You’d think it would be painfully obvious that dollars sunk into historical IT investments have nothing in common with chests of Spanish Doubloons on lost underwater wrecks, but given the tendency for most organizations to hang onto their archaic IT systems, one has to wonder. Really, really wonder. Especially when many organizations are still drowning in red ink.
It’s not how much you spent on a system, it’s how much value it’s generating now. Maybe it was worth 1M a year and 2M in integration costs five years ago when it enabled you to streamline operations and shave 5M in the first 2 years, but if you’re still spending a million and not saving a single cent, then it doesn’t matter that you spent 7M — what matters is that you are spending 1M a year with nothing to show for it! Enterprise software prices have dropped considerably over the past decade while functionality has increased exponentially. Today, that Million will get you an end to end e-Sourcing AND e-Procurement suite with some professional spend analysis and category services thrown in (and then some) — a solution that could easily save you millions.
When evaluating your technology solutions, past expenditures should never enter the picture. Only current expenditures should be considered, and only in the ROI calculation. That’s all that matters — the expected return on the current solution vs. the expected return on a new solution. If a new solution has an expected ROI that is greater than the current solution (factoring conversion costs into account and amortizing them over the expected utilization period, which should never be more than a few years), you switch. It’s that simple.
And until you realize this, you’re never going to get the true analytics solutions you need to really cut costs. Remember, as I’ve been saying for years, Business Intelligence (BI) is not analytics. As echoed in this recent article on Analytics by Ritu Jain over in the Supply Chain Digest, a lot of users, industry analysts, and consultants have not fully grasped the difference between business intelligence (BI) and analytics. They continue to consider simplistic query and reporting and OLAP drill-down capabilities to be analytics, thus limiting themselves to traditional BI systems that provide simple alert, monitoring, and dashboard capabilities — and then use the erroneous sunk-cost argument to justify sticking with current systems that just don’t do the job.
And without these modern systems, the company will realize the cost savings potential of true analytical capabilities such as forecasting, data mining, predictive modeling and optimization [that] provide businesses with an understanding of why something is happening, when it can occur again, [and ] what will be the future impact of decisions, so that outcomes can be optimized. So bury your sunk costs in the history ledgers. That’s where they belong.