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Showing ROI for Your Analytic Project

Analytics play a critical role in supporting strategic business initiatives. Despite the obvious value to analytic professionals of providing the analytics for these initiatives, many executives question the economic return of analytics as well as data lakes, machine learning, master data management, and the like. Technology professionals need to calculate and present business value in terms business executives can understand. Unfortunately, most IT professionals lack the knowledge required to develop comprehensive cost-benefit analyses and return on investment (ROI) measurements. This session provides a framework to help technology professionals research, measure, and present the economic value of a proposed or existing analytics initiative, no matter the form that the business benefit arises. The session will provide practical advice about how to calculate ROI and the formulas, and how to collect the necessary information.

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Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 1
Unlock Potential
William McKnight
President
McKnight Consulting Group
(214) 514-1444
wmcknight@mcknightcg.com
www.mcknightcg.com
linkedin.com/in/wmcknight
Showing ROI for Your Analytic Project
Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 2
Presentation Objectives
At the end of this hour, you should be able to
Navigate an analytic project justification
Distinguish between tangible and intangible benefits
Present an itemized ROI
Articulate the value of an information program
Adapt a methodology in your program that includes
ROI attainment and measurement
Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 3
ARCHITECTURE BUSINESS
Sample Analytic Projects Justified
Healthcare
• Claims Routing
• $25M
Financial
• Loan Origination
• $22M
Pharmaceutical:
• Offer Analysis
• $35M
Telecommunications:
• Full CDR Analysis
• $22M
Retail:
• Offer Optimization
• $35M
Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 4
Acknowledging the Strategic
To gain a competitive advantage
To increase market share
To develop new products or services
To enter new markets
To increase brand recognition
To increase customer loyalty
To increase efficiency
To improve customer service
To develop new technologies
Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 5
Workloads
Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 6
Prioritizing Efforts
Ease to Do
Current Technology Set
Prerequisites First
ROI

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Showing ROI for Your Analytic Project

  • 1. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 1 Unlock Potential William McKnight President McKnight Consulting Group (214) 514-1444 wmcknight@mcknightcg.com www.mcknightcg.com linkedin.com/in/wmcknight Showing ROI for Your Analytic Project
  • 2. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 2 Presentation Objectives At the end of this hour, you should be able to Navigate an analytic project justification Distinguish between tangible and intangible benefits Present an itemized ROI Articulate the value of an information program Adapt a methodology in your program that includes ROI attainment and measurement
  • 3. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 3 ARCHITECTURE BUSINESS Sample Analytic Projects Justified Healthcare • Claims Routing • $25M Financial • Loan Origination • $22M Pharmaceutical: • Offer Analysis • $35M Telecommunications: • Full CDR Analysis • $22M Retail: • Offer Optimization • $35M
  • 4. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 4 Acknowledging the Strategic To gain a competitive advantage To increase market share To develop new products or services To enter new markets To increase brand recognition To increase customer loyalty To increase efficiency To improve customer service To develop new technologies
  • 5. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 5 Workloads
  • 6. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 6 Prioritizing Efforts Ease to Do Current Technology Set Prerequisites First ROI
  • 7. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 7 Ordered Benefits: What Makes it Difficult Benefits can be direct or indirect First order benefits have a direct relationship to the bottom line Second order benefits have an indirect relationship The system will enable an activity that in turn provides the benefit Third order benefits have a transitive relationship The system enables an activity that allows performance of another activity which actually provides the benefit
  • 8. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 8 The Current State of Project Justification We're good at Tasks and activities We're not so good at Realistic returns (overconfidence) Risk Costs Timelines
  • 9. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 9 Unlock Potential Types of Justification: Program vs. Project
  • 10. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 10 Analytics Programs and Projects Justifying an Analytics Project Analytics seen as a stand alone project Built for one application Justifying an Analytics Program Analytics store enterprise data Inclusion based on governance The goal of the program is to enable the component of the applications it supports
  • 11. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 11 What is being justified? An information management program which will provide analytics for several projects A project which will use analytics The inclusion of new projects into an existing analytics program
  • 12. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 12 Return on Investment (ROI) (Returns - Investment)/Investment ROI should always be supported with a time period (i.e. 132% return in 3 years) ROI should be presented with assumptions and risks and be itemized By source system, subject area, users, history data, technology used, use of AI/ML Add the possibilities! But don’t oversell Used for Predicting and Measuring
  • 13. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 13 Analytics Program Justifications (TCO) Analysis of the impact of operational systems on business processes A single approach to achieving desired outcomes Demonstrated proficiency in the use of relevant tools and technologies Consolidation of expense streams to maximize efficiency Identification of key enterprise subject areas for further investigation
  • 14. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 14 Variations on the ROI Theme Payback Period Analysis Return on Investment Net Present Value Internal Rate of Return
  • 15. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 15 Presenting the ROI Possibilities For each suggested business project, present multiple possible scenarios along with the odds of that scenario happening, forming a probability distribution Best Case Little Goes Wrong Worst Case Most everything goes wrong Planned Case
  • 16. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 16 Unlock Potential Tangible vs. Intangible Metrics
  • 17. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 17 Tangible versus Intangible Returns Tangible Returns - Returns you decide to measure More activities have a measurable return than you may think Usually 1-2 returns are reasonable to measure for each phase Intangible Returns - Returns you decide not to measure These will not justify data warehouse efforts
  • 18. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 18 Tangible Returns Increase in sales Efficiencies in processes Reduction in inventory Automated processing Reduction in returns Reduction in fraud Procurement Savings Operational Savings
  • 19. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 19 Intangible Returns Improved customer experience and satisfaction Increased customer loyalty Enhanced decision-making capabilities Improved operational efficiency Increased revenue and profitability Improved marketing effectiveness Improved risk management Improved customer segmentation Improved customer retention Improved competitive advantage
  • 20. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 20 Unlock Potential Return on Investment Examples
  • 21. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 21 Need to Know Discount Rate Duration 2-4 Years Time Blocks Minimum: Quarter Suggestion: Half-Year
  • 22. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 22 ROI Sample Total Year 1 Year 2 Year 3 Cost savings $140,000.00 $0.00 $60,000.00 $80,000.00 Financial Return $140,000.00 $0.00 $60,000.00 $80,000.00 Hardware $120,000.00 $100,000.00 $10,000.00 $10,000.00 Investment $120,000.00 $100,000.00 $10,000.00 $10,000.00 ROI -100.00% -45.45% 16.67%
  • 23. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 23 Break Even, IRR and NPV ROI -100.00% -45.45% 16.67% Cash Flow $100,000.00 $50,000.00 $70,000.00 Cumulative Cash Flow (Break Even) $100,000.00 -$50,000.00 $20,000.00 IRR 0% -50% 12% NPV @ 4% Discount Rate ($96,153.85) ($49,926.04) $12,303.71
  • 24. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 24 Worksheet: Probability Distribution Probability of ROI 1 40% Probability of ROI 2 30% Probability of ROI 3 30% Total Year 1 Year 2 Year 3 Cost savings $140,000.00 $0.00 $60,000.00 $80,000.00 ROI -100.00% -45.45% 16.67% Total Year 1 Year 2 Year 3 Cost savings $80,000.00 $0.00 $30,000.00 $50,000.00 ROI -100.00% -72.73% -33.33% Total Year 1 Year 2 Year 3 Cost savings $260,000.00 $10,000.00 $100,000.00 $150,000.00 ROI -90.00% 0.00% 116.67% Weighted ROIs: -97.00% -40.00% 31.67%
  • 25. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 25 To Use a Worksheet Get the Discount Rate Know the Revenue Generation and Cost Reduction dollars by year for the next n years Know the Costs to Implement Estimate the costs and benefits for multiple scenarios Estimate the probabilities of each scenario Plot the results
  • 26. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 26 Examples Walmart used analytics to identify customer buying patterns and optimize product placement resulting in an increase in sales Amazon used analytics to identify customer preferences and optimize product recommendations resulting in an increase in sales Netflix used analytics to identify customer viewing habits and optimize content recommendations resulting in an increase in viewership Apple used analytics to identify customer preferences and optimize product design resulting in an increase in sales Google used analytics to identify customer search patterns and optimize search results resulting in an increase in search traffic Starbucks used analytics to identify customer preferences and optimize product offerings resulting in an increase in sales McDonald’s used analytics to identify customer preferences and optimize menu items resulting in an increase in sales Target used analytics to identify customer buying patterns and optimize product placement resulting in an increase in sales UPS used analytics to identify customer shipping patterns and optimize delivery routes resulting in a reduction in delivery times
  • 27. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 31 Abstracted ROI Impossibly measurable at the detail level Must measure at large group impact level Like Customer Lifetime Value/Spend Decile Use indirect measure like customer satisfaction index (CSI) Projects target this level
  • 28. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 32 TCO Examples Data Warehouse or Data Lake Storage Medium to Use The Cloud to Use Cloud Instance Master Data Management Upgrade or Replace Outsourcing
  • 29. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 33 Unlock Potential Summary
  • 30. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 34 Analytic ROI Methodology Summary Cost Analysis Tangible Benefits Analysis Cash Flow Analysis Probability Distribution ROI Calculation Intangible Benefits Analysis Prioritization and Planning Decisions Continuous Learning
  • 31. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 35 Presentation Summary Target the business deliverable of the project Use a repeatable, consistent process using governance for project justification Use lower TCO for Program Justification Isolate project benefits and costs If it’s important, you can measure it and you can improve it, the project will almost always pay for itself Judgment is essential
  • 32. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 36 Presentation Summary Isolate project benefits and costs If it’s important, you can measure it and you can improve it, the project will almost always pay for itself Judgment is essential
  • 33. Copyright © 2023 McKnight Consulting Group, LLC All Rights Reserved Slide 37 Unlock Potential William McKnight President McKnight Consulting Group (214) 514-1444 wmcknight@mcknightcg.com www.mcknightcg.com linkedin.com/in/wmcknight Showing ROI for Your Analytic Project