revenge of the roi - cisco · revenge of the roi with profitability ... ask not how much budget...
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Revenge Of The ROIWith profitability and cost management back in the limelight against the cautious backdrop of a fragile recovery economy, how can Small- and Medium-Businesses (SMBs) justify their prudence in IT investments effectively?
All contents are Copyright © 1992 - 2010 Cisco Systems, Inc. All rights reserved. This document is Cisco Public Information.
SHOW ME THE MONEY
The job of the CIO is getting tougher. Ever since the financial meltdown of 2008, calls for more
accountability and audit has been ever-increasing in direct proportion to shrinking budgets. Your business
department is at it again, asking for more proof of a credible justification for your latest IT investment
proposal. With the advent of the “immeasurables”, Return on Investment (ROI) – or the performance
benchmark used to evaluate the efficiency of any investments1 – has only proven to be more than
elusive ever especially in the current age of fiscal volatility. Now, bundle in the huge capital outlays, long
implementation lead times and intense cultural changes into the equation and you have the impossible task
of justifying the value and benefits in your proposed IT investment project – not without gnawing your arm
off. Or risk having your proposal dumped and forgotten together with the rest of the KIV pile.
THE BUDGET VERSUS INVESTMENT PARADOX
Ask not how much budget your organization can offer for your investment, but how much value your
proposed investment can contribute to your organization’s direct bottomline.
It’s just ROI, not rocket science.
Firstly, the ROI concept is not a difficult one. Rather, it is the measurability of metrics or dollar value that
banishes any attempts to define – into obscurity. The revenue (return) of the product is compared with the
costs (of the investment) – with the final value minus the initial value of the investment divided by the initial
value of the investment. Or simply,
r = (Vf - Vi)/Vi
This number will be returned as a percentage. ROI is important because IT spending decisions are made
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1 ROI definition, SMBWorldAsia http://www.smbworldasia.com/en/topic/180/roi
based on it. The budgeting process has more far-
reaching consequences with forecasts and plans for
future investments in staffing resources, IT initiatives
and projects being dependant on it. Unfortunately,
not every metric is a monetary metric and thus, not
quantifiable. For example, in the case of calculating
ROI for a social media tool, the metrics are qualitative
impact metrics (i.e. clicks, impressions of the
website, number of followers, etc) and not assigned
any monetary value. The paradox lies here – you
cannot measure or justify the investment value. On the other hand, you know you cannot do without that
social media tool. Many SMBs face the difficulty of defining the drivers of cost and profitability for the IT
investment and effectively align technology with respective business needs.
With a cautious IT spending trend predicted for the recovering economy in 2010, escalating competition
has limited SMB interest only for investment categories which benefit their business bottomline directly.2
This has cast the spotlight back on ROI measurement and justification with a cost-conscious focus on
reduction of operating costs, improvement in employee productivity, or increasing customer acquisition
and retention.3 Which are the tools that can help you measure ROI effectively? Are you prepared to
respond to any strategic questions from your functional management team with regards to IT investments?
ENTER ENTERPRISE RESOURCE PLANNING (ERP)
ERP is more than a necessary infrastructure that forms the transactional system of record for which
your business is based.4 It is a potential source of operational improvements and cost savings for SMBs
through innovation. ERP enables greater visibility in your organization and positions your business to
provide immediate transparency to your respective stakeholders. However, a recent ROI study has
found that SMBs are paying too much attention to Total Cost of Ownership (TCO) and not enough to ROI
during the implementation of ERP. The study also revealed that despite the high level of organizational
costs involved with most ERP projects, 52 per cent of SMBs “sometimes” or “never” estimate ROI in order
to cost-justify it. After post-rollout, 75 per cent “sometimes” or “never” measure ROI after the completion
of these projects. Many SMBs feel “compelled to make this investment because they felt that ERP was
necessary for the support of their businesses.5 How can SMBs optimize ROI to avoid this costly mistake?
RULE # 1: ABCS OF PROFITABILITY AND COST MANAGEMENT (PCM)
What was first known as activity-based costing (ABC) or activity-based management (ABM) has evolved
into a Profitability and Cost Management (PCM) approach which has become increasingly relevant
towards justifying ERP today. PCM is a multidimensional exercise which displays profitability (revenue
and costs) for various customer (segments) and product (groups), time period, channel, etc. What used to
be pure financial focus has now extended into various business domains. PCM is becoming increasingly
relevant because of a rise in indirect costs. In addition, more SMBs are recognizing the benefits of
e-enabling in customers through self-service business channels. For example, customers can now
All contents are Copyright © 1992 - 2010 Cisco Systems, Inc. All rights reserved. This document is Cisco Public Information.
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2 State of SMB IT April 2010, Spiceworks http://www.spiceworks.com/voice-of-it/ 3 SMB IT spending recovers: looking for ROI and diagnostic guidance, 22 April 2010 http://tompiselloroiguy.blogspot.com/2010/04/smb-it-spending-recovers-looking-for.html 4 Measuring the ROI of ERP in SMB, Cindy Jutras, Mar 2009, Aberdeen Group White Paper http://www.aberdeen.com/Aberdeen-Library/5793/RA-enterprise-resource-roi-smb.aspx 5 SMB ERP Projects: don’t forget the ROI, Thomas Wailgum, 6 April 2009 http://www.cio.com.au/article/297824/smb_erp_projects_don_t_forget_roi/
check themselves in via the Web, a call center or
machines at airports. Every unique specification and
preference represents an impact in all dimensions
of profitability, including customer, product, and
channel profitability. Most importantly, PCM helps
enable business performance by identifying the
drivers of cost and profitability, empowering SMBs
with visibility and flexibility, thereby improving
resource alignment on organizational levels.6
KNOW THE RULES: ROI TOOLS AND METRICS
Many SMBs lament the lack of tools to measure ROI.
Yet, in reality, most of these tools exist within the
applications for which the ROI should be measured.
The following illustrations display the various tools and
saving factors that SMBs can use to measure ROI. Most
ERP solutions include embedded Business Intelligence
(BI) capabilities (i.e. dashboards). However, regardless
of the types of analytics or BI tools embedded, the real
challenge for SMBs here is to display data effectively
from installed applications in real time, without having
to synchronize or batch data.
RULE # 2: MEASURING ROI FOR VIRTUALIZATION PROJECTS
All contents are Copyright © 1992 - 2010 Cisco Systems, Inc. All rights reserved. This document is Cisco Public Information.
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6 The need for profitability and costs management, Sep 2008, Oracle Leadership White Paper http://viewer.bitpipe.com/viewer/viewDocument.do?accessId=12470599
Do you measure the ROI of ERP projects?
So
urc
e: A
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dee
n G
roup
, Mar
ch 2
00
9
RR E|R|PIn Operation
ALWAYS SOMETIMES NEVER
56%38% 6%
So
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e: A
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roup
, Mar
ch 2
00
9
% All SMB Respondents
Reasons for not Measuring ROI
24%33%29%48%
ROI is too hard to measure
ERP is viewed as a necessary cost of doing
business
We simply manage
against our IT budget
Don’thave the
necessary tools
Tools for measuring ROI
Source: Aberdeen Group White Paper
Advanced analytics and Business Intellenc (BI)
Reporting capabilities of the installed application
Dashboards displaying data from installed
applications in real-time
Custom reporting
Spreadsheets
Ad hoc report writer and query capabilities 47%
53%
58%
58%
74%
79%
Saving Factors Considered in ROI
Source: Aberdeen Group White Paper
Reduction inoperational costs
IncreasedProfits
Better utilization of resources
Reduction of general administrative costs
Reduction ininventory costs
Reductionin Waste
Increase in value-add delivered to customers
Reduction or redeployment of
headcount
84%
84%
84%
79%
74%
68%
68%
95%
The proliferation of Virtualization technology
in 2009 could be attributed to its natural ability
to satisfy cost management policies during
the downturn. As we trudge along the road
to recovery, this exciting technology is here
to stay. Moreover, a cautious spending trend
amongst SMBs now triggers the need to prove
ROI for any planned Virtualization projects
more than ever. A recent study discussed the
diverse nature and many layers of Virtualization
– from server and storage to desktops and application – which requires a change of metrics when
calculating ROI. Virtualization provides solid ROI, but how can you ensure your business is getting
the most out of it? What are the elements to consider (i.e. hard and soft cost savings) before you
implement the Virtualization strategy?
Potential and real cost savings from server virtualization
Soft dollar savings might be difficult to prove
How much do you value the time you save in preparing a virtual versus a physical server? A
virtual server can be prepared in minutes but for a physical server – this might take weeks.
How much do you value the automation of standard testing and development environment
preparation? You can deploy and manage your own test environments with Virtualization
technologies in place.
Is flexibility in your a virtual infrastructure important or relevant for your business? With the
ability to deploy new applications quickly, your organization is now able to react accordingly and
effectively to evolving business needs.
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CATEGORY POTENTIAL SAVINGS
Power savings $300 to $600 per virtualized server
Cooling savings Up to $400 per virtualized server
Hardware savings From $2,500 or more per virtualized server, depending on physical server type
License savings (Microsoft Windows Server)
75% of Enterprise license per virtualized server
License savings (open source) Nothing, except for support costs
Power rebates (selected utilityorganizations)
Up to 50% of the total cost of the project
Government rebates (federal, provincial and state)
Variable reduction rates (income tax reductions, sales tax rebatesand more)
Space savings More than 90% space reduction (based on an average of 10 virtualmachines per physical host)
BREAKING THE RULES: INNOVATIVE MODELS FOR MEASURING ROI
As mentioned earlier, qualitative metrics for IT investments such as social media tools are difficult to
define, making ROI measurement an uphill task. For example, a recent Forrester report, The ROI of Online
Customer Service Communities, noted that value or benefits to the business from the customer service
approach to social Customer Relationship Management (CRM) could be gauged by elements such as:
reduction in call volume, increase in productivity, increase in product idea generation, etc. For other
areas such as IT security investments, it is even tougher to assign “risk” a tangible cost value. Six Sigma
has devised a five-step approach to define “what can, and should be measured” in any IT investment
disciplines7 :
Define – performance improvement goals
Measure – the existing system under evaluation
Analyze – to eliminate gaps
Improve – the process, be creative
Control – institutionalize the improved system
ROI RULES IN TIMES OF RECOVERY
In the current delicate period of uncertainty, cost-efficiency still reigns supreme with ROI providing the
key towards greater organizational visibility. However, as IT progresses with new emerging technologies
by the second, traditional classic ROI measurement models can no longer cope, and SMBs should
innovate by researching and studying vigilantly into new methods of proving ROI. Rather than toss the
next IT investment project out the windows, instead, we should seek ways to justify “why it should
NOT be implemented”. It is now more imperative than ever to give these cost-saving and productivity-
enhancing proposals a chance and more critical than ever to keeping innovation alive.
All contents are Copyright © 1992 - 2010 Cisco Systems, Inc. All rights reserved. This document is Cisco Public Information.
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7 Forget ROI – use Six Sigma to proven business value, Tom Bowers, 8 Jan 2009 http://security.networksasia.net/content/forget-roi-use-six-sigma-prove-business-value
All contents are Copyright © 1992 - 2010 Cisco Systems, Inc. All rights reserved. This document is Cisco Public Information.
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KEY SUMMARY
The new cautious spending trend in 2010 has brought ROI measurement back into the limelight with
a cost-conscious focus on reduction of operating costs, improvement in employee productivity, or
increasing customer acquisition and retention.
Most SMBs face the difficulty of defining the drivers of cost and profitability for their IT investment
and effectively align technology with their respective business needs.
Most ROI measurement tools are available, and exist within the applications for which the ROI should
be measured.
With today’s period of uncertainty, cost-efficiency should remain a top business priority with ROI
providing the key towards greater organizational visibility.
Traditional classic ROI measurement models can no longer cope, and SMBs should innovate by
researching and studying vigilantly into new methods of proving ROI.