Calculating the ROI for Business Intelligence

As a Business Manager or a CIO in your enterprise, you are always evaluating the benefits of implementing new solutions by applying the cost benefit analysis methodologies. By applying these studies you aim for knowing which solution will yield the greatest benefit to the enterprise.

Understanding and quantifying the costs and benefits of each option are necessary to answer the preceding question. In other words, the cost benefit analysis finds, quantifies, and adds all the positive factors and mark them as benefits. Then identifies, quantifies, and subtracts all the negatives, the costs. The difference between the two indicates whether the planned action is advisable. The real trick to doing a cost benefit analysis well is making sure you include all the costs and all the benefits and properly quantify them. Since the cost benefit analysis relies on the addition of positive factors and the subtraction of negative ones to determine a net result, it is also known as running the numbers. Increasingly, project managers are asked to evaluate the cost versus the benefit of undertaking a business intelligence (BI) project. Several financial measures can be applied but the commonly accepted financial measure is ROI.

Overview of ROI

The ROI or the return on investment is the commonly used way by business managers to obtain financial measures for the financial benefits over the cost of the implemented projects. Your return on investment on a specific project equals the present value of your accumulated net profits (gross profits after deducting the ongoing costs) over a certain period divided by your initial investment. It is usually expressed as a percentage over a specific amount of time. According to the findings of these calculations, you can compare the attractiveness of an investment in a solution to another.

With this financial measures, several assumptions should be done that can significantly impact your analysis. These assumptions include the estimated cost of the software project, the cost to maintain the current business intelligence components (i.e. current reporting environment is available) and the estimated payback time horizon; in IT purchasing, three years is the most common time span since technology is often effectively obsolete after three years.

Estimating the cost of a BI Project

There are two levels or components forming the cost of a BI application, the direct cost level and the indirect cost level. Direct costs are tangible cash in which your enterprise can clearly identify, and includes the purchase price of the software itself, maintenance or support fees, implementation expenses such as labor costs, hardware and supplementary software needed to support the BI application, and users training.

The indirect costs are a major component of the total cost but they are not as easy to identify or quantify. Because they usually occur after the BI application implementation, they are often not considered significant factors into the total cost of the application implementation. They include the cost of client machines upgrade, upgrade of network communication, upgrade of supporting software, additional internal support for users and user training beyond the initial training. Understanding the total cost of implementation is imperative if the organization needs to stay within budget. It can also help determine the phases of implementing the BI application. Cost components of this project such as software costs, maintenance or support fees and average configuration cost can be obtained from external resources. The estimated cost of implementing a BI application will be used in the ROI calculation.

Nonfinancial Aspects of BI Project
While the ROI calculation is the major measure to evaluate a BI project, there are some other nonfinancial aspects that should also be considered. These nonfinancial considerations are based on a qualitative analysis, may include information access, propagation of knowledge about the organization through training and the use of the BI application. Bridging the gap to obtain a balance between the financial measurement and the qualitative analysis is important in both winning support and in the success of a BI project.

Summary
The quantitative and qualitative benefits of a BI project need to be evaluated before the project is undertaken. Calculating the ROI on a BI project is one means of measuring the benefit to the enterprise. But even more critical to the success of the BI project than the calculated costs, benefits and ROI is

the extent of buy in for the project from the executive leadership and the business operations of the organization. Having support for the BI project from senior management as well as user involvement in the configuration of the application(s) is essential to its success. Without the necessary support and involvement, the ROI calculation for the BI project is meaningless.

References

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