ROI
The new system is supposed to dramatically improve service and cut costs. However, Providian failed to realize that this system fixes “back office” operations and does not change the way customers are served. It will improve operating efficiency but will not necessarily affect customer service.
The estimated implementation cost was 18 million dollars with an expected savings of $9.2 million per year. The savings were intended to come from reducing staff, reengineering business back-end processes, and using the improved functionality of the new system to speed customer statement deliver and free the front-office to concentrate on developing customer accounts. One hundred and eighty full-time employees would be eliminated, leading to annual savings of $7.2 million.
Providian’s cost analysis had some serious shortfalls, however. Because the new system was not designed to improve customer service, its annual return should be calculated entirely from operational impact. However, the investment summary assumes the new system will be responsible for $1,200,000 in new business. This increased revenue is intended to come from improved selling skills of the front-office. However, the system itself offers no new tools or skills to support the trust officers.
In computing the initial $18 million price, Providian underestimated the true costs of installing Access Plus. Severance pay for the downsized staff, for example, is not explicitly included in the summary. In addition, training is estimated at $600,000, a comparatively small figure considering the scope of the training. In ABCs of ERP Christopher Koch states that training is likely the most underestimated factor of ERP installations. In addition, Mr. Simmons noted that software costs are typically a small portion of the overall implementation costs. Providian also does not analyze intangibles such as decreased employee morale. Providian should evaluate the system on the basis of its total impact on the Business Score Card, including effects on customers and business processes and not just costs. It focused exclusively on hard numbers, forgetting about the effects on soft value.
Risk assessment was another area that Providian failed to adequately account for. Storey and his auditing staff repeatedly stated that Access Plus should be considered a high-risk project; it affected a significant amount of assets and was strategically important to the business. Storey submitted a list of 13 risks that he felt were not fully addressed; he was fired four days later, indicating they were not fully investigated. The project is only a mid-value project because Providian is changing operational costs and not affecting quality, cycle time, or customer service. They should have mitigated the risk by implementing a roll-out plan that would have unveiled the system in segments to anticipate loss. In addition, scenario planning would have identified the worst -case scenarios and should have influenced the implementation plans. In evaluating the risk, Providian also should look at the risk of not doing the project. In this case, they are losing money due to poor customer service and erred and late records; clearly something needs to be done. It is more a question of what should have been done as opposed to whether or not to do it.
Providian should have considered outsourcing the project. LeBlanc was partially correct in his decision to customize an off-the-shelf system was the only viable option. The project isn’t strategic and it wouldn’t be cost efficient to write a unique system. Because this is a high-risk, mid-value project, d-value, high-risk project Providian should have considered outsourcing. This allows it to focus the valuable time and resources that could otherwise be invested in improving the strategic processes and systems.
Final Assessment: Providian should have included the entire BSC, scenario planning, and risk in evaluating this system. By including these, it is likely that outsourcing would have been a practical alternative and would have likely saved them time, money, and resources.