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IT’s Payback Time – Part 2: Avoiding the risks that prevent ROI realization on IT innovation

Les ViszlaiBy Les Viszlai

ROI In part 1 of this two-part series we discussed how economists use many formal models to calculate ROI (Return on Investment), TCO (Total Cost of Ownership), as well as some of the methods for determining IT Business Value and payback periods.  In this post we’ll dig into the areas that can delay or prevent you and your organization from realizing the projected benefits from this ROI activity.

It’s critical that your ROI initiative has a communication plan that clearly communicates the status, timing and risks to the ROI initiative on a regular basis.  It’s not unusual for IT organizations to spend a lot of upfront effort to get business approval to proceed with an initiative, disappear and later back pedal on why the ROI initiative failed.

Potential Risks to ROI

There are a number of risk areas that can potentially impact the realization and value of an ROI initiative.

Financial

Changes in the business may cancel/delay the ROI initiative.  The initial ROI may be based on spending money that has a longer payback period then the business is now willing to take on in the current budget reporting cycle.  

Human Resources

Describes the people component of ROI initiatives.  A lack of training or not having the right people to execute and manage the project results in project timelines that are delayed.  Additional unplanned staff costs can be incurred in order to rework or complete the initiative.  Consider adding the cost of using Professional Services firms that have the expertise to accelerate the project as part of the initial ROI calculations to avoid these often costly unplanned costs.

Legal/Governance

Requirements change due to unforeseen circumstances or new industry related compliance requirements that present themselves after project kick off, and additional resources (Technology/People/Funding) are required to complete the ROI initiative.  This additional resource requirement may wipe out any of the original ROI benefits due to unplanned delays or costs.  

Management

Priorities can simply change and management’s commitment to support and funding can be delayed or cancelled. Having a solid communication plan in place keeps the initiative on managements radar and reduces the chances that their interest will wane.

Market

Market changes and competitive pressures or new customer demand may cause management to delay or cancel the project.  Resources (people/funding) can get diverted from IT to other areas of the business.

Organization

Political infighting or parent company relationships may limit ROI benefits. There can be a dependency on the business unit to use technology/services that benefit the parent company, increasing costs at the subsidiary level and reducing the ROI benefit. For example, if the parent company institutes an accounting package that enables simplified reporting across all of its subsidiaries, the costs increase to maintain and implement this system and impacts any resource savings.

Dependencies

Reliance by the current ROI initiative on a different project or initiative is a common risk.  Key resources (people/time/money) can be tied up which can impact the projected ROI of our current initiative.

Technology

Implementation related ROI activities can be affected by chosen technology that is not compatible with an existing system (not uncommon).  Or the new technology could have limited scalability and can’t handle the current or projected system demand.  A simple example is the case of existing switches that can’t handle the new call center phone system volume, or a new cloud services provider can’t handle the volume the business is generating.

Users

ROI benefits may be based on when and how users will utilize the new capabilities.  Anything that prevents them from doing so will be a risk.  The ROI initiative should have a strong end user communication component that describes why/how/when the transition will happen, and don’t forget the end user training if its needed.

Vendors

When you engage vendors to provide critical services/technology, sometimes they won’t execute as promised or go out of business before the initiative is completed.

Keep Your Guard Up

ROI RisksBe aware of the potential risks that may impact your ROI initiative during the initial analysis phase and factor that contingency into your planning.  A strong predefined communication plan will go a long way in preventing and/or minimizing the impact of many of the potential risk areas described in this blog. I personally like the traditional high level red/yellow/green dashboards that give a snap shot of risk over time, but use whatever works best for your organization to keep these risks top of mind.

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Les Viszlai is a principal strategist with VMware Advisory Services based in Atlanta, GA.

IT’s Payback Time – Calculating the ROI on IT Innovation – Part 1

To justify investment in new IT projects, we need to show that it pays off – here’s how to do that.

Les Viszlaiby Les Viszlai

ROI Calculation“Innovation in IT pays for itself.”  That’s something pretty much everyone in IT believes. But it’s also something that a surprising number of companies I visit aren’t in a position to prove.  Why? Because most companies don’t actually know what it costs to provide their IT services and can’t quite put a figure on the benefits IT innovation projects can bring.  Missing these key data points can make it very difficult to quantify the Return on Investment (ROI) or payback on any IT project, making it harder for IT to compete internally with other departments for scarce business funding.  Many times, approved IT budgets get frozen or delayed because the business does not understand the value of the projects in question and opportunities are missed or delayed.

In Part 1 of this blog series, let’s begin at a basic level in order to get you familiar with the topic of calculating ROI.  We’ll dig in to what you can do to calculate whether an IT project will be self-funding.

Calculating Basic ROI

ROI Increased Revenue Cost ReductionEconomists have used many formal models to calculate ROI (Return on Investment), TCO (Total Cost of Ownership), as well as methods for determining IT Business Value and payback periods.  For this conversation, let’s focus on basic ROI, and ask the question: if we spend X dollars on a new IT project or service in order to get a new or existing capability, will we spend less money than we are paying now for the equivalent capability or service that we will replace?   If an initiative does this, then we can easily make the case for moving forward with that innovation program.

To figure this out, we’ll look at these two areas:

  • Reduced or avoided capital and/or operational costs
  • Increased/Enhanced Revenue

Hard Costs and Soft Costs

Hard cost is money we have to pay. Most hard cost savings or cost avoidance opportunities are fairly easy to quantify. These savings will include the cost of hardware and software you no longer need to pay for and savings from staff reductions and licenses you will no longer need.   However, don’t forget to factor the added cost of the new hardware and software you are installing, any one time professional services fees you will need in order to deploy everything in place and any new staffing needs.  But this should all be relatively easy to quantify from a hard cost standpoint.

Soft cost savings or cost avoidance is more complex, because the benefits accrued are harder to put actual numbers on and its harder to get internal agreement on how its determined. In addition, most companies capture this information over a 3 to 5-year period, which may compete with short-term goals.

If you are already measuring soft costs today, then you’re ahead of the game.  However, you might be surprised by how often I see organizations failing to quantify them. The main reason, typically, is that nobody wants to do the work or no one understands the benefit. Quite often, I see companies look at an IT project purely from a hard cost savings perspective and say, “We can’t figure out how much time this will save, or how much happier this will make the client, so we’re not going to use these additional metrics as a measurement for this project.”

For those of you that want to start looking at this, I suggest reviewing the benefits below to see if they are addressed in the proposed project.  These project benefits are easier to quantify and can easily add up to substantial savings over time.  To calculate the savings for projects designed to improve existing capabilities, look at the current delivery time and associated costs and then subtract those numbers from the new projected delivery time and costs.

Will this IT project:

  • Provide faster delivery times?
    With simplified work flows and more repeatable processes being done more often by a machine automation, we can look forward to faster delivery times.  In order to calculate this, we multiply the current hourly FTE costs by the average delivery duration, by the number of requests on a yearly basis and compare that to the new times and costs.
  • Reduce the cost of training?
    With a simplified system, can we reduce training times for people new to the company, and likely employ more junior staff and divert more senior staff to innovation activities.   These savings can be quite high in organizations that have seasonal hiring needs and organizations that have a high staff turnover.
  • Lower regulatory and compliance costs?
    Automation and simplification activities can have a significant impact on reducing the cost of compliance, especially in regulation-intensive sectors like healthcare or finance.  These savings can be calculated by tracking the current FTE time used to manually record and document audit related activities and compare that to the improvements driven by the project.
  • Reduce human and machine errors?
    With simpler, more repeatable processes being done more often by a machine, we can look forward to less failures.  In order to calculate this, we multiply the current hourly loss, by the average downtime duration, by the number of times this happens on a yearly basis.
  • Drive faster resolution times?
    Using MTTR (how long it takes, on average, to restore a system) we multiply the number of incidents, by the time it takes to resolve, by the cost of personal on a yearly basis.

The above is the short list of soft cost savings you can use as a starting point.  They are easier to quantify and get agreement on, and collectively they can seriously add up.

Projecting Increases in Revenue

It should also be entirely possible to figure what the IT project change will do for your revenues.  Just to be clear: we’re not talking about the results of funding an entirely new product. We’re talking about the revenue enhancements that come with the cost avoidance/reductions and efficiencies tied to existing product/service lines.

Let’s take this scenario for quantifying IT Project payback: A business owner is running a web store where it takes a customer 3 minutes to buy something, but 90% of customers abandon the sale after 38 seconds. Along comes the innovative IT team, offering a project that reduces the average time-to-purchase down to 30 seconds. It’s entirely feasible, then, to figure the increased revenues that ought to accrue, all other things being equal, from the technology change and the faster buy time.

Again, the biggest thing that I see getting in the way of these kinds of calculations is that businesses first have to commit to doing them. I don’t think it really matters which method we use (ROI, EVA, TCO, they’re all fine). We just have to get agreement to pick one.

By doing the work upfront and having those numbers available for review, you put senior leadership in a better position to approve the IT project proposal.  It also leaves very little room for debate on the savings value of the project since we have established agreement within the organization on how the ROI is determined.

Key Take-Aways

  • Don’t forget to establish how you will calculate the expected ROI as you set an innovation strategy.
  • Don’t be hesitant to dive in.  Just pick an accounting method, get agreement on it within your organization, and then start doing the math.
  • This pays off!  In all likelihood it will help you prove that IT innovation does indeed pay for itself.
  • When IT innovation can pay for itself, this leads to more innovation, and that leads to increased customer satisfaction or added brand value, which of course will have a positive direct impact on your business.

Stay tuned.  In my next blog we will dig into the obstacles to watch out for that impact our ability achieve the projected savings.

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Les Viszlai is a principal strategist with VMware Advisory Services based in Atlanta, GA.

Introducing Kanban into IT Operations

les2By Les Viszlai

Development teams have been using Agile software methodologies since the late 80’s and 90’s, and incremental software development methods can be traced back to the late 50’s.

A question that I am asked a lot is, “Why not run Scrum in IT Operations?”  In my experience, operations teams are trying to solve a different problem.  The nature of demand is different for software development vs the operations side of the IT house.

Basically, Software Development Teams can:

  • Focus their time
  • Share work easily
  • Have work flows that are continuous in nature
  • Generally answer to themselves

While Operations Teams are:

  • Constantly interrupted (virus outbreaks, systems break)
  • Dealing with specialized issues (one off problems)
  • Handling work demands that are not constant (SOX/PCI, patching)
  • Highly interdependent with other groups

In addition; operational problems cross skills boundaries.

What is Kanban?

Kanban is less restrictive than Scrum and has two main rules.

  1. Limit work in progress (WIP)
  2. Visualize the workflow (Value Stream Mapping)

With only two rules, Kanban is an open and flexible methodology that can be easily adapted to any environment.  As a result, IT operations projects, routine operations/ production-support work and operational processes activities are ideally suited to using a Kanban approach.

Kanban (literally signboard or billboard in Japanese) is a scheduling system for lean and just-in-time (JIT) production. Kanban was originally developed for production manufacturing by Taiichi Ohno, an industrial engineer at Toyota.  One of the main benefits of Kanban for IT Operations is that it will establish an upper limit to the work in progress at any given process point in a system.   Understanding the upper limits of work loads helps avoid the overloading of certain skill sets or subsets of an IT operations team.  As a result, Kanban takes into account the deferent capabilities of IT operations teams

Key Terms:

Bottlenecks

Let’s look at our simple example below; IT operations is broken up into the various teams that each have specific skills sets and capabilities (not unlike a number of IT shops today). Each IT ops team is capable of performing a certain amount of work in a given timeframe (u/hr). Ops Team 4, in our example below, is the department bottleneck and we can use Kanban methodology to solve this work flow problem, improve overall efficiencies and complete end-user requests sooner.

Kanban Bottlenecks

As we said earlier, the advantage of adopting a Kanban methodology is that it is less structured than Scrum and is easier for operations teams to adopt. Kanban principles can be applied to any process your IT operations team is already running. The key focus is to keep tasks moving along the value stream.

Flow

Flow, a key term used in Kanban, is the progressive achievement of tasks along the value stream with no stoppages, scrap, or backflows.

  • It’s continuous… any stop or reverse is considered waste.
  • It reduces cycle time – higher quality, better delivery, lower cost

Kanban Flow

Break Out the Whiteboard

Kanban uses a board (electronic or traditional whiteboard) to organize work being done by IT operations.

A key component to this approach is breaking down Work (tasks) in our process flow into Work Item types.  These Work Items can be software related like new features, modifications or fixes to critical bugs (introduced into production).  Work Items can also be IT services related like; employee on-boarding, equipment upgrades/replacements etc.

Kanban Board

The Kanban approach is intended to optimize existing processes already in place.  The basic Kanban board moves from the left to the right. In our example, “New Work” items are tracked as “Stories” and placed in the “Ready” column.  Resources on the team (that have the responsibility or skill set) move the work item into the first stage (column) and begin work.  Once completed the work item is moved into the next column labeled “Done”.  In the example above a different resource was in place as an approver before the work item could move to the next category, repeating for each subsequent column until the Work Item is in production or handed off to an end-user.  The Kanban board also has a fast lane along the bottom. We call this the “silver bullet lane” and use it for Work Items of the highest priority.

How to Succeed with Kanban

In my previous experience as a CIO, the biggest challenge in adopting Kanban in IT operations was cultural.  A key factor in success is the 15 min daily meeting commitment by all teams involved.  In addition, pet projects and low priority items quickly surface and some operations team members are resistant to the sudden spotlight.  (The Kanban board is visible to everyone

Agreement on goals is critical for a successful rollout of Kanban for operations.   I initially established the following goals;

  • Business goals
    • Improve lead time predictability
    • Optimize existing processes
      • Improve time to market
      • Control costs
  • Management goals
    • Provide transparency
    • Enable emergence of high maturity
    • Deliver higher quality
    • Simplify prioritization
  • Organizational goals
    • Improve employee satisfaction (remember ops team 4)
    • Provide slack to enable improvement

In addition, we established SLA’s in order to set expectations on delivery times and defined different levels of work priority for the various teams.  This helped ensure that the team was working on the appropriate tasks.

In this example, we defined the priority of work efforts under 5 defined areas; Silver Bullet, Expedite, Fixed Date, Standard and Intangible.

Production issues have the highest priority and are tagged under the Silver Bullet work stream.  High priority or business benefit activities fell under Expedite.  Fixed Date described activities had an external dependency such as Telco install dates.  And, repeatable activities like VM builds or Laptop set-ups would be defined as Standard.  Any other request that had too many variables and undefined activities was tagged as Intangible (a lot of projects fell into this category).

I personally believe that you can’t fix what you can’t measure, but the key to adopting any new measurement process is to start simple.  We initially focused on 4 areas of measurement:

  1. Cycle Time: This measurement is used to track the total days/hours that a work item took to move through the board.  This was the time it took to move through the board once a Work Item moved out of the Ready column.
  1. Due Date Performance: Simply measures the number of Work Items that completed on or before the due date out of the total work items completed
  1. Blocked Time: This measurement was used to capture the amount of days/hours that work items are stalled in any column
  1. Queue Time: This measurement was used to track how long work items sat in the Ready column.

These measurements let us know how the Operations team performed in 4 areas:

  • How long items sit before they are started by Operations.
  • Which area/resource within IT is causing blockage for things being done.
  • How good is the team at hitting due dates and
  • The overall time it takes things to move through the system under each Work stream.

Can we use Kanban with DevOps?

The focus on Work In Progress (WIP) and Value Stream Mapping makes Kanban a great option to extend into DevOps. Deploying Work Items becomes just another step in the Kanban process, and with its emphasis on optimizing the whole delivery rather than just the development process, Kanban and DevOps seem like a natural match.

As we saw, workflow is different in Kanban than in Scrum. In a Scrum model, new features and changes are defined for the next sprint. The sprint is then locked down and the work is done over the sprint duration (usually 2 weeks). Locking down the requirements in next sprint ensures that the team has the necessary time to work without being interrupted with other “urgent” requirements.  And the feedback sessions at the end of the sprints ensure stakeholders approve the delivered work and continue to steer the project as the business changes.

With Kanban, there are no time constraints and the focus is on making sure the work keeps flowing, with no known defects, to the next step.  In addition, limits are placed on WIP as we demonstrated earlier.  This ensures that a maximum number of features or issues can be worked on at a given time. This should allow teams to focus and deliver with higher quality.  In addition, the added benefit of workflow visibility drives urgency, keeps things moving along and highlights areas of improvement.   Remember, Kanban has its origins in manufacturing, and its key focus is on productivity and efficiency of the existing system. With this in mind, Kanban by design, can be extended to incorporate basic aspects of software development and deployment.

In the end, organizations that are adopting DevOps models are looking to increase efficiencies, deploy code faster and respond quicker to business demands. Both the Kanban and Scrum methodologies address different areas of DevOps to greater and lesser degrees.

The advantages of the Kanban system for IT operations is in its ability to create accountability in a very visible system. The visibility of activities, via the Kanban board and its represented Work Items, aid in improving production flow and responsiveness to customer demand.  It also helps shift the teams focus to quality improvement and teamwork through empowerment and self-monitoring activities.

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Les Viszlai is a principal strategist with VMware Advisory Services based in Atlanta, GA.