Thursday, December 22, 2005

Improve Project Success Rates

Although improving over the past 5 years, IT projects still suffer too many setbacks and failures.

In our latest research with IDC, the good news is that 2/3rds of IT projects are now successfully deployed. This is truly a drastic improvement over pre-2000 figures, where 1/3rd of all projects were cancelled prior to deployment, and 40% failed to meet budget, schedule and requirement criteria for success. The primary success factor has to do with a more frugal environment – today’s projects are smaller and incremental. As well, development tools and resources have dramatically improved along with application development capability and maturity. Good project management stills are still rarer than they should be, but contribute greatly to overall success when in place.

Today, of the failed projects, only 1 in 10 projects are cancelled before deployment, but an additional 2 out of every 10 are delivered short of expectations - missing scheduled release deadlines, exceeding budget estimates or short originally planned features and functions.

So 2/3rds delivery is good right? Yes, but the bad news is that when examining the projects deployed successfully, ½ of these surveyed do not deliver on promised value propositions. In examining why, some of the value gap is because expectations are too high for the projects initially, and key assumptions such as the impact of features or user adoption are not realized. For these projects, it is important to thoroughly risk adjust the business cases and set expectations more realistically. Still for other projects, value is not being realized because metrics to measure value success or failure, and drive improvements early when it is clear that the project will fall short on delivery, are not in place. When surveyed, most qualitatively are assuming the projects don’t deliver because of adoption issues, or other roll-out disappointments, but they really don’t know quantitatively whether the return on investment is realized or not.

My wish 9 is for all IT executives to better quantify project success, including adding new tracking criteria to assure that projects are not only are delivered on-time, within budget and meeting requirements – but deliver promised business value and ROI.


The Metrics: Average Project Success Rates
Canceled before completion - 11.0%
Issues - behind schedule, over budget, short key features / functions - 21.4%
Successful Delivery, But Short on Promised Value - 32.4%
Successful Delivery and Value Realization - 35.3%

The Benefits of Storage Consolidation

Storage consolidation consists of migrating distributed storage on individual servers to a networked NAS and/or SAN solution. The following are a few of the possible benefits:



Reduce Storage Capacity and Growth Costs

Adding storage to handle growth can be expensive, especially in high growth environments:

1) Reduce Needed Headroom - Distributed storage on individual servers require headroom on each disk array – islands of unused capacity. With consolidated SAN and NAS solutions, headroom only needs to be allocated within the single storage pool rather than for each disk array island.

2) Reduce Need for Standby Storage: SANs and NAS solutions require less standby storage because instead of having to buy additional drives for distributed servers or arrays, a single standby pool can be purchased for the consolidated storage pool.

3) Reduce Need for Additional Servers: Growing local disk arrays or database storage often forces organizations to add additional servers or computing power in order to handle limitations or maintain access performance to large storage pools.

4) Auomate Storage Resource Management (SRM): SRM solutions are often implemented with consolidation, helping to analyze current files, usage and users, helping to reduce the amount of wasted storage by analyzing and removing non-business content, restricting storage consumption and setting policies and enforcing procedures to maintain proper usage.

5) Implement Archiving: Application, database and messaging data is currently the largest storage consumer and continues its rapid growth, yet the data needs to be maintained, protected and available for operations and compliance. Migrating the data to less expensive storage mediums can help to reduce current storage utilization and costs.

6) Reduce Storage Administration Costs - With consolidation, solution storage administration and support can be better centralized and automated, leading to better storage per administrator ratios. As well, the amount of storage can be reduced via headroom reduction, storage resource management and archiving – less storage to manage means less administration needed.

7) Backup Window Savings – Backing up server disks locally is not effective nor efficient. Backing up data on distributed servers centrally is better, but often needs to be done during off hours to avoid effecting network performance and related productivity or business impacts. Network upgrades are performed often as storage pools grow to help avoid these downtime issues. With consolidated storage on a NAS or SAN, backups are performed on the storage pools own network helping to avoid corporate network issues or upgrade investments.

8) Reduce storage related unplanned downtime – High availability NAS and SAN configurations can be implemented to include redundancy, automatic snapshots, mirroring and vaulting helping to achieve 99.995% availability or higher.

9) Reduce storage related planned downtime – With NAS and SAN solutions moves, adds and changes can often be made without having to take the system down for reconfiguration.

10) Reduce data restore times – if a file, volume or array is lost, data restoration can be performed more quickly via the storage arrays own network rather than the corporate network. In high availability configurations, automatic fail-over and other features can eliminate any downtime via access to mirrored or vaulted data.

The ROI of HR Self Service Applications

Here are a few suggested HR applications you may wish to consider for self-service enablement

Employee self-service applications

 Retiree services
 Paid time off requests
 Electronic paystubs
 Withholding changes and deductions
 Time card entry
 Personal data maintenance
 Training registration
 Benefit inquiries
 Open enrollment
 401(k) or pension services
 Employee communications (HR policies, who’s who, what’s new, FAQs)

Management self-service applications
 Leave management
 Employee change actions (transfers, promotions, terminations)
 Management reports (headcount, salary, listings, time reports, LOA reports)
 Budget analysis
 Time card approval and reporting
 Purchase orders
 Travel and expense management
 Job requisitions
 Salary and Bonus actions

Strategic self-service applications
 Workforce planning
 Succession planning
 Stock option granting and handling
 Staff development
 Skills management
 Online job postings and applications

Benefits of these applications include the following:

1. HR Productivity Improvements – compare the current HR administrative process, with a re-engineered and automated process to determine potential elimination of tasks (particularly through self service empowerment), time savings or perhaps enabling a lesser paid employee perform the task.

2. Employee and Manager Productivity Improvements – compare the current administrative tasks by employees and managers, and potential elimination of the tasks or time savings.

3. Overhead and outsourced service fee avoidance – calculate current expenses on overhead items such as printing, mailing, outsourced administration and payroll fees and predict savings based on solution implementation such as eliminating the need for printing and mailing, in-sourcing more effectively tasks which were outsourced, or eliminating fees such as those to recruiters by improving the capability of internal recruiters, employee referrals and on-line campaigns.

4. Compliance and Error Reduction – eliminate errors such as compensation and incentive pay mistakes, and reduce the risk for non-compliance fines and penalties.

5. Improve Employee Retention – reduce employee turnover and eliminate associated costs for recruiting, hiring and training new employees, as well as the indirect productivity or business loss typical to get a new employee up to speed.

6. Strategic Business Impact – the revenue impact of satisfied employees to the business, often difficult if not impossible to quantify.

The Benefits of RFID

The costs for implementing RFID are still too high for most mainstream applications, but are falling. While the costs and risks might be too high to deploy in a production environment, the benefits are proving more apparent and many should be conducting research projects to begin determining the potential ROI.

Here is a quick checklist of several benefits which can be achieved with RFID solutions:

1. Reduce Warehouse and Distribution Labor Costs - Replace the point and read labor intensive operation of tracking pallets, cases, cartons and individual products with sensors which can track these items anywhere in the facility with pin-point accuracy. This can reduce the high labor costs and service fees of regular stock management and store shelf inventory.

2. Reduce Point-of-Sale Labor Costs – With RFID enabled products, checkout can be completed with a quick scan of all items in cart helping to reduce point-of-sale labor costs. The current scan-it-yourself component of self-service checkout can be improved helping to improve adoption, reduce self service checkout times and reduce fraud.

3. Reduce Inventory – inventory accuracy is important to helping eliminate excess / missing inventory, losses and write downs. With RFID, inventory errors can be reduced so that the company can be assured that the inventory indicated is the actual inventory available.

4. Improve Forecasting and Planning - Visibility improvements throughout the supply-chain can help to improve the forecasting capabilities to help better track where inventory is and what is happening to it throughout the supply chain.

5. Reduce Theft – losses due to theft are estimated to cost retailers over $30B per year, and are estimated conservatively at 1.5% of overall sales. With RFID, products can be tracked through the supply chain to pinpoint where a product is and eliminate inventory errors that can cause shipments to go missing, or to better find where and when in the process the product was lost. Within the retail store, RFID can and has been successfully deployed, particularly on higher margin items, to help prevent theft.

6. Reduce Out-of Stock Conditions - when an item is out-of-stock the customer is often left disappointed, either avoiding the purchase altogether – common in grocery stores where as much as 4 percent of their revenue is lost each year due to out-of-stock conditions, or worse, the customer moves on to a competitor in order to source the product. Eliminating out-of-stock conditions via better RFID product tracking and inventory visibility and forecasting, such as alerting the store staff even immediately when the last item leaves the shelf, can have an immediate top-line revenue impact and have residual effects by improving customer service and satisfaction.

7. Improve Customer Experience – With RFID, items in a cart can be tracked and if a high tech cart or kiosks are part of the shopping experience, offers can be made automatically related to the items – such as dynamic up-sell / cross-sell of useful or necessary accessories.

The ROI Risks of VoIP

VoIP projects indeed can deliver great cost savings and empower the business for greater agility, applications and capabilities. But these projects are not without their risks. These typically include:

1. Network readiness is often under-estimated resulting in higher that expected upgrade investments required in network equipment and connectivity

2. Quality of Service issues can occur if enough bandwidth is not provided, or there are network performance issues. This can cause dissatisfaction in the system by users and customers.

3. With a converged network carrying voice, data and perhaps even video the business will be more than ever dependent on the network being available. Any issues with network systems or connectivity can cause critical business outages and losses.

4. With a converged network, security is also more of a concern. Destructive intrusions or denial of service attacks can cause outages or losses effecting more business assets than before.

5. User adoption, where users do not take advantage of the VoIP empowered phone’s enhanced features, unified messaging and application features expected

Many of the issues will depend on having IT Capability and Maturity enough to handle this convergence and the added responsibility. Where the IT staff does not have the skills needed to effectively manage and support the solution, many of these risks can be mitigated by purchasing managed services or a hosted solution

The Benefits of Business Intelligence

As a result of implementing business intelligence applications, organizations are gaining key business value advantages ranging from simple cost avoidance, such as saving on the labor, printing and distributing reports, to competitive advantage, such as recognizing hot selling items quickly enough to respond to customer demands and avoid “out-of-stock” conditions. Several of the possible benefits include:

1. Consolidate Query, Reporting, Analysis, and Analytic Applications, such as eliminating custom development and manual maintenance of Excel spreadsheets and reducing data consolidation efforts

2. Leverage important and valuable data currently being captured by ERP, CRM, SCM and other systems, but locked in these systems due to inadequate and difficult mining and reporting tools

3. Improve the integrity of analytics by assuring source data validity and calculation integrity, reducing or eliminating the cost of business decisions based on incorrect data.

4. Eliminating stove-piped analysis across departments and divisions, reducing the time have on people arguing about numbers or making conflicting decision

5. Create powerful dashboard applications for various user groups to help gain visibility into performance and key performance indicators, helping to correlate the cause and effect relationship between metrics so you could take action to quickly resolve a business process issue, reduce costs or increase revenue. Dashboard can help the business act quicker on important information such as better recognizing a hot product in order to meet growing demand and eliminate “out of stock” conditions, or better recognizing competitive pricing issues in order to reset prices.

6. Empower users to create, manage and distribute their own standard, ad-hoc and multi-dimensional reports and content, saving time on current report development and maintenance labor

7. Reduce report printing and distribution costs including saving on printers, toner and mailing costs

8. Improve velocity of reporting and visibility, reducing report time from weeks to minutes, such as real-time visibility into the impact of pricing and promotional strategies on corporate profitability, or creating compliance reports quickly in order to meet audit demands.

9. Uncover business issues, mistakes or fraud more easily, such as recognizing unusual business purchases or unusual sales bookings

10. Reduce the impact of employee turnover and need for training by unlocking islands of information and analytics in proprietary Excel spreadsheets by standardizing on a BI platform

11. Better meet financial reporting and regulatory compliance by assuring consistency of information and automating analysis, validation and distribution of reports by policy

Thursday, December 15, 2005

The ROI SLA: Assuring Value Delivery

The rules for IT spending have changed significantly in the past 18 months and financial accountability is the new name of the game. Many vendors see ROI analysis as the way to arm prospects with a dollar-driven business case needed to win C-suite approval. Unfortunately, many IT professionals are finding that even the most robust vendor ROI tools aren't enough to stand up under the increased levels of financial scrutiny.

Clearly a dangerous gap exists between the demands of CIOs and CFOs, and the ability of most IT solution providers to address their purchase decision requirements. One approach to closing the distance may be found in service level agreements - valued as a tool for guaranteeing availability and responsiveness.

What if a vendor could be engaged enough in a personal ROI analysis to stand behind the results? This may be radical thinking for many, but this type of partnership could benefit IT departments, business groups and solution providers alike.

Under the service level agreement of the future, IT vendors would sign up for the delivery of key benefits promised by ROI analysis. If the benefits were not realized at some minimum level, the vendor would have an opportunity to help remedy the situation. If they still failed to deliver, penalties would apply. On the flip side, if the results deliver higher value than expected the IT vendor would be rewarded with additional compensation or substantial intangible benefits. This approach would:


Give companies more confidence that IT projects will actually deliver tangible gains
Create a vested positive interest in the customer's success for IT solution providers
Require that all parties involved understand the proposed costs, benefits and ROI and commit to the accuracy of measurement
Facilitate collaboration on tracking costs and benefits
Share the success - and the rewards of effective solutions
IT managers can appreciate a vendor with a substantial stake in the project's success, and who is involved in the planning, implementation and management phases to ensure that the investment is delivering as promised. Undoubtedly, few business unit managers would want to pay vendor more if the project exceeds expectations. The good news is that there are many forms of compensation beyond direct payment, including public testimonials, reference credentials or future contract extensions. Companies that see opportunity in a partnership of this intensity must be willing to step up to the plate with rewards that match the value.

For the IT vendor, implementing service level agreements is a difficult proposition. SLAs introduce an unknown impact on planned revenues, require that the customer successfully implement and adopt the solution as expected, and can greatly increase expenses if more investment is needed to meet the promised service levels. The upside lies in eliminating any doubt a customer may have and shrinking the sales cycles, not to mention significant revenue opportunity if the customer agrees to share in the benefits if the project exceeds expectations.

Moving to an ROI service level agreement would be a revolution for IT managers and vendors alike, however, the return to financial scrutiny requires a fundamental change in the relationship between customer and vendor. In the new economy, accountability for returns from IT investments is the solution provider's responsibility as much as the corporations'. Now, more than ever, making the move to shared risk and reward makes fiscal sense and SLAs may be the vehicle to drive the evolution.

CIO to CFO: Extreme Makeover

Everyone loves a good makeover. Perhaps the CIO could benefit from one. With the help of a 'keen eye' and some pointed advice, these embattled executives need to shift focus to what's really the most important criteria for IT and business success.

A recent Empirimetric analysis (contributions to profitability as surveyed by the PIMS Program from the Empirimetric Corporation – 2002) of 3,000 business units from more than 300 corporations found that operating effectiveness (also known as "the ability to run a tight ship") contributes to a company's financial performance just slightly more than luck and random events. Overwhelmingly, success depends on market position: the ability to deliver the right solutions to the right market on a timely basis.

To help drive this market positioning -- which is where the greatest opportunities for success lie -- CIOs must focus on business-oriented goals rather than technological ones.

It's a difficult mindset shift to make, compounded by the intense scrutiny and pressure for IT spending to deliver high value. Although the economy is showing signs of modest recovery, analysts predict IT budgets will remain flat again in 2004. At the same time, demand for IT is increasing, project backlogs are building and business leaders are pressing for migrations, upgrades and new solutions.

Escalating the CIO challenge, IT governance is being transformed from a strategy to make budget planning more efficient and effective to being legislated. The Sarbanes-Oxley Act requires that companies report large material investments to corporate financials, placing most large IT projects such as ERP, data warehousing and intelligence, custom application development, infrastructure upgrades and consolidation under intensified scrutiny.

Economic and legislative realities now mandate targeted goals to define how a CIO contributes to overall business performance. These realities include:

IT spending results in bottom-line impact
IT spending drives strategic and competitive advantage
Individual IT projects deliver measurable results
We recommend a three-step process for a CIO makeover, rooted in reconnaissance to grade past performance, outlining a roadmap for improvement and collaborating with business executives at every stage.


Step 1: Financial performance

If technology investments truly have a positive impact, the results should be visible in the corporate financials and key financial metrics and ratios -- showing that the company is besting the competition and continually improving performance over time.

These influences should include revenue growth, increased profitability, lower costs of goods sold and operating expenses. For example, the investments in supply chain management should help to improve inventory turns and reduce days sales outstanding overall, as well as show relative improvements compared to the competition.

The most informative competitive benchmarks will measure the company's metrics against named peers in similar industries and geographies, with comparable business models and size.

Competitors' performance information can be obtained from several sources, including annual reports, financial filings and information brokers, as well as specialized benchmarking service and software providers. Typical metrics include important elements and derived ratios from the income statement, balance sheet and cash flow statement.

The metrics a company should use to measure corporate performance is debatable, and can vary greatly by industry. A few commonly used top-level metrics to assess the impact of IT include:

Revenue, revenue per employee and revenue growth
Profitability and profitability growth
Economic value-add (EVA)
Return on equity
Return on assets
Cost of capital
SG&A/revenue
Days sales outstanding
Inventory turns
Working capital productivity
Cash to assets and liabilities
We also suggest using two specialized metrics, both developed by Paul Strassmann, most recently the CIO of NASA and the former CIO of Xerox and Kraft Foods:


Information Productivity (IP) -- a measure of the overall impact that IT has on the organization. Assuming that IT investments are made to help reduce overhead (SG&A) and increase profitability, the IP ratio highlights the macro-economic impact of IT, calculated as a productivity ratio of output vs. input: EVA (the output) versus SG&A spending (the input).


Knowledge Capital -- a measure of a company's sustainable value, calculated as the ratio of overall profitability, EVA, divided by the cost of capital, which highlights how risky the company is perceived to be in the capital funding marketplace -- and an indication of future value devoid of market capitalization volatility and the tumultuous whims of the stock market.


Step 2: IT spending and TCO

Understanding corporate performance provides only half of the picture; equally important, the CIO must understand which IT investments drive overall performance for the company, and for the competition. Key measurements include IT spending as a percentage of revenue and per employee, as well as the total cost of ownership (TCO), a detailed analysis of IT spending and key performance indicators in various categories.

Finding the IT spending and TCO metrics for competitors is more difficult, but can be obtained from analyst firms, benchmarking specialists and tool providers, or commissioned studies.


Step 3: Spending versus performance

Once IT spending is assessed, the final step is to correlate the performance of the company and peers with IT spending to gauge the efficiency and effectiveness of spending. This comparison will reveal which companies are spending wisely and achieving great performance, which are investing for the future and which ones are falling behind as spending laggards.

It is essential to place a benchmark in context: Often, there is no direct relationship between IT investments and improved business performance. IT projects are complex, and their success depends on the investments being technically sound, aligned with corporate goals, adopted by the user base and accompanied by changes in business processes and behaviors of employees, supply chain partners and customers.

IT investments can deliver positive business results, and they can be squandered just as easily.

The ROI of RFID

The promise of RFID is the dream of every supply chain manager -- enabling the accurate real-time tracking of every single product, from manufacture to checkout. Compared to universal product code (UPC) bar coding, which it promises to replace, RFID proactively transmits information, eliminating the manual point-and-read operations needed with bar coding. This enhanced visibility could result in significant decreases in warehouse, distribution and inventory costs, increases in margins and enhancements in customer service.

Several of the most prominent suppliers and retailers are already taking advantage of this new technology; Wal-Mart and the Department of Defense are the most visible. Wal-Mart is demanding its top 100 suppliers put RFID tags on all pallets, cases, cartons and high-margin items by January 2005; the DoD has set an early 2005 deadline for its suppliers as well, insisting that all pallets and cases are tagged. If these deadlines are met, suppliers will be forced to invest quickly and heavily, despite the serious business risks. As adoption accelerates, the cost per tag, an obstacle today, will also lessen. Companies that invest early will have a serious advantage over competing companies -- which will be scrambling to catch up with this new 'best practice.'

RFID holds promise for significant bottom-line benefits, including:

Reduced warehouse and distribution labor costs -- Warehouse and distribution costs typically represent 2% to 4% of operating expenses for retailers. Replacing point-and-read labor-intensive operations with sensors that track pallets, cases, cartons and individual products anywhere in the facility can significantly reduce labor, resulting in 30% or more in savings.

Reduced point-of-sale labor costs -- Using RFID at the product level can help retailers reduce the labor costs and service fees of regular stock management and store shelf inventory. With RFID-enabled products, the current 'scan-it-yourself' checkout can be improved with increased self-service adoption, shortened checkout times and reduced fraud.

Inventory savings -- Accurate inventory eliminates write-downs. RFID reduces inventory errors, ensuring that the inventory reported is indeed available. By tracking pieces more exactly, companies can more accurately detail what has sold in the past 24 hours, and improve the accuracy of their forecasts about what inventory is actually needed.

Reduced theft -- Theft costs retailers more than $30 billion yearly, and is estimated conservatively at 1.5% of overall sales. With RFID, products can be tracked through the supply chain to pinpoint where a product is at all times, and eliminate inventory oversights that can cause shipments to 'go missing.' RFID has already been successfully deployed in stores, particularly on higher-margin or costly items.

Reduced out-of stock conditions -- When an item is out-of-stock, disappointed customers often end up not buying anything, or buying from a competitor. Grocery stores lose as much as 4% of revenue yearly due to out-of-stock conditions. Better RFID product tracking, inventory visibility and forecasting can have an immediate top-line revenue impact; residual benefits include improved customer service and satisfaction.


Risks to adoption

Several ROI challenges, including cost and risk, should be considered before investing in RFID:

The high cost per tag -- The cost of RFID tags is 25 to 30 cents per tag, down from 40 cents in 2002. It typically makes sense to place tags only at the packaged product level (pallet or carton), or on the highest-margin products, where the tags represent much less than 1% the total cost of the product. With demand increasing and production costs declining, the tags are expected to reach 5 cents per tag in 2006.

Mountains of data -- The location of pallets, cases, cartons, totes and individual products in the supply chain; the activities of picking, packing and shipping; the tracking of expiration dates and recalls will all produce mountains of real-time data. Most organizations are not ready to transmit, store, process, warehouse and integrate that data with warehouse management, inventory management, financial and other enterprise systems. The business processes and systems for effectively processing, purging, storing and analyzing this information often aren't in place.

Limited edge computing power -- Most retail outlets are not set up to handle the data and information workload required to make RFID effective at the product level. Reaping the rewards will require a large investment in computing power, bandwidth, storage and IT operations/administration per store.

Product level tagging does not always work -- Current tags do not transmit well on certain products, such as liquids or metals. This limits the overall benefit of RFID until the problem can be resolved.

Complexity and required investment levels -- RFID implementation is complex in all ways: process re-engineering, integration, maintenance and data storage, and design and deployment. A full implementation on an accelerated cycle could require a full year's IT budget and resources As a result, most companies have only rolled out limited pilots and are cautious to commit to broader deployments.


The bottom line

The competitive advantage and bottom-line business benefits of RFID are significant to both retailers and suppliers, despite the typical risks associated with adopting any early-stage technology. Early estimates indicate that a comprehensive RFID solution can generate a 2% to 3% in revenue; reduce days in inventory by 1% to 2%; and reduce operating expenses by 2% to 5%. Companies that achieve this ROI early will have significant financial advantages over the competition, mitigating the risks and making a strong business case for RFID, especially for companies that rely on their supply chains.

The ROI from CRM

Getting analysts to agree on the potential returns of CRM is nearly impossible. Several reports recently published claimed that the return on investment (ROI) from recent CRM implementations had been dismal, with eight out of 10 projects failing to deliver on ROI promises, and project failure rates typically running between 50% and 70%. Other reports were more optimistic, estimating that about 70% of companies said their CRM initiatives had exceeded original ROI expectations.

Why the big difference in the results? Some blame analysts for a lack of clarity. But the biggest problem is a failure to measure success. Only about 20% of companies surveyed were able to demonstrate ROI for their CRM investments. Additionally, most companies say that, when it comes to determining value, intangible benefits are more significant than cost savings. Yet companies often fail to establish key performance indicators for judging these intangible benefits.

Companies need to use yardstick techniques when evaluating CRM software investments. Metrics are essential. A formal business plan must be in place before the project begins -- one that quantifies the expected costs, tangible financial benefits and intangible strategic benefits, as well as the risks.

According to a 2003 survey by CAP Ventures Inc., nearly 90% of organizations that have measured ROI-based CRM objectives have found that CRM solutions are meeting their goals. Additionally, about 70% said that their CRM initiatives exceeded their original expectations. The survey showed that the CRM projects cost these companies one-quarter of what was expected. And, finally, the survey found that deployments were completed in five weeks or less, and that projects yielded $1.2 million in cost avoidance by moving more customers to self-service.

How can a company replicate that kind of success? Crafting a detailed business plan is a good start. This plan should predict:
• Tangible net benefits -- The plan must include a clear and precise cost-benefit analysis that lists all of the planned project costs and tangible benefits. This portion of the plan should also contain a strategy for assessing key financial metrics, such as ROI, net present value (NPV) and internal rate of return (IRR). It should specify a payback period (the amount of time that's expected to pass before the solution produces results). The total estimated cost should be less than 50% of the benefits (because of inevitable cost overruns), and the payback period shouldn't exceed 12 months.
• Intangible benefits -- The plan should detail the expected intangible benefits, and it should list the key performance indicators (KPIs) that will be used to measure success and shortfalls. Often, an improvement in customer satisfaction is the primary goal of the CRM solution, but this key value, in many cases, is not measured before and after the project.
• Risk assessment -- The risk assessment is a list of all the potential pitfalls related to the people, processes and technology that are involved in the project. Having such a list helps to lessen the probability of these problems' occurring. And, if they do occur, a company may find that, by having listed and considered the problems in advance, the problems are more manageable than they would have been otherwise.
Assessing the issues in these three categories -- costs, benefits and risks -- helps establish a business case for the project and helps allow for post-project success measurement. Now let's look at each of these objectives in detail.
Implementation costs
Implementation costs are often split equally between IT costs and business-unit costs. Here's how they break down.
IT costs include:
• CRM software licensing and support contracts.
• Licensing and support contracts for electronic data interchange (EDI) tools, databases, operating systems and other software.
• Hardware purchases and support contracts -- specifically server-, storage- and network-related expenses.
• Software integration and customization, including design, development, testing and maintenance.
• Implementation labor.
• Ongoing administration and support labor.
Business-unit costs include:
• Planning and requirements meetings.
• User training and learning time.
• Process change management.
Tangible and intangible benefits
Benefits typically include increases in staff productivity, cost avoidance, increased revenue and margin, and reduced inventory costs (due to the elimination of errors).
Here are a handful of the objectives that should be considered:
• Reduce the cost of sales.
• Reduce sales administration overhead.
• Improve leads-to-sales closure ratios.
• Increase customer retention.
• Improve customer satisfaction and loyalty.
Risks
Some potential pitfalls include:
• Biting off more than you can chew -- Start with small, focused CRM solutions. The solution should target specific sales or service business functions, or specific groups of users. Additionally, it's essential to manage the project's scope, goals and objectives throughout the project-development phase and deployment.
• Over-budget and behind schedule -- According to CIO magazine, 49% of CRM projects are now expected to be complete within 12 months of their start dates, and 70% within 18 months. Companies are significantly reducing project scope and implementing projects with tighter schedules and more reasonable budgets.
• Poor user adoption -- Ease of use and adequate training are essential. Otherwise, users might not understand and adopt the solution.
• Maintenance and support that's too expensive -- The cost of maintaining CRM applications can be high. Weak or incomplete training almost always raises support costs.
• Isolation -- The effectiveness of a project may suffer if the CRM data isn't used throughout the company. Failure to use the data broadly can severely hamper the achievement of key benefits.
• Garbage in-garbage out -- Because CRM systems require so much data entry, users often put in placeholders, misguided estimates or inaccurate information -- leading to poor analytical results and decision-making errors.
• Who needs tangible results? -- The failure to measure success is one of the clear killers for CRM. Measurement of pre-project status and post-project achievements is essential if a company is to show success.

The bottom line on CRM ROI

• CRM solutions should focus on solving a specific sales issue, such as improving response rates, implementing self-service or automating forecasting and accuracy.
• Projected benefits should be twice the expected cost, to assure success.
• Solutions should take less than six months to deploy. If more time is needed, phased roll-outs will drive a steady state of success.
• Solutions should provide a positive payback on the investment in less than 12 months from deployment.
• Pre-project and post-project ROI analysis including net tangible benefits, intangible benefits and risk measurement is essential to assure success.

Selling with ROI

IT vendors have accepted the fact that closing deals today requires proving that their products deliver substantial value. But, with some budget relief in sight for this year, vendors may be optimistic about the return of the happy days of pre-bubble selling -- and they could abandon their commitment to ROI-based selling programs.

Unfortunately, most of the recent IT budget increases will not materialize into a spending windfall, and scarce dollars are already allocated to meet backlogged demands and cover key compliance, security and infrastructure projects. The most forward-looking IT vendors will continue to improve their value-selling methodology. They'll use tools to help sales professionals and partners quantify ROI pre-sales, and implement ongoing ROI-based service-level agreements.

In a recent survey by CIO Insight and Computerworld, 80% of buyers rated financial justification as important for IT purchase approvals. However, more than 65% of buyers revealed that they do not have the knowledge or tools needed to perform ROI calculations. ROI is required for purchase approvals, but vendors focused on closing deals can't leave the ROI analysis up to the client for three major reasons:


Prospects do not have the product feature and benefit insight, financial-modeling knowledge or analysis tools needed to quantify the value of the proposed solution.
Customers can take months to perform the justification, slowing the sales cycle significantly. Prospects are not able to quantify the differentiating value and TCO advantages of the proposed solutions versus competitive solutions.

These facts are proven in a recent study by Ernst & Young, which states that more than 81% of buyers expect IT vendors to quantify the value proposition of proposed solutions, and 61% of buyers rate a vendor's ability to quantify its value proposition as important in the vendor selection process.

The new ROI selling requirements for vendors represent a real and permanent shift in the way solutions are bought and sold. In this new era of corporate accountability, buyers will remain in control of purchasing decisions. Companies are becoming more decentralized in their decision making, and more stakeholders are involved in every purchasing decision. Quantifying value is vital to helping prospects rationalize their decisions to other stakeholders. It also helps them competitively analyze and align each purchase decision with all other opportunities, and prove value delivery on an ongoing basis.

To date, success-minded vendors have implemented several types of ROI tools to help meet the new ROI selling requirements. These include:


> Web-based ROI calculators, which are primarily used for basic analysis, education and lead generation.

> Spreadsheet-based selling tools, typically developed by an in-house, financially savvy marketer, or by a consultant.

> More advanced software that encapsulates spreadsheet models into a better presentation and report-building package.

To reach a new level of competitive advantage, sales and marketing executives will need to view ROI selling as an enterprise initiative; this shift will dominate selling strategies during the next decade. Successful vendors will deploy a standardized selling toolkit that addresses each step in the sales process with credible value quantification, and with seamless integration into current CRM solutions and selling methodologies. Just as other solutions have migrated from simple tools to enterprise applications, these leading vendors will move their ROI selling programs beyond point-based ROI solutions and view ROI as an integral component of a successful selling process both pre- and post-sale.

CIOs: Winning the Budget Battle

CIOs at organizations of all sizes are prepared to go into budget battle -- competing for precious few dollars to fund routine IT needs and hopefully some innovative initiatives. Even while the predictions for IT spending look promising for the next year, overall available funding is going to be tight, as revenue falls victim to the whims of an uncertain and unstable economy.

CIOs need to be on the top of their negotiating game to make certain that the dollars they need to keep technology working for the company are available -- today and in the longer term. In this fiscally prudent environment, CIOs know that every new initiative must be cost-justified through a rigorous ROI analysis. Once a CIO determines that a project makes good business sense, making the case in financial terms, with internal and external competitive awareness, will ensure victory in the budget review battle.

Here's how to speak the language of the CFO and make the case for new spending, both in terms of what it will deliver to improve everyday operations and to meet the organization's strategic objectives for the coming year:

Tie the impact of any IT project to overall corporate performance. Every initiative has an impact on the corporate financials, whether it drives bottom line, lowers operating costs, improves efficiency, increases customer satisfaction or meets a legal compliance. Quantifying IT value in financial terms or with key performance indicators demonstrates that the CIO sees both the trees -- and the forest.
Benchmark internal spending plans against the competition. Knowing what industry peers are spending, and with what returns, is perhaps the most powerful tool for making the case for an IT investment -- especially setting sights on the competitor who is considered to be best-in-class. A recent study from the industry research firm, Gartner Inc., linked IT spending directly to profits, concluding that companies that spend above the average amount on IT can make up to 36 percent more in profits than those who spend under the average.

Monitor, measure, adjust and report back. Understanding and communicating the business value that IT brings to the equation is a critical first step to getting necessary financial support. Once the investment is made, the real work begins. Tracking a project and its ability to deliver as promised brings accountability and provides an opportunity for adjustment.


CIOs who learn how to draw a direct line between investment and business value will build trust with the CFO, paving the way for future 'green lights' on IT investments, and ensure that information technology makes the right impact on the company's performance.

The ROI for Information Lifecycle Management (ILM)

With consolidation to storage area networks and advances in storage management software packages, the concept of hierarchies and intelligent management like information lifecycle management (ILM) is again at the forefront of storage architecture planning.

ILM is a growing set of recommended practices and technologies that allow companies to manage data more efficiently and effectively. Organizations process, manage, move, protect and archive various business data according to unique characteristics such as age, usage patterns, compliance and archiving policies, security and disaster protection rules, and value.

ILM has its roots in hierarchical storage management (HSM), which was popularized with mainframe storage management strategies in the early 1980s. Driven by the high cost of mainframe disk subsystems and exploding compound annual storage growth of 50% or more, mainframe managers sought HSM to reduce storage costs by migrating rarely accessed data from expensive online hard drives to near-line optical jukebox storage (at the time about one-fourth the cost of disk storage), and eventually to off-line tape library storage (about one-tenth the cost of disks).

By correctly establishing migration rules, the organization would see little to no delay in information access (keeping frequently accessed information or data requiring instant access, regardless of age, near-line). At the same time, the company would save significantly by conserving precious disk subsystem space and eliminating disk subsystem purchases to support growth.

The savings could be significant beyond storage costs. According to data from Strategic Research Corp. and other research firms, more than $7 was spent for storage management, administration and utilities costs for every $1 of disk capital cost. Because more than 90% of data stored on hard disks was not actively accessed by users or applications, it was ripe for more intelligent management and migration to less expensive storage.

ILM is not a new concept. In the early 1990s, records and information librarians introduced ILM as a way to track the lifecycle of data from creation or acquisition, editing and refinement, publication and evolution, through retention and data disposal. Similar to HSM, ILM seeks to minimize storage costs by providing various storage mediums -- disk, optical and tape -- and various rules to manage migration, archiving and disaster recovery.

And as with mainframe HSM, the economics are similar. Most data older than 90 days is seldom (if ever) accessed, and online storage remains expensive to procure and manage, making migration to increasingly cost-efficient technologies attractive. All data is not created equal, and taking advantage of this fact helps save costs.

ILM outdoes HSM by taking a more holistic view, incorporating data's business value into the equation. Implementing ILM identifies not only the right storage medium to minimize storage costs while meeting access speed, but the right process and path to manage the data to meet business requirements such as information security, disaster recovery, data retention rules, compliance regulations and retirement. It's the right storage at the right time and price, helping the IT department manage larger amounts of information, while simultaneously lowering costs and improving storage operations' efficiency.

As for ILM adoption, Gartner Inc. reported that fewer than 6% of organizations had purchased and implemented ILM software packages in late 2004, but more than 50% are planning on purchasing them in 2005 and 2006.

The business value of ILM for all storage includes:

> Reduced need to add hard disk storage for growth.

> Reduced storage administration tasks, such as moves, adds and changes, to support growth, performance optimization, and backup and restore tasks.

> Reduced backup window overruns and resultant performance degradations.
Reduced disaster recovery time by minimizing the necessary online storage restoration.

> Reduced compliance costs and risks of compliance issues.

For application or e-mail databases in particular, archiving older data from the production database organizations can:

> Improve application and database performance by minimizing the size of production databases.

> Reduce database upgrade or maintenance downtime.

> Reduce risk of batch job window overruns.

> Reduce development/test workloads and storage requirements.

> Most organizations that can migrate 50% or more of their data to less expensive media can easily justify the investment in hardware, software, training, systems administration, and support to implement and maintain ILM software packages. With 50% or higher storage growth, an organization's reduced costs and storage administration productivity improvements alone generate paybacks of fewer than 12 months and typical ROIs of 250% or higher.

ILM ROI success is at risk if the solution and processes overwhelm the capability and maturity of the IT team; poor results can lead to incorrect migration rules, delay in information access for users, lost data, compliance issues or application performance or availability issues.

Prior to implementing ILM technology, the team should thoroughly understand and document the processes by which data is to be managed: analyzing and categorizing all data by age and usage characteristics, value, retention and compliance rules, and other important management criteria. Profiling all management rules and lifecycle paths comes first and drives the selection of systems and software packages to meet the needs, rather than selecting an ILM solution first.

ILM can minimize the total costs and maximize the business value of storage through proper analysis and planning, combined with thorough documentation, valuation technology selection, integration and implementation.

IT Does Matter

Nick Carr's argument that IT initiatives are no longer a source of corporate competitive advantage is both right and wrong. True, many IT purchases are commoditized buys that don't lift an organization past its peers. But the fundamental mistake in Carr's thesis is that all IT investments are a commodity, and should therefore be cut because they don't drive business value. Alinean's analysis of 2004 IT spending across more than 5,000 companies clearly disproves Carr's theory, showing that on average, companies that spend more on IT achieve greater bottom-line benefits. The key to ROIT™ (Return on IT) success: minimizing commodity purchases and investing more in innovation, which has proven to generate significant competitive advantage.¹

Simply put: value isn't derived from how much companies spend on IT, but from how IT dollars are invested and managed.

Nick Carr's recent comments contain a litany of flawed logic:

"IT is shifting from a potential source of competitive advantage to just a cost of doing business." Averaging best and worst performers across all market sectors, companies spend 65 percent of IT budgets on ongoing operations and support, and 25 percent on migration and upgrades to existing infrastructure and applications. These expenses, which Carr correctly calls "a cost of doing business," drain 90 percent of the IT budget. But the remaining 10 percent sliver matters most; this is where companies' strategic technology investments achieve competitive gain.

Top performers find ways to reduce the commoditized 90 percent and spend more on inventive IT projects that align with business goals and deliver bottom-line value. Typical areas of cost cutting occur in hardware consolidation, standardization, managed services, selective outsourcing and utility computing.


"My argument is not that you don't need IT or that it's not important, but that it doesn't matter strategically and doesn't provide one company with a way to distinguish itself in any meaningful way from its competition."
Were this statement true, all boats would rise and fall with the tide. However, the ROIT evidence of thousands of public companies shows that businesses achieve both positive and negative returns from their IT spending, regardless of the amount invested. In short, a company that spends more does not necessarily obtain higher returns or additional competitive advantage.

So while some leaders are clearly frugal, an under-spending company is just as likely to get poor results. Similarly, spending more on IT could lead the company to good results, but can also just as easily be squandered. A demonstrable competitive edge exists, and it goes not to those who spend the most or least, but those who invest in innovation, and manage those investments wisely.


"I think longer term trends toward the greater standardization of IT and toward rapid price declines of IT components have also influenced executives in leading them to move away from the cutting edge and look for cheaper ways to get the capabilities they need." Carr correctly notes that during the downturn, companies sensibly adopted frugal spending practices. Those agile enough to reduce total cost of ownership (TCO) of IT spending and other overhead expenses the most generally out-performed peers.

But for the long term, 2004 data reveals that companies agile enough to increase IT spending derive the greatest value, as they capitalize on the recovering economy and new market opportunities.

Case in point: IT spending for the top 20 highest-performing companies has nearly doubled over the past year, rising from a frugal 0.82 percent of revenue to 1.6 percent of revenue. The lowest-performing companies still spend more than the top performers, but maintain a frugal approach, cutting investments from 2.72 percent of revenue in 2003 to 2.6 percent of revenue in 2004.


"Focus on cost management, risk management and the capabilities your company needs with the reliability and the low cost that will itself distinguish you from perhaps less frugal competitors." Cost management and risk management alone are counter-intuitive to the facts. Alinean's statistical analysis of IT spending and shareholder value for 5,000 companies shows a modest correlation of 0.64, meaning that companies that spend more on IT today are outperforming their peers.²

Looking at specific industries (the recommended approach for companies to compare themselves to competitors), results show that 40 percent of sectors have a significant positive correlation (greater than 50 percent) between IT spending and performance. Others, meanwhile, show no correlation or even a negative correlation.

This insightful breakdown demonstrates the risk of blindly following one strategy. Companies must not only understand the market conditions for top performers, but also base strategy on how IT spending generates bottom-line value in their sector.

Conclusion: IT does matter

Alinean's ROIT analysis proves that IT does matter. Nick Carr is right to call for a lowered TCO of many IT investments. But narrowly viewing all technology as commodities ignores the reality that innovation spurs competitive advantage, and companies that increase pioneering purchases will likely surpass the competition.

References

¹ ROIT is a metric developed by Alinean to measure the efficiency and effectiveness of IT spending when comparing companies in a peer group. The formula for ROIT is EVA / IT Spending, where EVA® is a Stern-Stewart metric for corporate profitability, and IT Spending is the total IT spending for the organization including formal IT, business unit IT (20-30 percent of total spending for a typical company) and shadow IT spending (consuming from 5 to 15 percent of the total spending for some organizations).
² Correlation results are based on calculating the correlation coefficient, the relationship between any two sets of key metrics for a select set of organizations or the entire database. The analysis utilized the CORREL worksheet function in Excel to compare the two results and generate the correlation coefficient.

The ROI of Server Consolidation and Virtualization

There's a huge opportunity for IT budget savings by reducing IT labor requirements – primarily administration and support. In fact, more than 70% of the total cost of ownership (TCO) for typical data centers is for labor or outsourced services.

The high cost of labor, particularly performing mundane administrative and support tasks, is one of the key reasons why little of the IT budget is left for innovative projects that can help deliver competitive value.

That's where server consolidation enters the picture. It's one of the most effective ways to lower TCO of a company's data center. Typically performed using one of the four strategies highlighted here, server consolidation methods can be applied independently or simultaneously.

Physical consolidation

This means collecting servers distributed across multiple remote/branch offices and business units into a central data center.

Pros:

The team can improve configuration control by restricting server access, and strengthening business resilience through the superior data center infrastructure and security. It can also eliminate the cost of moves, add-ons, and changes (MACs), as well as break-fix maintenance and support by eliminating travel time and expenses.

Physical consolidation can help the team reduce complexity and more easily standardize purchases, configurations and management best practices. Costs to implement physical consolidation are low, and consist of network enhancements to support the centralization, data center build-out to support the consolidation, and physically moving the servers. Ultimately, IT labor savings can reach 10%.

Cons:

The risks are performance degradations due to poor network planning and business resilience risks by having all of the server assets in "one basket," particularly if the data center does not have adequate recovery plans.

Re-hosting

Porting from older legacy platforms and operating systems to newer solutions often results in consolidation, as fewer new high-performance systems are typically needed to support the workload.
Pros:

Depending on the age of a legacy system, expensive support and maintenance contracts can be eliminated. Since the number of administrators and support labor is usually correlated to the number of individual servers, having fewer servers generates proportional administration and support labor savings.

Migrating the operating system to a newer version enhances availability, security, management features and performance, and provides better upgrade options.

Cons:

If the proposed system for re-hosting is not compatible with the prior systems, the application may require porting to another platform, custom code rewrites, procedures and data migration. Porting costs are often underestimated.

Logical consolidation

Individual servers are often configured into individual server "islands" with 40% or more headroom to allow for changes in workload and growth. Using logical consolidation, hard partitions can be established for the operating system, application, processors and memory requirements so that these individual server "islands" are pooled onto a single server or cluster. That way, fewer servers are needed because headroom is reduced and the applications are hosted on a single cluster. The team can change the partitions to allocate more resources as needed for workload changes, as opposed to managing moves, adds and changes physically on multiple "islands" of individual servers.

Pros:

Logical consolidation on a shared server can save 40% or more of overhead headroom, and a proportional decrease in server assets. This can lead to a similar reduction in administration and support.

Cons:

Logical consolidation requires manually managing the hard partitions, made difficult in a dynamic environment where workloads change frequently. This process can be difficult and can introduce management burden and complexity. Many business units will not support logical consolidation where they must share servers, and will need to be "sold" on the business merits of consolidation and assured that service levels will hold steady or increase.

Workload optimization

The server operating system (such as with HP-UX11i's virtualization features) or third-party utilities (such as EMC's VMWare) can be configured to intelligently manage server resource allocation based on workload demands. Partitions can be established based on demand and schedule rules, and the system takes care of the rest, allocating computing power to automatically meet needs.
Pros:

Fewer CPUs, and in turn, fewer servers are needed to support multi-application workloads. For multi-application portfolios, this approach maximizes asset utilization and consolidation, reducing software licensing requirements, facilities costs and labor -- saving at leat 40 % based on the application profiles. Typically, fewer, smaller applications that peak at different times drive the highest consolidation. Because the system manages workloads and partitions, administration and support are minimized.

Cons:

Establishing workload optimization configuration and rules will take some time and can be complex, requiring professional services assistance. As with logical consolidation, business unit apprehensions and business resilience best practices apply.



The Bottom Line: ROI Analysis

The right consolidation decision takes careful analysis of current TCO, proposed consolidation options and architectures, required investments, and potential savings. Because the analysis is complex, internal IT teams should consult with independent analysts and performance benchmarking sites (such as www.spec.org and put vendors to task (with requisite scrutiny), to help propose and analyze current opportunities and various consolidation options. Comparing the solutions' TCO and service levels head-to-head with a TCO analysis tool can provide the team with visibility into potential savings, and provide justification needed to empower the business to make the right decision.

The ROI of Business Intelligence

Companies have spent millions on transactional systems to help automate key business processes. While these systems generate enormous amounts of valuable information, they often have poor reporting capabilities, inhibiting the sharing of key information -- like demand forecasting, inventory levels, error rates, finances and budgets.

The most common way for organizations to analyze and report on valuable business data is through spreadsheets. Businesses often have thousands of these analytical spreadsheets and reports, managed by individual owners. These spreadsheets remain difficult and costly to maintain, introduce data and analytical errors, and lock key information within the hands of too few employees.

Business intelligence (BI) software offerings, such as that offered by Hyperion and SAS, hold great promise to automate consolidation, analysis, presentation, reporting and compliance capabilities necessary to free enterprise data for actionable insight. According to 2005 research by Accenture, 15% of companies are at the proof-of-concept stage with BI, 22% are engaged in a pilot, and 36% have committed to one or more solutions. One in 10 isn't doing anything and 12% are monitoring the situation. In 2004, while most IT spending was flat, the BI market grew 11% to reach $4.3 billion in worldwide software revenues.

As a result of implementing BI applications, organizations are gaining key business value advantages ranging from simple cost avoidance, such as saving on the labor, printing and distributing reports, to competitive advantage, such as recognizing hot selling items quickly enough to respond to customer demands and avoid "out-of-stock" conditions.

Common benefits of BI include:

Consolidated query, reporting, analysis, and analytic applications, such as eliminating custom development and manual maintenance of Excel spreadsheets and reducing data consolidation efforts.

Better leveraging important and valuable data currently being captured by ERP, CRM, SCM and other systems, that previously has been locked in these systems due to inadequate and difficult mining and reporting tools.

Improved integrity of analytics by assuring source data validity and calculation integrity, reducing or eliminating the cost of business decisions based on incorrect data.

Eliminating stove-piped analysis across departments and divisions, reducing the time people spend arguing about numbers or making conflicting decisions.

Creating powerful dashboard applications for various user groups to help gain visibility into overall performance and specific key performance indicators.

Dashboards can help the business act faster on important insights, like quickly recognizing a hot product in order to meet growing demand and eliminate "out of stock" conditions, or more competitively establish price points.

Empower users to create, manage and distribute their own standard, ad-hoc and multi-dimensional reports and content, saving time on current report development and maintenance labor.

Reduce report printing and distribution costs including saving on printers, toner and mailing costs.

Improve velocity of reporting and visibility, reducing report-time from weeks to minutes, gaining real-time visibility into the impact of pricing and promotional strategies on corporate profitability, or creating compliance reports quickly in order to meet audit demands.

Uncover business issues, mistakes or fraud more easily, such as recognizing unusual business purchases or sales bookings.

Reduce the impact of employee turnover and need for training by unlocking islands of information and analytics in proprietary Excel spreadsheets and standardizing on a BI platform.

Better meet financial reporting and regulatory compliance by assuring consistency of information and automating analysis, validation and distribution of reports by policy.

Making the business case

Once the organization has reached consensus on the potential impact and value of BI initiatives, the team must make a sound business case for the investment, taking into account all possible costs and risks.

Costs
As a first step, it's important to take into account all costs considered over the lifetime of the solution. These likely include:

Purchase price of the software licenses, maintenance or support fees, application customization, implementation labor costs, consulting and professional services, additional hardware and software needed to support the BI application, and user training

Necessary upgrades of client machines or network communication

After the implementation is complete, the cost of ongoing management and support of systems, further customization and integration, and user training
System pricing, features and functions vary wildly, making it difficult to pinpoint what an organization might expect. Total expenditures can range from $100 per employee to $1,000 per employee in lifetime total cost of ownership.

The most critical component of the business case is to analyze up-front and on-going costs to select the solution that promises the lowest TCO, and will meet the most pressing needs of the business today and in future.

Risks
A second critical component of the business case is to evaluate possible risk. Too often, individual departments implement BI solutions best suited to that department or application. As a result, it's common for organizations to have five or more BI analysis and reporting tools, escalating the ongoing costs of supporting multiple solutions and vendors. Consolidated and standardized solutions with the right vendor and solution across multiple departments dramatically lowers costs – both for IT and the business -- by as much as 80%. On the same token, vendors in this space will also continue to consolidate.

User training is often overlooked when implementing a BI solution, but empowering users to understand analytics and customize their own reports is a critical key to business value success. Organizational skills must be cultivated to develop and use BI reporting tools and analytics in order to achieve the full benefit of new solutions.

Implementation and roll-out timing is the third critical piece. While it's tempting to try to automate all key metrics, reporting and analytics off the bat, there's a risk that the organization may not be culturally ready, IT resources spread too thin, and users fail to get as involved as they need to be.

The last common source of risk is found in the integrity of the data feeding the system. Much attention and evaluation needs to be paid to enterprise data quality, and may require an additional investment.

Realizing ROI from BI
When implemented correctly, BI initiatives can generate immediate cost savings over current analytics and reporting, enough to usually justify the investment. More importantly, these solutions can fundamentally transform the business by unlocking the power of the enterprise information and shared knowledge. Such a transformation is possible, but not always guaranteed as it requires setting up a proper and reliable BI platform, user training and cultural change.

The most powerful impetus to proceed, however, may be found in the numbers: For companies that Alinean has evaluated, 1000+% returns on investment were not unusual, because the tools made such a significant impact on supply chain optimization, inventory management or revenue.

Ten Steps to High ROIT

1) Think like the CEO. Focus on the business first. This will affect your competitive advantage.


2) Communicate in stakeholder-specific terms, such as "competitive advantage," "growth," "income statement," "TCO" and "key business metrics."


3) Think strategically. Create a competitive analysis. Compare your company to others in the industry. Be aware of where you stand, and communicate that to your board.


4) Know where your company stands in terms of things like net income vs. IT spending and revenue.


5) Manage tactically. Project ROI. Look at the overall impact of projects across the business.


6) Don't forget the intangible benefits and risks, such as costs, financial impact, IT cost reductions, revenue and more.


7) Manage IT investments as a portfolio.


8) Translate bottom up project ROI into financial impact.


9) Remain agile and prudent but stay innovative


10) Do analysis continuously. Establish internal and external ROI SLAs for continuous improvement.

Don't just cut IT spending - Use IT to reduce SG&A is best way to cut costs

Reducing IT costs is a great idea and all, but maybe you should take a closer look at administrative expenses instead.

That's the advice from Alinean Research. The ROI consultancy, based in Orlando, Fla., crunched several years' worth of financial data from 10,000 publicly held companies and found that IT departments have indeed reduced costs through consolidation and cutbacks. But sales, general and administrative costs (SG&A), have proved resistant to savings. Given that IT spending generally represents 3.5% of revenue, while SG&A represents 19% to 23%, the latter represents some significant opportunities for improving the bottom line, said Tom Pisello, Alinean's CEO.

"We found that when we compare current revenue and the revenue of the last five years with SG&A spending, the ratios haven't changed very much," Pisello said.

"Companies need the same amount of SG&A. If IT was doing what it was supposed to, those ratios would change. That just hasn't occurred at the macroeconomic level."

When IT spending was at its high five years ago, investment was directed at capturing new market share, not corporate efficiency. A lot of that money was squandered, Pisello said.

"When we look at some of the trends in spending today, a lot of IT is looking inward at cost reduction," he said. "CIOs are being treated like cost cutters, as opposed to holding the line or spending more on things that create greater efficiencies."

The remedy, according to Pisello, lies in three key areas: strategic planning in IT to reduce expenses, "knowledge capital," and tactical outsourcing.

A lot of the investments that have been made have not improved efficiency; rather, they have produced build-and-junk cycles wherein technology is abandoned before it has shown a return.

Executives need to understand the underlying business processes so they know when to abandon a project before they get in too deep. Streamlining the way an organization functions and doing strategic planning can ensure IT spending is directed wisely, Pisello said.

"Management has been drinking the technology Kool-Aid without understanding the true costs and business benefits," Pisello said. He recommends that companies look at IT investment with eyes focused on increasing the value of "knowledge capital."

Outsourcing, currently the smoking-hot trend in IT, holds promise as well, Pisello said. But it needs to be directed appropriately. Many organizations are turning to outsourcing as a cost-cutting measure but not taking the time to factor in the costs of managing those outsourced services. Many business processes are specific to individual companies, and an organization may be better off automating the processes in-house rather than doing wholesale outsourcing of IT, Pisello said. With tactical outsourcing, companies can free up resources for more high-impact projects.

Does Size Matter in ROIT?

It's a long-held theory that larger companies have an advantage over smaller ones in IT spending, largely because of their ability to tap economies of scale. They can spend less and extract more value from investments. Recent research supports the notion that size does matter but that companies investing the most in IT are not always the winners. In fact, on average, the most successful small and midsized (SMBs) companies are more frugal than the average large company when it comes to spending as a percentage of revenue.

To understand the differences between large and small companies, Alinean turned to its PeerComparison ™ database of 8,000 companies worldwide, which includes detailed IT spending and financial performance data. To judge if size really matters, the IT spending and performance ratios of public U.S. companies were compared between large companies with revenues greater than $2 billion, midsized companies with annual revenues between $50 million and $2 billion, and small companies with less than $50 million in revenues.

Our analysis shows that small and midsized companies often outspend larger companies. The average small company spends 6.9% of revenue on IT, midmarket firms spend 4.1% and large companies bring up the rear at 3.2% of revenue.

On a per-employee basis, small companies are also bigger spenders, at $15,810 per employee, while midsized companies spend less at $13,100 per employee, and larger companies spend $11,580 per employee.

For small businesses, these higher spending rates are the norm across all industries. In midsized businesses, the differences are more apparent in industries where IT spending is more critical to success -- particularly in financial services, IT and telecommunications, and consumer discretionary. In industries where IT is less strategic -- energy, consumer staples, legal and insurance, materials and transportation -- there is little or no difference in IT spending per employee between companies of any size.

The most successful small and midmarket IT spending programs map far more closely to those found in the SearchCIO 200, which identifies the highest-performing large companies. These top-flight small and midsized firms spend less than the average company -- almost 50% less, and only 2.8% of revenue on IT.

We can conclude that the most successful companies are more efficient and effective with their investments. Interviews with several top SMB performers reveal that most are extremely conservative in their approach to IT; they avoid large projects and demand quick payback from investments. Investments are well aligned with the business needs of supporting market advantage, growth and profitability, and with the strategies of basic business blocking and tackling, driving increased productivity, controlling overhead, improving business processes and streamlining operations. At the same time, keeping pace with product lifecycle management and replenishing aging products with new ones remains a challenge. This reality suggests that market conditions have an impact on companies' ability to make the most of IT investments.

While no single spending practice can determine a company's success, the following characteristics are common among the top performers:

For smaller companies, IT spending must be closely managed because projects can get out of control quickly, threatening execution and profitability. The key investment decisions center on whether the initiative helps the company enter a new market or business, provide better time to market, support continued innovation or enable growth.

Standardization and consolidation initiatives are extremely important for smaller companies and help to hold the line on IT infrastructure costs. The more centralized the IT group, the more easily assets can be standardized, which in turn requires fewer resources to manage the environment. With roughly 60% of direct IT costs dedicated to support resources, these savings can be substantial. Most top performers have programs in place to drive best practices in standardization and consolidation.

Being fiscally disciplined is important, but it shouldn't be the ultimate goal. For most SMBs, IT "innovation" often represents less than 15% of total IT spending. The most successful companies are interested not only in cutting costs but also in reducing basic operating costs so that precious funds can be reallocated to more innovative, business-enabling initiatives.
Wholesale outsourcing is not an influencing factor for leading companies, and smaller companies tap outsourcing strategies far less often than larger companies. Instead, outsourcing is done selectively, helping to supplement the core IT team with specialty resources for specific projects and initiatives. As with larger companies, SMBs that align IT with the most important business initiatives realize the greatest success. These companies optimize IT investments to reinforce positions in current niche markets, help maintain a strong pace of innovation, utilize precious resources more effectively, grow more efficiently, improve productivity, change key business processes, transform business information, or change or reinforce competitive and innovative cultures.
As with large companies, SMB leaders run the risk of becoming complacent, milking "cash cows" and failing to invest enough in the future. These companies face the ever-present risk of not innovating enough. The companies with good current performance must maximize strategic and innovative investments while minimizing ongoing costs for IT migrations, upgrades, management, maintenance and support.

For performance laggards, the decisions are tougher: Is current performance hampered by high overhead costs or a lack of revenue or growth? As with the top performers, lower-performing companies should make IT investments to reduce the cost of ongoing IT operations, and they should shift investments to improve the business.

The bottom line is that while SMBs often outspend their larger counterparts on IT as a percentage of revenue, the best performers are those deriving maximum value from technology investments that are well managed, innovative and aligned with the true needs of the business.

Q&A for SearchCIO: The State of ROI from IT

Between utility computing and offshore outsourcing, it's a pretty safe bet that the data center of tomorrow won't look like the data center of today. What can CIOs do to prepare for the inevitable evolution? In this interview, Tom Pisello, founder, CEO and president (basically "The Man") of Orlando, Fla.-based Alinean LLC, a company that develops tools to measure IT value and ROI, talks to SearchCIO.com about which current trends merit attention -- and what CIOs should be doing to stay ahead of the curve.

What current trends -- tech or non-tech -- do you see having the biggest impact on tomorrow's data center?
Tom Pisello: Budgets are still tight, and the data center is still a place where CFOs are demanding that CIOs do more with less, and that current investments be maximized before any new investments are improved. Three areas will be the focus of investments:


Continued consolidation of servers and storage to minimize the assets and associated TCO needed to deliver services.
Outsourcing of commodity services such as managed computing services/utility computing or outsourcing of development and service desks overseas.
Enterprise application integration, which will enable an organization to get more from their current ERP investments.



Since an IT budget is a terrible thing to waste, for which technologies should CIOs be socking away?
Tom Pisello: We recommend that CIOs take a value chain management approach to their budget planning, aligning the business goals with the IT investments. That way, they can be sure that the plan will have the desired strategic and tactical impact on the bottom line. The steps include:

Examining the company and peer's financial and key metric performance with business leaders to determine pain points and competitive weaknesses.

Aligning project plans with these pain points.

Calculating the cost/benefit, ROI, risks and strategic benefits of all proposed projects.

Analyzing all projects head to head to select the highest-reward, lowest-risk plans which align with the corporate strategy.

Predict the three-year impact on [the] IT budget and corporate financials to help optimize, communicate and sell the plan to executives.

Repeat the process on a regular basis to report card the realized value of IT.



What kind of a role will offshore outsourcing play?
Tom Pisello: Offshore outsourcing is seen as a method to extend IT budgets by using lower-cost resources to do more with less. But the outsourcing usually requires different skills of the team and requires more thorough specifications and stronger project management versus implementation. There are also hidden costs and risks, such as the ability to effectively specify, translate and meet requirements and security. This is being used today as a quick fix for many projects, because resources are not available to do everything in-house. Some of the projects are well suited for outsourcing, while others with less-defined requirements, higher security and IP needs should be kept in-house.


What kind of impact will utility computing, another hot trend of today, have on tomorrow's data center?
Tom Pisello:

The business case for utility computing is solid, with some direct cost savings (3% to 5%), but more significant gains in service levels and availability (20% to 50%). Most organizations are better at delivering the services and are typically not good at managing outsourcers, so this is a risk. Management needs to change from providing the service to managing the service provider, which sometimes isn't easy to do. Also, some of the savings gained by reallocating resources will mean having to let current folks go to hire the strategic resources to replace them, which has a hidden cost.

Overall, we're a big fan of this approach. IT investments can be viewed in a hierarchy of needs (a.k.a. Maslov), whereby the commodity investments are outsourced and the company focuses resources and investments on the differentiating higher needs, which today is business process optimization, and soon will be business intelligence and knowledge capital management.



Are there any current trends that will not live up to their potential or promise and simply sizzle out?
Tom Pisello: Of course there will, but they're hard to predict. For an individual company, it pays to do the analysis and business case for each proposed solution -- and to be prudent. Development projects and payback periods should be kept short -- six months or less from approval to deployment -- and six months or less for the payback period. Personal analysis is key to [being] sure that the solution will reap rewards, regardless of the broader market trends.


If the economy bounces back and CIOs begin to tap more freely into their checkbooks, how could that affect the data center? I've heard analysts and vendors alike say that so many things will change when the uptick begins. How do you see IT changing once the economy gains some muscle?
Tom Pisello: IT will remain under a new level of accountability for some time, so even though the constraints may be lifted, the accountability and skepticism will remain. Because IT has not been able to officially be increased, but the demand has, business units have created shadow IT projects and budgets. Those have increased to as much as 20% of the official IT budget in some organizations. This trend away from centralization of the budget to the business units, officially or unofficially, will continue to be a management challenge for the CIO.


If I'm a CIO in 2003, what should I be doing now to make sure I'm on top of things in, say, 2006?
Tom Pisello: Implementing an IT governance program, rather than having one dictated upon the CIO, is the most important initiative. Once the IT governance is in place, the CIO can talk the language of the executives and the CFO and get back some lost ground. This also moves planning from a black art to a science of ROI -- which is well practiced and used by the other business leaders in the company.


What should I be avoiding? Are there any traps I may fall into?
Tom Pisello: Doing nothing to move the organization toward lower costs or higher business impact is a huge risk. Cost cutting has cost data centers dearly, and many people within the organization are going around the data center to get the things done that they need. The CIO needs to be proactive in repositioning the data center and IT from a cost center into a profit center for the business.


Can you see a day when an IT department is totally outsourced?
Tom Pisello: Only if it is a commodity and doesn't add strategic value. If the CIO cannot elevate IT from a cost center into a profit center, this is a risk. The biggest way to prevent this is to, as a CIO, perform a makeover and become the 'CFO of IT,' utilizing business planning, portfolio management, ROI and IT value programs to get on par with the other business unit leaders in the company.

The ROI for Anti-Spam

The spam issue has reached such epidemic proportions that if its growth goes unabated, it can potentially ruin the utility and business value of e-mail. Nearly 36% of all e-mail messages received today are spam, according to NetIQ Corp.'s recent study of 750 small and large organizations worldwide. That's a sixfold increase over the past three years.

As the spam count mounts, the cost of managing the overflow (now estimated at $285 per employee per year) rises in lost productivity and incremental IT costs. As a result, the business case for antispam tools continues to increase: The typical organization gets payback on antispam software in six months or less, and an return on investment (ROI) of well over 300%, according to Alinean Corp. research.
All employees complain about the overflow of e-mail in their inboxes each morning, how long it takes to weed through it all and, increasingly, how embarrassing the e-mails are to the user and to the company.

The impact of spam is most heavily felt in three areas of the business:

• Lost productivity: Spam has the greatest impact on employees. More than 80% of costs related to lost productivity is managing and deleting unwanted e-mails. Alinean studies show that the average user receives more than 25 spam e-mails each day, and even though these e-mails take about five seconds to recognize and resolve, small productivity hits of two minutes per employee per day over the course of a year can add up quickly.
The costs multiply for remote users and for employees who access e-mail via voice-mail or wireless devices. The impact of spam results in an average 0.4% productivity loss per employee per year. For a typical 1,000-user organization, that means more than $250,000 in lost productivity yearly.
• IT costs: Spam consumes an estimated 11% of total Internet bandwidth costs and almost 500 GB of storage each year, according to NetIQ. In addition, it generates more than five help desk support calls per day for every 100 users, and it requires additional administrative staff to help manage and address the inquiries.
For a typical 1,000-user organization, incremental IT costs are almost 20% of the total cost of spam, resulting in additional costs of approximately $38,000 yearly.
• Legal and security risks: E-mails laced with sexual content, discriminatory humor, viruses, worms and Trojans are becoming more common. Companies need to take proactive measures to filter such messages or they risk facing costly consequences. Failure to address e-mail issues can jeopardize an IT manager's position if legal issues arise. The potential legal and security risks are difficult to quantify, but if just one of these risks is realized, the cost to the organization can easily outweigh the more tangible IT and lost productivity costs.

No silver bullet will resolve this problem immediately, but in the near term, these techniques will help mitigate spam's impact:
• Educate users. User behavior can influence how much spam they attract. Educate users and tell them not to register on or visit questionable Web sites. Tell them not to respond to spam e-mails and to avoid publishing e-mail addresses on public Web sites, because spam programs scour these sites for new targets.
• Implement text analysis. Administrators can configure antispam software to recognize words used by spammers and prevent them from being routed to users' inboxes.
• Analyze e-mail headers. E-mail headers often contain clues that the message is spam. Headers can be analyzed to block such messages.
• Establish blacklists for e-mail hosts, domains and users. Blocking messages from known spam hosts, domains and users can help significantly reduce unwanted e-mails.
• Invest in antispoofing. By preventing spam e-mails from looking like legitimate correspondence, users will not be fooled into responding and attracting even more spam.

Spam senders are as savvy as virus writers in outfoxing protection strategies and filters. To stay one step ahead of blocking technology, spammers are changing text, altering headers and changing e-mail hosts and domains. In response to this cat-and-mouse game, antispam vendors are constantly enhancing their products.
Eliminating 80% to 90% of spam is an admirable target. One of the biggest challenges, of course, is to ensure that valid communications are not blocked. Today, most antispam software captures about 40% of unwanted e-mails. Newer tools promise to hit the 90% mark, with less than 1% "false positives" (important e-mail messages unintentionally blocked.)

The bottom line: The ROI for antispam initiatives is already significant and will continue to increase as software becomes even more advanced.

Wednesday, December 14, 2005

Front office investments vs. back office investments

In a current IT spending vs. performance study we are doing with Bain we are looking at various IT success factors - trying to determine what makes some organizations more successful with their IT investments. One of the first items we confirmed, was the long standing belief that it is not how much you spend on IT that matters, but rather what you invest in that counts. Looking at 500+ companies we plotted IT spending versus performance metrics such as revenue growth, profitability and economic value add (EVA)- and the results showed no correlation between more spending and higher performance.

With overall spending versus performance proving inconclusive, we are now researching additional success factors which we think drive superior performance.

One of the key factors we are researching as to how it drives superior performance is front office investments versus back office. Front office investments include direct external customer facing applications and resources, as well as indirect investments in applications to support customer services and experiences. Looking at a few of our select top performers we see that these companies have a higher amount of customer centric investments compared to the competition. These investments are helping to drive revenue growth and market share, and in today's expansive economic times, are driving these companies to superior performance.

On average small and medium businesses spend around 40% on front office IT, with top performers spending 10% more or so. So what's your mix of front office vs. back office investments? Assess the mix for existing spending and new projects to see if you are focusing enough on growth and customers, or are too focused on internal optimization.

Vendor ROI: Can it be trusted?

As an IT buyer you often don't have time to do your own ROI analyses, and often rely a lot on vendors to help. But, can vendor ROI analyses be trusted?

The simple answer is yes and no. Just like a reporter putting together a news story, your reliance on vendor ROI analyses depends on having a credible source and questioning/validating the facts. You should not accept just any solution provider's ROI as gospel; however, working with a good solution provider in partnership and using their ROI analysis can help the team reduce the time it takes to gather an understanding of the opportunities, the potential benefits and the costs.
Here are a couple of guidelines to making sure the ROI collaboration is successful:

1) The analysis should use a standard methodology for calculating ROI, one that matches recognized accounting principals and financial facts -- better yet one developed by a credible third party and not the solution provider themselves.

2) The analysis needs to be completely personalized with your own current spending and performance metrics, such as what your particular current costs are, current practices and opportunities for improvement. Using industry estimates is OK when doing an initial review, but your own personal opportunities for benefits and savings are what count.

3) The benefits need to be reviewed and adjusted. Almost all ROI analyses start with ideal benefits, collected by reviewing several typical installations (case studies) to determine what benefits can be derived. The collection of these across all companies forms the benefits list and assumptions. But all companies are not the same, and even in the case studies, not all companies received all the benefits. So each benefit should be reviewed and adjusted to reflect the companies' own assumptions on benefit achievability.

4) Costs need to completely recognize the initial capital investment, labor and services, business unit and user impacts as well as on-going costs. Only 20% of any technology investment is hardware and software costs, yet in solution provider's own ROI analyses these costs are often all that's considered leading to surprises during development, deployment and on-going management and support.

5) Risks need to be included and reflected in the analysis, yet many solution provider ROI analyses fail to account for project risk factors, deployment schedules, less than 100% adoption curves and differences in realizing benefits of different types (hard vs. soft benefits). With only 20% to 30% of all IT projects coming in on time, on budget and with all desired features as planned, risk is a reality. Factoring in risk on vendor-provided costs and benefits will help to create a more realistic and achievable business case.

6) When comparing different ROIs from different providers, make sure the assumptions are the same. We have found that often homegrown vendor analyses, often spreadsheet-based models, are developed by internal experts and have a lot of excellent information on benefits and costs. However, these models often use non-standard ways of treating different costs, benefits, risks and calculating key financial metrics. When comparing ROI analyses even within a single vendor, we have found major differences in assumptions and methodologies, much less across two or three vendors in a space. Be sure that you understand each solution provider's standard and force them to normalize and conform to your own methodologies or the most conservative of the group under consideration.

7) Make the ROI your own. This is the most important advice I can provide. When you are done with the collaboration with the solution provider, you know it's a valid analysis when it's yours and not the vendor's. You've used the vendor to jumpstart the process, but you've taken ownership of all metrics, assumptions, risk adjustments, costs, benefits and so on such that you know its achievable and credible. It is your own.