Download ppt - 2002-Calculating the ROI for Business Intelligence

Calculating the ROI for Business Intelligence

ProjectsJonathan Wu

BASE Consulting Group, Inc.October 2002

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved Template Copyright © 2002 Business Objects - All Rights Reserved

Why Calculate a Return on Investment (ROI)?

Individuals calculate ROI for the following reasons:

Quantify the financial benefits of the project Prioritize IT projects Determine allocation of resources


Agenda

Financial measures How to estimate the cost Performing a ROI sensitivity analysis Non-financial considerations Business intelligence ROI case study Conclusion Questions and answers


Financial Measures 1/5

Net Present Value (NPV) of project benefit Internal Rate of Return (IRR) Payback period Return on Investment (ROI)


Net Present Value (NPV) of project benefit Calculation of the discounted projected cash flows

of project benefit from the date of implementation

NPV formula

NPV = CF1 + CF2 + CF3 + … + CFn

(1 + r)1 (1 + r)2 (1 + r)3 (1 + r)n

Legend

CF The net cash flow for each year that the NPV is to be applied

r The borrowing rate or investment yield rate for the organization

n The total number of years for which the calculation is to be applied



Internal Rate of Return (IRR) Calculation of the rate that will make the present value of the

projected cash flows equal to the investment

IRR formula

Initial Investment = CF1 + CF2 + CF3 + … + CFn

(1 + r)1 (1 + r)2 (1 + r)3 (1 + r)n

Solve for the “r” to calculate the IRR

Legend

CF The net cash flow for each year that the IRR is to be applied

r The Internal Rate of Return

n The total number of years for which the calculation is to be applied



Payback Period Calculation of the number of years that are required for the

discounted projected cash flows to equal the initial investment

Payback Period formula

Payback Period = Initial Investment

(NPV of project benefit / N years)



Return on Investment (ROI) Calculation evaluates the discounted projected cash flows

derived from the benefit generated by the project divided by the initial investment

ROI formula

ROI = NPV of project benefit X 100

Initial Investment



Agenda



How to Estimate the Cost 1/7

The cost of implementing a BI project can be classified into one of three types:

Hardware Software Labor


Hardware Cost

The cost of the hardware devices required by the project

Examples

Client systems Server system(s) Network communication hardware



Software Cost

The cost of the software applications required by the project

Examples

BI license fees Relational Database Management System (RDBMS)

license fees



Labor Cost

The cost of internal and external resources dedicated to the project

Examples

Project manager Business analyst(s) BI application specialist(s) Trainer(s)




The total cost of implementing a BI project can be divided into two categories:

Initial Recurring


Initial Cost

The cost an organization incurs for the BI project that are a one-time event

Examples

Hardware cost for the project Software license fees Labor cost associated with the development,

implementation, and deployment of the BI solution



Recurring Cost

The cost associated with the maintenance and support of the BI solution after the BI project has been implemented

Examples

Software maintenance fees Labor cost to maintain the solution and to train

individuals on the BI solution



Agenda



Performing a ROI Sensitivity Analysis1/2

A sensitivity analysis addresses the probability of various outcomes and quantifies the financial impact of the BI project

Example

Outcomes % Probability

Successful 60%

Partially successful 30%

Failure 10%

100%


Performing a ROI Sensitivity Analysis2/2

The % probabilities associated with each potential outcome must be validated with available research information

When performing the sensitivity analysis, the total project benefit should be greater than the initial investment for the benefit to outweigh the risk


Agenda



Non-Financial Considerations1/2

Non-financial considerations or qualitative analysis should be assessed and factored into the project business case

Examples

Improved information dissemination Improved information access Propagation of knowledge about the organization

through training and use of the BI solution


Non-Financial Considerations2/2

In certain cases, qualitative aspects can be quantified after the BI solution has been implemented as a post-project ROI assessment

Examples

Assessment of sales channel after September 11th Financial analysts working more efficiently Reduction of paper expense


Agenda



Business Intelligence ROI Case Study1/17

XYZ corporation is interested in implementing an BI application

The project sponsor wants to know the costs and benefits of the initiative

The current reporting environment requires 1,000 hours/month to support

There are ~ 250 individuals that spend ~ 1 hour/week gathering data and updating their spreadsheets

Background


One Sun Enterprise 3500 server with 4 processors is needed with an estimated cost of $115,000

The number of users with access to the BI application is estimated at 1,200 individuals

WebIntelligence UNIX server (InfoView, Reporter, and Explorer) uncapped license is estimated at $761,400

Broadcast Agent on Windows NT using an existing server is needed for scheduling documents with an estimated cost of $135,000

Assumptions



The number of developers/administrators of the BI application is estimated at 5 individuals

BusinessObjects Designer and Supervisor (IT Bundle) modules for 5 individuals is estimated at $20,950

The software maintenance fee is 20% of the initial license fee per year for InfoView, WebIntelligence, Broadcast Agent, Designer, and Supervisor modules

A discount of 20% of the total software license cost will be applied

Assumptions (continued)



The duration of the project is less than 1 year

The proposal amount from the external consulting firm selected is $850,000

The number of work hours per year per individual is 2,000

The fully burdened hourly labor rate is estimated at $100 for IT professionals and $75 for business analysts




XYZ’s borrowing rate is 7.75%

Annual inflation rate is 0%

A three-year time horizon is used for the ROI calculation




Ongoing support of the BI environment after implementation will require the following:

# Position % of Time

2 BI specialists 100%

1 Database administrator 5%

1 System administrator 5%

1 Network administrator 1%

1 Trainer 25%

Total 236%


or 2.36 Full Time Equivalents



Hardware$115,000 = Server cost Software $917,350 =

Labor$850,000 = Consultant proposal

Total $1,882,350

Initial Cost

WebIntelligence / InfoView 761,400$ Broadcast Agent 135,000$ IT Bundle (5) 20,950$

Gross License cost 917,350$ 20% Discount (183,470)$ Net License cost 733,880$

Maintenance Fee - 20% 183,470$

Total Software Cost 917,350$



Software$183,470 = $917,350 license x

20% maintenance Labor$472,000 = 2,000 hrs x 2.36 FTE x $100/hr

Total $655,470

Recurring Cost



XYZ with a BI applicationYear 0 Year 1 Year 2 Year 3

Hardware 115,000$ -$ -$ -$ Software 917,350$ 183,470$ 183,470$ 183,470$ Labor 850,000$ 472,000$ 472,000$ 472,000$

Total cost 1,882,350$ 655,470$ 655,470$ 655,470$



XYZ without a BI application

Labor Year 0 Year 1 Year 2 Year 3IT support 1,200,000$ 1,200,000$ 1,200,000$ 1,200,000$ Business analysts 937,500$ 937,500$ 937,500$ 937,500$

Total cost 2,137,500$ 2,137,500$ 2,137,500$ 2,137,500$

• IT support of current reporting environment

$1,200,000 = 1,000 hrs/month x 12 months x $100/hr

• Business analysts cost to gather data and update spreadsheets

$937,500 = 250 individuals x 1hr/wk x 50 wks/yr x $75/hr



XYZ with a BI applicationYear 0 Year 1 Year 2 Year 3

Total cost 1,882,350$ 655,470$ 655,470$ 655,470$

XYZ without a BI applicationYear 0 Year 1 Year 2 Year 3

Total cost 2,137,500$ 2,137,500$ 2,137,500$ 2,137,500$

Project benefit 1,482,030$ 1,482,030$ 1,482,030$



Year 0 Year 1 Year 2 Year 3Project benefit 1,482,030$ 1,482,030$ 1,482,030$

Discounted project

benefit at 7.75% -$ 1,375,434$ 1,276,505$ 1,184,691$

NPV formula

= $1,482,030 x 1 / (1+.0775)

= $1,482,030 x 1 / [(1+.0775) x (1+.0775)]

= $1,482,030 x 1 / [(1+.0775) x (1+.0775) x (1+.0775)]

Total discounted project benefit at 7.75% 3,836,630$



Total NPV of project benefit at 7.75% (a) 3,836,630$

Initial investment in BI project (b) 1,882,350$

Return on investment [(a) / (b)] x 100 204%

Calculation of ROI Over 3 Years



Calculation of Internal Rate of ReturnYear 0 Year 1 Year 2 Year 3

Project benefit 1,482,030$ 1,482,030$ 1,482,030$

IRR formula

Initial Investment = $1,482,030 x 1 / (1+ r)

Initial Investment = $1,482,030 x 1 / [(1+ r) x (1+ r)]

Initial Investment = $1,482,030 x 1 / [(1+ r) x (1+ r) x (1+ r)]

Internal rate of return (Solve for variable r) 59.2%



Total discounted project benefit at 7.75% 3,836,630$ Number of years in time horizon 3

Average total discounted project benefit at 7.75% 1,278,877$

Initial investment in BI project 1,882,350$

Payback period in years 1.47

Calculation of Payback Period

Payback period is approximately 1 year and 6 months



Outcomes%

Probability Gain/(Loss)Weighted Outcome

Successful 60% 3,836,630$ 2,301,978$ Partially successful 30% -$ -$ Failure 10% (1,882,350)$ (188,235)$

Totals 100% 2,113,743$

Sensitivity Analysis


The weighted outcome of $2,113,743 is greater than the $1,882,350 initial investment


3 year ROI is 204% Payback period is 1.47 years and less than time horizon 3 year IRR of 59.2% is greater than XYZ’s borrowing

rate of 7.75% Probability of success is greater than 50% Total weighted outcome is significantly greater than

the initial investment

The potential gain to XYZ corporation

from the BI project

outweighs the risk of failure

Summary of Case Study



Agenda



Conclusion

ROI quantifies the financial benefits of a project Qualitative benefits must also be considered

Without the necessary support and user involvement, a ROI calculation for a BI project is meaningless


Questions and Answers

For a copy of this presentation or the accompanying white paper or ROI calculator, please contact

Jonathan Wu

[email protected]

(510) 628-3300 x224

mailto:[email protected]

mailto:[email protected]