Thanks for keeping track of our series on Business Intelligence ROI! So far we’ve evaluated the potential ROI of a new BI project and we’ve explored the top 5 BI projects that never pay off. Finally, today we’ll outline the methodology for calculating the actual ROI of your BI project. We can accomplish this by addressing specific phases in our Cost-Benefit Analysis.
- Choose a targeted return goal and state your definition of success. One of Steven Covey’s habits in his book entitled “The 7 Habits of Highly Effective People” is to begin with the end in mind. Are you trying to reduce costs, avoid costs, or enhance profitability? State your goal so that you know what you’re working towards.
- List assumptions. Clearly state the specific assumptions being made in the Cost-Benefit Analysis. Provide documentation for the rationale or logic used in making this assumption and include any implications or risks involved. Yes, it’s a way of covering your bases, but more importantly it gives the project transparency.
- Resources. In this step, we are calculating costs from specific business units. We need to examine the current process and look at the resources that are currently involved. What is the hourly cost of your external consultants and analysts and how many working hours do they accumulate per week? The hourly rate and hours worked per work week will tell you what the project is costing you in terms of human resource allocation.
- Define the benefits in timeline format. How much time do your analysts or members of the management team spend loading data from a financial system, dealing with data load issues or generating reports? How often do you require external consultants or get visits from external auditors? Additionally, we must note the periodicity of these exercises. How often are these people in place? Monthly, quarterly or twice a year? And do you have daily reconciliations? If some of these tasks can be replaced, automated or accelerated by your BI solution, then you can calculate monthly savings and even a cumulative extended benefit in the future.
Part 1 of our BI ROI series examined key questions to consider when evaluating the potential ROI of a new business intelligence project. As a company that’s implemented our solutions thousands of times and gone through just as many ROI justifications, we’ve come to think of ourselves as experts in this area…and not just with regard to what pays off, but also what doesn’t. And never will. Below are the top 5 BI projects that never actually produce a tangible financial return on investment. That doesn’t mean you shouldn’t tackle them ever – in fact, you may be forced to at some point. Read on:
- ‘Rip and replace’ your business intelligence platform.
Replacing your existing platform as quickly as the wind changes poses a tremendous strain on resources to get to the exact place to where you are today. Don’t switch platforms just for the sake of switching. Your new BI project or platform should address a pressing issue or solve a problem. You may hear complaints like “the interface is too difficult” or “it takes too long to run reports” and think that a platform switch is the answer, but there are other investments you can make – like implementing a different front-end, or trying overnight batch processing – that will relieve your pains without costing a fortune (and taking years off your life).
- Regulatory/ legal requirements for reporting.
Reporting standards, such as Sarbanes-Oxley (SOX), International Financial Reporting Standards (IFRS) and HIPPA for example, are mandatory regulatory requirements. A solution that helps make compliance more convenient is nice to have, but in reality these regulatory reports can be summed up as the cost of doing business. If you’re forced to implement BI to meet reporting requirements, you’re unfortunately just going to have to suck it up – this rarely pays off financially.
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.