Our series on Business Intelligence ROI has explored the importance of ROI for BI projects, provided examples of the types of BI projects that never pay off, and evaluated the methodology for calculating BI ROI. We saw that if a project has measurable returns it is more likely to get off the ground and get you acceptance for future BI projects.
Many of you who are tasked to calculate the ROI of your BI projects were never taught such a thing in school, so let's break down another element that will help you do your calculations: types of return. Here are 5 types you should evaluate:
1. Revenue enhancement
Simply put, your organization will generate more money as a result of doing your project. Shareholders appreciate these types of projects – you're reaching the right group of customers who see value in your project – and are willing to pay.
An example of this type of ROI would be one of arcplan’s grocery chain customers – their arcplan BI solution ties together three separate IT systems (one for sales, one for ordering, and one for inventory) and allows them to get a handle on inventory shrink (the loss of products between the point of manufacture and the point of sale…think brown lettuce or rotten tomatoes). arcplan allows the right people to see how many tomatoes are stocked in stores, how many are coming in from the warehouse, and how many are selling. The system allows the grocery stores to sell more tomatoes since they have better-looking inventory and less rotten tomatoes since they’re only ordering the amount they need in each store.
2. Revenue enhancement/margin protection
This means that your organization will increase profits through better efficiency. This does not necessarily mean more revenue but just higher profitability as a result of streamlining your current process.
The grocery store example from above also fits this type of ROI. The same shrink avoidance system allows stores to not only sell more tomatoes, but also to throw out less, thus protecting their profits (less shrink = more profit).
3. Cost reduction
The current process costs 'x', but as a result of doing your project, it will cost x minus 5% or even x minus 10%. Your project could reduce wasteful practices and therefore save the company money.
An example would be one of arcplan's airline customers, which uses an arcplan Enterprise-powered scorecard to analyze the efficiency of each terminal. Some airports are unionized and require negotiations every so often. Our customer has a competitive advantage when going into these negotiations since they have insight into the efficiency of each of their facilities around the country. They can compare one terminal in a similarly-sized facility to another and get better rates, reducing costs for the airline.
4. Cost avoidance
In the business intelligence space, cost avoidance is the easiest type of ROI to prove. There's an existing process and it takes 'x' amount of resources over a certain period of time. As a result of implementing your project, the process takes fewer (maybe no) resources to produce the same results, thereby avoiding current costs.
Think of a finance team at one of arcplan's commercial print customers. They used to print out hundreds of pages of reports per day to understand the previous day's transactions. Now they're using real-time BI dashboards to view and analyze the same data. The cost of paper and the time it took to compile results and print out the reports is now totally avoided.
5. Capital cost avoidance
If your project extends beyond a single fiscal year, then you are investing in a capital expenditure ("capex"). These are expenditures that create future benefits, or help you avoid capital costs in future periods.
Some of us may be tempted to throw "other benefits" into the explanation of our BI ROI calculations – vague terms like "better reporting" – but I encourage you to avoid "other." There are no numbers behind "other" – it is amorphous. Keep your BI project credible by sticking to tangible returns and proving its ROI case.