Ro It


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RoIT - How to Justify Information Technology (IT) and Other Programs via ROI
The word is out. Management and financial officers no longer accept vagaries, such as: "It's a must for corporate survival to stay competitive", " We owe it to ourselves to go ahead with this new initiative, our competitors are", "It will help leverage our present IT or technology infrastructure", "We'll be at the frontier of knowledge and ahead of the game"......

The fact that you must now compete for scarce corporate investment dollars with other projects, and the fact that purely intangible considerations are no longer enough to justify investments forces CIOs, IT executives, technologists and operations personnel to a) prepare pragmatic proposals; and b) justify them in quantitative ROI terms in order to stand a chance of gaining approval for your vital investment initiatives.

Return on Investment is a term often mentioned but rarely defined or understood. As a result, IT and business managers find themselves struggling to develop some measure of technology’s business value. For too many, the answer remains elusive.

In this workshop technical and business professionals will learn how to answer the fundamental question: "What is information technology worth?" And they will learn to do it in straightforward non-financial and financial terms.
Participants will learn about the "tangibles":
the traditional "financial measures" (NPV, IRR, payback) in easy to understand terminology
why the actual calculations are the easy part
how to solve the real challenge - deciding what numbers to use and where to find them

Participants will also learn how to show IT’s value when traditional monetary measures simply can’t tell the story. For example:
Will the organization be better off as a result of this project and expenditure? How?
What tangible changes in key business operations can we expect? How much?
We know security is important, but how much is improved security worth?
What is the value of better information or faster access?
What do we get for our investment in infrastructure?

Participants will leave this workshop with:
a new way of thinking about IT’s value,
tools and techniques for quantifying business value, the ability to communicate IT’s value in clear, tangible terms that business decision makers will understand.

Decision-makers will get clear, concise, and actionable requests

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Ro It

  1. 1. RoIT Making Technology Investments Profitable
  2. 3. Agenda <ul><li>Why IT projects falter and how astute business cases help save the day </li></ul><ul><li>How to recognize a trustworthy business case </li></ul><ul><li>The importance of good processes </li></ul><ul><ul><li>Defining, assessing, delivering </li></ul></ul><ul><li>Building better business cases </li></ul><ul><li>Finding hidden value others miss </li></ul><ul><li>Handling intangibles </li></ul><ul><li>Tracking </li></ul>
  3. 4. Why IT Projects Falter and How Astute Business Cases Help Save the Day Many IT investment disappointments can be avoided when a value-focused business case plays a starring role during the project’s entire lifetime.
  4. 5. How Hidden ROI Problems Torpedo IT Success <ul><li>Approve IT projects that should have been rejected. </li></ul><ul><li>Reject IT projects that should have been approved. </li></ul><ul><li>Never see project opportunities that should have been approved </li></ul><ul><li>Approve good projects that fail during implementation. </li></ul>
  5. 6. Business Case-based Causes of IT Project Problems Undetected omissions in the business case. Root Cause Related to the Business Case Erroneous cost estimates Actual Contributing Cause Poor cost control Assumed Cause Cost Overrun Perceived Problem
  6. 7. Business Case-based Causes of IT Project Problems Unresolved fuzzy project boundaries in the business case Root Cause Related to the Business Case Project scope creep Actual Contributing Cause Mismanaged implementation tasks Assumed Cause Delivery Delay Perceived Problem
  7. 8. Business Case-based Causes of IT Project Problems No personal payoff for workers identified in the business case Root Cause Related to the Business Case Lack of user motivation to make the system successful Actual Contributing Cause Inadequate and/or improper user training Assumed Cause Worker Productivity Shortfalls Perceived Problem
  8. 9. Business Case-based Causes of IT Project Problems Lack of postfunding use of the business case to determine functionality's value Root Cause Related to the Business Case No value analysis of dropped features Actual Contributing Cause Lack of project team resources to implement Assumed Cause Missing Key Functionality Perceived Problem
  9. 10. Business Case-based Causes of IT Project Problems Lack of postfunding use of the business case to clarify the project’s value. Root Cause Related to the Business Case Newly involved executives lack awareness of project’s business value Actual Contributing Cause Project management problems Assumed Cause Mid-Project Cancellation Perceived Problem
  10. 11. Spotting Business Case Defects <ul><li>Terminology confusion: when your ROI is not my ROI </li></ul><ul><li>Content defects: curveballs from everywhere </li></ul>
  11. 12. When Someone Mentions ROI They Could Actually Mean… Value management Benefits determination Benefits realization Business case Cost-benefit justification Benefit analysis Benefits realization ROI study Value analysis Return on investment (ROI) (which different people calculate in different ways) Or a process which someone else might call: Or a document which someone else might call: A formula called:
  12. 13. Six Roles of a Business Case During a Project’s Lifetime <ul><li>Role 1: “money magnet” </li></ul><ul><li>Role 2: “crowd convincer” </li></ul><ul><li>Role 3: “gyroscope” </li></ul><ul><li>Role 4: “team cheerleader” </li></ul><ul><li>Role 5: “executive reminder” </li></ul><ul><li>During the system’s operational lifetime </li></ul><ul><li>Role 6: “value progress tracker” </li></ul>
  13. 14. How to Recognize a Trustworthy Business Case Trustworthy business cases explain true business value logically and convincingly.
  14. 15. The Seven C’s of Content Quality <ul><li>Correct fit to the decision being made </li></ul><ul><li>Concerns of decision participants fully identified and reflected in the decision criteria </li></ul><ul><li>Complete analysis of all value areas, both tangible and intangible </li></ul><ul><li>Connections from IT features to business goals </li></ul><ul><li>Credibility of analysis </li></ul><ul><li>Conciseness of expression </li></ul><ul><li>Compelling story usage </li></ul>
  15. 16. Correct Fit (Nature and Boundaries of This Analysis Are Clear) Invest up to 3 percent of a project’s potential investment in a business case analysis. Guideline An ill-defined business case boundary or level of effort undermines the reliability of the business case. Importance The scope and level of effort of the business case reflects investment size and impact. Explanation
  16. 17. Concerns (“Who Cares About What” Is Apparent.) IT investment decisions typically impact four or more organization groups. Guideline Overlooking people involved in the decision reduces business case credibility. Importance All decision participants and their true concerns are accurately identified. Explanation
  17. 18. Complete (Every Important Cost and Benefit Area Is Assessed.) Fully explain at least five quantified and two nonquantified benefits areas. Guideline Information gaps of significance weaken validity of the entire business case. Importance Has no major gaps in cost or benefits; includes both tangible and intangible factors; assumptions and rationale. Explanation
  18. 19. Connections (Key Features Are Linked to Business Goals.) Show at least one cause-and-effect link between investment option features and each organizational group involved in the decision. Guideline Only consider investments unambiguously supporting major goals of the business. Importance Major features of each investment option are clearly linked to business goals. Explanation
  19. 20. Credibility (Analysis Is Convincingly Supported.) Show visible support from subject-matter experts and politically influential people. Guideline Analysis is useless without rational support for assumptions and logic. Importance Evidence / support for assumptions, assertions and calculations is relevant and believable. Explanation
  20. 21. Conciseness (Message Is Succinct.) Main body of business case is 5 to 15 pages, not including appendices. Guideline Lengthy documents discourage readership and comprehension. Importance Document does not exceed maximum length specified by decision makers. Explanation
  21. 22. Compelling (Stories Illustrate Key Themes.) Use at least one story to illustrate each major message of the business case. Guideline Loss of interest means loss of comprehension, thus reducing business case impact. Importance Key themes, rationale and messages are reinforced with convincing stories. Explanation
  22. 23. The Importance of Good Processes To be fully effective, business cases must be melded to simple, but powerful, proposing, selecting and tracking processes.
  23. 24. Key Processes <ul><li>Proposing process (to provide standard and methods for building and submitting useful business cases) </li></ul><ul><li>Selecting process (to define who decides which projects get funded, how and why) </li></ul><ul><li>Tracking process (to report the progress of information technology (IT) investment value by comparing actual value with that forecasted by the business case) </li></ul>
  24. 25. Costs of Tolerating Process Problems Are High <ul><li>When the proposing process if flawed: </li></ul><ul><ul><li>A high-payoff IT investment option is overlooked because no process exists to encourage an accurate business case analysis. </li></ul></ul><ul><ul><li>A low-payoff IT investment option is accepted, this preventing higher-value investment options from seeing the light of day. </li></ul></ul>
  25. 26. Costs of Tolerating Process Problems Are High <ul><li>When the selecting process is flawed: </li></ul><ul><ul><li>A brilliant business case is developed, but ignored when politically powerful decision makers ram through an alternative investment. </li></ul></ul><ul><ul><li>The best investments for the firm are overlooked. No consistent decision criteria are employed. </li></ul></ul>
  26. 27. Costs of Tolerating Process Problems Are High <ul><li>When the tracking process is flawed: </li></ul><ul><ul><li>A high-potential system is selected, and yet it flounders during implementation. Management realizes, too late, that scope of failed system was modified during rollout. </li></ul></ul><ul><ul><li>In spite of early awareness at the plant level that workers’ productivity on a new system was poor, management never got the message in time to revise flawed training methods. </li></ul></ul>
  27. 28. Common Symptoms of PROPOSING Process Problems <ul><li>The proposing process may need fixing when: </li></ul><ul><ul><li>Business cases are not used for important projects </li></ul></ul><ul><ul><li>Business cases are weak, misleading and/or overly complex. </li></ul></ul><ul><ul><li>No standards exist for constructing effective business cases. </li></ul></ul><ul><ul><li>Business case creation standards are inconsistently applied. </li></ul></ul>
  28. 29. Common Symptoms for SELECTING Process Problems <ul><li>The selecting process may need fixing when: </li></ul><ul><ul><li>Complaints are frequently made about an unfair funding process. </li></ul></ul><ul><ul><li>Existing selection methods are inconsistently applied. </li></ul></ul><ul><ul><li>Business cases are inconsistent in use of decision criteria. </li></ul></ul><ul><ul><li>Business cases do not address standardized project selection criteria. </li></ul></ul><ul><ul><li>There is not feedback to project submitters on why funding was withheld. </li></ul></ul>
  29. 30. Common Symptoms of TRACKING Process Problems <ul><li>The tracking process may need fixing when: </li></ul><ul><ul><li>The business case is not used for monitoring value realization. </li></ul></ul><ul><ul><li>The tracking process is inconsistently applied. </li></ul></ul><ul><ul><li>Out-of-date business cases are used in the tracking process. </li></ul></ul><ul><ul><li>No feedback is given on why projects had value shortfalls. </li></ul></ul>
  30. 31. Types of Process Problems <ul><li>Design weakness </li></ul><ul><li>Complexity of procedures and forms </li></ul><ul><li>Missing or confusing documentation </li></ul><ul><li>Lack of acceptance of the process </li></ul><ul><li>Lack of maintenance of the process </li></ul>
  31. 32. Detecting Process Problems <ul><li>Look back 24 months and ask these questions: </li></ul><ul><ul><li>Was the true value that was actually realized from all IT investment implementations analyzed? </li></ul></ul><ul><ul><li>Were payoff results reported to management for review and action? </li></ul></ul><ul><ul><li>Was action taken from payoff reporting? </li></ul></ul><ul><ul><li>Is there certainty that not strong IT investment opportunity was overlooked due to process shortcomings? </li></ul></ul>
  32. 33. Defining: Steps 1, 2 and 3 of Building Better Business Cases Effective business cases require a clear purpose, supported by well-aligned decision criteria.
  33. 34. The Challenge <ul><li>A business case is a unique document: </li></ul><ul><ul><li>Its goal is to analyze and yet it is not a truly financial document. </li></ul></ul><ul><ul><li>Its goal is to sell and yet it is not a sales tool. </li></ul></ul><ul><ul><li>Its goal is to explain and yet it is not an instruction manual. </li></ul></ul><ul><ul><li>Its goal is to convince and yet it is not a marketing guide. </li></ul></ul>
  34. 35. Seven Hats <ul><li>Project manager (to astutely organize and wisely administer the entire business case development process) </li></ul><ul><li>Politician (to discern who counts and how) </li></ul><ul><li>Salesperson (to accurately unearth needs of the decision influencers) </li></ul><ul><li>Detective (to cleverly uncover information) </li></ul><ul><li>Investigative reporter (to clearly interview and convincingly write) </li></ul><ul><li>Analyst (to accurately calculate and insightfully assess) </li></ul><ul><li>Attorney (to convincingly construct evidence and rationale, and compellingly present it. </li></ul>
  35. 36. Step 1: SCOPE (Who Expects What?) Clarify final output of the project Confirm the business case creation project cost is proportional to decision importance. Key Principles Identify needed resources Avoid time-wasting detours Accurately set management expectations. Why Do This Step Project plan. Output Decision needs. Input Define the business case contents and project plan. Purpose
  36. 37. Step 2: CRITERIA (Who Cares About What?) <ul><li>Avoid missing key decision criteria </li></ul><ul><li>Focus team resources on those payoff areas of most importance to the final decision. </li></ul>Why Do This Step Continued… Key Principles Filtered criteria Output Project Plan Input Accurately determine the audience for the business case and factors they will use to make the investment decision. Purpose
  37. 38. Step 2: CRITERIA (Who Cares About What?) <ul><li>The business case audience is always the decision participants. </li></ul><ul><li>Be sure the highest-level decision maker is accurately identified. </li></ul><ul><li>Have a least one criteria for each decision participant. </li></ul><ul><li>Express criteria in language understood by each level of decision participant. </li></ul><ul><li>Include some intangibles. </li></ul><ul><li>Address risks. </li></ul><ul><li>Be clear how investment opportunity aligns to high-level business goals. </li></ul>Key Principles
  38. 39. Fatal Decision Criteria Mistakes <ul><li>Criteria are deemed irrelevant by decision makers. </li></ul><ul><li>Criteria are missing that are of high interest to decision participants. </li></ul><ul><li>Criteria focus too much on systems and data benefits and on enough on business value implications </li></ul><ul><li>Intangible criteria are mistakenly omitted or underplayed. </li></ul><ul><li>Criteria that could have been tangible are shown as intangible. </li></ul><ul><li>Criteria that should have been shown as intangibles are presented as unbelievable tangibles. </li></ul><ul><li>The most important criteria are underanalyzed and the least important criteria are overanalyzed. </li></ul>
  39. 40. Effective Business Cases Target Business Results, Not System Features Strategic Results (CEO, Board of Directors Objectives/Tactics (VPs, Directors System/Data (Managers) Focus of business cases that win Focus of business cases that fail
  40. 41. Valueboard (by Decision Participant Levels) Reduce Risk of Security Breeches Reduce TCO Information Systems Reduce Commun. & Print Mtrl. Costs Reduce Content Mgr. Skill Reqmts. Central Resources Reduce Risk of Project Failure Reduce Engineering Labour Costs Reduce Engineer Turnover Product Engineering Group Reduce Customer Turnover Make Better New Product Decisions Sales and Marketing Increase Competitive Advantage Increase Profit via Cost Savings Increase Enterprise Flexibility CEO/CFO
  41. 42. Step 3: ALIGN (Connect the Dots) Lower-level criteria link to higher-level criteria. Key Principles Best business value occurs if solution directly supports enterprise needs. Why Do This Step Aligned criteria Output Filtered criteria Input Confirm all decision criteria and link to key business goals Purpose
  42. 43. Assessing: Steps 4, 5 and 6 to Building Better Business Cases Effective business cases require believable assertions and well-reasoned recommendation.
  43. 44. Step 4: CALCULATE (Show the Money) <ul><li>Establish credibility with clear, believable calculations. </li></ul><ul><li>Explain every computation. </li></ul><ul><li>Cite convincing evidence for ever assumption, reason and conclusion. </li></ul><ul><li>Use agreed-upon estimates if no concrete data are available. </li></ul>Key Principles Money impacts have a major influence on investment decisions. Why Do This Step Calculated payoffs. Output Aligned criteria. Input Compute realistic hard-money costs and benefits. Purpose
  44. 45. Step 5: PROVE (Who Says So?) <ul><li>It is reasons, not arithmetic, that ultimately make a business case a winner. </li></ul><ul><li>Keep explanations logical and rational. </li></ul><ul><li>Follow the “rules of evidence.” </li></ul>Key Principles To be accepted, business case claims must be credible. Why Do This Step Payoff explanations Output Calculated payoff Input Use compelling evidence to make calculations and claims believable. Purpose
  45. 46. Step 6: ANALYZE (Find the Winner.) <ul><li>Match to a Balanced Scorecard matrix, if being used. </li></ul><ul><li>Align values computed to key management drivers of business success. </li></ul><ul><li>The recommendation needs to be logical, believable and clear. </li></ul><ul><li>Base recommendations on both tangible and intangible factors. </li></ul>Key Principles Key output of the entire business case process. Why Do This Step ROI computations Output Payoff explanations. Input Identify the investment to be recommended and why. Purpose
  46. 47. Characterize the Results
  47. 48. Return on Investment <ul><li>Definition: the average of all net benefits over the life of the project divided by the initial cost of the project. </li></ul><ul><li>Easy to compute. </li></ul><ul><li>Ignores economic life of the investment. </li></ul>
  48. 49. Payback Period <ul><li>Definition: the period of time needed to recover the investment (sometimes breakeven point). </li></ul><ul><li>Easy to calculate. </li></ul><ul><li>Does not address magnitude of return. </li></ul><ul><li>Only addresses recovery time period. </li></ul>
  49. 50. Net Present Value <ul><li>Definition: the present value of all future cash flows at a given interest rate. </li></ul><ul><li>Best used as a screening device for a minimum earnings standard: when positive there are earnings above the standard. </li></ul><ul><li>Can be dependent on subjective cash flow projections. </li></ul>
  50. 51. Internal Rate of Return <ul><li>Definition: the rate of return that makes combined discounted cash flow equal to zero. </li></ul><ul><li>“ Fairly accurate and superior to simple method (payback and accounting return). </li></ul><ul><li>Small projects can have high irrs but may not be fairly compared to large projects. </li></ul>
  51. 52. Step 7: Delivering Well-done graphics, narratives and stories make or break the ability of the business case to succinctly communicate to those who need to know.
  52. 53. Step 7: STORYTELL (Explain It.)
  53. 54. Step 7: STORYTELL (Explain It.)
  54. 55. Finding Hidden Value Others Miss Rich value opportunities missed by others can be revealed by looking in the right places and asking the right questions.
  55. 56. Knowing Where to Look <ul><li>Ask the execs what they care about </li></ul><ul><li>Examine public pronouncements </li></ul><ul><li>Ask the neighbors </li></ul><ul><li>Follow the money chain </li></ul><ul><li>Do the right thing </li></ul><ul><li>Go where the action is </li></ul>
  56. 57. Knowing What to Look For (Tangible Savings) <ul><li>Eliminate wasted time locating data. </li></ul><ul><li>Empower the end users. </li></ul><ul><li>Find the hidden asset. </li></ul><ul><li>Eliminate duplicate systems. </li></ul><ul><li>Ensure better scheduling of discretionary employees. </li></ul><ul><li>Reduce turnover of key employees </li></ul>
  57. 58. Additional Tangible Savings <ul><li>Save management time via faster, easier approvals. </li></ul><ul><li>Speed up time-sensitive processes. </li></ul><ul><li>Eliminate ad hoc reconciliation and reporting. </li></ul><ul><li>Reduce audit costs. </li></ul><ul><li>Reduce leakage. </li></ul>
  58. 59. Additional Tangible Savings <ul><li>Improve labor relations via better grievance management. </li></ul><ul><li>Improve collaboration of teams. </li></ul><ul><li>Reduce time helping colleagues. </li></ul><ul><li>Make small changes. </li></ul><ul><li>Avoid errors. </li></ul><ul><li>Eliminate ineffective training. </li></ul>
  59. 60. Handling Intangibles: An Emotional Enigma of the IT Evaluation Intangible benefits are central to business case validity both as a basis for conversion to tangibles and “as is.”
  60. 61. Five Ways to Handle Intangibles <ul><li>Ban the intangibles from use in any business case. </li></ul><ul><li>Allow intangibles on a case-by-case basis only. </li></ul><ul><li>Use individual intangibles as scorable items. </li></ul><ul><li>Group multiple intangibles together and quantify them as a set. </li></ul><ul><li>Convert as many intangibles to tangibles as possible. </li></ul>
  61. 62. The DNA of Tangibility Premise Premise Premise Premise Premise Value Ladder Value Ladder Value Ladder Value Ladder Formula Formula Formula Metrics Metrics Proof INTANGIBLE!!! TANGIBLE!!!
  62. 63. Tracking: Making Sure Benefits Get Realized Benefits come true when management monitors every step of the way, from project funding through system retirement.
  63. 64. Why IT Benefits Are Hard to Realize <ul><li>No one seems to care once the project is funded. </li></ul><ul><li>No one seems to know how. The business case was shelved. </li></ul><ul><li>The business case was built in la-la land. We operate in the real world. </li></ul><ul><li>The implementation team never talked to the business team. </li></ul>
  64. 65. Why IT Benefits Are Hard to Realize <ul><li>Benefits shortfalls were never discovered until it was too late. </li></ul><ul><li>Things change, externally and internally. </li></ul><ul><li>We do not like formal stuff. </li></ul><ul><li>Management does not support a formal process. </li></ul>
  65. 66. Principles of a Good IT Benefits Realization Process <ul><li>Effective benefits realization is a formal, not an ad hoc process. </li></ul><ul><li>Executive sponsorship of the BR process is crucial to success. </li></ul><ul><li>Business case metrics, assumptions and rationale set the bar for benefits success. </li></ul><ul><li>The business case is the basis for the main tracking document. </li></ul><ul><li>Focus tracking process on highest priority benefits. </li></ul>
  66. 67. Principles of a Good IT Benefits Realization Process <ul><li>If reality dictates the need, modify benefit forecasts quickly. </li></ul><ul><li>Assign managers to be accountable for the attainment of every key benefit. </li></ul><ul><li>Ascertain that the benefits data collection system is reliable. </li></ul><ul><li>Identify who is to receive BR progress reports. </li></ul><ul><li>Conduct regular review meetings to track BR progress. </li></ul>
  67. 68. Recap and Questions <ul><li>Why IT projects falter and how astute business cases help save the day </li></ul><ul><li>How to recognize a trustworthy business case </li></ul><ul><li>The importance of good processes </li></ul><ul><ul><li>Defining, assessing, delivering </li></ul></ul><ul><li>Building better business cases </li></ul><ul><li>Finding hidden value others miss </li></ul><ul><li>Handling intangibles </li></ul><ul><li>Tracking </li></ul>