1. Understanding ROI Just
Enough to Get (or Keep)
Your Project Funded
Heather Kotula
VP, Marketing and Communications
hkotula@accessinn.com
505-998-0800 x123
2. Poor project planning
A weak business case
Ineffective or insufficient management
support
Why Do Projects Fail?
3. Benefits of the proposed change
Communicating those benefits
Understanding is the beginning of approving.
André Gide
Building a Business Case:
First Things First
4. Business problem or opportunity
Benefits
Risk
Costs
Likely technical solutions
Timescale
Impact on operations
Organizational capability
Assess This
5. What is your goal?
What’s stopping you from reaching the goal?
How much change is needed to overcome the
problem?
Are you certain this will solve the problem?
Ask Yourself
6. Brief and convey only the bare essentials
Interesting, clear and concise
Free of conjecture
Light on jargon and buzzwords
Your vision of the future
Clear about the value and benefits
Consistent and easy to read
Your Business Case Should Be
9. Measure To Manage
Measure what's important
Publish your metrics and benchmarks
Reward people for exceeding their goals
And then keep tuning the metrics
The Ol’ Business Adage
10. Metrics are used to track all areas of business
KPIs – Key Performance Indicators – are used
to target and track critical areas of
performance
Metrics vs. KPIs
11. Metrics Matter
Metrics are a concrete way of defining what a
[knowledge management or content
management] project will achieve, and whether
it met those goals.
James Robertson, StepTwo
12. What Should Metrics Include?
Targets to be set
Success to be assessed
ROI to be estimated
Ongoing viability to be tracked
Lessons to be learned in the process
13. Make Metrics Good
The most powerful metrics are those that directly
measure the desired business outcomes.
14. Expressing Metrics
DO SAY
Improve the rate of
product cross-selling
by front-line staff
Improve the average
number of intranet
hits to 30,000 per day
by June
DON’T SAY
Deliver information
more effectively
Improve intranet
usage by staff
19. For example
Original cost of investment is $50
Increased sales is $200
ROI is 3 times the original cost
20. ROI, Traditionally Speaking
Calculated retrospectively
From existing accounting records, which provides
for transparency of the numbers
Real money – money invested and money
returned from the investment
21. Traditional Cost Components of ROI
Infrastructure – software, hardware, hosting
Labor – Salaries for internal personnel, Consultant
Fees
Training – internal personnel training by third
parties, end-user training
22. Traditional Returns Components of ROI
Cost savings
Cost avoidance
Increased revenue
Revenue enhancement
Revenue protection
23. Required investment
Payback period
Estimates
Assumptions
Project risk (probability of success or failure)
What You Should Quantify
24. Alignment of an initiative with business
strategy
Interdependence of projects and systems
from an overarching view
Effectiveness of the system (qualitative
measure of its “goodness”)
Efficiency of the system (what it does per
dollar invested)
ROI usually fails to address:
25. …ROI is designed to assess
profitability or financial efficiency
…and therefore has limitations.
And…
26. …in order to calculate an ROI–like measure for
information infrastructure investments, we have to
address intangible benefits.
Therefore…
27. Costs of upsetting customers
Costs of failure due to inappropriate system or
faulty implementation
Incompatibility with other systems leading to
unexpected costs of software amendments,
tailoring, and maintenance
Costs of errors due to lack of experience in
using new system
Intangible Costs Might Include:
28. Costs of losing staff morale
Costs of losing a competitive edge
Costs of declining company image
Loss of investment in prior or legacy systems
Temporary drop in productivity during the
change
Intangible Costs Might Include:
29. Better information
more timely information
more accurate information
faster access to data
uniform information (well-formed data)
Intangible Benefits Can Include:
30. Better use of information
strategic and organizational planning
resource control
asset deployment
flexibility and transparency
Intangible Benefits Can Include:
31. Increased productivity
Time savings
Happier staff
Increased job satisfaction
Happier customers
Improved findability and discovery
Better corporate image
Intangible Benefits Can Include:
32. How do you quantify intangible
costs and benefits?
33. Total Economic Impact (TEI) from Forrester
Research Inc.
Business Value of IT (ITBV) program developed by
Intel Corporation
Other Metrics For Measuring Value
34. Methodology developed by Forrester
Research, Inc.
“When discussing the project, use this entire
sentence to reinforce the project and its
value.” ChipGliedman
Total Economic Impact (TEI)
35. “We will be doing ______ to
make ________ better, as
measured by _______, which
is worth ________.”
TEI - Forrester Research Inc.
36. “We will be doing [THIS PROJECT OR
ACTIVITY] to make [PAIN POINT] better,
as measured by [METRIC(S)], which is
worth [ESTIMATED PAYBACK].”
TEI - Forrester Research Inc.
37. User productivity, as measured by increased
capacity
Program effectiveness toward market growth
Organizational efficiency
Customer satisfaction, in terms of additional sales
to current customers or decreases in account
turnover
Quantifying Benefits with TEI
38. Developed in 2002 at Intel Corporation
Business Value Dials (Indicators)
Business Value of IT (ITBV)
43. “Change what you think and say before you
change anything else, and focus your comments
always on business outcomes.”
RichardHunter
Change Happens
44. “Show the value of IT as an investment in business
performance.”RichardHunter
Show Off
45. What’s the Final Answer?
A. I can use Google to find the answer
B. My biggest competitor has the answer
C. My organization has a unique answer
D. Jabin has the answer but he won’t tell me
We’ll help you with project planning so that this doesn’t happen
Can you answer these questions quickly? Do you have evidence that supports your answers?
The executive summary will let your reader – likely the person who will approve the project – know if they want to keep reading. Write this last, after you have done the detail work on the other sections. It should include a brief summary of the project and your recommendation
The Introduction should include the scope of the project, the market context, and a financial discussion
The Analysis includes assumptions, costs including actual and opportunity, benefits and risks, and other options
The conclusion should include your recommendation (again) and the next steps to be taken – action items!
This does not have to be a ponderous tome suitable for bedtime reading. You want something to happen – i.e., your project to be approved – so make it a compelling argument that is not too long but still interesting to read
You can’t manage what you don’t measure
To be effective, business metrics should be compared to established benchmarks or business objectives. This provides valuable context for the values used in the metric and allows business users to better act on the information they are viewing. For instance, $20M sales in Q4 sounds like an impressive figure; however, if you're Boeing Aircraft, this figure would have you contemplating filing for bankruptcy.
KPIs evaluate the success of an organization or of a particular activity in which it engages. Often success is simply the repeated, periodic achievement of some levels of operational goal (e.g. zero defects, 10/10 customer satisfaction, etc.), and sometimes success is defined in terms of making progress toward strategic goals
Targets to be setMetrics provide clearly defined goals and scope for projects, allowing for more concrete design, planning and implementation. Metrics state “this is what we plan to do, and this is the benefit it will have”.
Success to be assessedMetrics provide very specific ‘success criteria’ for projects, allowing the outcomes to be assessed at the end of implementation.
ROI to be estimatedIn the current times of tight IT budgets, there is an expectation that projects will deliver quantifiable benefits. This is often defined in terms of ‘return on investment’ (ROI). Without strong metrics, estimating ROI is little more than guesswork.
Ongoing viability to be trackedMetrics continue to provide value beyond initial implementation. Appropriate measures will quickly highlight issues, allowing them to be resolved before they grow or spread.
Lessons to be learntBy providing a concrete way of assessing the success (or lack of) various approaches, a greater understanding can be gained. This can then be applied when establishing new initiatives.
In short, metrics can be of tangible benefit both at the early stages of a project, and throughout its life.
These days, most labor-intensive operations can be replaced with automation, and you need to recognize as you grow the business when the cost of automation is justified. At some point, the return on investment (ROI) of more computer systems, and automated manufacturing operations, is well worth the cost and time to change.
This is the basic formula for calculating return on investment.
For example, if I spend $50 on my investment, and I get increased sales of $200, then my ROI is 3: $200 is my gain from investment, minus the $50 cost of investment equals $150. $150 divided by my $50 original cost of investment is 3 times. This could also be expressed as a percentage, which in this case would be 300%.
Traditional ROI makes people feel good because Numbers look objective, so they inspire confidence more than opinions do
These are tangible costs – there is paperwork somewhere with these dollar figures.
These are tangible benefits or gains – things that can be measured in dollar values in a reasonably straightforward way. While these might not all come with a clear, easy to access paper trail that defines the exact dollar figures, the numbers can be calculated using data from various sources: for cost avoidance and the potential of not having to hire additional personnel, we can access salary information pertinent to the position in question, or we can track additional income from sales of new products.
A few of those characteristics could be:
Proceed with caution! If you include some of these things in your calculations, you’ll probably have a better ROI that is backed with a better story.
And this is very true for information infrastructure investments which have so few tangible gains.
So consequently …
Assessing the value of intangibles is fraught with danger. Measuring the intangibles can be tricky. What is the cost of upsetting customers as you make a transition, or ask them to learn something new? Do they get frustrated and walk away for a day, or do they cancel entirely, thereby reducing revenue? What if someone on your staff clicks in the wrong place and makes your taxonomy into a flat list?
Downtime when switching systems, for example, or the staff time spent learning the new system, or incomplete or inaccurate porting of data to the new system are all intangible costs that can – and should – be included in your calculations.
But intangibles aren’t all bad! That legacy system that you replaced had limitations, and the new one provides opportunities.
Increased productivity can be calculated based on the reduction of personnel, or based on a few minutes per day per staff member. The first can be viewed as tangible, the second as intangible, depending on the context. Context can mean the difference between tangible and intangible.
not all factors are the same for every organization or every project within one organization. How do you calculate the gain from better information? Or more timely, accurate, or uniform information? There isn’t a formula for that that I have found, and if it did exist it would vary widely among organizations
ROI isn’t the only option for evaluating your information infrastructure investment. Some of the others are
Total Economic Impact Methodology. Gliedman, Chip, The Foundation of Sound Technology Investment: The Total Economic Impact™ Methodology”, Planning Assumption, September 26, 2003, www.gigaweb.com
He says, “When discussing the project, use this entire sentence to reinforce the project and its value.”
For example, We will be implementing Data Harmony’s MAIstro software (next slide!)
Quantifying the benefits derived from an IT decision must be made in light of an individual organization’s goals. With this alignment, the contribution of IT can be measured in such terms as the following:
For example,
Uses a set of financial measurements of business value called Business Value dials. There are about 20 of these, not all of which are used in every evaluation. They are things like Employee Productivity, Capital Hardware and Software Avoidance, Risk Avoidance, Time-to-Market, Open New Markets, Optimize Existing Markets, Direct Income, even Scrap Reduction.
Exploration, Stage One, Understanding Customer needs. If you are using this method, Ask yourself How does this project contribute to patron results or help address the patron’s needs?
The most important features of a business case are:
They must promise benefits for the organization.
They should have a way of measuring or evaluating whether the promised benefits have been achieved.
They must be visibly aligned with the goals of your senior management.
They must generate trust, confidence and commitment.
This makes them political as well as logical tools. You must never forget that we are dealing with human beings as well as accountants.
Gartner analyst Richard Hunter has a great opening question for presentations on the business value of IT investments:
“What is the value of an exercise machine?” He explains that the benefits – the value – are in the performance of the user. What are some other possible examples or analogies that we can draw? A new car? It loses value the minute you drive away. How can you apply that to your ROI calculations?
Gartner analyst Richard Hunter also says “Change…………”
Talk about what the business does and how IT can make it better instead of talking about the system specifications or what the system does. Don’t tell them how you make the sausage, tell them how delicious and satisfying the end product will be.