Getting Smart About ROI

Measuring the Impact of Business Intelligence

Contents
Getting Smart About ROI Tools for Evaluating Business Initiatives Evaluating a Business Intelligence Solution Approaches to Measuring BI Effectiveness Conclusion 1 2 3 6 9

GET TING SMART ABOUT ROI

Getting Smart About ROI

The magicians have moved on those with the fancy tricks that were supposed to pull fortunes from thin air. Now its back to reality. A reality that in many countries includes economic recession and, for many industries, slower growth and decreased profits. Not surprisingly, there is pressure to return to business basics. Good governance. Real revenues. Careful planning. Cost control. Profitability. Stakeholders investors, regulators, customers and others are demanding it. But meeting these demands is challenging. Among other things, senior management is faced with the task of deciding which ventures and initiatives should be funded, and which curtailed or abandoned. There are a variety of methods for making such decisions and, because of their familiarity with these methods, financial managers are increasingly called upon for advice and guidance. For some time, financial managers responsibilities have extended beyond preparing financial reports and budgets to include evaluating and approving funding for initiatives that help move the organization toward its strategic objectives. These include initiatives involving IT, such as implementing business intelligence software solutions.

What is BI?
The term business intelligence was coined in the 1980s by industry analyst firm Gartner Group. In a 1996 report, Gartner defines business intelligence as the enterprises ability to access and explore information (contained in a warehouse), analyzing that information and developing insights and understanding, which leads to improved and informed decision making.
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Business intelligence (BI) solutions are designed to help companies efficiently access and analyze data in order to operate more effectively. BI solutions can valuable in analyzing the effectiveness of ongoing operations and special initiatives alike. And so BI can make an important contribution to better management, especially in times like these. But in the harsh light of todays new business reality, investments in BI are receiving the same scrutiny as every other business initiative. This paper provides some approaches that will help companies evaluate BI initiatives. By doing so, they can see what value these solutions may hold for their organization and make more informed decisions about whether to implement them, and how.

Business intelligence (BI) typically includes all types of software solutions used to organize, analyze and deliver information to employees, managers, business partners, suppliers and customers. Today, the definition of BI has expanded to include applications that provide a more holistic view of organizational performance and technologies that enable organizations to carry out predictive analytics, giving them an increased ability to use data to understand their customers and markets, and to plan for the future.
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Data Warehousing, Data Mining and Business Intelligence: The Hype Stops Here, by Erik Brethenoux, Howard Dresner, Kevin Strange and Jonathan Block, October 28, 1996. 2002 SPSS Inc.

Tools for Evaluating Business Initiatives

Some of the tools used for evaluating the potential benefits of various courses of action include internal rate of return (IRR), net present value (NPV), payback period and return on investment (ROI). Ideally, by using such tools thoughtfully and methodically, management can compare a number of possible initiatives in terms of their potential benefit to the organization, so that the organization can choose those with the greatest likelihood of helping it achieve its objectives. IRR compares potential benefits to a companys cost of capital. NPV and payback period analyses are somewhat different tools used in evaluating potential investments of resources. ROI, expressed as a percentage and typically including calculation of NPV, has become perhaps the most popular metric for this purpose, the formula being: ROI = Investment Cost - NPV of Savings Investment Cost As with most things, the devil is in the details. When comparing proposed initiatives, management must be sure that all costs and benefits are included in the evaluation process. This means not only the initial investment but also recurring costs required to maintain the initiative over its intended lifespan. Similarly, when considering potential benefits, the direct, immediate benefits must be included, and also those that may occur as a secondary result of the implementation. And, of course, a specific time horizon must be established. This may be as brief as several months, or as long as several years. With experience, an organization may be able to arrive at a fairly accurate view of costs, benefits and time frames. Even so, a variety of assumptions must be made. And when evaluating proposals dealing with BI, organizations face additional challenges. Because it typically supports an organizations operations in numerous areas, the impact of implementing a BI solution or of extending or modifying an existing one often affects the organization in many different ways. Some of these lend themselves fairly easily to quantifiable measurement, but others may not.

GET TING SMART ABOUT ROI

Evaluating a Business Intelligence Solution

The question has been raised many times: How can organizations best evaluate the potential value of a business intelligence initiative? While there is no easy answer, this does not mean that companies need to fall back on gut feel decision-making. There are definitely ways to get smarter about measuring the ROI of BI. Here are seven points to bear in mind when evaluating the implementation or enhancement of a BI solution.

Since BI initiatives are generally linked to both strategic and tactical goals, it is important to fully understand all the ways in which a proposed BI initiative may impact a particular organization. Figure 1 shows a number of process areas grouped under the headings Financial Performance, Customer Performance and Operational Performance that can potentially benefit from a BI solution. While a particular proposal may directly affect one area, it may also affect several others. For example, many companies use BI to analyze sales performance. They centralize detailed information about product sales, then generate analyses that identify which products are selling well, at what price points and through which channels, stores or salespeople. While these reports help sales managers improve sales performance, they also could provide valuable information to other functional areas, such as marketing, production, shipping and finance.

Even if a BI implementation is intended for use by a single department, consider the potential benefits to other departments in the evaluation process.

Performance Areas
Financial Performance Customer Performance Operational Performance

Process Areas
Business Process & Activity Analysis Customer Performance Analysis Supplier Performance Analysis Production & Inventory Analysis

Planning & Budgeting

Financial Reporting & Analysis

Financial Forecasting

Customer Behavior & Loyalty Analysis

Fulfillment & Channel Management Analysis

Product Demand Forecasting

Sales Analysis

Fraud, Waste & Abuse Detection

Product & Customer Profitability Analysis

Logistics Analysis

Human Resource Analysis

Figure 1. There are numerous business areas that will benefit from the application of business intelligence. Evaluate the impact on all areas when measuring the ROI of a BI initiative.

2002 SPSS Inc.

In any analysis of a BI proposal, it is also important to include the multiple ways an initiative may affect a single area. A BI solution enabling a sales department to move from paper-based reports to browser-based information delivery, for example, would obviously eliminate costs associated with producing and shipping these reports. But the initiative is likely to have other benefits. Time saved in reviewing reports, for example, might allow salespeople to make additional sales calls; and easier access to more detailed information might allow them to quickly identify up-sell or cross-sell opportunities, resulting in increased revenues.

To evaluate the true impact of a proposed BI initiative, include its potential not only for cost savings but also for revenue generation in other words, its impact on overall profitability.

Find a way to properly allocate credit when evaluating the return your company has achieved from BI and other initiatives. In most organizations, several initiatives are under way at any given time, each playing a role in improving the performance of particular areas or processes. Allocating a fair share of improved performance to each effort gives a more accurate picture of their respective value to the organization. By using a BI solution, a supplier may be able to save a significant amount of money for a customer by eliminating excess inventory. By demonstrating its efficiency, the supplier may gain additional business from that customer. Although the sales organization will rightfully claim credit for some of the extra revenues, part of the credit should also go to the BI solution for providing information that enabled the company to provide added value to the customer.

To understand the true value of a BI initiative, look at the role it plays in supporting other business initiatives.

Another factor to consider is the effect that denying or postponing funding for an initiative might have on the companys competitive position. An organization might be aware that its competitors are providing order-status information online to their customers. Failing to provide the same convenience could mean a lower level of customer satisfaction and, potentially, lost business and market share.

Include the cost of not doing in any analysis of BI.

GET TING SMART ABOUT ROI

When considering the time frame of a BI project, factor in both the scope and complexity of the initiative and the degree of experience an organization has with such efforts. For organizations with little experience in BI, the services of a consultant to help develop a realistic time frame may be extremely valuable at this point. A project involving several different departments or regions likely will require more time to implement than one involving a single area. While a companys first project might require more time to implement perhaps due to issues with the quality of its data, or the time needed for staff to acquire skills in using BI tools subsequent projects are likely to be require somewhat less time. Also, a company-wide initiative such as improving customer relationship management (CRM) may take time to show results, particularly in organizations with a lengthy sales cycle.

For a more accurate ROI calculation, be realistic about the amount of time an initiative will require both to implement and to achieve results.

Compare the actual return to the expected...then keep on measuring. By systematically evaluating the impact of completed BI implementations, an organization learns to more accurately predict the impact of new proposals. New applications of BI technologies can actually help companies more accurately measure the results obtained from various business initiatives including BI implementations. For example, applications that support activity-based costing efforts give companies a more accurate view of the cost of the numerous processes behind their operations. This helps them understand more clearly what they save when those processes are made more efficient.

Refining the techniques used to measure ROI can help companies predict ROI more accurately.

2002 SPSS Inc.

A final challenge to properly evaluating BI initiatives lies in the fact that it can be difficult to quantify some costs and benefits. While its generally easy to quantify the cost of purchasing additional hardware and software, and even the cost of staff time for programming and for upgrading from existing systems, it can be less easy to quantify the impact the new system may have on existing processes. A company that has implemented BI in one area of the organization may find it hard to quantify the benefit that its managers and executives receive, now that they have faster access to a far greater level of detail to support decision-making. The company expects that extending the solution to other areas would have a similar beneficial effect, but dont know how to quantify it.

In making evaluations, it may be desirable to create a weighting system to provide a way to include hard-to-quantify costs and benefits in the evaluation.

To sum up, there are several critical questions to pose when developing an ROI analysis for a BI initiative:
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What are all the ways that this initiative will affect our organization? What kinds of costs will be associated with the implementation? When do we expect to see results? What measures should we use to evaluate results?

Approaches to Measuring BI Effectiveness

Organizations implement BI solutions for a wide variety of reasons. Some do so when facing a specific problem or inefficiency, such as controlling inventory costs, using vendors more effectively, or improving the effectiveness of sales and marketing efforts. Others turn to BI to solve strategic issues, such as facilitating the coordination of their efforts enterprise-wide, improving customer retention, or increasing revenues and profits. As discussed above, it is important in any situation to determine beforehand just what problems the BI solution is expected to address, what degree of improvement is expected, and in what time frame. Then, measure the results. To do this, companies may employ:
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Quantitative measures, such as cost or time savings, increased revenues or increased profits Qualitative measures, such as improvements in the quality or usability of information A combination of both

GET TING SMART ABOUT ROI

Some quantitative measures will be specific to particular industries. For example:

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A European trucking company used a BI solution so analyze the load factor of its fleet, including details on each vehicles destination, mileage traveled, amount of goods carried, time spent on the road and more. By improving routing to minimize partial loads, the company within two years saved more than 20 million on an initial BI investment of 150,000. A leading U.S. textile manufacturing company spent 10 months implementing a BI solution to support quality-control efforts. Almost immediately, the new system resulted in a 50% drop in reported product defect levels, saving the companys customers millions of dollars per year A French real estate management company managing more than 90,000 apartments monitors the number of days the apartments are vacant. By using a BI solution to decrease its average vacancy rate by a single day, the company realized savings of several hundred thousand euros per year.

Other quantitative measures such as time and costs saved are similar, regardless of industry.
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A U.S. manufacturer deployed a BI solution costing less than $800,00 and within 90 days identified process efficiencies enabling it to save one of its customers $1.5 million. Additional savings identified for other customers further increased the ROI of this implementation. Another American manufacturer deployed a BI solution costing approximately $600,000 and within two months was able to control its excess inventory by 1%, for a savings of $2 million. A company invested $500,000 in a BI solution but saved $3.5 million in shipping costs alone, since the new system allowed it to deliver reports electronically to managers throughout its operating area. A U.K. based high-tech manufacturing and services organization saved 14 person-days of data entry and report preparation time by implementing a centralized BI solution for its finance department. A European fashion retailer used BI to improve the efficiency of its order analysis, and realized a time savings of 80%. An entertainment company used a BI solution to consolidate monthly financial statements for a time savings of 90%. A British telecommunications company made use of BIs predictive analytics capabilities to understand the target market for a particular marketing campaign, and saw the response rate improve by 100%.

2002 SPSS Inc.

Quantitative measures like these tell only a part of the story, of course. In many cases, the immediate perceived value of a BI implementation is the improvement in the quality and timeliness of information available. For example:
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A business-to-business seller of technology products uses a daily flash report to monitor sales of thousands of products through multiple channels. These reports, delivered through a company intranet, enable management to quickly spot and respond to trends in product sales and customer requirements. In slightly over 18 years, the company has gone from a start-up to the Fortune 500. A U.S. vehicle processor, upon first deploying a BI solution, saw the efficiency of its data preparation increase ten-fold, but was more impressed by the fact that reports contained more detailed information, in a format that was useful in supporting decision-making at all levels. The company expanded operations, confident that it could do so profitably. A U.K. company finds its budgeting process far more efficient, because its BI solution provides a single source for data and, in using it, all budget owners rely on consistent terminology and assumptions.

When using a combination of quantitative and qualitative measures, companies are likely to concern themselves with questions such as how the solution has improved their ability to be responsive to customer needs, or act with greater coordination and economy of effort. Then theres the basic question: Are the end users of information satisfied with how the solution helps them do their jobs? For example:
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The sales arm of a vehicle manufacturer wanted to be able to give managers in the field the ability to compare a dealers performance to its competitors, and turned to a BI solution to achieve this goal. A European manufacturer, by giving employees the ability to interact with reports through a Web browser, saved a significant amount in software and IT staffing costs, and also allowed customer-facing staff to be more responsive to customer needs. An American chemicals manufacturer used a BI solution to make its budgeting process more efficient. The solution enabled the company to complete its annual budget one month earlier than previously, and also allowed managers time to develop what-if scenarios, giving them greater understanding of what actions the company might want to take, if certain market conditions were to occur. A real estate management company not only immediately improved its bottom line through BI but also improved customer satisfaction with the level of staff responsiveness to customer inquiries.

GET TING SMART ABOUT ROI

Conclusion
BI solutions, as the examples included here have shown, can play many roles in business organizations. They can be used to help companies analyze and optimize their supply chains. To improve sales and marketing efforts. To manage operations more efficiently, develop budgets and forecast financial results more accurately. BI solutions can also help companies manage customer relationships for greater profitability, and keep the entire organization moving in the same direction, toward the same goals. It should also be apparent that organizations use a variety of methods to measure their BI results. Using a consistent method to compare expected and actual results is important in understanding the true value of a BI solution. But the method that works for one organization may not be entirely appropriate for another. So, after selecting and applying measurements meaningful to your organization, the final decision may come down to a single question. And that question is not, What is the perfect way to evaluate a BI initiative? Rather, the question is, What is the best way for our organization to evaluate whether a BI initiative can help identify and move us toward our goals more rapidly or with a greater likelihood of success? Obtaining that answer is the final objective of an ROI evaluation, whatever method your organization may use to calculate it.

2002 SPSS Inc.

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Patrick Dauga As Executive in Charge, Patrick Dauga is responsible for leading SPSS' global software solutions group. Dauga has spent more than 16 years in executive-level leadership positions at companies such as SPSS, ShowCase Corporation and Comshare, Inc. He holds a degree from Sup de Co Bordeaux business school in France. SPSS solutions help companies use analytics to support critical business initiatives, including CRM, financial management, sales/marketing analysis, supply chain analytics, and Web site optimization. SPSS software technologies support historical reporting and analysis, as well as predictive functions, such as forecasting, data mining, text mining and personalization.

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