2002-Calculating The ROI For Business Intelligence

Calculating the ROI for
Business Intelligence Projects

Jonathan Wu
BASE Consulting Group, Inc.
October 2002
Why Calculate a Return on Investment (ROI)?
 Individuals calculate ROI for the following reasons:
 Quantify the financial benefits of the project

 Prioritize IT projects
 Determine allocation of resources
Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Template Copyright © 2002 Business Objects - All Rights Reserved
Agenda
 Financial measures
 How to estimate the cost
 Performing a ROI sensitivity analysis
 Non-financial considerations
 Business intelligence ROI case study
 Conclusion
 Questions and answers

Financial Measures 1/5
 Net Present Value (NPV) of project benefit

 Internal Rate of Return (IRR)
 Payback period
 Return on Investment (ROI)

 Net Present Value (NPV) of project benefit

 Calculation of the discounted projected cash flows
of project benefit from the date of implementation
 NPV formula
NPV = CF1 + CF2 + CF3 +…+ CFn

(1 + r)1 (1 + r)2 (1 + r)3 (1 + r)n
Legend
CF The net cash flow for each year that the NPV is to be applied
r The borrowing rate or investment yield rate for the organization
n The total number of years for which the calculation is to be applied

 Internal Rate of Return (IRR)
 Calculation of the rate that will make the present value of the
projected cash flows equal to the investment
 IRR formula
Initial Investment = CF1 + CF2 + CF3 + … + CFn

(1 + r)1 (1 + r)2 (1 + r)3 (1 + r)n
Solve for the “r” to calculate the IRR
Legend
CF The net cash flow for each year that the IRR is to be applied
r The Internal Rate of Return
n The total number of years for which the calculation is to be applied

 Payback Period
 Calculation of the number of years that are required for the
discounted projected cash flows to equal the initial
investment
 Payback Period formula
Payback Period = Initial Investment

(NPV of project benefit / N years)

 Return on Investment (ROI)
 Calculation evaluates the discounted projected cash flows
derived from the benefit generated by the project divided by
the initial investment
 ROI formula
ROI = NPV of project benefit X 100

Initial Investment

Agenda
 Conclusion

How to Estimate the Cost 1/7
 The cost of implementing a BI project can be

classified into one of three types:
 Hardware
 Software
 Labor

Hardware Cost
The cost of the hardware devices required by the
project
 Examples
 Client systems
 Server system(s)
 Network communication hardware

Software Cost
The cost of the software applications required by the
project
 Examples
 BI license fees
 Relational Database Management System (RDBMS)
license fees

Labor Cost
The cost of internal and external resources dedicated
to the project
 Examples
 Project manager
 Business analyst(s)
 BI application specialist(s)
 Trainer(s)

 The total cost of implementing a BI project can be

divided into two categories:
 Initial
 Recurring

Initial Cost
The cost an organization incurs for the BI project that
are a one-time event
 Examples
 Hardware cost for the project
 Software license fees
 Labor cost associated with the development,
implementation, and deployment of the BI solution

Recurring Cost
The cost associated with the maintenance and
support of the BI solution after the BI project has
been implemented
 Examples
 Software maintenance fees
 Labor cost to maintain the solution and to train
individuals on the BI solution

Agenda
 Conclusion

Performing a ROI Sensitivity Analysis 1/2
 A sensitivity analysis addresses the probability of

various outcomes and quantifies the financial impact
of the BI project
 Example
Outcomes % Probability
Successful 60%
Partially successful 30%
Failure 10%
100%

Performing a ROI Sensitivity Analysis 2/2
 The % probabilities associated with each potential

outcome must be validated with available research
information
 When performing the sensitivity analysis, the total

project benefit should be greater than the initial
investment for the benefit to outweigh the risk

Agenda
 Conclusion

Non-Financial Considerations 1/2
 Non-financial considerations or qualitative analysis

should be assessed and factored into the project
business case
 Examples
 Improved information dissemination

 Improved information access
 Propagation of knowledge about the organization
through training and use of the BI solution
Non-Financial Considerations 2/2
 In certain cases, qualitative aspects can be quantified

after the BI solution has been implemented as a post-
project ROI assessment
 Examples
 Assessment of sales channel after September 11th

 Financial analysts working more efficiently
 Reduction of paper expense

Agenda
 Conclusion

Business Intelligence ROI Case Study 1/17
Background
 XYZ corporation is interested in implementing an
BI application
 The project sponsor wants to know the costs and

benefits of the initiative
 The current reporting environment requires 1,000

hours/month to support
 There are ~ 250 individuals that spend ~ 1 hour/week

gathering data and updating their spreadsheets

Assumptions
 One Sun Enterprise 3500 server with 4 processors is
needed with an estimated cost of $115,000
 The number of users with access to the BI application
is estimated at 1,200 individuals
 WebIntelligence UNIX server (InfoView, Reporter, and

Explorer) uncapped license is estimated at $761,400
 Broadcast Agent on Windows NT using an existing

server is needed for scheduling documents with an
estimated cost of $135,000
Assumptions (continued)
 The number of developers/administrators of the BI
application is estimated at 5 individuals
 BusinessObjects Designer and Supervisor (IT Bundle)
modules for 5 individuals is estimated at $20,950
 The software maintenance fee is 20% of the initial

license fee per year for InfoView, WebIntelligence,
Broadcast Agent, Designer, and Supervisor modules
 A discount of 20% of the total software license cost

will be applied
 The duration of the project is less than 1 year
 The proposal amount from the external consulting

firm selected is $850,000
 The number of work hours per year per individual

is 2,000
 The fully burdened hourly labor rate is estimated at

$100 for IT professionals and $75 for business
analysts

 XYZ’s borrowing rate is 7.75%
 Annual inflation rate is 0%
 A three-year time horizon is used for the

ROI calculation

 Ongoing support of the BI environment after
implementation will require the following:
# Position % of Time
2 BI specialists 100%
1 Database administrator 5%
1 System administrator 5%
1 Network administrator 1%
1 Trainer 25%
Total 236% or 2.36 Full Time Equivalents

Initial Cost
 Hardware$115,000 = Server cost
 Software $917,350 = WebIntelligence
Broadcast Agent
/ InfoView $
$
761,400
135,000
IT Bundle (5) $ 20,950
Gross License cost $ 917,350
20% Discount $ (183,470)
Net License cost $ 733,880
Maintenance Fee - 20% $ 183,470
Total Software Cost $ 917,350
 Labor$850,000 = Consultant proposal

Total $1,882,350
Recurring Cost
 Software$183,470 = $917,350 license x
20% maintenance
 Labor$472,000 = 2,000 hrs x 2.36 FTE x $100/hr
Total $655,470

XYZ with a BI application

Year 0 Year 1 Year 2 Year 3
Hardware $ 115,000 $ - $ - $ -
Software $ 917,350 $ 183,470 $ 183,470 $ 183,470
Labor $ 850,000 $ 472,000 $ 472,000 $ 472,000
Total cost $ 1,882,350 $ 655,470 $ 655,470 $ 655,470

XYZ without a BI application
Labor Year 0 Year 1 Year 2 Year 3
IT support $ 1,200,000 $ 1,200,000 $ 1,200,000 $ 1,200,000
Business analysts $ 937,500 $ 937,500 $ 937,500 $ 937,500
Total cost $ 2,137,500 $ 2,137,500 $ 2,137,500 $ 2,137,500
• IT support of current reporting environment

$1,200,000 = 1,000 hrs/month x 12 months x $100/hr
• Business analysts cost to gather data and update
spreadsheets
$937,500 = 250 individuals x 1hr/wk x 50 wks/yr x $75/hr
XYZ with a BI application

Total cost $ 1,882,350 $ 655,470 $ 655,470 $ 655,470
XYZ without a BI application

Total cost $ 2,137,500 $ 2,137,500 $ 2,137,500 $ 2,137,500
Project benefit $ 1,482,030 $ 1,482,030 $ 1,482,030

Project benefit $ 1,482,030 $ 1,482,030 $ 1,482,030
Discounted
project
benefit at
7.75% $ - $ 1,375,434 $ 1,276,505 $ 1,184,691
= $1,482,030
= $1,482,030 x 1 /
= $1,482,030 x 1 / [(1+.0775) x
NPV x1/ [(1+.0775) x (1+.0775) x
formula (1+.0775) (1+.0775)] (1+.0775)]
Total discounted project benefit at 7.75% $ 3,836,630

Calculation of ROI Over 3 Years

Total NPV of project benefit at 7.75% (a) $ 3,836,630
Initial investment in BI project (b) $ 1,882,350
Return on investment [(a) / (b)] x 100 204%

Calculation of Internal Rate of Return

Project benefit $ 1,482,030 $ 1,482,030 $ 1,482,030
Initial Initial
Initial Investment = Investment =
Investment = $1,482,030 x $1,482,030 x
IRR $1,482,030 x 1 / [(1+ r) x 1 / [(1+ r) x
formula 1 / (1+ r) (1+ r)] (1+ r) x (1+ r)]
Internal rate of return (Solve for variable r) 59.2%

Calculation of Payback Period

Total discounted project benefit at 7.75% $ 3,836,630
Number of years in time horizon 3
Average total discounted project benefit at 7.75% $ 1,278,877
Initial investment in BI project $ 1,882,350
Payback period in years 1.47
Payback period is approximately 1 year and 6 months

Sensitivity Analysis
% Weighted
Outcomes Probability Gain/(Loss) Outcome
Successful 60% $ 3,836,630 $ 2,301,978
Partially successful 30% $ - $ -
Failure 10% $ (1,882,350) $ (188,235)
Totals 100% $ 2,113,743
The weighted outcome of $2,113,743 is greater than the

$1,882,350 initial investment

Summary of Case Study
 3 year ROI is 204%
 Payback period is 1.47 years and less than time horizon
 3 year IRR of 59.2% is greater than XYZ’s borrowing
rate of 7.75%
 Probability of success is greater than 50%
 Total weighted outcome is significantly greater than the
initial investment
The potential gain to XYZ corporation
from the BI project
outweighs the risk of failure
Agenda
 Conclusion

Conclusion
 ROI quantifies the financial benefits of a project

 Qualitative benefits must also be considered
Without the necessary support and user involvement,

a ROI calculation for a BI project is meaningless

Questions and Answers
For a copy of this presentation or the accompanying

white paper or ROI calculator, please contact
Jonathan Wu
jwu@baseconsulting.com
(510) 628-3300 x224


2002-Calculating The ROI For Business Intelligence

Uploaded by

Copyright:

Available Formats

You might also like

2002-Calculating The ROI For Business Intelligence

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2002-Calculating The ROI For Business Intelligence

Uploaded by

Copyright:

Available Formats

Calculating the ROI for

Business Intelligence Projects

 Individuals calculate ROI for the following reasons:

 Quantify the financial benefits of the project

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

 Net Present Value (NPV) of project benefit

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

 Net Present Value (NPV) of project benefit

NPV = CF1 + CF2 + CF3 +…+ CFn

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Initial Investment = CF1 + CF2 + CF3 + … + CFn

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

 Payback Period formula

Payback Period = Initial Investment

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

ROI = NPV of project benefit X 100

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

 The cost of implementing a BI project can be

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

 The total cost of implementing a BI project can be

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

 A sensitivity analysis addresses the probability of

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

 The % probabilities associated with each potential

 When performing the sensitivity analysis, the total

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

 Non-financial considerations or qualitative analysis

 Improved information dissemination

 In certain cases, qualitative aspects can be quantified

 Assessment of sales channel after September 11th

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

 The project sponsor wants to know the costs and

 The current reporting environment requires 1,000

 There are ~ 250 individuals that spend ~ 1 hour/week

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

 WebIntelligence UNIX server (InfoView, Reporter, and

 Broadcast Agent on Windows NT using an existing

 The software maintenance fee is 20% of the initial

 A discount of 20% of the total software license cost

 The proposal amount from the external consulting

 The number of work hours per year per individual

 The fully burdened hourly labor rate is estimated at

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

 Annual inflation rate is 0%

 A three-year time horizon is used for the

Content Copyright © 2002 BASE Consulting Group - All Rights Reserved

Total 236% or 2.36 Full Time Equivalents

Maintenance Fee - 20% $ 183,470