revenge of the roi - cisco · revenge of the roi with profitability ... proposal. with the advent...

Revenge Of The ROIWith profitability and cost management back in the limelight against the cautious backdrop of a fragile recovery economy, how can Small- and Medium-Businesses (SMBs) justify their prudence in IT investments effectively?

All contents are Copyright © 1992 - 2010 Cisco Systems, Inc. All rights reserved. This document is Cisco Public Information.

SHOW ME THE MONEY

The job of the CIO is getting tougher. Ever since the financial meltdown of 2008, calls for more

accountability and audit has been ever-increasing in direct proportion to shrinking budgets. Your business

department is at it again, asking for more proof of a credible justification for your latest IT investment

proposal. With the advent of the “immeasurables”, Return on Investment (ROI) – or the performance

benchmark used to evaluate the efficiency of any investments1 – has only proven to be more than

elusive ever especially in the current age of fiscal volatility. Now, bundle in the huge capital outlays, long

implementation lead times and intense cultural changes into the equation and you have the impossible task

of justifying the value and benefits in your proposed IT investment project – not without gnawing your arm

off. Or risk having your proposal dumped and forgotten together with the rest of the KIV pile.

THE BUDGET VERSUS INVESTMENT PARADOX

Ask not how much budget your organization can offer for your investment, but how much value your

proposed investment can contribute to your organization’s direct bottomline.

It’s just ROI, not rocket science.

Firstly, the ROI concept is not a difficult one. Rather, it is the measurability of metrics or dollar value that

banishes any attempts to define – into obscurity. The revenue (return) of the product is compared with the

costs (of the investment) – with the final value minus the initial value of the investment divided by the initial

value of the investment. Or simply,

r = (Vf - Vi)/Vi

This number will be returned as a percentage. ROI is important because IT spending decisions are made

now. Issue 7Executive Insights

of 6

1 ROI definition, SMBWorldAsia http://www.smbworldasia.com/en/topic/180/roi

based on it. The budgeting process has more far-

reaching consequences with forecasts and plans for

future investments in staffing resources, IT initiatives

and projects being dependant on it. Unfortunately,

not every metric is a monetary metric and thus, not

quantifiable. For example, in the case of calculating

ROI for a social media tool, the metrics are qualitative

impact metrics (i.e. clicks, impressions of the

website, number of followers, etc) and not assigned

any monetary value. The paradox lies here – you

cannot measure or justify the investment value. On the other hand, you know you cannot do without that

social media tool. Many SMBs face the difficulty of defining the drivers of cost and profitability for the IT

investment and effectively align technology with respective business needs.

With a cautious IT spending trend predicted for the recovering economy in 2010, escalating competition

has limited SMB interest only for investment categories which benefit their business bottomline directly.2

This has cast the spotlight back on ROI measurement and justification with a cost-conscious focus on

reduction of operating costs, improvement in employee productivity, or increasing customer acquisition

and retention.3 Which are the tools that can help you measure ROI effectively? Are you prepared to

respond to any strategic questions from your functional management team with regards to IT investments?

ENTER ENTERPRISE RESOURCE PLANNING (ERP)

ERP is more than a necessary infrastructure that forms the transactional system of record for which

your business is based.4 It is a potential source of operational improvements and cost savings for SMBs

through innovation. ERP enables greater visibility in your organization and positions your business to

provide immediate transparency to your respective stakeholders. However, a recent ROI study has

found that SMBs are paying too much attention to Total Cost of Ownership (TCO) and not enough to ROI

during the implementation of ERP. The study also revealed that despite the high level of organizational

costs involved with most ERP projects, 52 per cent of SMBs “sometimes” or “never” estimate ROI in order

to cost-justify it. After post-rollout, 75 per cent “sometimes” or “never” measure ROI after the completion

of these projects. Many SMBs feel “compelled to make this investment because they felt that ERP was

necessary for the support of their businesses.5 How can SMBs optimize ROI to avoid this costly mistake?

RULE # 1: ABCS OF PROFITABILITY AND COST MANAGEMENT (PCM)

What was first known as activity-based costing (ABC) or activity-based management (ABM) has evolved

into a Profitability and Cost Management (PCM) approach which has become increasingly relevant

towards justifying ERP today. PCM is a multidimensional exercise which displays profitability (revenue

and costs) for various customer (segments) and product (groups), time period, channel, etc. What used to

be pure financial focus has now extended into various business domains. PCM is becoming increasingly

relevant because of a rise in indirect costs. In addition, more SMBs are recognizing the benefits of

e-enabling in customers through self-service business channels. For example, customers can now



of 6

2 State of SMB IT April 2010, Spiceworks http://www.spiceworks.com/voice-of-it/ 3 SMB IT spending recovers: looking for ROI and diagnostic guidance, 22 April 2010 http://tompiselloroiguy.blogspot.com/2010/04/smb-it-spending-recovers-looking-for.html 4 Measuring the ROI of ERP in SMB, Cindy Jutras, Mar 2009, Aberdeen Group White Paper http://www.aberdeen.com/Aberdeen-Library/5793/RA-enterprise-resource-roi-smb.aspx 5 SMB ERP Projects: don’t forget the ROI, Thomas Wailgum, 6 April 2009 http://www.cio.com.au/article/297824/smb_erp_projects_don_t_forget_roi/

check themselves in via the Web, a call center or

machines at airports. Every unique specification and

preference represents an impact in all dimensions

of profitability, including customer, product, and

channel profitability. Most importantly, PCM helps

enable business performance by identifying the

drivers of cost and profitability, empowering SMBs

with visibility and flexibility, thereby improving

resource alignment on organizational levels.6

KNOW THE RULES: ROI TOOLS AND METRICS

Many SMBs lament the lack of tools to measure ROI.

Yet, in reality, most of these tools exist within the

applications for which the ROI should be measured.

The following illustrations display the various tools and

saving factors that SMBs can use to measure ROI. Most

ERP solutions include embedded Business Intelligence

(BI) capabilities (i.e. dashboards). However, regardless

of the types of analytics or BI tools embedded, the real

challenge for SMBs here is to display data effectively

from installed applications in real time, without having

to synchronize or batch data.

RULE # 2: MEASURING ROI FOR VIRTUALIZATION PROJECTS



of 6

6 The need for profitability and costs management, Sep 2008, Oracle Leadership White Paper http://viewer.bitpipe.com/viewer/viewDocument.do?accessId=12470599

Do you measure the ROI of ERP projects?

So

urc

e: A

ber

dee

n G

roup

, Mar

ch 2

00

9

RR E|R|PIn Operation

ALWAYS SOMETIMES NEVER

56%38% 6%

So

urc

e: A

ber

dee

n G

roup

, Mar

ch 2

00

9

% All SMB Respondents

Reasons for not Measuring ROI

24%33%29%48%

ROI is too hard to measure

ERP is viewed as a necessary cost of doing

business

We simply manage

against our IT budget

Don’thave the

necessary tools

Tools for measuring ROI

Source: Aberdeen Group White Paper

Advanced analytics and Business Intellenc (BI)

Reporting capabilities of the installed application

Dashboards displaying data from installed

applications in real-time

Custom reporting

Spreadsheets

Ad hoc report writer and query capabilities 47%

53%

58%

58%

74%

79%

Saving Factors Considered in ROI

Source: Aberdeen Group White Paper

Reduction inoperational costs

IncreasedProfits

Better utilization of resources

Reduction of general administrative costs

Reduction ininventory costs

Reductionin Waste

Increase in value-add delivered to customers

Reduction or redeployment of

headcount

84%

84%

84%

79%

74%

68%

68%

95%

The proliferation of Virtualization technology

in 2009 could be attributed to its natural ability

to satisfy cost management policies during

the downturn. As we trudge along the road

to recovery, this exciting technology is here

to stay. Moreover, a cautious spending trend

amongst SMBs now triggers the need to prove

ROI for any planned Virtualization projects

more than ever. A recent study discussed the

diverse nature and many layers of Virtualization

– from server and storage to desktops and application – which requires a change of metrics when

calculating ROI. Virtualization provides solid ROI, but how can you ensure your business is getting

the most out of it? What are the elements to consider (i.e. hard and soft cost savings) before you

implement the Virtualization strategy?

Potential and real cost savings from server virtualization

Soft dollar savings might be difficult to prove

How much do you value the time you save in preparing a virtual versus a physical server? A

virtual server can be prepared in minutes but for a physical server – this might take weeks.

How much do you value the automation of standard testing and development environment

preparation? You can deploy and manage your own test environments with Virtualization

technologies in place.

Is flexibility in your a virtual infrastructure important or relevant for your business? With the

ability to deploy new applications quickly, your organization is now able to react accordingly and

effectively to evolving business needs.



of 6

CATEGORY POTENTIAL SAVINGS

Power savings $300 to $600 per virtualized server

Cooling savings Up to $400 per virtualized server

Hardware savings From $2,500 or more per virtualized server, depending on physical server type

License savings (Microsoft Windows Server)

75% of Enterprise license per virtualized server

License savings (open source) Nothing, except for support costs

Power rebates (selected utilityorganizations)

Up to 50% of the total cost of the project

Government rebates (federal, provincial and state)

Variable reduction rates (income tax reductions, sales tax rebatesand more)

Space savings More than 90% space reduction (based on an average of 10 virtualmachines per physical host)

BREAKING THE RULES: INNOVATIVE MODELS FOR MEASURING ROI

As mentioned earlier, qualitative metrics for IT investments such as social media tools are difficult to

define, making ROI measurement an uphill task. For example, a recent Forrester report, The ROI of Online

Customer Service Communities, noted that value or benefits to the business from the customer service

approach to social Customer Relationship Management (CRM) could be gauged by elements such as:

reduction in call volume, increase in productivity, increase in product idea generation, etc. For other

areas such as IT security investments, it is even tougher to assign “risk” a tangible cost value. Six Sigma

has devised a five-step approach to define “what can, and should be measured” in any IT investment

disciplines7 :

Define – performance improvement goals

Measure – the existing system under evaluation

Analyze – to eliminate gaps

Improve – the process, be creative

Control – institutionalize the improved system

ROI RULES IN TIMES OF RECOVERY

In the current delicate period of uncertainty, cost-efficiency still reigns supreme with ROI providing the

key towards greater organizational visibility. However, as IT progresses with new emerging technologies

by the second, traditional classic ROI measurement models can no longer cope, and SMBs should

innovate by researching and studying vigilantly into new methods of proving ROI. Rather than toss the

next IT investment project out the windows, instead, we should seek ways to justify “why it should

NOT be implemented”. It is now more imperative than ever to give these cost-saving and productivity-

enhancing proposals a chance and more critical than ever to keeping innovation alive.



of 6

7 Forget ROI – use Six Sigma to proven business value, Tom Bowers, 8 Jan 2009 http://security.networksasia.net/content/forget-roi-use-six-sigma-prove-business-value



of 6

Americas HeadquartersCisco Systems, Inc.170 West Tasman DriveSan Jose, CA 95134-1706USAwww.cisco.comTel : 408 526-4000800 553-NETS (6387)Fax : 408 527-0883

Asia Pacific HeadquartersCisco Systems, Inc.168 Robinson Road#28-01 Capital TowerSingapore 068912www.cisco.comTel: +65 6317 7777Fax: +65 6317 7799

Europe HeadquartersCisco Systems International BVHaarlerbergparkHaarlerbergweg 13-191101 CH AmsterdamThe Netherlandswww-europe.cisco.comTel: +31 0 800 020 0791Fax: +31 0 20 357 1100

Cisco has more than 200 offices worldwide. Addresses, phone numbers, and fax numbers are listed on the Cisco Website at www.cisco.com/go/offices.

Copyright © 2010 Cisco Systems, Inc. All rights reserved. Cisco, Cisco Systems, Cisco Systems Capital and the Cisco Systems logo are registered trademarks or trademarks of Cisco Systems, Inc. and/or its affiliates in the United States and certain other countries. APAC 022009

Copyright & Reprints:All materials in now are protected under the copyright act. No material may be reproduced in part or whole without the prior consent of the publisher and the copyright holder. All rights reserved.

Disclaimer: The views and opinions expressed by contributors are not necessarily those of Cisco System. Whilst every reasonable care has been taken to ensure the accuracy of the information within, neither the publisher, editor or writers may be held liable for errors and/or omissions however caused.

KEY SUMMARY

The new cautious spending trend in 2010 has brought ROI measurement back into the limelight with

a cost-conscious focus on reduction of operating costs, improvement in employee productivity, or

increasing customer acquisition and retention.

Most SMBs face the difficulty of defining the drivers of cost and profitability for their IT investment

and effectively align technology with their respective business needs.

Most ROI measurement tools are available, and exist within the applications for which the ROI should

be measured.

With today’s period of uncertainty, cost-efficiency should remain a top business priority with ROI

providing the key towards greater organizational visibility.

Traditional classic ROI measurement models can no longer cope, and SMBs should innovate by

researching and studying vigilantly into new methods of proving ROI.

revenge of the roi - cisco · revenge of the roi with profitability ... proposal. with the advent...

Documents