Strategic Investments ....

[mjsus@atlanta.com]

This can be some interesting .....


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                                GLOBAL STRATEGIC SYSTEMS NEWSLETTER

                                                        December, 1995

Strategic Management Investments, Asset Allocation, Evaluation and Review

Strategic Management System (SMS) investments are long-term investments and
total ROIs of these investments can only be evaluated after several years
from the initial decisions and activities. However, this does not mean that
the organization can not evaluate many specific elements and short-term
projects of the whole SMS project separately and obtain some good feedback
and information about the short-term performance within one year or sooner.
The implementation of an overall SMS can be divided into small development
projects such as back-up system, customer complaint processing,
environmental communication and employee recruiting system development.
Specific Return on Investment and other financial and cost objectives can be
established for these projects, and they can be evaluated and monitored on a
quarterly and/or annual basis. However, the main strategic objective, the
aim of the SMS, can only be achieved, when all elements of the SMS have been
implemented, integrated and operated effectively. To justify, specific
investment decisions, both short-term and long-term financial indicators can
be used, which can satisfy many passive investor's requirements to commit to
the long-term investments.

Depending on the field of technology and business complexity, the
organization can spend up to 30 % of its annual revenue in the strategic
investments including system development and any new technology R&D
activities. In some cases, costs can be higher. What is the portion of this
amount that is invested in the development of the SMS? With some rough
information, it was possible to calculate that about 25 % of the total
annual strategic investment was spent in one ISO 9000 quality system
development. This 25 % was invested in organizational capability, improved
quality assurance and additional equipment, manpower and machine
acquisitions. Using the above estimation, the management estimated that it
had invested up to 7.5 % of its annual revenue in the strategic management
system development activities.  The major portion of this investment can be
used in tactical, short-term development projects such as returned goods
processing and test and equipment control, where the investment performance
data can be obtained faster; and the rest of the SMS investment can be used
for project/program management and coordination, organizational
restructuring, responsibility and authority definition, document and data
control and any other supporting system development activities, the
financial monitoring can be more difficult. The major cost categories in the
SMS development projects are: 1. development, implementation and training
time (manpower excluding external training, consulting and assessment
activities), 2. equipment and machine acquisitions, 3. materials such as
office supplies and 4. external project activities.

Investments in the development of any SMS can be either tactical or
strategic. The financial performance of the tactical investments is very
often much easier to evaluate than the evaluation of the long-term
investments that may not have specific and measurable investment objectives
and/or the accounting information to evaluate the performance against any
specific objectives which can be difficult to obtain. It is possible to
develop specific budgets for each element of the SMS development project and
identify the sources of development benefits and cost reductions that can be
used for evaluating the financial performance of each project. The financial
performance (including the maintenance of development budgets and the
achievement of investment performance ratios such as Return on Investment
and Investment Payback Period) can be reviewed and evaluated on a quarterly
and annual basis. Any consolidated investments in the whole Strategic
Management System development and the SMS development progress can be
reviewed in the annual Strategic Planning activities by the top management
in the same way as any specific tactical investments can be reviewed and
analyzed in the departmental level to identify any problem areas, any
potential problems and to determine and initiate necessary corrective and/or
preventive actions to achieve or maintain all financial performance
objectives and targets.

The organization should manage its investments in the SMSs such as ISO 9000,
ISO 14000 or Information Security Systems as it manages all its capital
expenditures or any investments in financial instruments such as stocks and
bonds. These investments have to be controlled, managed, reviewed and
improved upon on an on-going basis by the managerial level. Each element of
the SMS development can have its own budget and budget responsibility. The
organization may establish its own unique accounting system for each SMS
development project including specific cost and expenses categories, and
identifying specific sources of financial benefit information that can be
used to calculate financial ratios. Any over spending or other negative
financial performance issues can be brought to the attention in the
management reviews, which may lead to the initiation of necessary corrective
and preventive actions. It is easy to overspend and waste financial
resources such as the waste of manpower without adequate accounting, record
keeping and monitoring systems and methods. The utilization of actual
financial performance measures helps the organization also to see actual
financial benefits from the strategic investments and to justify additional
SMS development activities. However, we still have the question: "How much
should the organization invest in any specific SMS to satisfy its future
business requirements?"