A Strategic Overview Total per unit costs decline systematically by as much as 15-25% every time cumulative production experience doubles. Costs decline due to a variety of factors, such as the learning curve, substitution of labor for capital (automation), and technological sophistication. • A company can always improve its cost structure; • Competitors have varying cost positions based on their experience; • Firms could achieve lower costs through higher market share, attaining a competitive advantage; and • An increased focus on empirical evidence

1. THE SILVESTRI GROUP
IT COST BENEFITS STRATEGY
IT Strategy for Business Finance
Thomas Silvestri
2/26/2016

2. THE SILVESTRI GROUP | Thomas Silvestri, Managing Partner | 3600 N Lake Shore Drive #2608, Chicago, IL. 60613 | thomas@thomassilvestri.com | www.thomassilvestri.com
IT ROI AND COST BENEFITS
IT Strategic for Business Finance
A Strategic Overview
Total per unit costs decline systematically by as much as 15-25% every time cumulative production
experience doubles. Costs decline due to a variety of factors, such as the learning curve, substitution of
labor for capital (automation), and technological sophistication.
 A company can always improve its cost structure;
 Competitors have varying cost positions based on their experience;
 Firms could achieve lower costs through higher market share, attaining a competitive advantage;
and
 An increased focus on empirical evidence
Financial Benefits Strategy
Cost Reduction Strategies
 Supplier consolidation
 Component consolidation
 Low-cost country sourcing
 Request for quotations (RFQ)
 Supplier cost breakdown analysis
 Function cost analysis / Value analysis / Value engineering
 Design for manufacture / Design for assembly
 Reverse costing
 Cost driver analysis
 Product benchmarking
 Design to cost
 Design workshops with suppliers
 Competitor benchmarking
Revenue Enhancement
 Providing a new service those results in increased revenue to new and existing customers.
Cost Reduction
 Travel reduction (e.g., online meetings replacing face-to-face meetings, remote support replacing
onsite support).
 Lower ongoing maintenance costs.
 Fewer days in receivables resulting in lower interest costs.
Cost Avoidance
 Time saved (increased productivity and reduction in time to complete tasks).
 Time saved from reduced length and number of customer service calls.
 Time saved from reduced numbers of errors.
Capital Reduction
 Lower costs for servers and storage.

3. THE SILVESTRI GROUP | Thomas Silvestri, Managing Partner | 3600 N Lake Shore Drive #2608, Chicago, IL. 60613 | thomas@thomassilvestri.com | www.thomassilvestri.com
Non-Financial Benefits Strategy
Non-financial benefits should not be included in ROI calculations. While they are often as important as
tangible benefits, they are difficult to financially quantify. Non-financial benefits should be fully explained
within the business case and, where possible, details provided of any quantification or measurement.
Examples of intangible IT benefits include:
 Increased customer satisfaction.
 Ability to offer improved customer service and support.
 Increased usability leading to increased sales.
 Increased user satisfaction.
 Improved/automated business processes that the new system supports and enables faster and
more accurate information.
 Improved analytical solutions.
 Better forecasting.
 Better controls to improve data input accuracy.
 Improved software vendor support and service, improved communications, better knowledge of
software, system set-up, and the like.
ROI Calculation Attributes
Relevant factors to consider in ROI calculations include:
 Timeframe: The timeframe for calculating ROI for IT projects may vary. Three years is
common for hardware projects, as technology is often obsolete after 3 years. However, 5 or
more years is often used for new software systems. Changing the timeframe can make significant
differences in ROI calculations. Try to be consistent from project to project.
 Consistency: ROI calculations should be consistently applied across all IT system projects.
Consistency also applies to the assumptions behind the ROI calculations. For example treatment
of inflation and taxation (corporate and VAT/sales taxes).
 Precision. Details shown to the last dollar or two cents lead users to believe in accuracy that
does not exist. Using $000’s omitted would be more appropriate. Equally, every figure being
rounded with two or more zeros may lead users to believe that calculations are fairly inaccurate.
A balance has to be struck, combined with the need to be as certain and accurate as possible.
ROI Financial Terms
Other calculations that are typically produced at the same time as calculating ROI are:
 NPV (net present value) i.e., the return a project will make at a specified discount rate.
Ideally this should be a high/positive value.
 IRR (internal rate of return) i.e., the yearly return % of the investment – the higher, the
better.
 Payback (also known as breakeven point). This is normally expressed as the number of years
it takes to recover the investment. The shorter the payback, the better.