Home > Blogs > VMware Accelerate Advisory Services > Tag Archives: ROI Analysis

Tag Archives: ROI Analysis

Quantifying the Business Impact of IT Agility

Harris_SeanBusiness ImpactBy Sean Harris

Let’s examine a story I see often in my work with customers as part of the VMware Advisory Services team.  The names and details have been changed to protect the innocent.

Jessica, the new Head of IT Service Delivery at ABC Banking Corp, was frustrated with being told that the cost of delivery of IT was too expensive. She wanted to show that had she massively reduced the cost of IT delivery with the new private cloud that her team had delivered.  Not only that, but the elastic demand and agility of the service had generated so much value to the business, in terms of revenue and market share, that the business should be investing considerably more in this solution going forward than they had done to date.

She worked with VMware’s Advisory Services to build a model that showed the true value of the private cloud solution in terms of time to market, market share (as a result of being earlier to market) and revenues over a 3-year period.

They first built a model that looked at supply and demand and showed the impact of shortage of supply on the loss of customers to competing services (so reducing demand and market penetration).  Once they understood the organisation’s ability to service demand they were able to estimate the revenue impact from lost customers, using the metric for average revenue per customer.

The Assumptions

The model did not consider the application development time of the service. It was assumed that this has already been done.  There is another value model that can be built to show the benefits of time to market through agile and cloud native application development vs traditional application development approaches, but that was out of scope for this exercise.

For a traditional service delivery model, it was assumed that capacity would be built linearly over time.  You need a certain capacity before the capability is available and/or there is a marketing decision made to delay the launch (availability) of a service (to prevent customer dissatisfaction due to disappointment when the service is actually not yet fully available).

For the cloud (public, private or hybrid) service it was assumed that the capability can be delivered from day one.  The agile elastic capacity of the private cloud infrastructure means the service receives the infrastructure capacity that it needs on demand.

The final key assumption was that they existed in a competitive market place and so there were other equivalent competitive services available to consumers. This means that if demand out strips supply and some consumers are unable to get the service when they want it a percentage will go to a competitive service and never return.

The Results

Business ImpactArmed with this model, Jessica could show her leadership team that with a traditional service delivery approach they were unable to deliver the service from day one, resulting in demand outstripping supply.  This would have resulted in a loss of final market share of 10 points (down from 40% to 30%) and a loss of 3 year service revenues of around 25%.

By switching to a private cloud delivery model, that allowed supply to match demand from day one, they would not lose out on revenue to their competitors.  Not only that, but she proved that a private cloud significantly reduced the TCO (total  cost of ownership) of infrastructure delivery at ABC Banking Corp. and that while some competing public cloud solutions were comparable in price, they were not fully compliant with (sometimes unique) security and audit requirements of the business and external regulators.

The lines of business and marketing were now able to clearly see the value to the business of the new private cloud infrastructure service and quickly approved additional investment in current private cloud.  They added private cloud services as well as directed a multiple new projects to target Jessica’s private cloud platform.

What can we learn from this story?

Providing on-demand infrastructure absolutely increases the agility of the business, and that agility has far reaching benefits throughout the organization, particularly for the bottom line.  A well-researched business case has proven to be the linchpin of success for many of the transformation initiatives, making it easy for the business to see the massive return on investment they will realize through shifting to a private cloud delivery model.

Like Jessica, many IT leaders have limited or no direct experience of creating business cases that go beyond IT costs and into revenue, market share or margin impacts to the business itself  If that’s the case for you, contact your VMware representative take advantage of the deep expertise of VMware Advisory Services.

=======

Sean Harris is a Business Solutions Strategist in EMEA based out of the United Kingdom.

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.

=======

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.

=======

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

ROI Analysis: 4 Steps to Set the Scope

Everything and the Kitchen Sink

Lisa SmithBy Lisa Smith

As I discussed in “Introduction to ROI”, determining what to include or exclude in your ROI analysis can be tricky.  What if you leave off a metric that ends up being materially very significant and eats up all of your savings when you begin to implement?  Shouldn’t you just include ALL of your related costs, just to be sure?  Sometimes it feels much more comfortable spending many hours in “analysis paralysis”, just to be safe.

But I am jumping ahead of myself.  Let’s start with the mechanics of how to figure out the scope of your ROI Analysis.

Setting the Scope for ROI Analysis

The guiding principle is pretty simple:  Model the stuff your solution is going to impact.   

Step 1 – Create a Capabilities List

Create a list of all the capabilities your project is going to deliver in a single column (I like to use Excel, even for a text exercise like this).

Step 2 – Create a Benefits List

In a second column next to this list of capabilities, draft the benefits that are going to be delivered by these capabilities.  To do this you need to answer the question, “So what?” with regard to every capability you are delivering.  The lens for these benefits should be focused on what the company is going to achieve from the successful implementation of the project you are requesting funding for.  Don’t get caught up in how you are going to measure these benefits just yet.  Don’t judge what will be considered big savings or small savings.  Just free flow – write them down.

If this exercise is really hard then it might mean that you need to get a better handle on your desired future state.  If you have a great vision of where you are trying to get to with your project, a list of high level benefits should flow easily.

Step 3 – Refine Your Value Drivers

After you have your list of capabilities and benefits (I will refer to these items as “value drivers”), share that list with your peers who are familiar with your “as is” state and your “to be” state.   You might be given a few more value drivers to consider, or you might decide to drop a few value drivers.  If your project includes benefits or services consumed by other teams or end customers then you need to spread your wings, leave your nest and start talking to other people.  The conversation would sound like, “If we could provide, ABC Service, what would the benefits to your team be?”  This “voice of the customer” data provides a great insight into how well adopted your project or service would be; evidence that wider spread gains would be achieved beyond just your team.

“If you build it, they will come” may work in the movies, but the success of any technology project hinges on internal adoption.  Many internal cloud projects failed to get the adoption levels they were expecting from other lines of business.  They built it, but no one is coming.  Quite often these missteps could have been avoided if they had a greater understanding of their consumers’ needs and desires, and used those to fuel the short list of the cloud services provided.

Step 4 – Create a Value Model

Let’s create a value model using an example from VMware’s product vROPs, Capacity Management benefit statement:

“Capacity management helps identify idle 1 or overprovisioned2 VMs to reclaim excess capacity and increase VM density3 without impacting performance.  “

Reclaiming excess capacity is our “So what?”, or benefit statement.    We need to draft a model to calculate the financial impact of reclaiming excess capacity.  The model should include the before and after depiction from our three new capabilities:

  1. Removing idle workloads
  2. Reducing assets provisioned per workload
  3. Increasing VM density or consolidation ratio

ROI AnalysisThe net effect of reclaiming excess capacity refers to expenses associated with server and storage infrastructure capacity.   If that was the scope of your analysis, the capital expense associated with the server and storage savings would be all you needed.  You might also consider expanding the scope, to include the operating expenses also tied to that hardware.  Those operating expenses would cover the power and cooling of the hardware, the data center space overhead, the administrator labor needed to install, maintain, support and refresh that gear.  This technique is often referred to creating a “total cost of ownership” view, considering the acquisition cost as well as the ongoing operating cost of an asset.

Try grouping the value drivers into themes such as reducing computer hardware infrastructure, reducing incident management processes, or reducing time to market for application development.  For a single theme it is best to create a single value model for all of those value drivers.  This is most helpful in providing a single depiction of the “as is” costs or process effort of today compared to a view of the future “to be” state – comparing apples to apples.

So where do we draw the line on scope?

If your value drivers are a pretty short list, feel free to model every aspect of those benefits.  If your value benefits list is lengthy and your “so what” list has over 10 items, please consider scoping to only key and material items.

While I am going to be applying a bit of circular logic here for a minute – if any one line item in your TCO analysis is less than 10% of your total savings, you might consider dumping it from your model.  The savings does not support the effort to QA your math or the effort to socialize the savings.  Secondly, if your savings is considered “soft savings” you might want to consider dropping it also.  Especially if you have plenty of hard dollar saving to justify the investment.  Don’t gild the lily.  If you are not familiar with “hard and soft dollars” concept, I will be covering that in a future article.

==========

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

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.