This can be some interesting ..... **************************************************************************** ********** 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?"