Investing In New Tech
By AICC Staff
April 6, 2016
When is the right time to invest in new technology? Although this question may seem simple, there are many factors to be considered. However, it all really boils down to a simple concept: The right time to invest in new technology (NT) is when you and your team have considered all the costs of the technology and have created a predictive model that can be used as the road map forward.
Ancient wisdom asks, “For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?” The costs that require study include previously unknown and assumedly unimportant aspects of the market and its growth. It was previously unknown to you because the NT is just that—new. It was previously unimportant to you because you were not focused on the NT. Now, however, before enthusiasm for shiny new bells and whistles or fear of being left behind by competitors rushes the decision, it is critical for all costs to be known and to understand each cost’s relative importance to the success of the NT project.
“Ancient wisdom asks, ‘For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?’”
Throughout my career I have purchased NT not only for companies in which I held an ownership interest, but also those started as cooperatives (i.e., startups). In both cases, the potential costs of nondelivery on promises made an impact on both finance and reputation. These investments have ranged from comparatively low-risk purchases like management software to high-risk buys like the simultaneous installation of several cutting-edge flexographic machines in an operating room environment with new software and controls on air, water, and power. Startup operations have extremely high expectations, and leveraged financial strength makes unrealized results unacceptable—and rightly so. With the importance of these weighty decisions in mind, here are some steps to acquiring NT.
Consider the Price
First, of course, there are the financial costs, primarily the NT cost in terms of purchase price. This cost has a direct impact on your balance sheet, P&L, and financial ratios. By the time you arrive at the decision to acquire the NT, you certainly will have considered those implications. Many make the mistake of skipping this first step of pure financial modeling. As the model is being prepared, another aspect of the financial impact needs to be determined.
The second step is to determine when to bring your lender, bank, or other financial institution into the process. Often, bringing them into the process early paves the way to a wrinkle-free, accelerated transaction, because lenders don’t like surprises and they appreciate transparency. While at some point you will seek formal approval from them, this early step is purely informational. I suggest they be brought in early and kept in the loop as milestone decisions are made.
Third, consider the current state of your operation. The larger the project, the more critical this phase will be, as it is the main factor in your company’s ability to adopt new technology, deploy it, and profit from its advantages. Returning to the tower analogy above, these factors are the foundation on which you build:
- What is the current state of technical expertise on the plant floor, in the maintenance department, or in any other applicable area? What additional talent or training will be required?
- What is the company’s cultural condition? Are you and your leadership team willing to exercise the discipline required to achieve all that this NT can deliver?
- Do the people closest to the process who will be most affected see the need for NT? Are they willing to embrace the challenges with the benefits?
- How important is the environment where the new technology will operate? Is there a need to create a cleaner and more organized workspace?
- Are you truly committed to an environment of continual improvement?
- How healthy is the quality process? Do people throughout the company have communication paths to deal with nonconformances and suggest meaningful improvements?
- Does your company have a significant, formal, and top-down commitment to the training process? NT will demand more from your organization than marginal upgrading of existing technology.
- Will you be willing to include sufficient training in the startup plan to ensure that those working with the NT have nonproduction time to gain production prowess?
- What new accountability tools will be required to help people comply with the increased complexity and discipline required for NT? Will SOPs, checklists, audits, or additional safety protocols be needed?
The fourth critical determination that needs to be modeled is the target market. How big is the market you intend to pursue? Is it a mature or emerging market? Certainly when NT is involved, it often means the market is emerging. Dealing with either a mature or emerging market does not change the consideration of the costs, but if the market is emerging, the costs need to be analyzed through the lens of speed. How long will it take the market to grow to a size that will allow your share to produce the financial results you modeled? As always, the math problem is, How long will the NT take to pay for itself?
Another aspect of the cost regarding the market is the ability of your sales team to sell it. Are they currently equipped to sell into the market with the NT in mind, or will they require training? Will the training be extensive or remedial? Can they receive the training and not lose focus on the existing sales initiatives? The right NT supplier will be prepared to partner with you in training on their technology, as well as with any vendors of materials required by the NT.
The fifth consideration is the state of the NT. Is it proven technology by having been installed in at least three separate locations and for more than one year? If you answered no, then you will be an “early adopter,” and you will need to perform significant due diligence in the process. In either case, you need to do some basic inquiry with the vendor of the NT you have chosen. How reputable is the vendor? Is this their first product offering or an updated version of an existing product line? Obviously, there are implications to either situation, but if you are an early adopter and it’s the vendor’s first product offering, you are in the danger zone. Proceed with caution and deliberation. Your inquiry of the vendor should include their financial condition as well as their corporate culture and history. Do they have the financial strength to deliver the NT and to service and support it going forward? Are they the leader in the field or a lower-price alternative? If possible, visit their manufacturing facility. While visiting, look for signs that can help you determine their commitment to the quality and service you expect. The cleanliness and organization of the vendor’s plant, like yours, is a reflection of the level of commitment to excellence. As you witness the scope and quality of their operation, you can learn an immense amount of information from your time in their facility.
Finally, your negotiation of the purchase agreement must be exacting regarding their performance guarantee. Include all productivity and quality benchmarks, and be certain that your final payment is subject to all the performance objectives being fully achieved. The final payment should be of a sufficient size to encourage the vendor to perform the installation and training both in a timely manner and completely.
Ultimately, investing in NT should be well considered by as large a team as possible. This takes discipline and structure, but it is well worth the effort. No one person has a complete perspective, and no one person will be solely responsible for NT’s success. It takes a team to realize all the anticipated benefits from your investment. Operational and cultural assessments can provide a strategic advantage at the commencement of any improvement initiative.
Thomas Andersen is a founding partner of P-Squared (P²). Contact Tom at firstname.lastname@example.org.