Teradata Magazine | Special Report: ROI: Wellspring of business value

Effective ROI begins with a single catalyst. Experts discuss how to start rings of impact—and value—rippling through an enterprise.

Return on investment. It's not as simple as it sounds—and certainly not as simple as any one-stop, plug-and-play ROI calculator or spreadsheet template would have you believe. More than a template, ROI is a fluid process that can send benefits rippling throughout an organization.

In today's business environment, ROI measurement for IT projects is not optional. In order to get the funding it needs, IT is required to make a business case for technology investments, including capital expenditures and ongoing technical support. Now, more than ever, absolute business sponsorship is required.

"Put down your architecture hat and put on your business hat," urges William McKnight, senior vice president of data warehousing at Conversion Services International. "Be prepared to deliver ROI every quarter, which may require rethinking the way you approach data warehousing—breaking larger efforts into smaller efforts, being creative about the ways (each part of the process) can affect the business."

In other words, says McKnight, "be able to speak the language of business returns—not just of a data provider."

Those who understand how important this is also know that there's much more to ROI than numbers. An ongoing, effective ROI measurement structure yields not only financial gains but also better information and improved business processes, which magnify returns and drive benefits and opportunities deeper into the organization.

Make no mistake: The numbers and calculations are essential to doing business properly. But true ROI is a concept as well as a calculation, a process as well as a project—it's a structure requiring accountability as well as accountancy. When properly defined, considered and executed, ROI is a balanced, holistic approach to determining the business value of an organization's activities.

ROI check valve

KEEP RESULTS MOVING IN THE RIGHT DIRECTION by adhering to the following management objectives of a "value-oriented" ROI process.

	Improve quantifiable results: Insist on better and more targeted metrics with individual accountability for each.
	Establish common language: Ensure business drives the "vocabulary" of business cases, business goals and desired business results.
	Increase value over time: Be sure to use a specific methodology to measure value. Everyone would like to increase value, but there has to be a "how" or "what" attached to the process to be meaningful.
	Optimize complex projects: Break projects into smaller initiatives that can be managed successfully to generate large returns rather than assuming mammoth undertakings doomed to failure.

Traditionally, IT ROI has been measured primarily—and often only—in terms of cost. The flaw in this approach is that it measures success equally by tracking cost as expense against projected returns and calculating returns achieved through IT cost reductions.

No matter how you look at it, cost is certainly a factor in effective ROI measurement—and in these times of tight money, it's often the leading factor. In fact, says Sid Adelman, principal at Sid Adelman & Associates, "the first thing you'll be looking at when you're doing an ROI (analysis) is justification for the project itself."

But if cost justification alone is the underlying driver for IT projects, then your organization is not taking a broad enough or systematic enough look at the total relationship between business and IT.

Mark Jeffery, associate professor of technology at the Kellogg School of Management at Northwestern University, notes that the metrics design process actually begins during the determination of the business case itself.

"You have to design your projects to be measured," Jeffery states. "Define the base business case up front, whether it is revenue optimization or cost containment, and establish the key metrics then, measuring them before the project starts. One percent of effort up front delivers a 90% better chance of success farther on."

This effort enables the measurement of specific performance results against specific business cases rather than general and often amorphous financial goals. Once this principle is built into a company's ROI process, it trickles down to every project and business unit throughout the enterprise.

But there's another less tangible—or perhaps more political—argument for moving incrementally through a prioritized ranking of achievable, valid projects. "You'll be able to deliver results more quickly, get benefits faster," Adelman says. "And there's less risk (of defeat) to quickly accomplished projects than extended or open-ended ones."

Adelman points out that a rigorous value-oriented approach not only wins friends and influences sponsors, but it also defends against potential enemies: "If you've done a good job of cost justification and ROI," he says, "it's much less likely that an 'assassin' will be able to hurt the project."

Business value can assume several forms: enhanced revenue, lowered cost of doing business, heightened customer satisfaction and retention, decreased time to market and increased operational efficiency, to name a few. Jeffery stresses the importance of addressing all of these benefits when planning any IT project.

"Look at data mart consolidation as an example," he suggests. "Viewed as an IT project, the business achieves certain benefits, including consolidation, deployment of an integrated system, reduced costs as a result of needing fewer people and vendor contracts, and so on. You should be able to get a decent ROI—let's say 15% to 16%—by viewing the consolidation solely as a cost-containment IT project."

Such a view, he argues, is unnecessarily restrictive. Moreover, it works against delivering the larger returns and added values that the transition to an enterprise data warehouse enables.

"There are multiple components to business value," he says, noting that there is much more to be gained from consolidation than mere cost reduction. The various benefits can only be identified and measured by planning for them before the consolidation begins.

In this case, the goal is a well-defined consolidation process that includes dividing the project into phases and establishing metrics to be applied against the progress of the project. The results of the initial phase—essentially a pilot project—are used to make better decisions and minimize risks as the project proceeds through the total consolidation effort.

Essentially, Jeffery argues, you establish a set of subsequent options that can be exercised or not, depending on the findings acquired during the first phase. "Done this way," Jeffery says, "you've minimized risk because you haven't committed your total capital, but you've also designed the project to give you more information that will let you make better decisions and continue to minimize risks and maximize returns as you proceed."

You'll still achieve the cost-containment ROI that comes with the consolidation, but you'll also be able to reap the other rewards that flow as a result of the project, such as revenue growth from analytic CRM. "The point is that you've delivered more value in business terms than just cost containment," explains Jeffery. "And one real benefit of thinking holistically about value is that business executives will tend to give such projects more priority than pure IT cost-containment projects receive."

Nine ways to make metrics saturate your business processes

Define metric detail and be specific: Don't bite off more than you can measure
Prioritize metrics and commit to the top 3-5 initially
Establish support analysis metrics
Establish measurement frequency and data sources
Establish measurement/analysis mechanisms and procedures
Assign responsibility for data/reports (and authorization/access rights)
Define distribution process and frequency
Pre-define report formats
Pre-schedule and commit to analysis and review meetings

What if the metrics show that you're not achieving the predicted results? For one thing, you'll know more and know it sooner in the new environment.

The value of the ability to modify or abandon cannot be underestimated. In addition to the risk mitigation that it provides, this process allows the organization to obtain specific measurements at specific times and to communicate the results with appropriate executives during the project itself.

But there's more to it than that. Mary Knox, research director of investment services for Gartner, notes that metrics can help you make course corrections as the company evolves. She believes that it is important to look beyond the project—or quarter—at hand when planning even the first implementation.

"Be aware of the velocity of change," Knox advises. "You need to look not only at the current environment but also at where the organization is heading, where you will achieve future cost savings, future revenue and risk-avoidance opportunities."

Failing to do so carries large risks. As she explains it, "if you only focus on current environment cost savings, you're going to build a highly constrained system, one that meets those current requirements but will go no further."

Likewise, don't fail to anticipate additional uses—and users—from the get-go. "Because of the phased manner of implementation, there can be a lack of consideration for other users. It's important to look beyond the initiating set of business units to potential business uses of the asset you're building," Knox says.

When it comes to keeping the momentum in ROI, it pays to look beyond the obvious measuring points. Almost anything can set a ripple effect in motion.

For instance, we've already seen how early and constant measurement enables better assessment of actual versus projected returns and provides direction on how to modify and adjust a project as needed. Now think about efficiency, an important—and measureable—business value.

Here's an example: "Eighty percent of (a corporate) analyst's time was formerly spent gathering data," Adelman says. "With the data in a warehouse (he/she) can actually spend (his/her) time analyzing. Say you improve (each analyst's) productivity by 50%. Multiply half of an analyst's fully burdened salary by the number of analysts and you've got a quantifiable value."

Adelman makes it clear that the real value transcends the numbers. "If your analysts are able to do queries and get results, rather than spending their time gathering information from data marts, they are going to do more and deeper queries," he notes. Value-centered ROI circulates throughout an organization: It builds upon itself, extends itself and renews itself.

In this environment, when IT looks at itself from a business perspective, it becomes a wellspring-a true enabler rather than simply a facilitator, a partner and collaborator with business rather than just a cost-based service provider.

"ROI is more than a just a project," Knox says. "It's an important level of IT/business alignment."

The value-growth approach to ROI discussed in this article and the enterprise data warehouse itself are designed to be organic, ever-growing. A long-term commitment is required—on the part of both business and IT—in order to feel the full effects.

"Effective ROI measurement," says Jeffery, "is all about business, not technology. Done right, business and IT work collaboratively. Business defines the benefits that are to be sought: IT shows how the project will be executed."

The process is ongoing. Don't mistake the ROI project at hand for the overall process of ROI and value-acquisition for the enterprise. By the same token, don't think of the measurement results as anything more than milestones in a process that has no end.

Instead, ROI should become a natural and essential part of the overall business culture. Thus the measurement and analysis of a project's costs and benefits not only provide an accurate review of the project's return, but also inform future decisions and play a large part in setting the direction for value-based approaches throughout the organization. And because the projects are based in an enterprise data warehouse, the data collected in initial projects can be used in concert with other projects, further increasing the value over time.

Data is designed to be leveraged and re-leveraged—and so, too, are the lessons learned and principles practiced in the value process. The result: an organization that daily grows more competent and supple, more effective and informed, more focused and more prepared to grow more valuable over time—tiny droplets merging into streams of possibility, growing into rivers of success for your enterprise.T