The Gantry Group

Market Validated ROI Analysis

Gantry Group Newsletter Issue No. 20, September 2003

This email is never sent unsolicited. You are receiving this email because you have subscribed to receive news and updates from us or one of our affiliates. If you don't remember opting in, or you think someone else has opted you in against your wishes, please follow "Unsubscribe" instructions at the end of this newsletter. Issue Insights: ROI value drivers are the metrics whose measurement drives the quantification of ROI. Identifying the value drivers qualitatively may have to suffice if they are not being measured. ROI value drivers can be found in the business processes that are impacted by implementation of the offering. Business processes extend beyond operational workflow to include the entire sales cycle and supplier and partnerships as well. Work with your customers to help them implement mechanisms to measure value drivers if they have not been doing so historically. New Publications Available! Value Driver ROI Profile SpotCell In-Building Solutions for Wireless Carriers is the latest in Gantry's series of solution category ROI profiles. Economics of Integration White Paper AppConnect is PeopleSoft's new offering in the "business process management" solution category. CLICK HERE TO DOWNLOAD

When Quantitative ROI Is Not an Option Whether you are a vendor or an enterprise, just about everyone would agree that the ability to accurately forecast the return on investment from an IT or IT services implementation is a great thing to have. However quantification of ROI is not always possible. In some cases, the offering does not lend itself to direct measurement of net benefits; in others, the nature of the industry constrains field measurement of the value driver metrics. To select the best alternative for your business, its important to first understand some of the nomenclature being used. There is a lot of talk these days about "tangible" and "intangible" ROI, and "hard" and "soft" benefits. Gantry Group defines tangible ROI as consisting of  net benefits that can be measured and are a direct result of implementation of the offering. For example, if a product enables a company to eliminate or reduce shipping costs within a business process, this would count as a tangible benefit. Intangible ROI is a qualitative identification of the value of the implementation that is not possible to measure with any degree of certainty. Improved employee morale is an example of this partly because there are no standard metrics that capture this attribute, and partly because it is difficult to isolate the contributions from the various dynamics that impact employee morale. Hard and soft ROI  both refer to measured, quantified ROI value drivers. However, hard ROI value drivers can be shown to have direct cash impact on the company's operating financials. An example is reduction of staff due to the implementation of an offering which will impact the bottom line of operating costs. Soft ROI is also based on quantifiable value drivers, however the cash impact is hard to accurately assess. For example, outsourcing of a business process to an IT services provider might save 5 employees an average of 2 hours per week. Multiplying the number of hours saved per year by the annual hourly salary does indeed produce a number. However, because these employees are likely to be reallocated to other tasks, the direct cash impact is impossible to assess even though there appears to be a "savings". So what do you do when, whatever the reason, quantitative ROI is not an option? In this newsletter issue, we'll review the alternatives.

In many instances there are tangible benefits from the implementation of a technology offering but they cannot be quantified for one simple reason: customers have not been measuring the relevant value drivers! According to Hewitt Associates, only 17% of CFOs actually measure return on investment for outsourcing projects. Some companies do not know what to measure while others know what to measure but not how.

One of Gantry Group's technology ROI assessments that fits this category (and there are many examples), is a company whose technology directly reduced the incidence of errors in a product line, dramatically increasing quality. It is reasonable to assume that with higher quality output, the amount of waste products to be scrapped (since the materials were not reusable) would decrease. However, companies in this industry traditionally have no business process in place to track and monitor costs incurred from waste.

Another company in the services business, implemented an IT product that enabled customer service reps to resolve issues faster. However, the company was not measuring the number of calls per service rep until they implemented the product so they were unable even to assess the soft ROI benefit from increased productivity.

What should you do when you intuitively know that there is value from a technology offering but you cannot quantify it? There are two basic options: identify the qualitative ROI value drivers (and base your marketing messages and sales efforts around these if you are a vendor), or, train up to begin putting measurement processes in place.

If the benefits from the offering are intangible, all is not lost. Embrace the qualitative value drivers. How do you identify the qualitative value drivers associated with a technology investment?  The best way to do this is by following the workflow. An IT implementation will always have some sort of impact on business processes so this is where you need to focus. The implementation might restructure an existing business process, eliminate it, or replace it with another process entirely. The value drivers you are trying to identify result from these business process changes.

For example, an IT implementation might restructure an existing business process, enabling the tasks involved to be completed by two people instead of three. This change in the business process results in a value driver. The qualitative value driver in this example is the reduction in employee costs due to increased efficiency.

Some offerings actually create business processes where there were none prior to the implementation. As an example, consider the implementation of an employee performance management solution that enables enterprises to quickly develop and track employee performance metrics against objectives. Some companies (even large ones) have no well developed business process for tracking employee performance. As a result, many pay out large performance bonuses for which they have no methodology for confirmation of merit. With the implementation of an HR performance management solution, a completely new business process is deployed for tracking and developing employees and paying out performance goals only as appropriate. Here, there are several potential qualitative value drivers. One obvious tangible value driver is the savings in bonuses not paid due to non-performance. But there are other value drivers that are no less important even though they are not possible to measure and quantify. One of the indirect benefits of such a solution, is that employees and their managers can clearly set goals and objectives and track how the employee is performing. If the goals need to be adjusted mid-way to reflect changes in the environment, the employee and manager can easily re-set expectations accordingly. As a result, employees are much more comfortable with the added visibility they have regarding the drivers of their compensation. The qualitative value driver is the increase in employee retention that results from employees being able to better understand the goals and objectives against which they are being measured.

The take-away in the above examples, is the importance of examining how business processes have changed and what effect those changes have on the operation of the enterprise. These changes will lead you to the qualitative value drivers of the IT implementation.

The second alternative when ROI value drivers could be measured but isn't, is learn how to deploy the necessary processes to measure and track the identified value drivers.  Depending upon the industry and the IT implementation, collecting data on the key value metrics can yield useful data in 6 - 12 months.

To begin an ROI value driver measurement program, you will need to identify the value drivers as explained above. Once the value drivers have been identified you can quickly distinguish between tangible and intangible. Tangible value drivers result from the changes in the business processes that directly reduce or eliminate costs or that directly increase revenues. An ideal place to start is with customers who can estimate what the value driver metrics were prior to implementation. In some cases this is easy such as situations where the savings come from staff reductions which they will know about. In other cases, such as measurement of the number of calls per customer service rep per day, or the mean time to problem resolution, the enterprise may have to estimate values if they have not been measuring them. Since ROI measurement is not an exact science, estimates of past data from individuals intimately involved in an operation are probably close enough.

Once you have estimates for the historical value drivers, the next step is to put measurement mechanisms in place within each impacted business process to capture the operational data required. Generally, a year of data collection should be sufficient to determine the incremental changes in costs and net revenues that will feed the ROI equation, providing you with solid quantitative data that demonstrates just how effective your IT investment has been.

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