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White paper on calculating the return on investment (ROI) for a business process management project (BPM).

White paper on calculating the return on investment (ROI) for a business process management project (BPM).

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    Calculating roi for_bpm --- Calculating roi for_bpm --- Document Transcript

    • A B U S I N E S S P R O C E S S M A N A G E M E N T W H I T E PA P E R OCTOBER 2011 Calculating Return onInvestment for Business Process Management SUBSCRIBE TO PERFICIENT BLOGS ONLINE www.Perficient.com/SocialMedia BECOME A FAN OF PERFICIENT ON FACEBOOK www.Facebook.com/Perficient FOLLOW PERFICIENT ON TWITTER www.Twitter.com/Perficient DOWNLOAD PERFICIENT WHITE PAPERS www.Perficient.com/WhitePapers Copyright © 2007-2011 Perficient, Inc. All rights reserved. This material is or contains Proprietary Information, Confidential Information and/or Trade Secrets of Perficient, Inc. Disclosure to third parties and or any person not authorized by Perficient, Inc. is prohibited. Use may be subject to applicable non-disclosure agreements. Any distribution or use of this material in whole or in part without the prior written approval of Perficient, Inc. is prohibited and will be subject to legal action.
    • Author As Director of Perficient’s national Business Process Management (BPM) practice, Kevin Feldhus provides leadership in developing and implementing Perficient’s BPM strategies with integrated enablement plans for sales and delivery. Kevin is a business-focused, tool-agnostic BPM professional with years of senior-level executive consulting experience. He has been focused nearly 15 years on using BPM as a method to bridge the communication gap between business and IT by leveraging a background in finance and IT consulting to create customized business-focused BPM solutions. He has led multiple strategic BPM engagements, including strategy and roadmap, assessment and implementation projects and led all phases of the BPM practice including marketing, alliances, training, recruiting and communications Calculating Return on Investment for Business Process Management t 2
    • Introduction Return on Investment (ROI) is a performance measurement tool used to evaluate the efficiency of an investment. Each individual project or a project within a program should have the ROI calculated to provide the basis for the value of the investment and the “worth” of that endeavor to the organization. A key part of any business case is to understand not only why an organization should undertake an initiative, but the value of that endeavor (i.e. the ROI). The ROI is also a key critical metric in determining which projects are funded from a pool of competing potential projects. Business Process Management (BPM) is defined as a disciplined approach that focuses on effectively and efficiently aligning all aspects of an organization, with the vision of constant process improvement, technological integration and increasing customer value. Since a key objective is increasing customer value and subsequently shareholder value, any improvement in a business process (increase revenue/reduce cost) should have the ROI calculated. BPM projects tend to be intangible (the results you cannot touch, but experience), so it is sometimes difficult to “see” the results of a BPM project or program and subsequently the value to the organization. As a result, calculating the ROI for a BPM engagement may be a difficult task, but not impossible. This paper provides guidance on calculating ROI for a BPM engagement. As is typical in most college text books, the formula is the simple part; determining and gathering the inputs is the real challenge.Calculating ROI Two ROI calculations are recommended for a complete BPM ROI analysis, a target ROI and the actual ROI. The target ROI is the initial ROI calculation completed when the BPM project is in the planning phase. The basic calculation is the estimated dollar cost of the project subtracted from the anticipated dollar gain from the project multiplied by 100. The result is typically expressed as a percentage. The equation to calculate ROI is: ROI % = (Anticipated $ improvement – Estimated project cost) / Estimated project cost * 100) Calculating Return on Investment for Business Process Management t 3
    • ROI Calculation Steps 1. Determine the dollar amount of the anticipated improvement, (the dollar amount of the estimated return on the investment). Some examples to consider include: • Process Reduction %: Current estimated cost of the process * improvement % (i.e. $1,000,000 * 10% improvement = $100,000) • Revenue Increase: $ amount or % of the revenue increase • Cost Reduction: $ amount or % of the cost decrease • Headcount: The fully loaded cost savings (number of employees * salary + benefits). This is a type of cost reduction that captures a lot of BPM interest • Regulatory: Cost of not implementing the regulation, expressed as the potential impact of non-compliance (i.e. fines or cost of not doing business) 2. Determine the estimated dollar project costs, ensure to include: • Consultant costs (hourly rates plus associated expenses) • Other vendor costs (hourly rates plus associated expenses) • Organizational subject matter expert (SME) costs (include associated expenses) • Hardware costs • Software costs 3. Subtract the estimated project costs from the $ amount of the anticipated improvement 4. Divide the result from step 3 by the $ project costs 5. Multiply the result of step 4 by 100 in order to represent as a % Example ROI Calculation: XYZ Company invested $100,000 in an internet advertising campaign to promote a new product. The results realized by the company were new project sales of $500,000 directly attributable to the internet advertising campaign. In order to calculate the ROI, subtract the cost of the investment ($100,000) from the sales results attributable to the campaign ($500,000). Take the $400,000 result and divide it by the amount of the investment ($100,000). The result is 4, which multiply by 100 to get the ROI as a percent. The result is a 400% ROI. Calculating Return on Investment for Business Process Management t 4
    • BPM Simple Example: 1. Target ROI Calculation: For a BPM process improvement project, project costs are estimated at $500,000. The goal of the project is a 10% increase in process efficiency. Current process costs are estimated by the business to be $10,000,000. The ROI calculation $10,000,000 * 10% is an initial process efficiency target ROI of $1,000,000. The initial target ROI minus the project estimated costs of $500,000 is $500,000. This result divided by the project estimated cost of $500,000 is 1, which when multiplied by 100 is a 100% ROI. 2. Actual ROI: For the BPM process improvement project, actual project costs are $600,000 and the actual increase in the process efficiency is 9%, not the targeted 10%. The result is an actual ROI of 50%. The difference is a 50% decrease in the targeted ROI, due to project cost overruns of $100,000 and actual improvement in efficiency was $100,000 less than anticipated.BPM Not-So-Simple Example:It becomes more challenging when the ability to calculate the anticipated improvement in a dollaramount is not relevantly apparent. For example, a project to “Manage a Portfolio of Projects” withthe stated management project goal to “increase visibility into the projects within the portfolio”.Here is how to calculate the ROI in this example.Estimated project costs are $3,000,000 including process design, build and rollout. The projectportfolio contains $10,000,000,000 in projects. After discussions with the Project Sponsor and theProject Manager, the tangible goal agreed to was to be able to align the portfolio to the corporategoal of a 5% annual return on assets. The initial portfolio was estimated to be returning a 4.8%return. So, the goal of the project was to increase the return on the project portfolio by .2% (5.0%- 4.8%) or $20,000,000. (The increase would be the result of management having visibility into theportfolio to improve the return by optimizing the projects within the portfolio). The ROI calculationis $20,000,000 ($10,000,000,000 * .002) less the estimated project costs of $3,000,000. The resultof $17,000,000 is then divided by the project cost of $3,000,000 for a factor of 5.67, which whenmultiplied by 100 is 567%. Not a bad ROI for a project that was kicked off with no ROI calculationand funded based on management’s frustration that they could not see the status of the work withina project portfolio. Calculating Return on Investment for Business Process Management t 5
    • Conclusion BPM combines people, process and technology to improve organizational performance and customer value. The basic challenge is not the calculation itself, rather quantifying the ROI. This is especially challenging for BPM projects, where the goals and objectives of the project may be expressed in non-tangible terms. The goal however, is to determine two ROI’s for each project, a targeted ROI calculated during the planning phase of the project and an actual ROI, calculated after the solution has been implemented. The analysis of the variance between the two ROIs is beneficial in analyzing the projects successes and “opportunities for improvement”.Perficient’s BPM Solutions and Services BPM combines people, process and technology to improve organizational performance and customer value • Strategy & Roadmap - Develop a prioritized roadmap of BPM projects • Assessment - Understand and quantify the potential of a BPM program • Implementation - Realize the benefits of the BPM program • Training - Identify and implement process efficiencies across the organization Why Perficient? • Experience delivering a variety of successful BPM projects • Proven systemic BPM delivery approach to understand and define business processes based on best practices • Expert facilitated session(s) to generate a solution with demonstrable return on investment • Leverage Perficient’s technical expertise to solve the technology requirements of a business process • Utilize Perficient’s business partners’ BPM tool suites For information on Perficient’s leading BPM solutions and services please contact BPM@Perficient.com Calculating Return on Investment for Business Process Management t 6