Calculating the ROI for Business Intelligence
ProjectsJonathan Wu
BASE Consulting Group, Inc.October 2002
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Why Calculate a Return on Investment (ROI)?
Individuals calculate ROI for the following reasons:
Quantify the financial benefits of the project Prioritize IT projects Determine allocation of resources
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Agenda
Financial measures How to estimate the cost Performing a ROI sensitivity analysis Non-financial considerations Business intelligence ROI case study Conclusion Questions and answers
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Financial Measures 1/5
Net Present Value (NPV) of project benefit Internal Rate of Return (IRR) Payback period Return on Investment (ROI)
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Net Present Value (NPV) of project benefit Calculation of the discounted projected cash flows
of project benefit from the date of implementation
NPV formula
NPV = CF1 + CF2 + CF3 + … + CFn
(1 + r)1 (1 + r)2 (1 + r)3 (1 + r)n
Legend
CF The net cash flow for each year that the NPV is to be applied
r The borrowing rate or investment yield rate for the organization
n The total number of years for which the calculation is to be applied
Financial Measures 2/5
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Internal Rate of Return (IRR) Calculation of the rate that will make the present value of the
projected cash flows equal to the investment
IRR formula
Initial Investment = CF1 + CF2 + CF3 + … + CFn
(1 + r)1 (1 + r)2 (1 + r)3 (1 + r)n
Solve for the “r” to calculate the IRR
Legend
CF The net cash flow for each year that the IRR is to be applied
r The Internal Rate of Return
n The total number of years for which the calculation is to be applied
Financial Measures 3/5
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Payback Period Calculation of the number of years that are required for the
discounted projected cash flows to equal the initial investment
Payback Period formula
Payback Period = Initial Investment
(NPV of project benefit / N years)
Financial Measures 4/5
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Return on Investment (ROI) Calculation evaluates the discounted projected cash flows
derived from the benefit generated by the project divided by the initial investment
ROI formula
ROI = NPV of project benefit X 100
Initial Investment
Financial Measures 5/5
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Agenda
Financial measures How to estimate the cost Performing a ROI sensitivity analysis Non-financial considerations Business intelligence ROI case study Conclusion Questions and answers
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How to Estimate the Cost 1/7
The cost of implementing a BI project can be classified into one of three types:
Hardware Software Labor
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Hardware Cost
The cost of the hardware devices required by the project
Examples
Client systems Server system(s) Network communication hardware
How to Estimate the Cost 2/7
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Software Cost
The cost of the software applications required by the project
Examples
BI license fees Relational Database Management System (RDBMS)
license fees
How to Estimate the Cost 3/7
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Labor Cost
The cost of internal and external resources dedicated to the project
Examples
Project manager Business analyst(s) BI application specialist(s) Trainer(s)
How to Estimate the Cost 4/7
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How to Estimate the Cost 5/7
The total cost of implementing a BI project can be divided into two categories:
Initial Recurring
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Initial Cost
The cost an organization incurs for the BI project that are a one-time event
Examples
Hardware cost for the project Software license fees Labor cost associated with the development,
implementation, and deployment of the BI solution
How to Estimate the Cost 6/7
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Recurring Cost
The cost associated with the maintenance and support of the BI solution after the BI project has been implemented
Examples
Software maintenance fees Labor cost to maintain the solution and to train
individuals on the BI solution
How to Estimate the Cost 7/7
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Agenda
Financial measures How to estimate the cost Performing a ROI sensitivity analysis Non-financial considerations Business intelligence ROI case study Conclusion Questions and answers
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Performing a ROI Sensitivity Analysis1/2
A sensitivity analysis addresses the probability of various outcomes and quantifies the financial impact of the BI project
Example
Outcomes % Probability
Successful 60%
Partially successful 30%
Failure 10%
100%
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Performing a ROI Sensitivity Analysis2/2
The % probabilities associated with each potential outcome must be validated with available research information
When performing the sensitivity analysis, the total project benefit should be greater than the initial investment for the benefit to outweigh the risk
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Agenda
Financial measures How to estimate the cost Performing a ROI sensitivity analysis Non-financial considerations Business intelligence ROI case study Conclusion Questions and answers
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Non-Financial Considerations1/2
Non-financial considerations or qualitative analysis should be assessed and factored into the project business case
Examples
Improved information dissemination Improved information access Propagation of knowledge about the organization
through training and use of the BI solution
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Non-Financial Considerations2/2
In certain cases, qualitative aspects can be quantified after the BI solution has been implemented as a post-project ROI assessment
Examples
Assessment of sales channel after September 11th Financial analysts working more efficiently Reduction of paper expense
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Agenda
Financial measures How to estimate the cost Performing a ROI sensitivity analysis Non-financial considerations Business intelligence ROI case study Conclusion Questions and answers
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Business Intelligence ROI Case Study1/17
XYZ corporation is interested in implementing an BI application
The project sponsor wants to know the costs and benefits of the initiative
The current reporting environment requires 1,000 hours/month to support
There are ~ 250 individuals that spend ~ 1 hour/week gathering data and updating their spreadsheets
Background
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One Sun Enterprise 3500 server with 4 processors is needed with an estimated cost of $115,000
The number of users with access to the BI application is estimated at 1,200 individuals
WebIntelligence UNIX server (InfoView, Reporter, and Explorer) uncapped license is estimated at $761,400
Broadcast Agent on Windows NT using an existing server is needed for scheduling documents with an estimated cost of $135,000
Assumptions
Business Intelligence ROI Case Study2/17
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The number of developers/administrators of the BI application is estimated at 5 individuals
BusinessObjects Designer and Supervisor (IT Bundle) modules for 5 individuals is estimated at $20,950
The software maintenance fee is 20% of the initial license fee per year for InfoView, WebIntelligence, Broadcast Agent, Designer, and Supervisor modules
A discount of 20% of the total software license cost will be applied
Assumptions (continued)
Business Intelligence ROI Case Study3/17
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The duration of the project is less than 1 year
The proposal amount from the external consulting firm selected is $850,000
The number of work hours per year per individual is 2,000
The fully burdened hourly labor rate is estimated at $100 for IT professionals and $75 for business analysts
Assumptions (continued)
Business Intelligence ROI Case Study4/17
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XYZ’s borrowing rate is 7.75%
Annual inflation rate is 0%
A three-year time horizon is used for the ROI calculation
Assumptions (continued)
Business Intelligence ROI Case Study5/17
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Ongoing support of the BI environment after implementation will require the following:
# Position % of Time
2 BI specialists 100%
1 Database administrator 5%
1 System administrator 5%
1 Network administrator 1%
1 Trainer 25%
Total 236%
Assumptions (continued)
or 2.36 Full Time Equivalents
Business Intelligence ROI Case Study6/17
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Hardware$115,000 = Server cost Software $917,350 =
Labor$850,000 = Consultant proposal
Total $1,882,350
Initial Cost
WebIntelligence / InfoView 761,400$ Broadcast Agent 135,000$ IT Bundle (5) 20,950$
Gross License cost 917,350$ 20% Discount (183,470)$ Net License cost 733,880$
Maintenance Fee - 20% 183,470$
Total Software Cost 917,350$
Business Intelligence ROI Case Study7/17
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Software$183,470 = $917,350 license x
20% maintenance Labor$472,000 = 2,000 hrs x 2.36 FTE x $100/hr
Total $655,470
Recurring Cost
Business Intelligence ROI Case Study8/17
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XYZ with a BI applicationYear 0 Year 1 Year 2 Year 3
Hardware 115,000$ -$ -$ -$ Software 917,350$ 183,470$ 183,470$ 183,470$ Labor 850,000$ 472,000$ 472,000$ 472,000$
Total cost 1,882,350$ 655,470$ 655,470$ 655,470$
Business Intelligence ROI Case Study9/17
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XYZ without a BI application
Labor Year 0 Year 1 Year 2 Year 3IT support 1,200,000$ 1,200,000$ 1,200,000$ 1,200,000$ Business analysts 937,500$ 937,500$ 937,500$ 937,500$
Total cost 2,137,500$ 2,137,500$ 2,137,500$ 2,137,500$
• IT support of current reporting environment
$1,200,000 = 1,000 hrs/month x 12 months x $100/hr
• Business analysts cost to gather data and update spreadsheets
$937,500 = 250 individuals x 1hr/wk x 50 wks/yr x $75/hr
Business Intelligence ROI Case Study10/17
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XYZ with a BI applicationYear 0 Year 1 Year 2 Year 3
Total cost 1,882,350$ 655,470$ 655,470$ 655,470$
XYZ without a BI applicationYear 0 Year 1 Year 2 Year 3
Total cost 2,137,500$ 2,137,500$ 2,137,500$ 2,137,500$
Project benefit 1,482,030$ 1,482,030$ 1,482,030$
Business Intelligence ROI Case Study11/17
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Year 0 Year 1 Year 2 Year 3Project benefit 1,482,030$ 1,482,030$ 1,482,030$
Discounted project
benefit at 7.75% -$ 1,375,434$ 1,276,505$ 1,184,691$
NPV formula
= $1,482,030 x 1 / (1+.0775)
= $1,482,030 x 1 / [(1+.0775) x (1+.0775)]
= $1,482,030 x 1 / [(1+.0775) x (1+.0775) x (1+.0775)]
Total discounted project benefit at 7.75% 3,836,630$
Business Intelligence ROI Case Study12/17
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Total NPV of project benefit at 7.75% (a) 3,836,630$
Initial investment in BI project (b) 1,882,350$
Return on investment [(a) / (b)] x 100 204%
Calculation of ROI Over 3 Years
Business Intelligence ROI Case Study13/17
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Calculation of Internal Rate of ReturnYear 0 Year 1 Year 2 Year 3
Project benefit 1,482,030$ 1,482,030$ 1,482,030$
IRR formula
Initial Investment = $1,482,030 x 1 / (1+ r)
Initial Investment = $1,482,030 x 1 / [(1+ r) x (1+ r)]
Initial Investment = $1,482,030 x 1 / [(1+ r) x (1+ r) x (1+ r)]
Internal rate of return (Solve for variable r) 59.2%
Business Intelligence ROI Case Study14/17
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Total discounted project benefit at 7.75% 3,836,630$ Number of years in time horizon 3
Average total discounted project benefit at 7.75% 1,278,877$
Initial investment in BI project 1,882,350$
Payback period in years 1.47
Calculation of Payback Period
Payback period is approximately 1 year and 6 months
Business Intelligence ROI Case Study15/17
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Outcomes%
Probability Gain/(Loss)Weighted Outcome
Successful 60% 3,836,630$ 2,301,978$ Partially successful 30% -$ -$ Failure 10% (1,882,350)$ (188,235)$
Totals 100% 2,113,743$
Sensitivity Analysis
Business Intelligence ROI Case Study16/17
The weighted outcome of $2,113,743 is greater than the $1,882,350 initial investment
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3 year ROI is 204% Payback period is 1.47 years and less than time horizon 3 year IRR of 59.2% is greater than XYZ’s borrowing
rate of 7.75% Probability of success is greater than 50% Total weighted outcome is significantly greater than
the initial investment
The potential gain to XYZ corporation
from the BI project
outweighs the risk of failure
Summary of Case Study
Business Intelligence ROI Case Study17/17
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Agenda
Financial measures How to estimate the cost Performing a ROI sensitivity analysis Non-financial considerations Business intelligence ROI case study Conclusion Questions and answers
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Conclusion
ROI quantifies the financial benefits of a project Qualitative benefits must also be considered
Without the necessary support and user involvement, a ROI calculation for a BI project is meaningless
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Questions and Answers
For a copy of this presentation or the accompanying white paper or ROI calculator, please contact
Jonathan Wu
(510) 628-3300 x224