2006 Baseline/The Hackett Group ROI Awards

 
 
By Kim S. Nash  |  Posted 2006-09-05
 
 
 
What's the measure of success? Call us old-fashioned, but we think an information-technology system should deliver more value to an organization than it costs to put in and maintain. That's the classic definition of return on investment, and it was the key metric used to select the winners of the 2006 Baseline/The Hackett Group ROI Leadership Awards.

All entrants submitted detailed, three-year cost and return information on a significant information systems project. In addition, this year we required that the results be verified by the company's finance department. The entries were then analyzed and validated by The Hackett Group, a business and technology research and consulting firm based in Atlanta.

The winner: The U.S. unit of camera maker Nikon, which saw major benefits with a customer relationship management project that yielded a plump 3,203% return. We also selected a solid runner-up, Kennametal. The industrial tools manufacturer used an e-procurement system to encourage employees to buy from preferred suppliers, saving an estimated $2 million over three years. Kennametal's three-year ROI: 161%.

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Both companies, notes Erik Dorr, senior business adviser at The Hackett Group, "utilized Web-based technologies, delivered benefits relatively quickly and involved process transformation rather than just automation."

Because the projects were geared around hosted applications, Nikon and Kennametal had relatively low startup costs and, as a consequence, saw fairly swift ROI.

"When you have an on-demand solution, your monthly fees are far less than if you bring a full ERP [enterprise resource planning] system in behind your firewall," says Jim Cebula, Kennametal's director of global purchasing and travel, who oversaw the e-procurement project. "Our infrastructure support cost is Internet access. We have no I.T. depreciation at all."

Of course, not every software-as-a-service project will be a winner. But if a project isn't working out the way a company expected—if, say, you're heading into negative-ROI territory—it's less painful to pull the plug on a hosted application.

Read about the 2006 winning projects:

  • Nikon: Aiming to Please
  • Kennametal: Attention, Shoppers!

    Read about previous years' winners:

  • 2005 Winners: Internet Leaders
  • 2004 Winners: Off-the-Charts Results
  • 2003 Winners: Extreme Returns

    How We Picked the Winners
    All entries were independently judged for accuracy, validity and completeness by The Hackett Group, a strategic advisory firm that provides best-practices research, benchmarking and business-transformation services. The company, a subsidiary of Answerthink, specializes in analyzing performance of sales, general and administrative and supply chain activities, and has published 3,500 benchmark studies over 14 years.: Aiming to Please">

    Aiming to Please

    Winner: Nikon
    Return on Investment: 3,203%
    Project: Customer Relationship Management

    For decades, Nikon cameras have captured beautiful images, from high fashion in Vogue to spacescapes shot from every manned space mission since Apollo 15 in 1971. The Nikon name carries connotations of fine photography and top-notch equipment, and people expect a certain level of quality from the 89-year-old, $5.9 billion Tokyo company.

    The problem was, Nikon's customer experience wasn't as good as the company wanted, says David Dentry, general manager of technical support and customer relations at Nikon's U.S. subsidiary in Melville, N.Y. For example, customers had to wait more than three days for a response to queries sent by e-mail, he says, and high-end professional photographers—the company's most profitable customers—were often frustrated by some customer support staff who knew less than they did.

    Nikon hired Dentry in 2002, he says, "to help bring customer service into a more modern world and also reduce costs and time."

    The way Nikon reshaped how it serves customers by phone, e-mail and the Web snagged the company top honors in this year's Baseline/The Hackett Group ROI Leadership Awards. Nikon disclosed detailed costs as part of its entry but requested that the figures not be published. For that investment, the company, as of June, showed a return of 3,203%.

    Nikon's previous customer service system involved several separate elements. Phone agents could query a homegrown Microsoft SQL Server database of common questions and answers, such as troubleshooting printer issues with Nikon's digital cameras.

    But there was little history kept on customers to help agents converse personably and knowledgeably with callers. The system also required someone to sort incoming e-mail to get it to the right person.

    Four years ago, the company replaced all of that with a contract for customer relationship management software and services from RightNow Technologies in Bozeman, Mont. RightNow's eponymous software lets agents open and update electronic records on each customer who contacts Nikon support, no matter how the contact comes in—via phone, e-mail or the Web.

    The customer service agents now have a history to draw from when speaking with customers, as well as a database of questions and answers all agents now use consistently.

    That increased each agent's efficiency. But with RightNow, Nikon also set up a self-service section of its Web site where customers could find answers to questions themselves. According to Nikon, the self-help site initially drew 20,000 inquiries per month, and soon as many as 45,000. The company estimates it saves $10 for each phone call or e-mail it avoids.

    Also part of Nikon's return: savings from not having to hire and train additional support agents as customer service volume has increased during the past four years. The company declined to say how many customers contacted the support center in past years, but says it had 3.5 million customer interactions in 2005.

    Nikon's U.S. project has since been replicated by Nikon Europe and Nikon Asia. "We presented it to them, and they all liked it," Dentry points out. "That was a good feeling." Nikon now runs the system in 19 languages worldwide.

    The feelings weren't always good. Dentry won't say exactly what customer satisfaction scores were for Nikon's 60-agent service department. But he describes some of the problems the revamp addressed.

    For example, under Nikon's old system, photographers who sent questions via e-mail waited an average of 80 hours for an answer. That's because all incoming e-mail landed in one mailbox. Once every day—or two or three—a support agent would read each message and route it to an appropriate technical expert to answer. "That person was doing it as a side job in addition to their regular support job," Dentry explains. "It was really holding us up."

    Now, a photographer customer can fill out an electronic form at Nikon's Web site. There's a box to type in a free-form question. But there are also fields in which to specify items such as product name, category of problem and, for customers already on file, a user ID code. Using those keywords, the RightNow workflow system automatically directs messages as they arrive to the right experts. As a result, average response time to e-mail has dropped from 80 hours to five.

    Nikon's CRM system allows special attention for professional photographers, who are the customers who spend the most money with the company, Dentry says. For example, messages that specify questions about Nikon's D2X product line—professional digital cameras priced at $5,000 or more—are funneled to a group of highly trained support staffers.

    Next, Nikon plans to go beyond reactive customer service with e-mail marketing newsletters to specific customer segments, Dentry says. But accurate profiling is key: People with a Nikon Coolpix point-and-shoot consumer camera won't care about an e-mail on the new Zoom-Nikkor lens for the top-of-the-line D2X camera, Dentry notes: "We want to make sure data we send is important data for each customer." —KIM S. NASH

    Total Benefits: $14,511,160
    Return on Investment: 3,203%
    Note: ROI assumes 8.73% annual discount rate on cash flows.
    : Attention, Shoppers!">

    Attention, Shoppers!

    Runner-Up: Kennametal
    Return on Investment: 161%
    Project: E-Procurement

    Jim Cebula, like any good bean counter, wants to save his company some beans. He did—$2 million over three years, from one $720,000 project.

    As the director of global purchasing and travel for Kennametal, a maker of tools for metal cutting and other industrial projects, Cebula oversaw the rollout of a Web-based procurement system in 2002 from hosted application provider Ketera Technologies.

    Today, the system lets 425 employees—located around the world at more than 25 facilities—use an online shopping cart to buy materials from Kennametal's 15 key suppliers. Those vendors, which include Staples and manufacturing-equipment parts dealer Kaman Industrial Technologies, account for about half of Kennametal's expenditures on "indirect materials" from 300 vendors in all. Indirect materials are things like office supplies; "direct materials," meanwhile, are those a company uses to produce its own products. Kennametal, which had $2.3 billion in sales for the fiscal year ended June 30, spends about $800 million on goods and services (both direct and indirect).

    Four years ago, Cebula and his team were looking for a way to drive more purchases of printer ink cartridges, machine parts and other indirect materials through preferred suppliers—those with which Kennametal had negotiated volume-discount deals. At the time, up to 70% of all indirect spending was "maverick," which means they were purchases from suppliers that didn't have a companywide purchasing agreement.

    Trouble was, Kennametal employees place more than 50,000 purchase orders for indirect materials every year. There wasn't a feasible way for someone on Cebula's staff—110 professional buyers globally—to investigate every time someone didn't buy from a preferred vendor.

    "There comes a point where the policing costs more than the benefits of compliance," he says. "We don't want to be tracking down every stapler bought off-contract."

    And while Kennametal encouraged employees to use contracted suppliers, that meant going to each individual vendor's e-commerce site and signing in. "People didn't use suppliers as much because they had to remember 15 different passwords," Cebula says. Each supplier's site also had different ways of dealing with various taxes and freight-handling charges, further complicating the picture.

    Virtual Private Megastore

    Enter the Ketera application, which employees access over the Internet; it provides a consolidated, consistent view into the products available from the 15 suppliers. Plus, the system is much simpler to use than most partners' ordering sites, Cebula says.

    That seemingly basic change has driven the proportion of on-contract buying to between 70% and 75%, and saved $2 million that would have otherwise been spent on higher-priced products, according to Cebula.

    The company paid Ketera $647,500 over two years for a three-year contract to use the e-procurement system, effectively prepaying for the third year (an insurance mechanism for Ketera, as the deal structure gives Kennametal an incentive to stick with the service in the third year).

    Factoring in $42,000 in ongoing internal labor costs over three years plus $31,000 labor up front, Kennametal's total spending on the project has been $720,500. Cebula notes that Kennametal this year re-signed another three-year contract with Ketera, with similar terms.

    And because Ketera hosts the software and servers that run the system, Cebula says the launch was comparatively swift: Kennametal had the first nine suppliers in the Ketera system within 90 days, he claims.

    Kennametal sees room for a bit more improvement, with a goal of getting to 85% of all indirect spending coming from contracted vendors. Why not shoot for 100%? Cebula says he wants to allow buyers the flexibility to take advantage of special, one-time deals from competing suppliers.

    "Almost all suppliers have loss leaders, so at times you want to take advantage of those," he says.

    Kennametal has found other, less tangible benefits from the e-procurement system as well. It can now analyze nearly all of its purchases immediately, by consolidating spending information from Ketera with that of purchases made through a corporate MasterCard procurement service from JP Morgan Chase. The nearly real-time view into spending lets Kennametal cut back spending if, say, it's nearing the end of a quarter and wants to control expenses that could drag on the bottom line.

    "We now have tighter, more current controls on our indirect spending," Cebula says.

    The big challenge for Kennametal's procurement team was to get buy-in for the project across the globally distributed company, which is based in Latrobe, Pa. That required many meetings with personnel in areas as far-flung as Switzerland and Singapore. "It was challenging," Cebula concedes.

    How did the vendors react to being stuffed into a virtual shopping cart? Cebula claims they loved it.

    "The supplier relations actually became stronger," he says, "because they had a good understanding that we were in complete control of our spend categories." Let's hear it for a project that gives bean-counters, bean-eaters and bean-spenders something to cheer about. —TODD SPANGLER

    Total Spending: $720,500
    Total Benefits: $2,025,000
    Return on Investment: 161%
    Note: ROI assumes 8.73% annual discount rate on cash flows.