According to Merriam Webster, one of the definitions of half-life is a period of usefulness or popularity preceding decline or obsolescence. It is important to match the half-life of your business processes with the half-life of the technology investments you are making. With the half-life of many business processes dramatically shrinking, the notion that every Logistics IT purchase needs to be a long-term strategic investment as opposed to a short-term tactical one has become bad advice. More than ever the emphasis on solution strategy needs to be on time-to-value, effective utilization period and portfolio management. Here’s why.
The typical IT purchase and install model is predicated on the assumption that the initial upfront investment in software and hardware, installation, training, etc. will be more than offset by some period of business value generated by the solution. With this approach, you get the traditional “hockey stick” return-on-investment profile.
There are several challenges to this approach. It assumes that business conditions will be as anticipated and that the payout period will play out according to the plan. The bigger the upfront investment, the bigger or longer the payout must be. But what is the likelihood both will happen? It’s all about risk. Do you expect that your business processes will be stable and predictable for 3, 5, or even 7 years? Maybe that thinking will work with your financial system implementation. But as you evaluate business processes closer to the customer and trading partners, you find that they are at greatest risk to change in a shorter period of time. This is because there are many factors that are not in your control such as evolving customer preferences and competitors and trading partners with new business models.
The two most critical factors for eliminating risk are minimizing the upfront investment and reducing the time-to-value. These are two important reasons for considering cloud-based logistics solutions. Cloud-based solutions minimize the upfront software and hardware investment because those costs are embedded in the monthly subscription or transaction price. In addition, they reduce the time to implement because they significantly minimize technical training and installation and rely less on scarce internal IT resources. Network-based logistics cloud solutions or Entrusts, further reduce time-to-value because they have many of the trading partners and carriers already pre-connected.
Effective utilization of logistics IT solutions is not well understood because of the “strategic” mindset of IT procurement. But, when the discussion turns to trucks and forklifts, it is well known that they have limited lifespans and their effectiveness diminishes over time to the point where they hurt, as oppose to help, the business. Yet, how many times have you heard about an ERP, WMS or TMS solution constraining or “killing” the business, but the plan to replace it are as painful as the original implementation? Logistics IT seems to be the land of the walking dead, because companies do not have technical or financial exit strategies for their existing solutions. Or worse, they are holding on to those solutions because they haven’t gotten the anticipated payback!
That is why companies need to embrace the concept of a portfolio strategy for logistics technology investments. Some logistics IT solutions will be around for a number of years and others need to address short-term business challenges and opportunities and then go away. The difference in how many IT professionals look at portfolio strategy and this approach is that the goal is to maximize business value as opposed to IT value. The fact that some aging IT investment doesn’t cost much to run has nothing to do with its value to the business. The financial metric return-on-net-assets (RONA) is a failed concept for measuring IT value. Instead, the focus needs to be on value creation like enabling revenue and profit growth or lowering total costs and improving customer service. That’s where cloud-based logistics IT solutions become a more important part of the portfolio. Cloud-based logistics solutions are better designed to be plugged and unplugged in a portfolio strategy where time-to-value is critical to maximizing the potential business value and competitiveness.
All good things — even logistics IT — run their useful course. The notion that logistics IT is more temporal is much more in-line with reality, and cloud-based logistics solutions are a better fit for increasingly greater percentage of logistics IT deployments. In fact, cloud-based logistics solutions have even more upside than making the most of your approach to optimizing technology half-life.
Chris Jones is the Executive Vice President for Marketing and Services at Descartes. He has over 20 years of experience in the supply chain market, holding variety of senior management positions including: Senior Vice President at The Aberdeen Group’s Value Chain Research division, Executive Vice President of Marketing and Corporate Development for SynQuest and Vice President and Research Director for Enterprise Resource Planning Solutions at The Gartner Group.