Ask the Experts
CIOview’s staff of experts is knowledgeable in a wide variety of technologies, as well as having a deep understanding of finance. We invite you to pose a question to our experts. Selected questions, with our experts’ responses, will be posted. Click here to submit a question.
What metrics do you use to measure ROI (monetary/non-monetary)?
Could you provide some examples?
The cost side of the equation would include items such as servers, software, facilities, support and maintenance, professional services, ongoing staffing, etc.
For instance, the benefits of a portal tend to fall under 4 general categories:
- Time savings (IT and users)
- Personnel savings
- Operational savings
- Revenue improvements
ROI by definition does not include qualitative benefits. If a benefit cannot be translated into financial terms then it does nothing to move your business forward.
What is the Cost of Capital and how is it used?
The cost of capital is simply the cost of money that would be required to finance a project. This number is different for each company. In CIOview's tools we ask you for the industry that you are in and we then determine a default cost of capital that you can change at a later stage of the analysis. Most companies' cost of capital is currently somewhere between 5 and 10%. In the case of calculating Return on Investment, since some of the benefits are two to five years out, these have to be discounted into today's monetary terms. In other words you take each year's benefits and discount that amount back into present day values. This is done by using a discount rate, which is different for each year but incorporates the cost of capital.
Why do I need to know NPV for my IT project? Isn’t ROI enough?
NPV (Net Present Value) is essentially a profit and loss statement for a project. It is calculated by summing the present value of the net benefits for each year minus the initial costs of the project. A positive NPV means that the project generates more cash than it took to fund it. A negative NPV means that the project generates a loss.
ROI figures alone don't give the full picture, and NPV can help to color your ROI analysis. Take for example two projects with equal ROIs, one with an NPV of $2 million, and the other with an NPV of $50,000. The first project is a more significant project to the company, since dollar value of your company's savings is more than forty times that of the second project. So, NPV is an indicator of significance of an IT project, and valuable when used in conjunction with ROI.
Read the CIOview White Paper: How to Calculate ROI, NPV, Payback and IRR.
How valid is Payback Period when evaluating a technology investment?
The good news is Payback Period is simple to calculate and to understand. It tells you how long it will take for you to get your money back. The downside is that Payback Period doesn't tell you anything about what happens to your investment after you've broken even. Commonly, it doesn't take into account the time value of money. In other words, a dollar you get two years from now is judged to be just as valuable as a dollar you get today, which is obviously not the case. Payback is intuitive, but when used on its own, it is somewhat crude. Read more on real-world definitions of financial terms.
How can I explain the default answers provided by ROInow! and TCOnow!?
The default answer either comes from market research data typically provided by a major market research firm such as IDC, or it is driven by CIOview's inference model. For example, when you select a customer's industry, this drives the default data for employee benefits, tax rate and the cost of capital. There are two important points that you should be aware of. First, all the default answers can be easily changed. Second, every default answer has a "Helpful Hint", which is available by simply clicking on the question response field. These Helpful Hints are often quite detailed, include a great deal of technical information, and can be used as a foundation for making judgments on the validity of your responses.
How can I establish a simple but objective ROI analysis of an ERP Solution?
I am trying to establish a simple but objective ROI analysis of an ERP/Manufacturing Enterprise Solution to small manufacturers. However I'm having some problems fundamentally on how to determine and also how to measure/quantify the key benefits to those manufacturers of that kind of solutions. Is there any source of information (case studies for example) I can recourse to?
In terms of benefits from ERP/CRM CIOview obtains these from interviewing customers that have already deployed systems. Customers who have deployed an ERP or CRM system in the last 12-18 months are ideal sources of information for determining ROI. These customers are references since they have implemented their systems long enough to realize the vast majority of benefits but not too long that they have forgotten how things were done before the new system was installed. In interviewing these type of customers you should follow these guidelines:
- Talk with a variety of different users to understand what tasks are impacted by the system; how much time per day those tasks used to take; and what amount of time is now saved. Not all time saved will be used productively, so you should deflate time saved by a factor of 0.6.
- For IT improvements, look for a reduction in Help Desk resources; less work linking disparate systems together; fewer people required for system monitoring; fewer patches; and perhaps even less system downtime.
- For operational savings look for a reduction in such expenditures as Express Mail, telecom costs and travel costs for meetings.
- For revenue-related benefits look for faster time to market, better management decision-making, improved inventory control and churn.
In conclusion, there are four general categories for savings: user productivity, IT staffing, operational efficiencies and revenue improvements. The best way to get data is to interview real users. Other sources for ROI analysis would be vendor case studies, trade associations and magazine articles.
How do you calculate the revenue implications for a company deploying E-Commerce?
There are two possibly quite different scenarios that a company may face when deploying e-commerce. The first is where you have an E-Commerce environment in play, and you want to know the revenue implications of replacing it with a more sophisticated solution. The second scenario is increasingly less common but it may be the case that a company has yet to invest in E-Commerce and it wants to know how much revenue it could realistically generate from an E-Commerce environment.
Example 1: Upgrading to a more sophisticated solution
There are generally 10 revenue related benefits of migrating to a more sophisticated E-Commerce environment:
1. An improvement in the conversion rate from browser to buyer
2. An increase in revenue associated with cross selling
3. Improvement in revenue from upselling
4. An increase in revenue from substitutions
5. Ability to run more marketing campaigns
6. Improvement in the abandonment rate
7. Improved web site uptime
8. Improvement in cross channel sales
9. Revenue from products/services that would otherwise be uneconomical to provide without E-Commerce
10. Other revenue opportunities available that are very industry- or company-specific.
Please note that for the vast majority of financial calculations such as Return on Investment (ROI), Internal Rate of Return (IRR), and Net Present Value (NPV) etc., it is the profit and not the revenue that must be taken into account. As a result, one must establish what the average profit margin would be for each of the revenue-related benefits.
Example 2: E-Commerce the First Time
How do you determine what the revenue-related benefits might be? Simply put, the revenue is a function of the number of visitors, the percentage of visitors that opens a shopping cart, your conversion rate and the average order size. The number of visitors is obviously largely based on how much advertising you do, how well the site is indexed, how integrated the site is into your other marketing activities. The percent of visitors who open a shopping cart is largely a function of the degree of personalization of your web site, and how well designed it is.
The conversion rate is highly influenced by the presence of an integrated shopping order management, automation level of fulfillment and customer service. Follow-up marketing efforts also reduce the level of abandonment and can also boost the average order size.
For many companies the revenue benefit of deploying E-Commerce can be quite substantial. However, one should certainly not ignore the benefits of operational savings, time savings, and the possible savings associated with software licenses.
I'm considering implementing a corporate portal.
How do I calculate ROI and TCO?
Calculating the ROI for a portal is not a small undertaking but given the costs that are typical for a portal this is increasingly a must-do for many companies. Starting with the cost side of the equation there are two general costs you will experience:
- Initial costs which are all of the costs required to get your portal up and running
- Ongoing costs: those costs that happen year in year out such as staffing costs
The initial costs will depend upon the number of people the portal needs to support, and the complexity of deployment. The 10 things that will drive your complexity are:
- Amount of collaboration
- Degree of LDAP integration
- Content management presence
- Type of integration
- Level of personalization
- Device support
- User interface
Therefore, your needs for each of these items will really drive your initial costs. Your ongoing costs will be more driven by the number of users since this is highly influential in dictating the number of servers required, which in turn drives your IT staffing needs.