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CASE FILES | VALUE PROPOSITION - Hard Numbers for Hard Choices

By Matt Villano

June 01, 2002 — CIO — Acquisitions are nothing new to the IT folks at Koch Industries. The Wichita, Kan.-based Koch?pronounced the same as coke?has been through the process of merging systems again and again, and today it runs dozens of subsidiaries worldwide.

On the subsidiary level, however, not all Koch executives are well versed in the rigors of acquisitions. In 1998, Koch Membrane Systems based in Wilmington, Mass., bought out Fluid Systems in San Diego. "With the acquisition, the business vision was to integrate the two organizations, standardizing on processes and systems," says Lloyd Boyd, director of information technology at Koch Chemical Technology Group.

Executives at Koch Membrane called on Boyd and other IT leaders in their immediate business unit?Koch Chemical Technology Group?to handle the integration. Boyd and other executives at the business unit had successfully measured the value of integrations before, touting a proprietary, economics-based philosophy known as market-based management that combines more than 50 economic models and drives a two-pronged cost-benefit analysis process. Boyd applied that cost-benefit analysis to Koch Membrane, resulting in a new ERP system from Wilmington, Mass.-based vendor Visibility, increased efficiency and a net cost savings of approximately $430,000.

Before Koch Membrane got a new ERP system, Boyd and Project Manager Dan Murphy had to estimate alternatives and prove that opting for an ERP system was better than signing on with an ASP or selecting comparable client/server technology. They did that with methodology that incorporates research-based estimates and the assignment of risk.

The Cost

The first cost Boyd tackled was for software, which he estimated on a per-user-per-year basis. Koch Membrane had roughly 240 IT users, but factoring in staff scheduling, Boyd figured he wouldn’t need to account for more than 80 users at a time. With all options, Boyd knew Koch would need a database upgrade, at a cost of $300 per user per year, or $24,000 annually.

In researching software cost for the ASP option, Boyd consulted colleagues and websites to determine a rate of $300 per user per month, or $3,600 per year. For 80 users, an ASP would cost $288,000; he multiplied the figure by a risk factor of 1.5 because the ASP market was volatile. The final price tag: $456,000 including a database.

Boyd relied on the same research for the client/server option. Licensing fees would cost $2,500 to $3,500 per user per year. For 80 users, that would be $200,000 to $280,000. He then multiplied those figures by a risk factor of 1.15 to account for his own inexperience with client/server technology, for a range of $230,000 to $322,000. Boyd accounted for annual maintenance costs, adding a standard 10 percent fee to the lower figure ($20,000) and an 18 percent fee to the higher one ($50,400). The final calculation: $274,000 to $396,000 per year including a database.

 

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