Does PLM Pay? – Calculating ROI for PLM (Part 1)
Here is a scenario familiar to many PLM professionals:- a project is initiated to implement or enhance a PLM system within an organization. All the participants are excited and everybody can clearly see the benefits to processes, collaboration and data security. All the pieces are in place; pricing, implementation schedule, software requirements, training plan – down to the last detail.
The champion starts getting all the signatures required to issue the purchase order. VP of engineering – done. CIO – done. CAD manager – done.
Then the fateful moment arrives and the champion walks into the CFO’s office. The first question out of his mouth is “You want to spend this money! What’s the return on investment?” And there it stops.
So, how do you calculate an ROI for a PLM initiative? The remainder of this post and the follow on articles will give an answer to the question. Here are the various reasons why you would want to calculate an ROI for PLM:
- To justify the project to a Finance department (scenario above)
- For presentation to a Board of Directors. If the project is substantial enough, this is a possibility
- The object of the CFO is correct – a PLM project should result in real, quantifiable savings
- Savings from the investment over a period of time will improve the organization’s competitiveness
- Savings will allow for company expansion as improved cash flow can be invested in other areas
The approach relies on breaking down PLM impact areas into categories that align with business targets. Consider the following hierarchy:
The strategic objectives at the top of the pyramid are common to all companies and can be supported by PLM systems in one way or another. Of course, PLM is not the only contributor to these objectives as other business initiatives can help meet these goals. Supporting these strategic initiatives are 22 business targets (more on this in Part 2) which are further divided into 43 business cost (more on this in Part 3).
Before we start describing the targets and costs, a definition of the types of costs used in ROI calculations is needed. There are two categories of costs – referred to as efficiency gains and cost saving. The illustration below gives examples of this division
We will start looking at some specific targets in Part 2.