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ROI Best Practices Series — Part 1: Introduction and Goal of an ROI Analysis

Lisa SmithBy Lisa Smith

When we are considering any large investment either in our personal or work life, it is natural to question how fiscally sound that investment decision is to make.  Whether a company is considering the impact of rolling out a new product to market, acquire a company to gain market share or opening a new factory, using a Return on Investment (ROI) analysis will help define in hard numbers just how much that investment will return to us and over what period will we see our investment paid back.

What constitutes “good” ROI analysis?

Many companies have been using ROI analysis in their demand management programs to evaluative which proposed projects should funded and those which are not.  In a manner, projects are competing for both the company’s focus (labor) and limited capital dollars.

What is ROI?But a good ROI analysis does not tell the whole story a demand management program needs to determine the merit of each project proposal.  Demand management teams are also requesting project teams to include a business case to accompany an ROI analysis.  A company is not just investing their capital dollars in these projects, they are also investing their people time and focus.  We need to ensure that the project focus and execution is supportive of corporate and or business unit’s strategy – we need to have all of our oars pushing the boat in the same direction.

ROI Analysis

As Gartner espouses in their “Total Value of an Opportunity” (TVO) framework, a good business case needs to include analysis of how an investment has strategic alignment and the overall business impact of the project.  Those projects which are ultimately funded should be best aligned to the strategic goals of the company.  While a project many be financially a great decision, if the project’s goals are not in line with where the company is headed, the financial gains should be disqualified.

The goal of the ROI analysis should be to cleanly portray the financial state of “as-is” and the “to-be” future state after making the investment.  Those financial states should include all elements which are going to vary between the optional states.  When considering what metrics should be included in the analysis, it can be confusing where to draw the line – what to include and what to exclude.  What makes a “good” ROI analysis is not that we analyzing every possible cost metric but only those relevant costs which make a material impact in the savings.  The other key element to consider when building your ROI master piece is how consumable is the analysis by your project’s key stake holders.  If your ROI analysis reminds people of something out of the movie “A Beautiful Mind”, you need to step back and re-evaluate your approach.  A clean view of your assumptions, inputs, formulas and a simple side by side financial comparison of “as-is” vs “to-be” is the best to socialize your ROI study and results.

Socializing Your ROI Study

Buy in and blessing of your ROI study is the final hurdle which you need to have a truly successful ROI analysis.  Set up one on one time with various project stakeholders, walk them through your business case and ROI analysis.  A clean set of eyes is a valuable exercise to see where how your analysis holds water, what elements of your Business case needs to be fleshed out and you will immediately see how “consumable” your analysis is by another person.  If everyone asks the same question, perhaps you should that address that question in your presentation?  Let’s face it, with all the time you have been spending on building out your business case, you probably have a lot of key assumptions in your head which might not be obvious to your audience.  Lastly, during those 1:1 sessions with your stakeholders, it is a great time to feel out their support of your project and your quest for funding.

In summary, when building a business case presentation for your project consider the following factors:

  • Explain “How does this project support my corporation’s strategic direction?”
  • Outline “How will the business be impacted by my project’s success?”
  • Summarize results of ROI Analysis including side by side comparison of “as-is” and “to-be” costs.
  • Cover key assumptions, inputs and formals supporting your ROI calculation.
  • Perform key stakeholder reviews to build internal support of your work

What’s next?

This is the first blog in a series that will explore end to end ROI best practices.  Stay tuned for blogs on:

  1. Introduction and Goal of ROI Analysis
  2. Scope of ROI Analysis
  3. Structure of ROI Framework
  4. Different type of Value
  5. Infrastructure Analysis
  6. Process Analysis – Labor
  7. Process Analysis – Time to Market
  8. Process Analysis – Service Impact
  9. Risk Mitigation
  10. Tying it all to together – telling the story
  11. Benefits Realization

Lisa Smith is a Business Value Consultant in the VMware Accelerate Advisory Services team and is based in New York, NY.

One thought on “ROI Best Practices Series — Part 1: Introduction and Goal of an ROI Analysis

  1. Brad Jennes

    Well stated Lisa. I agree that many times vendors fall into the ‘beautiful mind’ trap when it comes to ROI models. If it cannot be easily communicated and consumed, then it likely never fully agreed upon by the customer.

    Also, agree w/ you that while ROI is important, what really needs to ‘sell’ how technology/solution enables the customer’s strategy objectives.

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