Cash-strapped and revenue-hungry, companies today are very mindful of their expenses and are making a concerted effort to ensure that projects – business intelligence-related or not – have a return on investment in a reasonable amount of time. As a project owner, business planner or member of a BI competency center, you want to increase the probability that your business intelligence project will be approved. It's not enough to assume that your BI project has ROI – you must calculate and demonstrate that your proposal can produce positive cash flow for the company in a set time span. You've probably realized that your executives are not going to give the go-ahead just because you say that the cost of your BI project is justified because it will help achieve 'better reporting.' They're only going to listen to you if you can give them a real rate of return. Let's dive into how you can figure this out.
Return on Investment is defined as a measure of the value of an investment compared to the cost of the investment for a predetermined time limit. Your executives are likely asking you to show them how your BI project will produce positive ROI – how your project will save more money than it costs or how it will find ways to increase profits since you'll have better, more organized data. So let's talk about calculations. It is relatively straightforward to calculate the cost of hardware, software, the hourly rate of your consultants, and the cost of using internal resources. So outline those items first and come up with an investment number. Then you have to consider the following questions:
- 'Can I quantify the business value of this project?'
- 'Will the company see financial returns on this investment?'
- 'How soon are we going to see these returns?'
If you have stellar answers for these questions, go ahead and present your business case. If not, let's examine them.
Can I quantify the business value of this project?
Though you may be tempted to keep things generic ('Implementing BI will give us better reporting! BI will save us time and help us increase profits!'), you'll score more points by presenting the specific ways your project will solve a problem or simplify operational tasks. For instance, will your BI project automate repetitive, manually intensive work that normally takes 2 financial analysts 2 weeks each? It's easy to quantify the cost of this positive change. Will it address a certain reporting requirement you're mandated to meet and will have to spend money on anyway? Can you kill 2 birds with 1 stone here – get a much-needed BI system in place and address this reporting requirement all at once? Concrete answers to these questions can make a compelling case for your project.
Will the company see financial returns on this investment – and how soon?
Let's look into how a BI implementation can make money for your company – enough to cover the initial investment and then some. The possibilities for ROI include revenue enhancement, revenue enhancement-margin protection, cost reduction, cost avoidance, and capital cost avoidance (all within a reasonable time frame). Remember to maintain the credibility of your project by going back to the timeline to prove your case, even if it's a little off-target. If your project positions your company for one or more of these returns, you're setting yourself up to be an indispensable resource for your company!
Here are a few examples of business intelligence projects that have yielded significant ROI (okay, okay, using arcplan):
- Cost Reduction ROI: Financial managers at a major regional supermarket chain were able to get better visibility into inventory, improve the ordering process, and ultimately sell what they buy, reducing inventory shrink (the amount of wasted product that goes bad before it’s sold). Their BI investment has paid for itself over and over.
- Capital Cost Avoidance ROI: Advisors at a leading financial management company opted to use their existing BI framework to build a project management tool that records milestones, tracks hours, and assigns accountability. They avoided outlaying cash to purchase a new system and instead used what they already owned. A little elbow grease went a long way to save money on a tool they really needed.
- Cost Avoidance / Time Saved ROI: Planners at a community hospital were able to streamline and automate their budgeting cycle with a tool that consolidates hundreds of spreadsheets into a centralized system. The solution shortened this annual process from months into two weeks.
Still not sure if your BI project is one that will produce real returns? Tune in to the part 2 of this series where I'll list the top 5 BI projects that never pay off.