Peter Stewart, MBA, CICE Electronic Commerce Institute – Montreal

www.ccmm.qc.ca/institute

Your Web Project.

What’s the Payback?

ROI E-Business SeminarHalifax – November 24th, 2003Nova Scotia Community College

Peter Stewart, MBA, CICE

Electronic Commerce Institute – Montreal

Stephen Parsons, M.IT.Ed, MCPNova Scotia Community College

In collaboration with:


Objective

Help businesses make critical investment decisions regarding the Web, e-business and IT.– Relevant to Management, Operations, Project Directors,

Professionals, Accountants.


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


Section 1CONTEXT

ACHIEVING CORPORATE OBJECTIVES


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)


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 theire-business projects – Giga Information Group, 2001 IT Value Poll

Assessment: One of the most difficult tasks in a business


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!


Context

Gartner’s Technology Hype Cycle


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 100’s of success stories across all industries at

www.cebi.ca, strategis.ic.gc.ca/ebizenable, and other sites.


Context

Anecdotes (of Efficient e-Business Models)

Air Canada– Never loses a reservation

Dollar Rental Car– Efficient model well established– Couldn’t 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.


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? What’s 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


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?


Context

Are you on the right track? What’s 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. What’s 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?


Context

What is your Context?


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?


Innovation/

learning 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

Customer service/

partnersHow 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?

Exceptional

Contribution

Organizational and financial value 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?


How about your employee evaluations?

* 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.


Context Summary

In today’s complex environment, you need to demonstrate how your project meets

corporate objectives.

And sometimes, you need to be very creative and innovative.


Section 2OVERVIEW OF ROI THEORY

What`s my Payback?


Background

Achieving Corporate Objectives

A large number of concepts and tools are available to assess the performance of a project, service or business

Balanced scorecardTCO

ROI

NPV

TEITotal Economic Impact - Giga

VOIValue of Investment - Gartner


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 company’s intangibles.


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.


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


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


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.


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? It’s the net result of a multiyear investment expressed in today’s 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


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 aren’t likely to invest that capital for a 5% return.


Payback Period

Definition

• Payback Period is the time required to recoup your original investment (i.e. the point in time where benefits cover costs).

$

time

Accumulated Benefitscosts

Payback


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


Section 3ROI E-Business Calculation Tool

An aid in justifying your project


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.


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.


ROI Calculation Tool

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.

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


ROI Calculation Methodology

1. COSTS• Planning• Development• Deployment / Rollout• Monitoring and maintenance

2. BENEFITS• Tangible benefits

– Higher revenues– Lower costs

• Intangible benefits3. ASSUMPTIONS

• Tax rate and credits• Cashflow discount rate• General risks

4. RESULTS





Increase in Revenues


Decrease in Costs


Intangible Benefits

Intangible benefits are benefits that are difficult orvirtually impossible to quantify.

For example,– better customer relations and/or communications,– greater customer satisfaction and loyalty, and– improved service quality.


How far do you go in valuing intangible benefits?

Inspired by J. Efrim Boritz, School of Accountancy, University of Waterloo, Waterloo, Canada

Cost

Rigorousness of assessment

Assessment error

Cost of assessment

Cost-benefit ratio


How to measure Benefits? (examples)

Benefits Ways to quantify benefits

Increased client satisfaction Repeat sales New clients through word of mouth Loss of revenues if decreased

Increased loyalty Cost to acquire a new client Cost to retain an existing client

Better internal management and knowledge of clients

Productivity gains Cross selling, upselling

Customer Relationship Management (CRM)


How to Measure Benefits? (examples)

Benefits Ways to quantify benefits

Automating processes Improved productivity (i.e. savings in personnel)

Better decision making Lower costs of physical resources and commodities

Reduction in errors 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

Enterprise Resource Planning (ERP)


Intangible Benefits


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)


Assumptions


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


Results Within the Tool


Results Within the Tool (cont.)


Case Study

Section 4

CASE STUDY – GRIZZLY CO.

Would you go ahead with this project?


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


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?


Follow-Up

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].


END

Peter Stewart, MBA, CICE Electronic Commerce Institute – Montreal

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