ROI - Crunching the Numbers
Technology expenditures are viewed with a critical, if not jaundiced, eye these days so creating enterprise-wide alignment around the business benefits to be obtained is a critical part of the process. Nowhere is that need more evident than in enterprise software deployments like CDI. One of the most valuable tools for creating that alignment is the ROI analysis.
Creating Internal Alignment
Getting alignment means addressing three separate issues that any proponent of an enterprise technology investment needs to keep in mind:
There are as many ROI models as there are projects. These models do, however, tend to share some common characteristics and have some common requirements. Our goal here is to push the ROI away from "art" and more toward "science" by detailing some of those common elements and the methodology for evaluating them.
From a high level, a typical company has a "hurdle rate" for new investment, particularly for enterprise technology investments. In simplistic cases that hurdle rate is usually dependent upon the company's target operating margin plus some cost overrun allocation. If, for example, a company has a 20% margin and is targeting 25%, any project that has an expected ROI higher than 25% moves them closer to the goal, and higher ROIs move them there more quickly. The time horizon is also a factor - if the goal is 25% margins in 2006 and the proposed project will not yield any benefits until 2007, that's a non-starter.
More common is a budget-based ROI hurdle. The typical company, especially in financial services, has a wide range of potential investments that they are considering, all of which meet or exceed margin-based targets. The company, however, has a limited IT budget and therefore needs to establish an internal benchmark rate that is designed to act as a filter ensuring that only the highest ROI projects move forward.
It is important to understand that CDI needs to be evaluated just as any other prospective IT investment. Despite the fact that CDI is an emerging technology and as such is grossly underutilized in corporations worldwide, our purpose is not to justify the CDI decision but to evaluate it. Failure to adopt this impartial approach risks contaminating the results, and CDI is, as we shall see, a strong enough initiative to stand on its own.
It is a good idea to discuss the ROI analysis process with the CFO or his representative at the earliest opportunity. Often the Finance department has sophisticated multi-factor ROI models already in use and is going to want to plug your numbers into that model for evaluation. You can save a lot of time and effort by understanding the model and the required data points at the beginning of the evaluation rather than trying to retrofit and revisit at the end.
ROI Benefits - Creating the List
The first step in any ROI analysis is documenting the expected benefits. This can be a daunting task, because customer data touches so many operations, divisions, applications, and delivery channels. Moreover, there are various ways to classify and organize the benefits.
One common dividing line is between "Business Benefits" and "IT Benefits". The advantage in this approach is three fold:
A second approach is the "Benefits by Department" approach, in which benefits for each business unit, (and often, each delivery channel and constituency) are documented. Example classifications might be:
Departments
It is always best to start with your own internally-generated list of CDI benefits. It is simply too easy to rely on vendor-supplied materials or industry studies or articles, which tend to be too high level. A typical stated benefit from those sources might be:
For example, The CDI Institute (http://www.the-cdi-institute.com/) published a study in July 2005 entitled, "Customer Data Integration as Foundation for Unified Customer Views: Key Industry Scorecards for 2005-06". In this report the key business and IT drivers for current CDI initiatives in various industries are detailed.
In Financial Services, The CDI Institute compiled polling results from 33 institutions to identify the top five business reasons for major financial institutions to undertake a CDI project:
I have personally validated these results through several "CDI Workshop" engagements with customers, designed to create the vision and ROI analysis for a CDI initiative.
While having an exhaustive list of KPIs for CDI benefits is not an imperative, it is important that all the major requirements from all affected areas of the company are captured.
Time and again we have seen enormous amounts of time and effort wasted by pursuing the wrong goals. Most commonly, this arises when a company is evaluating build vs. buy in their customer data integration solution. Addressing tactical departmental level concerns such as creating a cross-referencing key or integrating a data quality solution leads to initial evaluations that substantially underestimate the effort.
When the issue is escalated to an enterprise level, new issues emerge such as reconciling the various data models in use across the company, or the sophisticated hierarchy and relationship management requirements in the B2B areas of the company. It is not uncommon to see companies start with initial estimates of 1,000 - 2,000 man-days of engineering effort to build a CDI solution, only to see it expand to over 5,000 days once all the major requirements are captured.
Quantifiable vs. Fuzzy KPIs
The central problem in crafting a credible ROI analysis for CDI initiatives is that many of the benefits are difficult to quantify. If a CDI solution enables a company to consolidate customer feedback and service requests, such that they understand customer needs better and are able to more quickly introduce new products that differentiate them in the marketplace, what is that worth? It may be matter of incremental revenue for one company, and a matter of survival for another.
Moreover, many of the benefits are particular to one company, or one department, or one application. Context matters in determining benefit. The benefits from being able to centrally manage exceptions and discrepancies in customer data from one central location (data stewardship) depend directly on the degree to which such exceptions and discrepancies occur. It may be a small matter for one department that uses only one core system for processing, but a mission-critical initiative for another running multiple systems or channels (i.e. administering multiple products, or multiple systems resulting from mergers or acquisitions).
If we examine the universe of potential KPI metrics for CDI, we see data types that range from "precisely quantifiable" to "very hard to determine" and from "objective" where hard data is available either internally or from industry statistics to "subjective" where benchmark data is not readily available. Thus a particular KPI can be precisely quantifiable, and yet be subjective if such calculations have not been done before. Or a KPI can be very hard to determine, and yet be objective if sufficient studies or analysis exist to provide confidence in the anticipated outcomes.
It would be nice to divide these up into quadrants and focus on objective, precisely quantifiable metrics, but in reality these KPIS exist along a continuum which is different for every company. Yet clearly, if data is too subjective or too hard to determine, we cannot classify it as measurable.
If we were to attempt to characterize these KPIs in graphical form, it might look like this:
If the anticipated returns from measurable KPIs come up short, then it's time to move on to the "somewhat measurable" category. There will be two sets of likely candidates here -
As a final note, once the ROI analysis framework is complete, it is worth revisiting the high level strategic documents for your company. Look at the mission and values statements for both the departments and the company as a whole. Reread the chairman's comments in the latest annual report. Couch your ROI proposal in similar language and position it as driving toward those larger corporate objectives. These are the metrics for which the senior management will be accountable to shareholders, and it is language that will resonate in the corner office. Positioning CDI as a feather in their cap in the fight for excellence is a winning proposition.
Creating Internal Alignment
Getting alignment means addressing three separate issues that any proponent of an enterprise technology investment needs to keep in mind:
- Creating the support network.
CDI is a "community good"; everyone benefits from having clean and consistent customer data even if they do not directly invest in the project. Even departments who are not touched by the mastered customer data benefit from improved reputation in the marketplace, better customer retention, better branding, and a higher stock price. In such an environment, it can be hard to find an individual executive sponsor. If, for example, each of 10 departments would have a realizable benefit through cost savings or new revenue of $1,000,000 over the first year, then funding a project of $2,000,000 would seem to be a slam dunk with a 500% ROI during year one. But no individual department has a large enough benefit to willingly step up and sponsor the project, so you have three options:
- Secure a C-level sponsor who can envision the benefits from the enterprise level to drive the initiative (best),
- Create a Coalition of business owners who will benefit from the initiative (second best), or
- Drive the Initiative out of the IT Department (generally not an easy or particularly effective thing to do).
- Creating alignment around common goals.
CDI projects are like the three blind men and the elephant: what it looks like depends on where you grab hold of it. CDI projects encompass a wide range of potential benefits, and that's a very positive thing. But when key business owners are describing the project in completely different terms to other executives within your enterprise (like, say, the CFO), this can create a impression of an ill-conceived and poorly planned initiative.
It is important that the group share a vision for the project, the key deliverables and the necessary phasing of the project over time. It is even worth your time to craft an "elevator pitch" that you can use internally to describe the initiative. Creating the shared vision also creates accountability in and between the group members for delivering on key elements of the project. Thus the credit card division understands that if they don't get their documentation of requirements completed by the end of the month, they will delay critical work for mortgage processing.- Building the financial case for CDI investment.
With benefits distributed throughout the organization, the financial returns for enterprise software are difficult to quantify. Without hard numbers to plug into the ROI analysis the project is unlikely to go forward. And today's typical CFO is going to be looking for key participants to "sign up" for revenue improvements or cost reductions from the project. Those participants, however, are not going to bet their careers on fuzzy concepts like "better customer data" or "customer lifecycle management". The analysis has to go one or more levels deeper, and LOB owners need to be involved in the process of defining requirements and quantifying the expected benefits.
The ROI ModelThere are as many ROI models as there are projects. These models do, however, tend to share some common characteristics and have some common requirements. Our goal here is to push the ROI away from "art" and more toward "science" by detailing some of those common elements and the methodology for evaluating them.
From a high level, a typical company has a "hurdle rate" for new investment, particularly for enterprise technology investments. In simplistic cases that hurdle rate is usually dependent upon the company's target operating margin plus some cost overrun allocation. If, for example, a company has a 20% margin and is targeting 25%, any project that has an expected ROI higher than 25% moves them closer to the goal, and higher ROIs move them there more quickly. The time horizon is also a factor - if the goal is 25% margins in 2006 and the proposed project will not yield any benefits until 2007, that's a non-starter.
More common is a budget-based ROI hurdle. The typical company, especially in financial services, has a wide range of potential investments that they are considering, all of which meet or exceed margin-based targets. The company, however, has a limited IT budget and therefore needs to establish an internal benchmark rate that is designed to act as a filter ensuring that only the highest ROI projects move forward.
It is important to understand that CDI needs to be evaluated just as any other prospective IT investment. Despite the fact that CDI is an emerging technology and as such is grossly underutilized in corporations worldwide, our purpose is not to justify the CDI decision but to evaluate it. Failure to adopt this impartial approach risks contaminating the results, and CDI is, as we shall see, a strong enough initiative to stand on its own.
It is a good idea to discuss the ROI analysis process with the CFO or his representative at the earliest opportunity. Often the Finance department has sophisticated multi-factor ROI models already in use and is going to want to plug your numbers into that model for evaluation. You can save a lot of time and effort by understanding the model and the required data points at the beginning of the evaluation rather than trying to retrofit and revisit at the end.
ROI Benefits - Creating the List
The first step in any ROI analysis is documenting the expected benefits. This can be a daunting task, because customer data touches so many operations, divisions, applications, and delivery channels. Moreover, there are various ways to classify and organize the benefits.
One common dividing line is between "Business Benefits" and "IT Benefits". The advantage in this approach is three fold:
- Different parties are clearly responsible - business owners come up with the benefits for their business units, and IT comes up with technology benefits list.
- IT benefits tend to be more strategic - the IT organization has to deliver on longer term capabilities like more rapid transaction processing and more rapid product introduction, which are harder to quantify. Without attribution of dollars in cost savings or revenue, having IT benefits as a separate list escalates those strategic initiatives in the ROI presentation.
- Each list plays better for specific audiences - the COO and CFO are likely to focus on the customer-related benefits and upside revenue potential from CDI initiatives, which tend to be on the business benefits list. The CIO and CTO are more likely to focus on the strategic technology advantages behind a CDI project, and the improved ability to execute against internal deliverables.
A second approach is the "Benefits by Department" approach, in which benefits for each business unit, (and often, each delivery channel and constituency) are documented. Example classifications might be:
Departments
- Sales
- Marketing
- Service - Call Center
- IT
- HR - Employees
- Customers - web
- Customers - branch
- Partners
It is always best to start with your own internally-generated list of CDI benefits. It is simply too easy to rely on vendor-supplied materials or industry studies or articles, which tend to be too high level. A typical stated benefit from those sources might be:
"Increase customer retention"
This is much less useful, and much less convincing, than a targeted and customized benefit statement such as:"Customer attrition rates in 2005 were 7.8% versus an industry average of 5.5%. Our target for 2006 is one percentage point below the industry average, or 4.5%. This would result in an additional 925,000 customers by year end 2006."
Aside from the benefits of creating your own internally generated list of expected CDI benefits, it is important to check that list against other published materials. This can be an eye-opener, particularly when the CDI initiative is driven by a specific departmental or operational requirement (e.g. Gramm-Leach-Bliley Privacy compliance). Likely sources include industry associations, CDI vendors, systems integrators and market analysts.For example, The CDI Institute (http://www.the-cdi-institute.com/) published a study in July 2005 entitled, "Customer Data Integration as Foundation for Unified Customer Views: Key Industry Scorecards for 2005-06". In this report the key business and IT drivers for current CDI initiatives in various industries are detailed.
In Financial Services, The CDI Institute compiled polling results from 33 institutions to identify the top five business reasons for major financial institutions to undertake a CDI project:
Source: Customer Data Integration as Foundation for Unified Customer Views: Key Industry Scorecards for 2005-06, A CDI Institute MarketPulse(TM) White Paper, July 2005, used by permission.
I have personally validated these results through several "CDI Workshop" engagements with customers, designed to create the vision and ROI analysis for a CDI initiative.
While having an exhaustive list of KPIs for CDI benefits is not an imperative, it is important that all the major requirements from all affected areas of the company are captured.
Time and again we have seen enormous amounts of time and effort wasted by pursuing the wrong goals. Most commonly, this arises when a company is evaluating build vs. buy in their customer data integration solution. Addressing tactical departmental level concerns such as creating a cross-referencing key or integrating a data quality solution leads to initial evaluations that substantially underestimate the effort.
When the issue is escalated to an enterprise level, new issues emerge such as reconciling the various data models in use across the company, or the sophisticated hierarchy and relationship management requirements in the B2B areas of the company. It is not uncommon to see companies start with initial estimates of 1,000 - 2,000 man-days of engineering effort to build a CDI solution, only to see it expand to over 5,000 days once all the major requirements are captured.
Quantifiable vs. Fuzzy KPIs
The central problem in crafting a credible ROI analysis for CDI initiatives is that many of the benefits are difficult to quantify. If a CDI solution enables a company to consolidate customer feedback and service requests, such that they understand customer needs better and are able to more quickly introduce new products that differentiate them in the marketplace, what is that worth? It may be matter of incremental revenue for one company, and a matter of survival for another.
Moreover, many of the benefits are particular to one company, or one department, or one application. Context matters in determining benefit. The benefits from being able to centrally manage exceptions and discrepancies in customer data from one central location (data stewardship) depend directly on the degree to which such exceptions and discrepancies occur. It may be a small matter for one department that uses only one core system for processing, but a mission-critical initiative for another running multiple systems or channels (i.e. administering multiple products, or multiple systems resulting from mergers or acquisitions).
If we examine the universe of potential KPI metrics for CDI, we see data types that range from "precisely quantifiable" to "very hard to determine" and from "objective" where hard data is available either internally or from industry statistics to "subjective" where benchmark data is not readily available. Thus a particular KPI can be precisely quantifiable, and yet be subjective if such calculations have not been done before. Or a KPI can be very hard to determine, and yet be objective if sufficient studies or analysis exist to provide confidence in the anticipated outcomes.
It would be nice to divide these up into quadrants and focus on objective, precisely quantifiable metrics, but in reality these KPIS exist along a continuum which is different for every company. Yet clearly, if data is too subjective or too hard to determine, we cannot classify it as measurable.
If we were to attempt to characterize these KPIs in graphical form, it might look like this:
Figure 2: Hard versus fuzzy KPI data
If the anticipated returns from measurable KPIs come up short, then it's time to move on to the "somewhat measurable" category. There will be two sets of likely candidates here -
- those that are closest to belonging in the measurable category, requiring the least effort to estimate and the most reliable estimates, and
- those that are most strategic, providing the larger contributions to anticipated returns and which therefore take priority in analytical efforts.
Finally, in the "unmeasurable" category will be several KPIs for CDI returns that are strategically important, and which should not be left out. Your ROI analysis will typically have a page or more of introductory text in which the project purpose is defined, the various approaches analyzed and the reasons for undertaking it listed. This is the place to include strategic objectives that are very difficult to quantify.
From recent CDI Workshop engagements some of these unmeasurable KPIs that we have encountered have included:
- Branding - appearing as "one bank" to customers regardless of channel
- Creating a branded service experience across all channels
- Increased employee satisfaction
- Reduced cost of adding future operational systems to the IT architecture
- Reduced average hold time in call center
As a final note, once the ROI analysis framework is complete, it is worth revisiting the high level strategic documents for your company. Look at the mission and values statements for both the departments and the company as a whole. Reread the chairman's comments in the latest annual report. Couch your ROI proposal in similar language and position it as driving toward those larger corporate objectives. These are the metrics for which the senior management will be accountable to shareholders, and it is language that will resonate in the corner office. Positioning CDI as a feather in their cap in the fight for excellence is a winning proposition.
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