The Business Intelligence ROI

Challenge: Putting It All Together

by Bill Whittemore
Getting approval for your business intelligence (BI) or data warehouse
project requires being able to demonstrate business value to your
decision makers. Among the most difficult tasks is providing a
predictable ROI to senior management.
Calculating the ROI for data warehouse and business intelligence projects is a very
complicated and perplexing task. Today’s decision makers can no longer accept being
unable to calculate the ROI for data warehousing and business intelligence projects.
This article provides a practical framework and process for calculating ROI for data
warehouse and business intelligence projects.
In the early 1990s, mantras such as build it and they will come or building a data
warehouse is a good thing to do justified many data warehouses. Soft statements such
as essential to the business to remain competitive, improved access to data, and yields
many intangible benefits are insufficient for most of today’s upper-level decision makers.
As a result, data warehouse and business intelligence projects almost always require
business justification through ROI analysis. Companies now want to know the business
case, the value proposition, and the potential ROI of the data warehouse project before
funds are committed. Projects that are funded deliver measurable, positive impact to the
financial bottom line in either revenue generation or cost savings.
There is hope for project managers, executive project sponsors, and CIOs facing the
task of assessing the benefits of data warehousing projects. One of the largest studies
of data warehouse ROI, conducted by International Data Corp. in 1996, touts an
average 401 percent, three-year return on investment for 62 organizations with data
warehouses.
However, many companies have no uniform, demonstrated ROI processes. A TDWI
study of 1,600 companies released in March 2001 showed only 13 percent of
respondents tracking data warehousing ROI across the value chain. Thirty-seven
percent said they plan to begin tracking ROI and 27 percent said they are not tracking
returns and have no plans to do so, underscoring that companies continue to struggle
with the ROI issue.
Calculating the ROI for a data warehouse is difficult because of the many intangible or
qualitative benefits provided. Furthermore, the data warehouse is normally not directly
linked with action. For example, the data warehouse may point out an area where sales
can be increased through cross selling a certain product but a sales representative still
has to make the sales call and close the sale to add to revenue.
In reality, despite what the tool vendors tell you, data warehousing and business
intelligence don’t provide a direct, quantifiable financial return as an interest-paying
bond or CD does. The return on data warehouse investment can be derived from
improved decision making and productivity as a result of having better information
sooner, as well as the new or modified processes enabled by the data warehouse.
Business intelligence leads to other new or modified processes that result in reduced
costs and higher revenues. It is still important to understand and quantify the costs and
benefits necessary to make an informed decision. All data warehouse and business
intelligence projects should have ROI justification prior to funding and each project or
phase should be able to stand on the merits of the project ROI. Business intelligence
efforts often can, and should, be justified through a comparison of estimated ROI to
other uses for the funds.
ROI is calculated to provide an initial business value analysis assessment that
quantifies the financial rewards of a business intelligence project, allowing managers to
evaluate and prioritize various IT initiatives within their organization. As part of the post
project review, recalculate the ROI and compare it to the original ROI figure. Following
is a step-by-step approach for calculating the ROI for your data warehouse or business
intelligence project.
Step 1: Define the Business Problem and Identify the Business Goals
Define and document the business problem and business objective, and identify the
business goals needed to solve the problem or meet the business objective.
Begin by ensuring you have outlined the current situation, including identifying the key
business problems or “pain” the company is experiencing, along with the overall need
for the project. This involves confirming what is already known by reviewing existing
documentation and through interviews and discussions with affected executives and
managers.
All projects should have written business objectives tied to the organizational and
possibly the sub-organizational (i.e., departmental) mission, strategy, and business
plan. Business objectives are the desired results of business operations. Business
objectives are typically more strategic in nature and could relate to areas such as
growth, corporate net income, and market share. Business objectives can be broad and
do not have to be measurable.
Business goals are tactical in nature and need to be defined for the overall initiative and
for the incremental project phases. Business goals should be specific, measurable,
achievable, realistic, and time related (SMART). An example of a business goal is
“improving customer retention by 3 percent by March 2003.”
Step 2: Gather the Business Requirements
When gathering the business requirements, it is important to understand the current
business processes, organization culture, and how decisions are made. For example,
when defining sales analytics, it may be necessary to understand the bookings, billings,
and backlog operational processes in order to define the analytical requirements for
these processes. Understanding the organization’s culture, including how technology is
used and how decisions are made, can have a major impact on how business
intelligence and analytics will be used. Some organizations will require the ability to drill
down to the lowest level of detail on a regular basis in order to make decisions while
others will prefer summarized information.
Relate the requirements to the business objectives they support. For example, if the
business objective is to improve cross sales through providing sales information by
customer, requirements related to customer churn do not apply. Gather the
performance measures that will gauge the involved processes to determine success or
failure. For instance, order count and the duration time for order fulfillment are key
performance measures for the fulfillment process.
Obtain both informational (data) and analytical requirements (e.g., performance
measures and reports). Informational requirements relate to the business dimensions
and the associated attributes needed to describe the performance measures. Focus on
identifying the key business requirements that yield positive ROI. Discuss how having
access to the performance measures will influence process changes. Business
intelligence is a catalyst for process improvement through providing a better
understanding of where the processes are not meeting expectations or goals and where
they need to be improved or reengineered. Examine the extent to which completing the
project on budget and on time will result in additional revenues or cost savings and
when that incremental revenue or cost savings can be realized based upon the
estimated project completion date. This directly relates to the overall ROI of the project.
Conduct facilitated joint application development (JAD) sessions to obtain requirements
consensus with all affected stakeholders and to define business requirement priorities,
including in-scope and out-of-scope requirements.
Step 3: Build the Project Charter and Blueprint
In addition to gathering business requirements, the overall project charter and blueprint
needs to be defined. Include the following:

 Project charter (define the business objectives, data warehouse mission and
vision, business subject area(s) included, project objectives and goals, overall
project scope, critical success factors, and key stakeholders)
 Technical requirements and architectural constraints, including tools
 Logical or conceptual architecture
 The infrastructure (development, system test, production, and training
environments)
 High-level logical data model
 Data source inventory and profiling
 The estimating drivers (such as number of analytics, source tables, target
entities, interviews, etc.)
 Project approach and deliverables
 Project plan, including effort, timeline, and investment

This up-front effort is essential to accurately define and estimate the project’s total cost
of ownership and can be completed over a short time frame (several weeks) with
experienced data warehouse and business intelligence resources. If this effort is
excluded, the outcome will be a vague project definition and a ballpark estimate that
often leads to non-approval or missed expectations.
Developing an accurate estimate is key to accurately estimating the initial investment.
The estimating technique recommended is a bottom-up approach that quantifies the key
estimating drivers (number of analytics, etc.) of the project based upon the business
requirements and the proposed architecture. This information is incorporated into the
project plan and used to derive the overall effort and time estimate. One of the most
difficult areas to estimate in a data warehouse project is the overall extract, transform,
and load (ETL) activities. Factor in time for the build and test of both the initial and
incremental data loads and plan for multiple mock data loads to test the back end.
Step 4: Identify and Quantify the Benefits (Tangible, Strategic, and Intangible)
Identify the organization’s anticipated benefits from the data warehousing solution and
the associated in-scope business requirements. The link between the benefit and how
much business intelligence will contribute to each benefit may in many cases be
subjective. In certain situations, past empirical evidence may support the business
intelligence link to the benefit. Benefits fall into three major categories: tangible,
strategic, and intangible. All three benefits should be provided in the ROI analysis.
Tangible benefits are specific, quantifiable, and verifiable. For example, if the focus is to
increase customer acquisition through personalized marketing, how many new
customers can be expected over a certain time period and what is the additional
revenue that will result from the new customers? Strategic benefits typically focus on
the broader, long-term corporate strategy and objectives and are more difficult to
quantify. Intangible (qualitative) benefits are not reasonable to measure.
Executives and managers who set out to calculate warehousing benefits should start
with the low-hanging fruit by using a straightforward justification based on the
technology itself—examples are hours saved in report development, report image
storage, report printing, and report distribution. These technology justifications can yield
substantial ROI cost savings when there are thousands of reports involved.
Following technology justification, the business must be examined closely to determine
the ROI that will result from process improvement coupled with better decisions that can
be made through the information provided by the new business intelligence. Determine
how the users will employ the new information provided by the data warehouse in their
day-to-day jobs to positively impact the bottom line. This involves interviewing all
classes of users, including executives, middle managers, analysts, and key end users.
When defining quantitative or tangible benefits, one approach that can be used is to
associate the business requirement to the processes that the proposed business
intelligence will analyze, such as inventory placement and control, to help identify
tangible benefits. The business benefits and numbers must be generated by the
business, often with IT or the data warehouse consultant playing the role of catalyst and
analyst.
Arriving at consensus estimates of the benefit across all affected stakeholders is the
most difficult challenge for business intelligence ROI. The biggest problem in getting
consensus estimates for ROI is related to concern over potential accountabilities
associated with quantitative measures of performance. This can be mitigated by being
conservative regarding setting the performance target for reduction in cost or additional
revenue. For example, if there is a strong probability that sales will be increased by 10
percent due to the new business intelligence, set a performance target of 5 percent.
Tangible benefit examples have been provided in Table 1 for both revenue generation
and cost savings provided by business intelligence based upon real-world experience.

Table 1
Examples of Tangible Benefits

Revenue Generation Cost Savings

· Improve customer acquisition
and conversions through
customer profiling and
segmentation
· Reduce customer churn,
increase customer loyalty, and
increase sales using multiple
performance measures,
including customer lifetime
value
· Increase revenue by
increasing sales (i.e., “How
many more clothes, policies,
accounts, and airline seats can
we sell as a result of the
business intelligence?”)
· Increase profit from the
propensity of existing customers
to purchase more products and
services due to the new
processes initiated by the data
warehouse
· Avoid sales lost to competitors
· Improve profitability with
access to granular, profitability
information across key business
entities such as account,
customer, product, business
unit, etc.
· Subscription or data brokerage
services such as providing
customer demographics
· Increase market share
· Negotiate better prices from
suppliers, identify the top
suppliers, and provide discounts
for quantity purchases; provide
the ability to accurately analyze
vendor performance and
allocate purchases accordingly;
supply score card (quality,
delivery, and price) [for supply
chain management projects]
· Reduce or redirect staff
required to carry out business
processes
· Increase productivity with
better information sooner
· Improve cost control
· Reduce expenses
· Eliminate inefficiencies and
reduce costs of operation by
providing a “single version of the
truth”
· Reduce losses due to fraud
detection
· Reduce write-offs by having
the information needed to
combat challenges from
vendors and customers
· Reduce claims (insurance)
· Reduce overproduction of
goods (manufacturing)
· Provide just-in-time inventory;
manage finished goods
inventory; improved inventory
management and stocking;
· Reduce time to market for new
products and services
· Improve the quality of data
collection activities, including
Customer, Human Resources,
Marketing, Finance, and
Operations
· Increase pricing with improved
access to revenue and cost
information needed to combat
challenges from customers
· Enable traditional list execution
and management
· Market basket analysis and
product affinity analysis
· Lay the foundation to be able
to adapt to changes in business
strategies
· Provide self service to
employees, partners, suppliers,
and customers
· Measure campaign
effectiveness quickly and be
able to make adjustments
throughout the marketing
campaign lifecycle
· Optimize marketing contacts
· Identify profitable customers in
unprofitable segments
· Look at competition when
pricing
· Determine incremental
revenue generated from the
lower value customers
· Up-sell and high-revenue
analysis will enable your
organization to identify and
cherry pick among the lower
revenue customers that share
comparable profiles with the
profitable and elite customer,
therefore having higher revenue
generating potential
· Create new business
opportunities and business
reduce inventory carrying costs
· Eliminate canned reports and
their associated support
processes
· Reduce response time for
report requests
· Analyze troubles, repairs, and
defects and provide information
to track and correct perpetual
problems
· Reduce time to gather
information for regulatory and
compliance reporting
· Assess the performance of
equipment and provide alerts
when preventive maintenance
must be performed
· Provide on-time delivery
(transportation)
· Track product failures from
cradle to grave (manufacturers)
· Consolidate and retire older
systems leading to a reduction
in operating expenses
· Reduce product returns
· Analyze productivity of
employees
· Track trip profitability and
provide performance analysis
· Support billing disputes
· Reduce customer dialogue
costs through more efficient
marketing
· Improve delinquency tracking
· Know what commissions have
been paid
· Reduce credit losses by
looking at customer usage and
provide credit rating functionality
· Minimize accounts payable
through effective contract
analysis and integration into the
payment process
 models

Revenue Generation and Cost Savings Benefit Examples

The next step is selecting and, if necessary, modifying a measurement technique that
can accurately reveal the returns delivered by the data warehouse relative to top
business needs. Because the true value of a data warehouse must reflect tangible,
strategic, and intangible benefits, the traditional ROI calculation—which analyzes
tangible benefits minus costs—omits the “soft” benefits that help make a compelling
case for a data warehouse (Table 2).

Table 2

· The ability to analyze pricing strategies

· The ability to identify and nurture the customers with the most
potential
· Improved decision-making quality through informed,
fact-based decisions
· Faster decisions
· Greater management visibility as to what is taking place
· Support for business strategies
· Value of market share that would otherwise be lost to
competitors
· Value of efficiencies added by the data warehouse

Potential Strategic Benefit Examples

Provide the qualitative or intangible benefits that cannot be measured but will still be
achieved by the data warehouse project (Table 3).

Table 3

· Improved customer service

· Improved customer satisfaction
· Improved access to data through query, analysis,
and reporting
· More timely information
· Improved data accuracy
· Competitive advantage
· Better control of data
· Cost savings
· Less reliance on legacy systems
· Better data integration

Some Qualitative (Intangible) Benefits a Data Warehouse Typically

Offers
Identify for each benefit the following:

 Overall timeframe in which the benefit will be received.

 Document whether the benefit will increase or decrease over time. Data
warehouse maintenance costs typically decrease over time and benefits should
increase over time, yielding an ROI that grows during the evaluation period. At
some point, you may assume a straight-line cash flow but this is usually at a
point in the future (five or more years).

Step 5: Establish a Measurement Baseline

Calculate the tangible operational costs associated with performing existing functions
and making decisions that will be influenced by the new system. Accurately measuring
ROI hinges on establishing a baseline, or a snapshot of the way the organization
operates without a data warehouse. A baseline serves as a comparison point so that
companies can estimate the expected benefits. The baseline should include data on
such criteria as time, human resources, cost, performance, results, etc. For example,
how long does it currently take to locate, extract, understand, and apply data? What is
the average cycle time to bring a new product or service to market? What are the
demands on time and resources to develop and deploy a customer-centric application,
and how do these costs impact overall productivity? Are results delivered in time to act
on a competitive threat or new product release?
Step 6: Calculate Total Cost of Ownership
Calculate the total cost of ownership (TCO), including hardware, software, consulting
services, internal resource costs (salaries and benefits), and other costs such as
hardware and software maintenance and ongoing training.
As part of the investment calculations, include the IT resource development cost.
Maintenance is typically one of the greatest costs of a system and needs to be included.
Step 7: Calculate the Return on Investment
Once the benefits are stated and quantified as much as possible, calculate the ROI
using your organization standard. The standard annual ROI calculation divides the
annual benefits by the total annual costs to determine the annual return on investment
percentage.
The project’s overall ROI calculation calculates the net present value (NPV) of projected
cash flows derived from the savings generated by the business intelligence project
divided by the initial investment and the maintenance cost. NPV gauges tomorrow’s
return in today’s dollars. The NPV allows you to determine the value today of $1 one or
more years in the future.
For example, assuming the total first year NPV savings of a business intelligence
project is $2,000,000 and the initial TCO investment and one year maintenance cost is
$1,000,000. The ROI for the project would be 200 percent of the initial investment. The
ROI formula is as follows:
   NPV of Savings  
ROI X
= 100
  Initial Investment + Maintenance Cost  

Unfortunately, technology projects rarely recoup costs in the first year of operation so
ROI calculations typically use a three-year time scale. With a three-year time scale, the
ROI calculation is now the average net benefit (benefits less additional costs) per year
divided by the initial cost, times 100, or:

ROI [ (Net Year 1 + Net Year 2 + Net Year 3) / 3 / Initial X

= Cost ] 100

Other techniques can be used to augment ROI analysis such as cost displacement,
which compares the cost of the new system against the one it will replace, and business
value added, which measures technology not in dollars but in terms of its support of key
strategic business goals and metrics. Even if the warehousing project clearly supports
strategic business objectives, calculating the ROI is still very important and should be
strongly considered.
Step 8: Determine the Payback Period
Identify the point in time at which benefit savings surpass the total costs of the project.
Benefit savings can be discounted to allow for inflation.
The payback period calculation determines the number of years that are required for the
discounted projected cash flows to equal the initial investment and the ongoing
maintenance cost.
For example, assuming that the initial investment for a business intelligence project was
$1,000,000 and the average annual NPV savings of that project was $2,000,000, then
the payback period would be $1,000,000/$2,000,000 or 6 months (0.5 years).
The payback period formula is as follows:

Initial Investment + Maintenance Cost

Payback period
=
(NPV of Savings / Years/n)
n = The total number of years for which the NPV calculation was
applied
Step 9: Measure the Investment and the Actual Benefits
Collect the investment cost (initial investment and annual maintenance cost) and benefit
measurements for the business intelligence project over the payback time scale period
(e.g., three years). Without this, it is not possible to determine whether the original
calculations were accurate. At the end of each year, submit a report to management
that provides the actual ROI calculations compared to the original ROI calculation. This
will provide the ROI scorecard for management to measure how well the organization is
doing relative to its ROI goals. This is an essential step for continual improvement.
Step 10: Determine How to Retain Benefits as Organization Objectives Change
Determine how to retain these benefits as organizational objectives change. According
to Wayne Eckerson, director of education and research for TDWI, “For certain
companies struggling to build these warehouses, the next step is how to drive the
warehouse into the fabric of the company, so that it’s part of its business culture, as
opposed to a technological addendum.” Business intelligence is developed for business
users versus IT users. If the business does not effectively integrate the data warehouse
business intelligence into its daily jobs, the business intelligence benefits will be difficult
to achieve.
Conclusion
Calculating ROI is both a science and an art. The art involves working with the business
community to determine the quantitative and qualitative benefits of the business
intelligence solution and obtaining buy in and accountability for the quantifiable benefits.
Given that the core of business intelligence relates to performance measurement, it
stands to reason that using a quantifiable ROI approach to data warehousing and
business intelligence projects offers management concrete evidence of an
implementation’s success and provides a mechanism for managing and retaining its
benefits throughout the data warehouse’s lifecycle. Without an ROI scorecard, it is
difficult to understand the true benefits to the organization—which is what business
intelligence is all about.
Bill Whittemore -
Bill Whittemore is a Principal of the Transportation Practice at Gazelle Consulting, Inc.,
a consultancy specializing in the design and implementation of large-scale data
warehousing and business intelligence solutions. Mr. Whittemore has more than 22
years of experience, including data architecture, physical database design, and system
architect responsibility on numerous large, full lifecycle, custom data warehouse
projects.