A Forrester Total Economic Impact Study Prepared For IBM The Total Economic Impact Of Business Analytics On IBM Power Systems

Transcription

1 A Forrester Total Economic Impact Study Prepared For IBM The Total Economic Impact Of Business Analytics On IBM Power Systems Project Director: Reggie Lau Contributor: Jon Erickson March 2013

2 TABLE OF CONTENTS Executive Summary...2 Running Business Analytics On Power Systems Simplifies Data Warehouse Architectures And Impacts Business Decisions...2 Factors Affecting Benefits And Costs...3 Disclosures...4 TEI Framework And Methodology...5 Analysis... 6 Interview Highlights... 6 Costs... 9 Benefits...10 Flexibility...15 Risk...16 Financial Summary...18 IBM Business Analytics On Power: Overview...19 Appendix A: Composite Organization Description...19 Appendix B: Total Economic Impact Overview...20 Appendix C: Glossary...21 Appendix D: Endnotes , Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective organizations. For additional information, go to About Forrester Consulting Forrester Consulting provides independent and objective research-based consulting to help leaders succeed in their organizations. Ranging in scope from a short strategy session to custom projects, Forrester s Consulting services connect you directly with research analysts who apply expert insight to your specific business challenges. For more information, visit Page 1

3 Executive Summary In March 2013, IBM commissioned Forrester Consulting to examine the total economic impact and potential return on investment (ROI) enterprises may realize by deploying business analytics software on IBM Power Systems hardware. The purpose of this study is to provide readers with a framework with which to evaluate the potential financial impact of IBM analytics on their organizations. Running Business Analytics On Power Systems Simplifies Data Warehouse Architectures And Impacts Business Decisions Our interviews with four existing IBM customers and subsequent financial analysis found that a composite organization, based on these four organizations, experienced the risk-adjusted ROI, costs, and benefits shown in Table 1. For the purposes of this case study, the composite organization is known as Laud Goods & Co. (See Appendix A for a description of the composite organization and its infrastructure environment.) Table 1 Laud Goods & Co. (Composite Organization) Three-Year Risk-Adjusted ROI 1 ROI Payback period Total benefits (PV) Total costs (PV) Net present value 64% 9 months $6,050,766 ($3,680,858) $2,369,908 Benefits. Laud Goods & Co. experienced the following benefits that represent those experienced by the interviewed organizations: o o o o Legacy software license cost avoidance. This benefit focuses on the retirement of licenses for legacy business analytics software with the deployment and adoption of Cognos. Preconfigured performance and maintenance efficiencies. This benefit centers on the preconfigured IBM Power Systems offering optimized to balance high-performance analytics and real-time operational throughput, mitigating system downtime and performance issues due to misconfiguration. Reporting and decision-making efficiency. This benefit details the capability to generate reports at a higher frequency due to a higher workload capacity. For the business, this allows for more timely business analysis and decision-making. Advanced incident resolution. This benefit speaks to the use of IBM analytics to single out problem areas in a set of data so that an organization can zoom in and fix individual issues as opposed to incorrectly attributing errors. Page 2

4 Costs. Laud Goods & Co. experienced the following costs that represent those experienced by the interviewed organizations: o o o o o Software licenses. This cost is the direct cost for annual software license fees. Hardware. This cost details the upfront investment needed for Power hardware. Additional software. This cost notes the additional non-ibm software that was purchased. Professional services. This cost focuses on the fees paid to systems integrators and IBM for implementation, migration, support, and training services. Internal planning and implementation effort. This cost centers on the time and level effort contributed by Laud Goods & Co. s internal BI team. Figure 1 Three-Year Risk-Adjusted Cost/Benefit Breakdown Factors Affecting Benefits And Costs Table 1 illustrates the risk-adjusted financial results that were achieved by Laud Goods & Co. The risk-adjusted values take into account any potential uncertainty or variance that exists in estimating the costs and benefits, which produces more conservative estimates. The following factors may affect the financial results that an organization may experience: Training and adoption of IBM analytics software. Overlapping analytics software that is not discontinued. Willingness to use preconfigured devices and not overly customize. AIX expertise and BI maturity. Page 3

5 Disclosures The reader should be aware of the following: The study is commissioned by IBM and delivered by the Forrester Consulting group. Forrester makes no assumptions as to the potential return on investment that other organizations will receive. Forrester strongly advises that readers should use their own estimates within the framework provided in the report to determine the appropriateness of an investment in business analytics on Power Systems. IBM reviewed and provided feedback to Forrester, but Forrester maintains editorial control over the study and its findings and does not accept changes to the study that contradict Forrester s findings or obscure the meaning of the study. The customer names for the interviews were provided by IBM. Page 4

6 TEI Framework And Methodology Introduction From the information provided in the interviews, Forrester has constructed a Total Economic Impact framework for those organizations considering implementing business analytics on Power Systems. The objective of the framework is to identify the cost, benefit, flexibility, and risk factors that affect the investment decision. Approach And Methodology Forrester took a multistep approach to evaluate the impact that IBM can have on an organization (see Figure 2). Specifically, we: Interviewed IBM marketing, sales, product personnel, and a Forrester analyst to gather data relative to business analytics on Power Systems and its marketplace. Interviewed four organizations currently using IBM Power Systems hardware, either Cognos software or another brand of BI software, to obtain data with respect to costs, benefits, and risks. Designed a composite organization, Laud Goods & Co., based on characteristics of the interviewed organizations (see Appendix A). Constructed a financial model representative of the interviews using the TEI methodology. The financial model is populated with the cost and benefit data obtained from the interviews as applied to the composite organization. Figure 2 TEI Approach Perform due diligence Conduct customer interviews Design composite organization Construct financial model using TEI framework Write case study Forrester employed four fundamental elements of TEI in modeling IBM s service: 1. Costs. 2. Benefits to the entire organization. 3. Flexibility. 4. Risk. Page 5

7 Given the increasing sophistication that enterprises have regarding ROI analyses related to IT investments, Forrester s TEI methodology serves the purpose of providing a complete picture of the total economic impact of purchase decisions. Please see Appendix B for additional information on the TEI methodology. Analysis Interview Highlights A total of four interviews were conducted for this study, involving representatives from the following organizations: 1. A North American food and beverage manufacturer and distributor with approximately $15 billion in annual revenue and operations in North America and Europe. This organization has engaged with IBM for more than 12 years and served as a catalyst for IBM to develop preconfigured systems. The first IBM Smart Analytics System was installed nine years ago, which solved this organization s concerns for stability, reliability, and architecture complexity. 2. A leading Latin American telecommunications provider for both B2C and B2B services. Not only does this organization receive data through sales and orders, but it also incorporates data from network operations and contact center records into its analytics environment. With the objective to scale, simplify its multi-brand BI environment, and keep up with growing data demands, this organization deployed a common set of IBM Power 795 servers. Not only was there an immediate improvement in query times by 30% and ad hoc report generation by 60%, there was also a 20% to 30% reduction in time needed for ongoing management. 3. A North American shared services provider focused specifically on government-funded medical insurance contracts. This organization has an estimated headcount of 2,100 employees, of which approximately 200 are users of the analytical warehouse, which is supported by seven staff members. Out of the 200 users, 150 use the system primarily to process insurance claims, and the other 50 provide statistical analysis and reporting. This organization migrated to Power for its stability and Smart Analytics System offering, which addressed its daily system outage concerns in the past. While IBM Smart Analytics Systems hardware and data warehouse is used, this organization has also kept licenses for a separate statistics software and business reporting software. 4. A North American retailer with $7 billion in annual revenue, approximately 300 stores, and 400 IT staff members. This organization estimates 1,000 Cognos users with 700, mainly from merchandising, who have adopted the tool very well. Not only did this organization use IBM analytics for price optimization, it also further used IBM analytics for vendor management and even components of supply chain management such as inventory and replenishment forecasts. The four interviews uncovered the following themes for our construction of Laud Goods & Co.: Preconfigured systems reduce maintenance issues, increase stability, and are a key driver in adoption of Power Systems and Smart Analytics Systems. Several interviewees noted that the catalyst to their migration to Page 6

8 Power Systems was the stability of the preconfigured and pre-optimized analytics solutions. Some customers even instituted policies that limited the level of customization their teams could perform because straying too far from the original design became an operational risk to system stability. Some customers use IBM Cognos exclusively, while others choose to keep a legacy BI tool or statistical tool for familiarity. Although the customers that used Cognos exclusively for BI from analysis to reporting did explicitly mention how much easier it was for the business to be engaged, some customers did not use Cognos as the exclusive BI tool. These customers preferred to keep either a legacy CRM tool with BI capabilities or a full statistical software in their software portfolio. Power Systems enable faster and more frequent reporting, leading to more timely decision-making. The Power Systems platform is optimized for analytics workloads, which meant going from weekly reporting to daily reporting for one customer. Furthermore, daily reporting not only translated into time savings for staff but also more timely decision-making, which affected the business in the form of price optimization and inventory management. While the use cases and derived business value of analytics is not always tracked, there are definitely examples of educated decision-making due to insight from analytics. The value of a decision is often difficult for customers to track, especially if a decision is a one-off or not part of a repeated process. However, some customers do attribute business metrics and results to analytics, and one such example centers on incident resolution between an IBM customer and its vendor regarding defective inventory. Instead of attributing all defective goods to all vendors in a region, the customer was able to zoom in on the exact style, exact batch, and exact vendor that produced defects. With that level of detail, the customer was able to quickly resolve with that specific vendor instead of incurring costs for return shipping and time for finding replacement vendors during a busy retail season. Laud Goods & Co. Composite Organization Based on the interviews with the four existing customers provided by IBM, Forrester constructed a TEI framework, a composite organization, and an associated ROI analysis that illustrates the areas financially affected. Laud Goods & Co., the composite organization that Forrester synthesized from these results, represents a North American mixed goods retailer with $10 billion in annual revenue and 400 stores throughout the US, Canada, and Mexico. While exploring options to expand into the European and Asian markets, Laud Goods & Co. already has an established presence through its vendor network outside of North America. As Laud Goods & Co. s business grew organically and through acquisitions, the IT team faced the challenge of a growing demand for business analytics with a dated and disparate infrastructure that was not built or optimized for BI workloads. Furthermore, as business demands continually pushed the IT infrastructure, system outages were common until the IT team set a policy that certain analytics reports may only be run once a week usually over the weekend when there was most bandwidth. The CIO quickly assembled a team of infrastructure staff (seven FTEs) and developed a new BI team (two FTEs) to decide which hardware systems and BI software to invest in. The infrastructure and BI teams held meetings with several vendors that provided a combination of hardware and BI software. After advancing discussions with two vendors to the proof-of-concept stage, Laud Goods & Co. chose IBM s pre-integrated and pre-optimized analytics system on Power servers and Cognos as the primary BI software. Page 7

9 Laud Goods & Co. s objectives in choosing Smarter Analytics on Power were: Increased system stability and reduced maintenance effort. Capacity to support at least 1,000 business and back-office users with BI software, with a subgroup that has daily reporting demands. Gaining business value from analytics by making smarter and more timely business decisions. Retiring overlapping software and phasing out obsolete hardware over time. Framework Assumptions Table 2 provides the model assumptions that Forrester used in this analysis. Table 2 Model Assumptions Ref. Metric Calculation Value X1 Hours per week 40 X2 Weeks per year 52 X3 Hours per year (M-F, 9-5) 2,080 X4 Hours per year (24x7) 8,760 X5 IT FTE annual salary $120,000 X6 IT FTE hourly wage $65 X7 Business FTE hourly wage $45 X8 Salary increase per year 3% The discount rate used in the PV and NPV calculations is 10% and time horizon used for the financial modeling is three years. Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult with their respective organization s finance department to determine the most appropriate discount rate to use within their own organizations. Page 8

10 Costs Laud Goods & Co. incurred costs in five categories: software licenses, hardware, additional software, professional services, and internal planning and implementation effort. While both software licenses and additional software costs are recurring annually, hardware, professional services, and internal planning and implementation effort are upfront costs that must be recouped before Laud Goods & Co. can see a positive ROI. Software Licenses This is the annual, recurring cost for IBM BI software licenses. Laud Goods & Co. has approximately 1,000 users across merchandising, marketing, finance, and several smaller departments that use BI software for analysis, reporting, or dashboard development. The total non-risk-adjusted cost each year is $700,000. Hardware After working with IBM and a systems integrator, Laud Goods & Co. took their recommendation and purchased the IBM preconfigured and pre-optimized analytics solutions on Power servers. The upfront, non-risk-adjusted cost is $700,000. Additional Software Although the BI team has pushed for major adoption of Cognos in the organization, a group of experienced users of the legacy statistics software requested that the organization keep that software. As this is a small subgroup, and keeping legacy BI or stat software could play into the road map of adoption and phasing out legacy components, the BI team decided to keep the stat software, which costs $100,000 per year for licenses before adjusting for risk. Professional Services Laud Goods & Co. has an IT team of average size but has never focused on advancing technology because it did not view IT as a core competency. As it takes incremental steps in modernizing its infrastructure and overall technology, the organization did not want to hire incremental headcount just for implementation and decided to leverage external professional services for implementation, testing, and training. Over two to three months of implementation, the total, upfront cost for professional services was $700,000 before adjusting for risk. Internal Planning And Implementation Effort The main portion of planning and implementation started after the team decided on which vendor s solution to deploy. At that point, since the organization had hired external professional services to assist with the implementation, the internal Laud Goods & Co. team was just two staff members at 90% (1.8 FTE) of their time. After incorporating fully loaded salary costs, this is an upfront, non-risk-adjusted cost of $18,720. Total Costs Table 3 shows the total of all costs mentioned above as well as associated present values, discounted at 10%. Page 9

11 Table 3 Total Costs Non-Risk-Adjusted Costs Initial Year 1 Year 2 Year 3 Total Present value Software licenses $0 ($700,000) ($700,000) ($700,000) ($2,100,000) ($1,740,796) Hardware ($700,000) $0 $0 $0 ($700,000) ($700,000) Additional software $0 ($100,000) ($100,000) ($100,000) ($300,000) ($248,685) Professional services ($700,000) $0 $0 $0 ($700,000) ($700,000) Internal planning and implementation effort ($18,720) $0 $0 $0 ($18,720) ($18,720) Total ($1,418,720) ($800,000) ($800,000) ($800,000) ($3,818,720) ($3,408,202) Benefits Laud Goods & Co. experienced four specific benefits: Legacy software license cost avoidance. Preconfigured performance and maintenance efficiencies. Reporting and decision-making efficiency. Advanced incident resolution. The implementation of IBM s preconfigured and pre-optimized analytics system on Power resulted in a balanced group of tangible and quantified benefits for Laud Goods & Co. Benefit categories covered tangible cost avoidance, time savings through efficiencies, and value derived from a business decision enabled by analytics. Legacy Software License Cost Avoidance One of the relatively easier and quicker benefits to realize is the retirement of legacy BI software. Laud Goods & Co. noted that its legacy software licensing costs were approximately the same as its current software costs from IBM. However, since Laud Goods & Co. s current agreement with IBM provides 1,000 licenses instead of 700, the organization is getting an incremental benefit of 300 licenses. Laud Goods & Co. not only broke even on software license cost but also saw a benefit of the value for 300 incremental licenses to increase its BI user capacity. As shown in Table 4, this is a $1 million benefit each year, before adjusting for risk. Page 10

12 Table 4 Legacy Software License Cost Avoidance Non-Risk-Adjusted Ref. Metric Calculation Year 1 Year 2 Year 3 A1 Amount of software licenses retiring Composite A2 License cost Composite $1,000 $1,000 $1,000 A3 At Incremental software licenses needed Legacy software license cost avoidance Composite (A1*A2)+(A3*A2) $1,000,000 $1,000,000 $1,000,000 Preconfigured Performance And Maintenance Efficiencies The main driver for Laud Goods & Co. s decision to implement IBM s preconfigured and pre-optimized analytics system on Power is need for stability and capacity as business analytics demands grow. Laud Goods & Co. estimated two resources dedicated 100% of their time in the previous environment to maintenance. Furthermore, there were frequent system outages, the organization did not have the capacity for daily reporting, and the team often did not have time to perform root-cause analysis for complicated breaks in the system. With the introduction of business analytics on IBM Power Systems, Laud Goods & Co. was confident that there would be fewer stability issues with a preconfigured IBM system running IBM hardware and software. After implementation, the team s two AIX administrators spent considerably less time on maintenance (10% of one resource), which freed up their time for more value-added activities. Page 11

13 Assuming a $120,000 fully loaded annual salary with a 3% raise each year, this benefit totals to approximately $700,000 over three years before adjusting for risk, as shown in Table 5. Table 5 Preconfigured Performance And Maintenance Efficiencies Non-Risk-Adjusted Ref. Metric Calculation Year 1 Year 2 Year 3 B1 B2 Maintenance FTEs needed in previous environment Maintenance FTEs needed in current environment Composite Composite B3 FTE annual salary Assumption $120,000 $123,600 $127,308 Bt Preconfigured performance and maintenance efficiencies (B1*B3)-(B2*B3) $228,000 $234,840 $241,885 Reporting And Decision-Making Efficiency As Laud Goods & Co. grew its business, the executive team realized that business analytics would play an important role if it wanted to be successful going forward. Meeting analytics demands was a top priority, and reviewing reports at a weekly frequency was not going to be enough for the organization s planned growth. Not only did weekly reporting actually cause business users to spend more time in generating, reviewing, and absorbing reports each week, it also did not allow for timely decisions. After implementing IBM s preconfigured and pre-optimized analytics system on Power, business users were able to use the BI software to pull reports more frequently. Approximately 10% of users got the most benefit out of reviewing reports daily instead of weekly and saw about a 3-hour difference. That is, instead of spending all or most of Monday reviewing reports generated over the weekend, these users were able to spend 1 hour each day during the work week to review reports and make more timely business decisions for everything from price optimization to inventory management. Assuming a $45 loaded hourly salary with a 3% raise per year for a business user, this benefit totals $2.2 million over three years before adjusting for risk, as shown in Table 6. Page 12

14 Table 6 Reporting And Decision Making Efficiency Non-Risk-Adjusted Ref. Metric Calculation Year 1 Year 2 Year 3 C1 C2 C3 C4 Business intelligence reporting users Hours spent on generating/reviewing reports to make business decisions per week in previous environment Hours spent on generating/reviewing reports to make business decisions per week in current environment Impacted users requiring daily reporting capabilities Composite 1,000 1,000 1,000 Composite Composite Composite 10% 10% 10% C5 Business user hourly wage Assumption $45 $46 $48 Ct Reporting and decisionmaking efficiency (C1*C4)*(C2-C3)*C5*52 $702,000 $723,060 $744,752 Advanced Incident Resolution Laud Goods & Co. has found a positive reaction among business users and an overall positive impact on business after implementing a new BI system. Business decisions are being made more quickly, and although the organization has not installed metrics to attribute and track the performance that BI has on each aspect of the business, there is at least one example that made a material impact. Although the Smarter Analytics System is not used as a primary ticket resolution system, Laud Goods & Co. was able to leverage the detailed data analysis capabilities to track down specific issues in its supply chain. The organization invests about $20 million in a group of vendors each retail season. Each vendor produces four, sometimes overlapping, SKUs each quarter. In the first year with Smarter Analytics deployed, Laud Goods & Co. was able to single out the three vendors that produced defects while also zooming in on the exact SKUs that had issues. In the past, Laud Goods & Co. would have likely returned all defects to all vendors producing the defective SKUs and rapidly looked for a replacement vendor, which would have taken time and potentially increased price because of shorter lead time for production. With Smarter Analytics deployed, Laud Goods & Co. was able to find out exactly which vendor has issues with a SKU instead of attributing the issue to all vendors producing that SKU. This enabled the Page 13

15 organization to work out the issue with the vendor instead of incurring return shipping and replacement vendor search costs, which are estimated at 1% of the quarterly cost of goods sold. As vendor issues are better managed, defect situations decrease over three years. Before adjusting for risk, this benefit totals $1.8 million over three years, as shown in Table 7. Table 7 Advanced Incident Resolution Non-Risk-Adjusted Ref. Metric Calculation Year 1 Year 2 Year 3 D1 D2 Vendors with defective product Investment in vendor per quarter Composite Composite $20,000,000 $20,000,000 $20,000,000 D3 Total SKUs at vendor Composite D4 Defective SKUs Composite D5 Dt Cost to return defective products and replace vendor (% of investment) Advanced incident resolution Composite 1% 1% 1% (D2/D3)*D1*D4*D5*4 $1,200,000 $400,000 $200,000 Page 14

16 Total Benefits Table 8 shows the total of all benefits mentioned above as well as associated present values, discounted at 10%. Table 8 Total Benefits Non-Risk-Adjusted Benefits Initial Year 1 Year 2 Year 3 Total Present value Legacy software license cost avoidance Preconfigured performance and maintenance efficiencies Reporting and decision-making efficiency Advanced incident resolution $1,000,000 $1,000,000 $1,000,000 $3,000,000 $2,486,852 $228,000 $234,840 $241,885 $704,725 $583,087 $702,000 $723,060 $744,752 $2,169,812 $1,795,295 $1,200,000 $400,000 $200,000 $1,800,000 $1,571,751 Total $3,130,000 $2,357,900 $2,186,637 $7,674,537 $6,436,985 Flexibility Flexibility, as defined by TEI, represents an investment in additional capacity or capability that could be turned into business benefit for some future additional investment. This provides an organization with the right or the ability to engage in future initiatives but not the obligation to do so. There are multiple scenarios in which a customer might implement IBM s pre-integrated and pre-optimized analytics system on Power and later realize additional uses and business opportunities. Flexibility would also be quantified when evaluated as part of a specific project (described in more detail in Appendix B). Laud Goods & Co. is seeing analytics capability scale and permeate faster than consumption. The organization knows that business analytics is a valuable asset to the company; therefore, the main question is which business units have most to gain and should adopt more rapidly. Not only has this IBM solution enabled for rapid analytics growth, the organization is also confident that the infrastructure will hold up with little-to-no downtime even with increased use. Looking forward, Laud Goods & Co. also sees scalability value in not only analytics scaling up but also the option of scaling up infrastructure, cores, and storage as needed. Most importantly, now that the organization is familiar with the Power platform and AIX, it foresees the next upgrade, regardless of hardware or software, to be much easier and faster. Page 15

17 Risk Forrester defines two types of risk associated with this analysis: implementation risk and impact risk. Implementation risk is the risk that a proposed investment in IBM s pre-integrated and pre-optimized analytics system on Power may deviate from the original or expected requirements, resulting in higher costs than anticipated. Impact risk refers to the risk that the business or technology needs of the organization may not be met by the investment in IBM, resulting in lower overall total benefits. The greater the uncertainty, the wider the potential range of outcomes for cost and benefit estimates. Quantitatively capturing investment and impact risk by directly adjusting the financial estimates results in more meaningful and accurate estimates and a more accurate projection of the ROI. In general, risks affect costs by raising the original estimates, and they affect benefits by reducing the original estimates. The risk-adjusted numbers should be taken as realistic expectations since they represent the expected values considering risk. The following implementation risks that affect costs are identified as part of this analysis: Decreased demand or adoption rate of analytics, impacting volume discounts. Increased need for additional software beyond planned needs. Implementation by professional services takes longer than expected. Lack of AIX and DB2 expertise when planning or hiring. The following impact risks that affect benefits are identified as part of the analysis: Requests by business to keep two sets of overlapping BI tools, slowing down license retirement schedule. Customization that deviates from IBM s preconfigured and pre-optimized analytics systems on Power, which may cause system instability. Decreased demand or adoption rate of analytics, impacting decision-making efficiency. No usage in live business decisions like vendor management or inventory management. Page 16

18 Table 9 shows the values used to adjust for risk and uncertainty in the cost and benefit estimates. The TEI model uses a triangular distribution method to calculate risk-adjusted values. To construct the distribution, it is necessary to first estimate the low, most likely, and high values that could occur within the current environment. The risk-adjusted value is the mean of the distribution of those points. Readers are urged to apply their own risk ranges based on their own degree of confidence in the cost and benefit estimates. Table 9 Cost And Benefit Risk Adjustments Costs Low Most likely High Mean Software licenses 100% 100% 125% 108% Hardware 100% 100% 125% 108% Additional software 100% 100% 125% 108% Professional services 100% 100% 125% 108% Internal planning and implementation effort 100% 100% 125% 108% Benefits Low Most likely High Mean Legacy software license cost avoidance 80% 100% 103% 94% Preconfigured performance and maintenance efficiencies 80% 100% 103% 94% Reporting and decision-making efficiency 80% 100% 103% 94% Advanced incident resolution 80% 100% 103% 94% Page 17

19 Financial Summary The financial results calculated in the Costs and Benefits sections can be used to determine the return on investment, net present value, and payback period for the organization s investment in IBM s pre-integrated and pre-optimized analytics system on Power. These are shown in Table 10. Table 10 Cash Flow Non-Risk-Adjusted Cash flow Original estimates Initial Year 1 Year 2 Year 3 Total Present value Costs ($1,418,720) ($800,000) ($800,000) ($800,000) ($3,818,720) ($3,408,202) Benefits $0 $3,130,000 $2,357,900 $2,186,637 $7,674,537 $6,436,985 Net benefits ($1,418,720) $2,330,000 $1,557,900 $1,386,637 $3,855,817 $3,028,783 ROI 89% Payback period 7.3 months Table 11 below shows the risk-adjusted ROI, NPV, and payback period values. These values are determined by applying the risk-adjustment values from Table 9 in the Risk section to the cost and benefits numbers in Tables 3 and 8. Table 11 Cash Flow Risk-Adjusted Cash flow Risk-adjusted estimates Initial Year 1 Year 2 Year 3 Total Present value Costs ($1,532,218) ($864,000) ($864,000) ($864,000) ($4,124,218) ($3,680,858) Benefits $0 $2,942,200 $2,216,426 $2,055,439 $7,214,065 $6,050,766 Net benefits ($1,532,218) $2,078,200 $1,352,426 $1,191,439 $3,089,847 $2,369,908 ROI 64% Payback period 8.8 months Page 18

20 IBM Business Analytics On Power: Overview An integrated analytics solution that is built on Power based servers and designed to accelerate delivery of insights for faster, smarter action: Key features include: Built on a foundation of IBM data warehouse management software, storage, and the Power platform. Offers business analytics capabilities including business intelligence reporting, analysis, dashboards, data mining, cubing services, and text analytics. Pre-integrated hardware and software modules can be added to existing installations resulting in scalability and flexibility. Engineered for the rapid deployment of a business-ready solution in days. Control console that allows for coordinated updates and maintenance. Operating systems supported: AIX. Appendix A: Composite Organization Description Based on the interviews with the four existing customers provided by IBM, Forrester constructed a TEI framework, a composite organization, and an associated ROI analysis that illustrates the areas financially affected. Laud Goods & Co., the composite organization that Forrester synthesized from these results, represents a North American mixed goods retailer with $10 billion in annual revenue and 400 stores throughout the US, Canada, and Mexico. While exploring options to expand into the European and Asian markets, Laud Goods & Co. already has an established presence through its vendor network outside of North America. As Laud Goods & Co. s business grew organically and through acquisitions, the IT team faced the challenge of a growing demand for business analytics with a dated and disparate infrastructure that was not built or optimized for BI workloads. Furthermore, as business demands continually pushed the IT infrastructure, system outages were common until the IT team set a policy that certain analytics reports may only be run once a week usually over the weekend when there was most bandwidth. The CIO quickly assembled a team of infrastructure staff (seven FTEs) and developed a new BI team (two FTEs) to decide which hardware systems and BI software to invest in. The infrastructure and BI teams held meetings with several vendors that provided a combination of hardware and BI software. After advancing discussions with two vendors to the proof of concept stage, Laud Goods & Co. chose IBM s pre-integrated and pre-optimized analytics system on Power servers and Cognos as the primary BI software. Laud Goods & Co. s objectives in choosing Smarter Analytics on Power were: Increased system stability and reduced maintenance effort. Page 19

21 Capacity to support at least 1,000 business and back-office users with BI software, with a subgroup that has daily reporting demands. Gaining business value from analytics by making smarter and more timely business decisions. Retiring overlapping software and phasing out obsolete hardware over time. Appendix B: Total Economic Impact Overview Total Economic Impact is a methodology developed by Forrester Research that enhances an organization s technology decision-making processes and assists vendors in communicating the value proposition of their products and services to clients. The TEI methodology helps organizations demonstrate, justify, and realize the tangible value of IT initiatives to both senior management and other key business stakeholders. The TEI methodology consists of four components to evaluate investment value: benefits, costs, risks, and flexibility. Benefits Benefits represent the value delivered to the user organization IT and/or business units by the proposed product or project. Often product or project justification exercises focus just on IT cost and cost reduction, leaving little room to analyze the effect of the technology on the entire organization. The TEI methodology and the resulting financial model place equal weight on the measure of benefits and the measure of costs, allowing for a full examination of the effect of the technology on the entire organization. Calculation of benefit estimates involves a clear dialogue with the user organization to understand the specific value that is created. In addition, Forrester also requires that there be a clear line of accountability established between the measurement and justification of benefit estimates after the project has been completed. This ensures that benefit estimates tie back directly to the bottom line. Costs Costs represent the investment necessary to capture the value, or benefits, of the proposed project. IT or the business units may incur costs in the form of fully burdened labor, subcontractors, or materials. Costs consider all the investments and expenses necessary to deliver the proposed value. In addition, the cost category within TEI captures any incremental costs over the existing environment for ongoing costs associated with the solution. All costs must be tied to the benefits that are created. Risk Risk measures the uncertainty of benefit and cost estimates contained within the investment. Uncertainty is measured in two ways: 1) the likelihood that the cost and benefit estimates will meet the original projections, and 2) the likelihood that the estimates will be measured and tracked over time. TEI applies a probability density function known as triangular distribution to the values entered. At minimum, three values are calculated to estimate the underlying range around each cost and benefit. Page 20

22 Flexibility Within the TEI methodology, direct benefits represent one part of the investment value. While direct benefits can typically be the primary way to justify a project, Forrester believes that organizations should be able to measure the strategic value of an investment. Flexibility represents the value that can be obtained for some future additional investment building on top of the initial investment already made. For instance, an investment in an enterprisewide upgrade of an office productivity suite can potentially increase standardization (to increase efficiency) and reduce licensing costs. However, an embedded collaboration feature may translate to greater worker productivity if activated. The collaboration can only be used with additional investment in training at some future point in time. However, having the ability to capture that benefit has a present value that can be estimated. The flexibility component of TEI captures that value. Appendix C: Glossary Discount rate: The interest rate used in cash flow analysis to take into account the time value of money. Although the Federal Reserve Bank sets a discount rate, organizations often set a discount rate based on their business and investment environment. Forrester assumes a yearly discount rate of 10% for this analysis. Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult their respective organization to determine the most appropriate discount rate to use in their own environment. Net present value (NPV): The present or current value of (discounted) future net cash flows given an interest rate (the discount rate). A positive project NPV normally indicates that the investment should be made, unless other projects have higher NPVs. Present value (PV): The present or current value of (discounted) cost and benefit estimates given at an interest rate (the discount rate). The PV of costs and benefits feed into the total net present value of cash flows. Payback period: The breakeven point for an investment. The point in time at which net benefits (benefits minus costs) equal initial investment or cost. Return on investment (ROI): A measure of a project s expected return in percentage terms. ROI is calculated by dividing net benefits (benefits minus costs) by costs. A Note On Cash Flow Tables The following is a note on the cash flow tables used in this study (see the example table below). The initial investment column contains costs incurred at time 0 or at the beginning of Year 1. Those costs are not discounted. All other cash flows in Years 1 through 3 are discounted using the discount rate (shown in Framework Assumptions section) at the end of the year. Present value (PV) calculations are calculated for each total cost and benefit estimate. Net present value (NPV) calculations are not calculated until the summary tables and are the sum of the initial investment and the discounted cash flows in each year. Page 21

23 Table [Example] Example Table Ref. Category Calculation Initial cost Year 1 Year 2 Year 3 Total Appendix D: Endnotes 1 Forrester risk-adjusts the summary financial metrics to take into account the potential uncertainty of the cost and benefit estimates. For more information on Risk, please refer to Appendix B. Page 22