Your Web Project. Whats the Payback? ROI E-Business Seminar Halifax November 24th, 2003 Nova Scotia Community College In collaboration with: Peter Stewart, MBA, CICE Electronic Commerce Institute Montreal Stephen Parsons, M.IT.Ed, MCP Nova Scotia Community College www.ccmm.qc.ca/institute Objective
Help businesses make critical investment decisions regarding the Web, e-business and IT. Relevant to Management, Operations, Project Directors, Professionals, Accountants. www.ccmm.qc.ca/institute Agenda
Welcome Introductions 10 minutes Section 1 Context 60 minutes Section 2 Overview of ROI Theory 20 minutes Break 15 minutes Section 3 ROI Calculation Tool 30 minutes Section 4 Case Study 40 minutes Wrap-up 5 minutes TOTAL: 3 hours. Finish time: Noon www.ccmm.qc.ca/institute Section 1 CONTEXT
ACHIEVING CORPORATE OBJECTIVES www.ccmm.qc.ca/institute Context Hi Peter, After losing over $1.3 Mil on Internet investments gone bad since 1993, I don't need a calculator to tell me what the ROI from an Internet investment will be. Good Luck with your seminar. I hope it helps others before they take the hype plunge. Best Regards, Tony (Moncton, NB, Oct. 8, 2003) www.ccmm.qc.ca/institute
Context Reality 1001 reasons e-Business projects are failing. Some environments littered with blood. Companies got caught up in the hype. Lots of consultants or so-called experts simply improvised.
80% of businesses surveyed have not defined programs to measure the value or benefits of their e-business projects Giga Information Group, 2001 IT Value Poll Assessment: One of the most difficult tasks in a business www.ccmm.qc.ca/institute Context E-Business is simply about doing business in a world where the right business models, the right software, the right hardware, the Internet and the right communications equipment can help improve productivity, sales and growth. Just need to get back to basics!
www.ccmm.qc.ca/institute Context Gartners Technology Hype Cycle www.ccmm.qc.ca/institute Context Reality From Another Perspective: Fantastic E-Business models working for many. Models core to business. Companies where every business decision sparks a web, e-business or IT decision 100s of success stories across all industries at www.cebi.ca, strategis.ic.gc.ca/ebizenable, and other sites.
www.ccmm.qc.ca/institute Context Anecdotes (of Efficient e-Business Models) Air Canada Never loses a reservation
Dollar Rental Car Efficient model well established Couldnt do business without it. Business Development Bank of Canada (1995-2002) Complex solution involving web, e-business, IT to improve client satisfaction and loan turnaround time to 16 days and less. www.ccmm.qc.ca/institute Context Reality => There
are WINNERS AND LOSERS, as there have always been in business And the one basic question remains the same: Am I doing the right thing? Whats my payback? Asking specifically today about: Website / Intranet / Extranet B2C transactional sites B2B Solutions Customer Relationship Management Solutions (CRM) Enterprise Resource Planning Solutions (ERP) E-Content Management Solutions And more
www.ccmm.qc.ca/institute Context Management wants to know about: ROI / Payback period How to reduce risk / ensure success
Impact on different parts of the company, including relationships Governance / process / methodology Skills requirements Benchmarks (performance vs. objectives) We always take one step back and ask: How does your project contribute to corporate objectives? www.ccmm.qc.ca/institute Context Are you on the right track? Whats the payback?
1000 employees or more? => web-based recruiting software Lots of clients, lots of points of contacts? => CRM Continuous service to clients? => Extranet Big printing bills? => Internet, Intranet, Extranet sites Flash vs. forms online? => Decide. Whats more core? Three people keying in same data? => ERP Shopping cart? => Outsource Platform for employee of month photo? => Forget about it! And how do you decide what to do?
www.ccmm.qc.ca/institute Context What is your Context? www.ccmm.qc.ca/institute How about Competing Viewpoints? Organizational and financial value How do we keep our shareholders happy?
Internal operations What processes do we need to do to continue growing, creating value and achieving long term financial objectives? User services / client satisfaction How do we set ourselves apart from our closest competitors? What must we do to increase client satisfaction? Innovation and learning How do we improve for the future?
www.ccmm.qc.ca/institute How about your employee evaluations? Innovation/ learning Exceptional Contribution What has the employee done to develop his/her competencies? How has the employee contributed to training within the company? How did the employee broaden his/her knowledge of the company and its
services? How has the employee helped others be more effective (e.g. by sharing his/her knowledge)? Exceptional Contribution How has the employee shown tact and professionalism in his/her relations with customers? How has the employee helped the company and its customers achieve their business objectives? How has the employee contributed to finding business opportunities or increasing existing opportunities?
Organizational and financial value
Customer service/ partners Exceptional Contribution How has the employee contributed to reaching financial objectives and controlling costs? What cost reductions has the employee identified? How has the employee shown his/her perception of risks? Internal operations Has the employee produced the
expected results, with the required quality and within the stated timeframe? How has the employee shown his/her initiative by generating results? How has the employee contributed to teamwork?
* Here, the Balanced Scorecard is adapted for the profile of a junior position within the company. For a more senior position, the assessment criteria is different. www.ccmm.qc.ca/institute Exceptional Contribution Context Summary In todays complex environment, you need to demonstrate how your project meets corporate objectives.
And sometimes, you need to be very creative and innovative. www.ccmm.qc.ca/institute Section 2 OVERVIEW OF ROI THEORY What`s my Payback? www.ccmm.qc.ca/institute Background Achieving Corporate Objectives A large number of concepts and tools are available to assess the performance of a project, service or business TCO
Balanced scorecard NPV VOI ROI Value of Investment - Gartner TEI Total Economic Impact Giga www.ccmm.qc.ca/institute Background
Significant changes in definition and attitudes for measuring returns Strategic management rather than tactical or operational management of the company - Alignment of profitability analysis with corporate strategy Working with a variety of measures (TCO, ROI, NPV, etc.) Consideration of the companys intangibles.
www.ccmm.qc.ca/institute Total Cost of Ownership (TCO) Definition Total Cost of Ownership (TCO) makes it possible to prepare an overall budget for computer projects, i.e. the total cost for a business to acquire and maintain a system. The basic approach entails identifying direct and indirect costs related to the solution.
www.ccmm.qc.ca/institute TCO Concept Total Cost of Ownership (TCO) includes acquisition, use, information technology support, cost of resources, cost of processes, cost of technologies related to use of assets, and cost of ownership and operations: Office computers LAN Servers
www.ccmm.qc.ca/institute ROI Concept Definition Return on investment (ROI): financial ratio that helps determine the profitability of invested capital Method ROI = (net earnings invested capital) x 100 where net earnings = quantified benefits costs www.ccmm.qc.ca/institute ROI Concept
For example, if a project earns 10 times more than it cost for the initial investment, the return on investment is 900%. Returns rarely appear rapidly; we should not expect immediate returns. www.ccmm.qc.ca/institute NPV Concept Definition
Net present value (NPV) of an investment is the present (discounted) value of future cash inflows minus the present value of the investment and any associated future cash flows. -- ComputerWorld, Feb 17, 2003 What does it mean? Its the net result of a multiyear investment expressed in todays dollars. To calculate NPV, compare the TCO and the present value of expected earnings over the life of the investment. NPV = capitalized net earnings - TCO www.ccmm.qc.ca/institute NPV Concept
In the most simplistic terms, $1 today would be worth $1.03 next year if it was invested in a risk-free Government of Canada bond. So, if you can turn $1 today into $1.20 next year, it might be a good investment. If, on the other hand, you need to borrow money at 7%, you arent likely to invest that capital for a 5% return. www.ccmm.qc.ca/institute Payback Period
Definition Payback Period is the time required to recoup your original investment (i.e. the point in time where benefits cover costs). $ Accumulated Benefitscosts Payback time www.ccmm.qc.ca/institute ROI Theory Summary
Several models available Often need to be used together Challenge are the assumptions: indirect benefits,
savings in the medium and long terms, cost of money long term risks Major challenge is valuing intangible benefits and assets Focus must remain on how you are contributing to corporate objectives www.ccmm.qc.ca/institute Section 3 ROI E-Business Calculation Tool An aid in justifying your project www.ccmm.qc.ca/institute
The ROI e-business calculation tool is not a calculator that makes your decisions for you, but one that helps you make your own decisions. www.ccmm.qc.ca/institute ROI Calculation Tool Objectives of the tool
Calculate the profitability of an e-business project Assess intangible aspects Develop a comprehensive list of points to take into consideration Add credibility and reliability to profitability analyses In a nutshell, justify your investment. www.ccmm.qc.ca/institute ROI Calculation Tool Who is it for? Anyone who has to justify a web, e-business or IT project
Management Project manager / Project champion Professionals from small to large enterprises Features Tool to assist in decision-making Inclusion of risk-by-activity calculation Useful tool for assessing multiple projects The user is responsible for calculation assumptions.
www.ccmm.qc.ca/institute ROI Calculation Methodology 1. COSTS Planning Development Deployment / Rollout Monitoring and maintenance 2. BENEFITS Tangible benefits Higher revenues Lower costs Intangible benefits
3. ASSUMPTIONS Tax rate and credits Cashflow discount rate General risks 4. RESULTS www.ccmm.qc.ca/institute www.ccmm.qc.ca/institute www.ccmm.qc.ca/institute www.ccmm.qc.ca/institute Increase in Revenues www.ccmm.qc.ca/institute
Decrease in Costs www.ccmm.qc.ca/institute Intangible Benefits Intangible benefits are benefits that are difficult or virtually impossible to quantify. For example, better customer relations and/or communications, greater customer satisfaction and loyalty, and improved service quality. www.ccmm.qc.ca/institute How far do you go in valuing intangible benefits?
Costbenefit ratio Cost of assessment Cost Assessment error Rigorousness of assessment Inspired by J. Efrim Boritz, School of Accountancy, University of Waterloo, Waterloo, Canada www.ccmm.qc.ca/institute How to measure Benefits? (examples) Customer Relationship Management (CRM) Benefits
Ways to quantify benefits Increased client satisfaction Repeat sales New clients through word of mouth Loss of revenues if decreased Increased loyalty
Better internal management and knowledge of clients Cost to acquire a new client Cost to retain an existing client Productivity gains Cross selling, upselling www.ccmm.qc.ca/institute How to Measure Benefits? (examples)
Enterprise Resource Planning (ERP) Benefits Automating processes Better decision making Reduction in errors Ways to quantify benefits Improved productivity (i.e. savings in personnel) Lower costs of physical resources and commodities Savings in the number of corrective actions required Increased client satisfaction Savings in management costs
Optimizing stocks / reducing inventory levels Improved inventory turnover ratio Improved Cashflow Reduction in interest on debt attributed to inventory stocking
www.ccmm.qc.ca/institute Intangible Benefits www.ccmm.qc.ca/institute 3. Assumptions Before making a decision about an e-business project certain assumptions need to be made, including:
Marginal tax rate Anticipated tax credits Discounted cashflow rate General risks (impact on the capitalization rate) www.ccmm.qc.ca/institute Assumptions www.ccmm.qc.ca/institute 4. Results The results page is living and dynamic. Here, the user will find the results of the data entered into the model and the calculations done automatically by the financial assessment tool:
Summary of costs Summary of tangible benefits Assumptions Calculation results TCO NPV ROI Payback Period Summary of intangible benefits www.ccmm.qc.ca/institute Results Within the Tool
www.ccmm.qc.ca/institute Results Within the Tool (cont.) www.ccmm.qc.ca/institute Case Study Section 4 CASE STUDY GRIZZLY CO. Would you go ahead with this project? www.ccmm.qc.ca/institute Case Study
Summary of Case Study Textile mfg. company which designs and markets tents and sleeping bags for amateurs of the outdoors. Annual revenues of $10M Strategic objective: Increase volume of sales Smoother more efficient operations Penetrate U.S. market Introduce complementary product lines Solution: Extranet for retailers
Cost $178,500 over five years www.ccmm.qc.ca/institute Seminar Summary -Things to remember Would you go ahead with this (or any other) project? Always keep in mind the following critical factors: What are your corporate objectives? How are you helping to achieve them? What is the overall impact of the project? What part does ROI analysis play? How should you incorporate ROI in your justification? Have you allowed yourself to be creative/innovative in your presentation? Are you proposing ways to reduce risk?
Stephen Parsons, Business Analyst, NSCC Halifax, Phone 902-491-3506/448-5498. email: [email protected] Peter Stewart, Electronic Commerce Institute, Montreal PQ (514) 871-4001 x 2015 or by email at [email protected] www.ccmm.qc.ca/institute END www.ccmm.qc.ca/institute
Version xx. DD Month YYYY. The Benefits. The benefits to you in using this system are: Improve your individual and team results. Increase your business profit. Lift motivation and morale. Become a stronger, more focused team. Team Activity.
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