A CIOview White Paper by Scott McCready 1
Table of Contents How to Craft an Effective ROI Analysis... 3 ROI Analysis is Here to Stay... 3 When is an ROI Analysis Not Necessary?... 3 It s More About the Analysis Than the ROI... 3 Where to Begin Your ROI Analysis: Collect the Costs... 4 Desktops... 4 Servers... 4 Storage... 4 Software... 4 Networking... 5 Professional Services... 5 Ongoing Personnel... 6 Training... 6 Support and Maintenance... 6 Benefits... 7 Time Savings... 7 Operational Savings... 7 Personnel... 8 Revenue... 8 Putting your ROI Analysis Together... 8 About CIOview... 10 Where Can You Go From Here?... 10 2
How to Craft an Effective ROI Analysis The goal of any rational business is to maximize expected profits, and the sole way of accomplishing that goal is to invest in those projects that award the highest rate of return. For many years, IT was exempt from this financial discipline, largely because the business people of the company did not fully understand the technology side. But those days are gone. The financial metrics, Return on Investment (ROI) and Total Cost of Ownership (TCO) are here to stay. The good news is that ROI studies are easier to accomplish than one might imagine. Here are some tips on the most effective way to complete a brilliant ROI analysis. ROI Analysis is Here to Stay Several years ago, a project had to cost $1M before a comprehensive ROI analysis was required. Last year, CIOview saw that number drop to $250K for Fortune 200 companies. Now ROI studies are common for IT investments of $125K and less. The continual lowering of the threshold for a required ROI analysis is a trend that is not going away. Fortunately if you are a newbie to IT financial analysis you have two factors working in your favor. First, all the evidence to date suggests that practice makes perfect, and having this skill set makes you more valuable to your company every day. Second, it is also true that the software tools to complete an accurate ROI analysis are getting better all the time. As companies increasingly rely less on spreadsheets, the grunt work component markedly decreases and the what-if analysis portion of the work becomes the most dominant element. When is an ROI Analysis Not Necessary? There are times when undertaking an ROI analysis does not make sense, for example: When the state of your technology infrastructure, for example your network, is interfering with the normal running of your business operation When government legislation or corporate governance demands change For charitable projects where the resources required have already been fully depreciated There is also a lower financial threshold where an ROI analysis (no matter how automated the analysis process may be) is not warranted because of the high outlay of management review time, or the associated delay or opportunity costs. For some smaller companies, this would be a project of $25K or less. For the Fortune 200, the project amount is more likely closer to $100K, given their associated levels of management oversight and administrative complexity. It s More About the Analysis Than the ROI It is sometimes the case that management sees the end result of an ROI study as the magic ROI number. Whether that number is 35% or 950%, the real value of the ROI analysis undertaking is in the analysis. During your analysis, you can see where your costs and benefits will occur, and then you are able to assess any dependencies or changes that can positively or negatively affect those costs and benefits. In sum, the benefits of an ROI analysis are more in the detailed analysis, and less in the end ROI number. The advantage is in the details, so getting those fine points right, and representing the complete ROI story, are crucial. 3
Where to Begin Your ROI Analysis: Collect the Costs The first task is to collect the cost of deployment. If you are working with a vendor, this can be a fairly quick process. You need to estimate your costs for: Desktops Servers Storage Software Networking Professional Services Ongoing Personnel Training Support and Maintenance Desktops The desktop cost associated with a new IT initiative will very much depend on the current state of your desktop infrastructure. Things to watch for would include: If you have a very heterogeneous desktop environment, beware of large-scale software deployments because the automated scripting or roll-out tools require a lot of manual intervention for older desktops If you do upgrade some of your desktops, this will benefit more than just the IT project you are doing right now. Therefore, you should typically only allocate a percentage of your desktop costs to this particular IT initiative Servers Server mis-configuration is the largest contributor to inefficiency in IT organizations. There are a great number of things to watch for in the case of servers, but here are the highlights: Do not assume that the server vendors have sophisticated configuration tools to do this for you. Many of them do not it s a manual process. Some vendors routinely under-configure the system to win the business which forces you to add server capacity shortly after deployment. If there is any portion of an ROI analysis where you should over-commit resources, this is it. The beauty is in the details. You need to complete extensive what-if analysis to come close to an optimal server configuration. Storage Your server and storage strategy are inextricably linked. Issues to consider include: Your selection of storage may increase the number of servers you may require. A Storage Area Network (SAN) may seem expensive when compared to traditional storage products, but that must be traded off with improvements, particularly in downtime. Storage virtualization software may reduce your storage costs and increase your vendor independence Software The vast majority of software is priced on a CPU basis, and pricing and functionality can vary tremendously (for example in systems software), so this cost area is one you should do carefully. 4
Look at how your software costs change as you make changes to your system configuration and the number of CPU s required change Some software costs, such as systems management, can be substantially cheaper when acquired from the server vendor as compared to a third party and sometimes the opposite is true. Software costs have interdependencies with other cost areas, such as IT resources. For example, if you spend less on systems management software, you may have to increase IT staffing. Networking Networking as a cost category has many of the same basic rules as Desktops. In other words, the cost of any networking improvements is very much tied to the current state of the networking infrastructure. However, in making general improvements, you should only allocate a percentage of those costs to any particular project since the benefits the company will experience will traverse many IT projects in the future. One last networking issue to be aware of is that the cost to upgrade a network is intrinsically tied to the distribution of the design. Professional Services Many companies opt for in-house resources to deploy a new system, as opposed to using an outside third party. However, there are a number of benefits that a professional services organization can offer. Points to be aware of when trying to estimate the cost of deployment and whether or not you will be better off seeking outside counsel include: Time to completion tends to be faster with an outside firm. Since in most cases, there is an opportunity cost associated with not having the new application; time to market commonly translates into a higher ROI. Systems configured by outside third parties very often use server resources more efficiently. This translates into fewer CPUs and therefore lower software costs. In addition, with fewer servers deployed, on-going personnel costs also tend to be lower. Internal resources are commonly under-priced. All employee costs -- including overhead -- should be taken into account for costing purposes. The cost of deployment will be a function of the complexity of your environment. Therefore, the number of systems you integrate with, if you integrate with a real-time system, and whether you require follow-the-sun capabilities, all play a very significant role in deployment costs. In particular, for high availability systems, testing and project management costs for a distributed environment can easily consume 30% or more of the total budget. 5
Ongoing Personnel The on-going staffing requirements will be influenced by a whole host of factors, such as: Number of servers Type of workload Consistency of software stack, etc. Using a highly trained outside provider to initially design and configure a system can lead to large savings in ongoing personnel since you may end up with fewer servers and a very well documented solution. Training Training costs are commonly reviewed very critically, particularly when companies find themselves in tight financial times. CIOview has found that companies that get the best training ROI commonly have four things in common. They usually: Invest heavily in training Spend more to document their solution Use outside third parties for design and implementation Have excellent project management skills or develop them quickly Support and Maintenance Support and maintenance costs are obviously impacted by the server configuration. Investing in outside configuration expertise can substantially reduce these costs like software. CIOview recommends that companies spend more of their vendor negotiation time on reducing support and maintenance costs, and give up something on the initial purchase price. Negotiating on recurring support and maintenance costs can often be a more advantageous bargaining strategy, and bring greater benefits over a longer time span. 6
Benefits Now that you have assembled all of your costs it is time to calculate your benefits. Costs are easier to document if you use the same cost categories for every project, and the same is true for benefits. There are generally only four major categories of benefits that most companies get from making an IT investment, namely: Time Savings or Productivity Operational Savings Personnel Reduction Improved Revenue Almost every possible benefit fits into one of those four buckets. The trick is deciding what to include and determining what items are difficult to estimate. Time Savings At its simplest, you must determine the number of people who will be positively impacted by the IT investment, how much time they will save and what financial value that time has to the corporation. The easiest way to accomplish that is to: Define the average salary for the user community Determine the productivity index List the tasks that will be impacted Determine before and after productivity difference (delta) The average salary for those individuals who will be impacted is necessary to translate the time savings into dollars. Unfortunately most HR departments will not release that data -- even internally -- so be prepared for a search. The productivity index is simply what percentage of time saved will be used productively. Certainly not all time saved will be used for more work. Perhaps only 50-60% of that time will be available for work. Most studies suggest that a 60% productivity index is appropriate. Listing those tasks that will be impacted may require interviewing people in the impacted positions and understanding what tasks will benefit from your automation effort and which ones may not. You simply have to determine how much time the average individual spends during their day on those tasks, which can be impacted, and then what portion of the task will be eliminated. Remember to include tasks that only occur once a month or once a quarter, and try not to get caught up in department specifics, which are not easily transferable from one group to another. Operational Savings This category of savings would include such items as: Reduction in the cost of express mail Lower telecom costs Printing savings Lower paper costs Lower copying costs Fewer facsimiles 7
These items may seem like fairly trivial expenditures, but in many cases they add up to hundreds of thousands of dollars. Major items would be a reduction in mainframe cycles, being able to get rid of some software licensing etc. If there is one cost category that companies routinely overlook, it is this one. However, these are hard savings which are fairly easy to document, and which should be included in any ROI analysis. Personnel Personnel savings can involve items such as: A simple reduction in staff Being able to move staff Lower the number of new staff Reduce costs for temporary or seasonal workers Lower consulting costs In some cases, it might even be a reduction in the travel budget that is possible. Even without sweeping personnel changes, personnel savings can still be a major benefit category. Revenue Revenue implications of technology can be enormous and they commonly are derived from things such as: Faster time to market Selling to new markets Selling services that otherwise would not be economical Reducing business cycles Revenue is a category where you should be a little careful in your analysis. It has great potential, but many of the revenue-related benefits may depend upon the economy. Putting your ROI Analysis Together Once you have collected all your costs and benefits, it is simply an exercise in straightforward arithmetic to generate the assorted financial metrics ROI, Payback Period, IRR, NPV, etc. It is essential to understand, however, that a great deal of the value of an ROI analysis is in being able to do what-if analysis. For example, what if you changed some of your financial assumptions such as tax rate, method of depreciation, depreciation schedule, cost of capital, etc.? Or what if you changed the rollout assumptions, moving all new users into Year 1 or spreading the new users out over a greater time period? All of these assumptions have a big impact on your financial results. The analysis part of your ROI analysis should incorporate an examination of scenarios, including such things as: Evaluating the impact of a SAN (Storage Area Network), partitioning, and/or clustering Changing the roll-out to see how the number of users over time changes your costs and benefits Varying your assumptions about your costs and benefits 8
Adjusting your risk assumptions or introducing the concept of risk into your equations in the first place Looking at the impact of one time costs versus recurring charges It is only by changing your underlying assumptions and then seeing how this impacts your financial results that management can become confident in the investment decision. Unfortunately, it becomes a very complex and time-consuming undertaking to try to use a spreadsheet to accomplish this. ROI software analysis tools, built for just this purpose, can streamline this operation, giving you the ability to produce a more accurate analysis more quickly. However you choose to proceed, an effective ROI analysis can get your organization on track to understanding the complete costs and benefits of your IT projects, and aligning your company s information technology with its profitability goals. 9
About CIOview Established in 1997, CIOview has spent more than five years gathering data from IT customers, IT consultants, and the major hardware and software companies. The result is an industry standard method to measure the business value of IT products. CIOview s TCOnow! and ROInow! software combines customer data with a sophisticated system configuration engine, making it quick and easy for each customer to generate their own business case report. CIOview has created 55 distinct products all of which use the same desktop player application and a product-specific content module. This provides customers access to a complete portfolio of business case analyzers for all of their IT purchase decisions. Where Can You Go From Here? Any other questions? Contact CIOview at info@cioview.com CIOview Corp. 4 Clock Tower Place Maynard MA 01754 USA P +1.978.823.1600 Disclaimer The information contained in the white paper scenarios is based on many variables and assumptions not stated herein. Results will vary, no results are guaranteed. Full terms and conditions can be seen at www.cioview.com/about_us/about_disclaimer.html Copyrights CIOview and ROInow are registered trademarks of CIOview Corp. TCOnow, Real-Time Business Value and Simplifying IT Purchasing are trademarks of CIOview Corp. All other trademarks used are the properties of their respective owners. 10