touted by companies wishing to develop world-class supply chain operations. Surveys conducted in conjunction with such consultancies as PRTM's Performance Measurement Group have pinpointed optimal levels of efficiencies for certain supply chain activities, like delivery performance, order fulfillment, production flexibility and cash-to-cash cycle time.

Cash-to-cash cycle time, for example, is the number of days between paying for raw materials and getting paid for the finished product. In a recent survey, PRTM found that "best-in-class" companies' cycle time for this metric is less than 30 days. For companies that fall in the median, it can be up to 100 days.

Unfortunately, standard measurements, like cash-to-cash cycle time, are designed for traditional click-and-mortar operations and have become increasingly difficult to capture in an online environment. "Dell Computer has turned the cash-to-cash cycle metric upside down," says Bill Petersen, director of McHugh Software International's logistics operation analysis program. Indeed, Dell has structured its supply chain so it receives payment before it builds a computer.

Yet what exactly can be used to replace or complement traditional supply chain metrics or measures has yet to gain any real consensus among industry experts.

Calling himself "an old guy from operations with an MBA," Jeff Kavanaugh, practice area director for supply chain fulfillment at Inforte Corp., a consultancy that focuses on the application of advanced technologies to supply chain and demand planning activities, says, "[I've] been scratching my head for the last few years, looking for something to put my feet on in this area. One of the challenges is how to measure collaborative supply chain relationships or applications, knowing they might change in six months."

Then there is the fact that, compared with traditional business strategies and systems, many of these newer supply chain applications are still in their opening credits. CRM, for example, is a relatively new discipline, and because of that "companies are not tracking these investments as they should," Trine says. "Few have any real sense of ROI for CRM investments." But "benefit calculations are definitely available."

Enter e-Metrics, as defined by Gartner Group; and eValuation, as defined by KPMG. Or PRTM's eClass and Gensym Corp.'s e-SCOR.

Whatever the nomenclature, they are the newest generation of supply chain metrics.

Big Business

This is not to say the old, traditional metrics have been summarily dismissed. Rather, their importance, in some cases, has subtly shifted. "One of the effects of the Internet is that it has broadened the scope of supply chain metrics," says McHugh's Petersen.

Karl Wilhelm, chief technology officer and co-founder of SBI, an e-business services company based in Salt Lake City, Utah, gives the example of an airplane manufacturer that uses supply chain collaboration to improve its relationship with a key supplier and, hence, is able to cut the time to implement an engineering change from 45 days to 3 days. "In the past, this value or cost-savings wouldn't have been included, now it's an important part of calculating total return on investment in the supply chain," he says.

Ryder's work in this area also provides interesting examples of new supply chain measurement strategies. Using data from a study by D.A. Aaker and Young & Rubicam, Ryder determined that every 1 percent increase in brand equity impacts market capitalization by 1 percent, the constraint being that brand equity must move by 10 percent or greater to realize full impact. Ryder also determined that an increase in its customer service index by one point decreases lost revenue by $8 million per quarter.

These measures make evaluating such projects as Web billing far easier. If, for example, improved billing leads to an overall increase in the Ryder Customer Satisfaction Index of 0.5 points, this would lead to a predictable number of fewer lost customers. Because each customer had an average revenue value, Ryder could determine a numerical benefit value in stemmed lost business for the qualitative benefit of increasing customer satisfaction. Ryder was also able to identify pure quantitative benefits, such as e-mail responses to billing inquires being 75 percent less expensive than using the phone, a savings of $43,000 a year.

"By establishing a common set of business assumptions, intangible Web-related business benefits can be evaluated in a consistent manner," Wormwood says. "This allows you to include impacts such as increased customer service, increased brand clarity and enhanced competitiveness, along with the traditional calculations of increased revenues and decreased costs in your financial analysis and subsequent decision-making process."

But Ryder's developmental efforts are in the minority. Those companies that are paying attention to e-metrics tend to rely on outside consultants. Indeed, developing new metrics for e-business is quickly becoming big business. Many of the international consultancies have developed business lines specifically geared to make these analyses. KPMG, for example, has launched a service called eValuation, which takes into account traditional ROI variables as well as Internet metrics, such as additional sales that can be reaped by participating in Net marketplaces and the benefits of supply chain management and CRM. PricewaterhouseCoopers has established an ROI consulting service called E-Business Investment Advisor. Gartner Group has developed its own version of eMetrics through a service offered with InfoRay Technologies, a supplier of monitoring technology. Some examples of these new metrics include average percentage of information shared from trading partners, average customer retention time and average new revenue per collaboration. For its part, Cap Gemini Ernst & Young created a CRM Index, a tool that assesses CRM effectiveness.

Other, smaller companies offer services and products along these lines as well. Gensym Corp.s' e-SCOR software models and simulates complex supply chain systems. Typically, a user will create a specific supply chain topology and enter the necessary information, such as product costs or shipping time into the system. e-SCOR then reports the appropriate service levels of that particular supply chain. The user also has the option, through what-if scenarios, to evaluate new supply chain models by entering new circumstances or possibilities.

In fact, many believe such modeling or simulation capabilities will be the next big thing in supply chain applications. More immediately, however, it's clear that providers of supply chain applications -- and their clients -- will focus more on ascertaining whether or not a proposed project will provide a clear payback. An illustration of that can be found with IPNet, a provider of B2B integration and supply chain collaboration that recently announced it was guaranteeing clients they will achieve a faster ROI using its B2B e-commerce solution compared with its competitors.

Don Willis, founder and CEO of IPNet, nailed it straight on the head when announcing the company's new policy. "A return to business fundamentals, including old-line ROI calculations and cost cutting measurers is overdue," he said. "One of the primary barriers to financing B2B budgets is credible metrics."