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How to Build a Great Cloud/SaaS Business Case Analysis for Technology Investment

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Shifting from a CAPEX to an OPEX model is one of the many potential benefits when considering cloud-based technology solutions. In this presentation, Drew Wright, co-founder of Technology Finance Partners and expert in ROI and SaaS pricing strategies, will help shed light on the economics of the cloud and provide insights into quantifying the financial benefits of smart technology investments.

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How to Build a Great Cloud/SaaS Business Case Analysis for Technology Investment

  1. 1. Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals How to Build a Great Cloud/SaaS Business Case Analysis for Technology Investment Drew Wright, co-founder, Technology Finance Partners Mike Murphy, CBO, goTransverse
  2. 2. 2 Benefits of Business Case Analysis for Tech Investments
  3. 3. Budgets Are Meant To Be Broken 3 1  in  6  IT  projects  have  an  average  cost  overrun  of   200%  and  a  schedule  overrun  of  70%.     (Source:  Harvard  Business  Review)   US  economy  loses  $50B-­‐$150B/yr  due  to  failed  IT   projects.  (Source:  Gallup  Business  Review)   Fewer  than  a  third  of  all  projects  were  successfully   completed  on  Nme  and  on  budget  over  the  past  year.   (Source:  Standish  Group)  
  4. 4. Why Produce a BCA? 4 • Helps  prioriNze  projects  in  resource-­‐ constrained  orgs   • Ensures  resources  expended  are   commensurate  with  opportunity   • Must  be  accurate,  transparent  &   conservaNve   Business  Case  Analysis  (BCA)  
  5. 5. Analytical Expectations 5 •  Analytical vs. gut •  Tie proof to support: –  Corporate goals –  Specific objectives •  Financial executives require numbers, supporting evidence Photo credit: Jared Tarbell 2009
  6. 6. Minimize Bias Risk 6 Key financial metrics from a business case analysis allow dispassionate, rational, comparison of investment opportunities.
  7. 7. Polling Question
  8. 8. 8 Quantify Financial Benefits
  9. 9. Comprehensive BCA Inclusions 9 •  Increased  labor  producNvity   •  Reduce  costs   •  Increased  revenue  (and  associated  margin)   Forecast  benefits   •  Upfront  costs   •  Recurring  costs   Project  costs   •  Ramp  up   •  [Benefits  –  Costs  =  Annual  Net  Benefits]     Map  benefit  and  cost  projecNons   Calculate  key  financial  metrics  
  10. 10. Meaningful Financial Metrics 10 Return  on  Investment  (ROI)     • [Total  Net  Benefits  –  Total  Costs]  /  [Total   Costs]   • Does  not  take  into  account  Nme  value  of   money   Net  Present  Value  (NPV)   • Uses  cost  of  capital  to  discount  to  “current”   dollars   • NPV  <  0    is  by  definiNon  a  poor  investment   Payback  Period   • Net  benefit  crosses  from  negaNve  to  posiNve   • CriNcal  if  expediNous  return  of  capital  is   needed!   Internal  Rate  of  Return  (IRR)   • Discount  rate  where  NPV  =  0  
  11. 11. Business Case Metrics: ROI Benefits – Costs Costs ROI =
  12. 12. Business Case Metrics: Payback  -­‐      500      1,000      1,500      2,000      2,500      3,000      3,500      4,000     1   4     7   10     13   16     19   22     25   28     31   34     37     40     43     46     49     52     55     58     Thousands   Month   Cumula/ve  Benefits  vs.  Cumula/ve  Costs  ($  USD)   Benefits  Range   Likely  Benefits   Costs   In  ProducNon   Payback  
  13. 13. Business Case Metrics: NPV C  =  Cash  flow   T  =  Time   r  =  rate    
  14. 14. Business Case Metrics: IRR Set  NPV  =  0   Solve  for  r    
  15. 15. Key Financial Metrics 5 Year Net Benefit $1,847,914 5 Year Net Present Value (NPV) @ a Hurdle Rate of 10% $1,311,119 5 Year Return on Investment 168% Payback in Months 18 Benefits Year 1 Year 2 Year 3 Year 4 Year 5 Total Total annual benefits $269,258 $614,889 $674,704 $687,837 $701,227 $2,947,914 Solution Costs Year 1 Year 2 Year 3 Year 4 Year 5 Total Total solution costs $300,000 $200,000 $200,000 $200,000 $200,000 $1,100,000 Net Benefit Year 1 Year 2 Year 3 Year 4 Year 5 Total Net benefit ($30,742) $414,889 $474,704 $487,837 $501,227 $1,847,914 Cumulative net benefit ($30,742) $384,147 $858,850 $1,346,688 $1,847,914 Business Case Analysis Summary
  16. 16. Evaluating a Technology Investment 16 $4,900   $1,100   $3,800   $2,300   $7,200   0   2   4   6   8   10   $0   $2,000   $4,000   $6,000   $8,000   $10,000   $12,000   Risk  (low=10,  high=1)   Profit:    5  Year  NPV  (000s)   Comparison  of  Contemplated  Technology   Investments   (size  of  bubble  represents  5  year  cost  in  000s)   Priority   Dark  Blue   Red   Green   Yellow   Light  Blue  
  17. 17. Polling Question
  18. 18. 18 Transparency & Accuracy
  19. 19. Detail Assumptions and Projections 19 •  Make assumptions and calculations TRANSPARENT •  Best Practice Example: include complete detail of assumptions and projections Ex  Benefit  #1:  Labor  Savings   Daily  savings  per  employee   $26.25   Calculated  as  15%  of  emp’s  day  X  rate  $175/day   Annual  savings  per  employee   $5,119   Assumes  195  days  worked/year   Total  pre-­‐tax  savings   $255,938   Assumes  50  affected  employees   Total  aqer-­‐tax  savings   $166,359   Assumes  35%  blended  tax  rate  
  20. 20. Use Scenarios 20 •  Create scenarios to evaluate ranges in projections •  Example: Benefit projections Total   Total  Benefits   $204,500   Total  Costs   $195,250   Net  Benefits   $9,250   Total   Total  Benefits   $214,500   Total  Costs   $195,250   Net  Benefits   $19,250   Total   Total  Benefits   $224,500   Total  Costs   $195,250   Net  Benefits   $29,250   Low Medium High
  21. 21. Scenarios: Payback 21 $0   $1   $2   $3   $4   $5   $6   Project  Init   Year  1   Year  2   Year  3   Year  4   Year  5   Millions   Benefit  Range  Across  Scenarios  vs.  Es/mated  Costs   Benefit   Range   EsNmated   Cost  
  22. 22. Use Scenarios to Set Expectations 22 Present “Low” version to Board for investment Hold employees accountable to “High” for performance
  23. 23. 23 Key Components of Cloud Economics
  24. 24. Economics of the Cloud 24 Cloud  Billing   System   Labor   Power   /  AC   Upgrade   Mgmt   HW  /   SW   FaciliNes   DR   PCI  
  25. 25. Why Cloud? 25 P  &  L  Impact   • Usage-­‐based  pricing  tracks  predictable  expenditures  more  closely   to  demand   • Move  from  large  CAPEX  to  consumpNon-­‐based  OPEX  enables   operaNon  agility  (and  reduces  shelf-­‐ware)   Strategic  Opportuni/es   • Take  advantage  of  the  latest  technologies  and  features   • Core  competency  focus  –  move  non-­‐core  IT  acNviNes  to  the  cloud   • Shiq  risk  from  enterprise  to  cloud  vendor   • Improve  business  agility  and  Nme  to  value  with  web  services   • Future  proof;  Increased  innovaNon  (IoT,  ecosystem  connected)  
  26. 26. On-Premise vs. Cloud – Costs 26 Cost  Item   On-­‐Premises   Cloud   CC  Soqware   Upfront   SubscripNon  –  Usage   CC  Hardware   Upfront   Included   Annual  Vendor  Support   Annual   Included   Servers   Upfront  &  refresh   Included   Server  Support   Annual   Included   Professional  Services   Upfront  &  periodic   Upfront  &  oqen  lower   FaciliNes,  Power,  AC   Ongoing   Included   Bandwidth   WAN/LAN   Internet   Support  Staff   Ongoing   Minimal   Infrastructure,  Staff  RetenNon,  Training   Periodic   Included   Vendor  Management   Higher  cost   Part  of  support  staff   Disaster  Recovery  (DownNme)   Higher  cost   Included  
  27. 27. On Premise Costs Example 27 $0   $100,000   $200,000   $300,000   $400,000   $500,000   $600,000   $700,000   Year  1   Year  2   Year  3   Year  4   Year  5   On-­‐Premises   DownNme   Support  staff   Bandwidth   FaciliNes,  power,  AC   Professional  services   Server  support   Annual  vendor  support   Servers   Soqware  
  28. 28. Cloud Costs Example 28 $0   $50,000   $100,000   $150,000   $200,000   $250,000   $300,000   $350,000   $400,000   Year  1   Year  2   Year  3   Year  4   Year  5   Cloud   DownNme   Support  staff   Bandwidth   Professional  services   Cloud  subscripNon  
  29. 29. Cumulative Costs 29 $0   $500,000   $1,000,000   $1,500,000   $2,000,000   $2,500,000   Year  1   Year  2   Year  3   Year  4   Year  5   Cumula/ve  Costs   On-­‐Premises   Cloud  
  30. 30. 30 •  Accelerate time to innovation •  Drive value to your customers by focusing on your core competence
  31. 31. 31 •  Peak costs determine on- premise cost –  Must match highest demand •  In cloud, can buy as needed –  Agility to scale
  32. 32. Agility, Scalability, TCO 32 •  Want to know more? Whitepaper: Calculating ROI for Technology Investments –  Overcoming objections to BCA creation –  How to leverage financial metrics in evaluating options –  Tips for best practices, iterations, and post- implementation
  33. 33. Thank You

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