|
Realizing Data Warehouse ROI (Part II)
It's not just about cutting cost.
by Vickie Farrell
Organizations that implement analytic applications realize a median return on investment (ROI) of 112%, according to a 2003 IDC study, "The Financial Impact of Business Analytics. In this era of closely scrutinized business accountability, IT staffs are as likely to wonder, "How do they know that?" as they are to ask, "How did they do that?"
Data Warehouse ROI Measurement No Longer a "Nice to Have"
If IT is now expected to meet the same standards of risk and reward as other enterprise expenditures, it's important to manage IT projects like an investment portfolio. Organizations typically avoid projects or investment where the internal rate of return (IRR) is less than their cost of capital or desired rate of return. That means you need to be as adept at projecting and assessing ROI as you are at using your OLAP tool.
There are organizations who have been able to reap data warehousing benefits such as improved customer service and retention; increased effectiveness of marketing programs; more accurate demand forecasting leading to reduced inventory costs; and overall cost savings from increased operational efficiency. But success isn't achieved until it is measured in a demonstrable way. And, unfortunately, there are no standard methodologies or recommended practices and the number of measurement practitioners is still low. A June 2003 Computerworld article reported that according to a Hackett Group survey of 2000 Fortune 1000 companies, fewer than half validate an IT project's business value after it has been completed. Polls at data warehousing focused events like The Data Warehousing Institute (TDWI) conferences show that the number is well below that.
Nevertheless, there is a positive upturn as a growing number of organizations have developed effective and consistent approaches to measuring data warehouse impact in quantitative terms for the purpose of evaluating investment opportunities as well as post-implementation assessment.
Total Cost of Ownership (TCO) vs. ROI
TCO
IT projects can be viewed from either a TCO or an ROI perspective. Is one view more appropriate than the other?
When you're considering the system for Sarbanes-Oxley reporting and compliance, use TCO. In most companies, calculating the value of avoiding executive incarceration would not be considered a worthwhile exercise. If it's something you must do to be in business, forget the ROI and compare the TCO of alternative solutions.
ROI: ROI is the ratio of how much one gains or saves (project benefits) to how much one invests (project costs).
When evaluating two different discretionary projects, ROI is often more illuminating than TCO (which is the denominator in the ROI calculation). For example, which of these two is a better investment?
- a $2M data warehouse which saves $1M in campaign costs and generates $2M in additional revenue due to increased acceptance OR
- a $1M data warehouse that generates historical reports sooner, but with no measurable value
The TCO criterion used alone would indicate that the $1M data warehouse is the better investment. Comparing the two options based on TCO may be easier to justify, but hardly provides a basis for building a world-class data warehouse, or doing what's best for the business, not to mention meeting IT's top priorities in 2004.
According to the 400 business-technology executives surveyed for Information Week's annual Outlook study, the top four business priorities for IT in 2004 are:
- Optimize business processes (91%)
- Boost worker productivity (90%)
- Improve customer service (88%)
- Gain better return on IT capital investments (83%)
Accomplishing the first two are challenging enough. How comfortable are you in assuring your management that the data warehouse implementation you're recommending can achieve those objectives while, at the same time, improve customer service, a seemingly opposing goal, based on a lowest TCO assessment?
Measuring the numerator (benefits) of the ROI equation is more difficult. But, you need to do pre-implementation projections as well as post-implementation assessment in order to:
- Secure project funding
- Properly set expectations
- Ensure that you're doing what's right for the business
- Improve processes as you go
There are three major categories of benefits:
- Cost savings
- Revenue enhancement
- Business process and productivity improvements
Cost Savings vs.Revenue Enhancement
Several Teradata® clients have seen a wide range of cost savings including reduced taxes; reduced shipping fines due to incorrect addresses; reduced inventory based on improved forecasting; and reduction in various types of fraud.
In general, cost savings are easier to identify and quantify than business improvements, and hold more credibility with CFOs. Reduced cost falls directly to the bottom line. There is cost in generating additional revenue, which must be deducted, allowing only the profit to fall to the bottom line. However, the upside opportunity for revenue enhancement from a data warehouse is far greater. Some organizations use projected cost savings to justify the investment, show early cost savings to demonstrate value, then further leverage the warehouse for business enhancement.
Measuring the Value of Improved Productivity
Improved productivity is a common outcome of implementing a data warehouse, but how can you quantify the benefit if you keep the people on staff?
You look at the impact of things such as:
* reducing or eliminating backlog
* speeding up implementation of subsequent projects
* deriving more value from the support staff by expanding job functions
Based on a single piece of data about a taxpayer, the State of Iowa was performing the slow, costly, labor-intensive manual process of tax compliance audits more often than necessary. By integrating data from many systems into their Teradata Warehouse, the Department of Revenue and Finance was able to perform analysis and much more accurately predict tax compliance problems. The increased productivity generates an additional $10M in tax revenue per year. The Tax Gap Compliance Project funds the data warehouse and won the State of Iowa a 2003 Data Warehousing Institute Best Practices award for best data warehouse by a government or non-profit organization.
Another Teradata customer's sales reps use the data warehouse to tailor complex bids, reducing their sales cycle from 90 to 20 days. The resulting increased number of sales per period times the average sale equals the revenue enhancement. Ten percent of that falls to the bottom line.
Measuring the Value of Improved Business Processes
Data warehouses themselves provide no financial return. Unlike an investment in bonds, there is no inherent return. The return on a technology investment is derived from the new or modified business processes that the technology enables.
At Harrah's Entertainment, the Total Rewards™ Program, enabled by their Teradata Warehouse, has fundamentally changed the way Harrah's interacts with their 100,000 most important customers. The quantifiable benefits of the program divided by the cost, which includes the data warehouse, equals the project ROI. A well-designed data warehouse like Harrah's will support multiple applications, all leveraging the same data model, ETL processes and transformed data elements. In this case, the slot placement system is leveraging the same investment made for Total Rewards.
Airlines Reporting Corporation (ARC), provider of ticket processing and financial settlement services for 133 global airlines and 25,000 ticket agency locations, has implemented the world's most extensive repository of air travel data in existence. The 25TB+ Teradata Warehouse includes 39 months of ARC ticketing history and serves over 15,000 users. Initially, the focus was on productivity, and the impact was huge. Internal auditors could summarize the activity of any airline or agent in 5 minutes vs. the previous 24 hours.
But the key benefits of integrating and centralizing all that data have been in business process changes such as fraud detection and management. ARC has reduced fraud to the level of insignificance. In addition, three-second access to 500 million tickets enables customers to manage their own tickets at airlines where that would not have otherwise been possible. As users manage their own subscriptions, ARC can sell services to a wider range of users, including airports and convention centers. As is typical in successful implementations, Phase II is focused on revenue generation, such as providing over 40 revenue-generating reporting products to the global travel industry. Now that the data warehouse has been established, revenue generation has become the primary thrust of the overall initiative, successfully covering expansions to the technology infrastructure.
The Big Payoff
When you add the second, then third, then nth application, all leveraging the same data warehouse, you can drive up the ROI dramatically. In terms of investment payoff, this is a very effective course vs. the hit-and-run data mart-per-application approach of the 1990s. Now that the data is there, ARC can continue to expand their line of products and services and grow into new markets. The cost of each new application is relatively small, resulting in a situation where the sum of many benefits is spread over a single investment. Moreover, because the time to deliver is reduced, benefits from new applications begin to accrue sooner, further adding to the benefits.
At Teradata, we focus on helping our customers maximize their investment in their Teradata Warehouse solution, and advocate using financial metrics to quantify and demonstrate its value. It's not about the technology itself, but what it can do for your business. Let us show you how we can improve your data warehouse ROI.
Vickie Farrell has marketed database and data warehousing products and systems for over 15 years, working closely with industry analysts and customers from a wide variety of industries.
© Teradata Magazine-June 2004
|
Quick Links
Printable version
Send to a colleague