Thursday, November 30, 2006
Frugal CIOs and CFOs want to understand how investing in the upgrade will yield immediate and direct benefits – particularly how it will help reduce IT costs, while at the same time improving user productivity, service levels and capability. With the most frugal buyers in mind, let us first look only at the direct impacts of implementing Vista – how the Vista investment can help lower ongoing IT costs.
Looking at the costs of PC ownership, IT labor for desktop management and support is the largest IT expense, consuming almost 60% of the total lifecycle costs. PC support and administration costs on average one FTE for every 100-200 PCs, with an estimated 8 to 12 service desk calls per PC per year. With this costing $400 to $700 annually per PC on labor or on outsourced equivalents the most significant direct IT savings can be achieved by reducing administration and support staff tasks and improving their productivity. By reducing the burden of PC management and support, organizations can help reallocate precious resources from mundane “keeping the lights on” operations, which today consume an average 61% of current IT spending, to more innovative projects, which now only amounts to a scant 14% annual investment – one of the highest priority goals for most IT organizations over the next three years.
Vista as a key to Infrastructure Optimization
In examining ways to achieve greater business value from IT, recent studies by IDC on Infrastructure Optimization strategies has demonstrated that implementing best practices can help to significantly reduce operating costs and boost service levels and agility. The study was conducted on almost 1,000 organizations, and analyzed the impact of maturing organization from a Basic practices level where IT operations are uncoordinated and manual and IT is seen as a cost center, through Standardized, where there is a managed IT infrastructure with some automation and knowledge capture to Rationalized, where IT is a business enabler, infrastructure is managed and consolidated and there is extensive automation, knowledge captured and re-used.
As part of the infrastructure optimization Windows Vista was indicated as a key catalyst and component, helping organizations to achieve optimization more quickly, efficiently and effectively, as well as being able to better adopt and sustain these practices once implemented. With the optimization of desktop management from Basic to Rationalized, organizations have been surveyed to achieve compelling IT labor savings / reallocation of up to $430 USD per PC per year, including the following specific improvement strategies:
• Centrally managed PC settings and configuration (savings of $190/PC): Keeping deployed PCs standardized by preventing users from making changes that compromise security, reliability and the application portfolio.
• Standardized desktop strategy (savings of $110/PC): Deploying a standardized desktop by minimizing hardware and software configurations.
• Comprehensive PC security (savings of $130/PC): Proactively addressing security with anti-virus, anti-spyware, patching, and quarantine.
Source: Optimizing Infrastructure: The Relationship Between IT Labor Cost s and Best Practices for Managing the Windows Desktop, IDC October 2006, #203482
Up to $430 in IT labor savings per PC per year can be achieved from implementing IDC recommended PC infrastructure optimization best practices – from Basic to Rationalized. Many of these benefits can be enabled and maintained more easily and less expensively with Vista.
When IDC isolated just the affects of Vista in Standardized organizations, predictions estimate $123 in benefits per PC when migrating from Windows 2000 environments migrating to Vista, while IT labor savings of $37 to $66 per PC are expected for migrating from Windows XP / XP SP2 environments respectively.
At Alinean, we incorporated the IDC research, along with research from GCR and WiPro into predictive models and tools to estimate the costs and benefits of migrations, and easily project these figures for any company or situation. Using these models resulted in slightly more conservative IT labor productivity improvements ranging from $69 per PC for Standardized Windows 2000 environments migrating to Vista, and $50 per PC for Standardized Windows XP environments.
These savings included some major improvements in manageability and support:
Improved image management – A typical organization spends $2-$6 per PC per year managing and distributing images to support updates, upgrades and refreshes. Because Windows Vista operating system is built using new Windows Imaging Format (WIM) hardware-agnostic image file format, and using separate and self-contained components with clearly defined dependencies, helping to significantly reduce the number of images to be managed. New deployments and maintenance of operating system costs can be significantly reduced as a result to image consolidation reducing costs to less than $1 per PC per year, a savings of between $1 and $5 per PC per year.
Enhanced security and security management – With almost 3% of total PCs falling victim to security incidents per year in average environments, security risk mitigation and management is important – a potential $18 opportunity per PC per year in reducing mitigation labor alone.
Making it harder for viruses, malware and exploits to be introduced and making it harder to spread over the network was a key design goal of Vista. Early tests of Vista have proven that it is much more secure, and although Vista is expected to be a prime miscreant target, based on the design, the resilience benefits are expected to continue. Because Vista is built on the Windows Server 2003 operating system, its core is more reliable than predecessor versions. To make security easier to manage and maintain, the Vista design requires smaller patches when needed, and an optimized distribution technology to get needed patches in place faster and with less burden on the network and resources.
These savings combine to contribute from $4 to $12.50 per PC per year in security remediation labor benefits – particularly avoiding security incidents before they happen.
Security Patch Management
Patch management and distribution is a painful reality of managing today’s Windows 2000 and XP environments. Windows 2000 has averaged 1 critical and 10 high priority patches per year, while Windows XP / XP SP2 has had 0.4 critical and 12.5 high priority patches per year. Patch management adds average cost of around $2 per PC annually.
Windows Vista adds the Windows Update Agent (WUA) for more reliable distributions with reduced reboot requirements, and Background Intelligent Transfer Service (BITS) providing intelligent distribution to reduce distribution and bandwidth issues when distributing patches.
With Windows Vista, less patches are expected and patches are easier to build and deploy, resulting in a projected 23% reduction in labor required per patch, and an estimated $1-$2 per PC per year in security patch management labor avoidance.
Automated Desktop Management
Currently PC infrastructure management costs organizations from $300 to $420 per PC per year in non optimized environments – the largest opportunity for savings. This labor includes managing PC related adds, moves and changes of hardware and software, user administration, software deployment, application management, asset and data management. Along with the security, image and patch management features above, Vista supports more automated and granular control of the desktop to help reduce labor costs including:
• Group policy – policy settings are expanded covering new features and areas of customer need
• Windows Image Management (WIM) – helping to reduce the number and complexity of images under management.
• Task scheduler facilitates recurring and event triggered task activation.
Savings from these features are estimated to be as much as 10% or around $30 to 42 per PC per year.
Improved Help Desk Support
In typical environments, the average PC user calls the help desk from 8 to 12 times per year in non-optimized environments. This translates to an average $120 to $180 in IT labor per PC per year.
With new features such as Windows Resource protection which automatically helps to maintain and protect Windows itself from inadvertent changes, as well as prior described platform reliability, security and manageability features, issues are prevented before they occur. When issues occur, getting them solved faster and without escalation helps to reduce support costs. Via in-the-box viewers Vista provides IT support with a unified view for all Windows components. With support for the Intelligent Platform Management Interface standard, hardware monitoring and diagnostics are improved.
The proactive prevention of calls combined with better supportability deliver estimated savings of up to 8% per PC, or a potential savings of $9.40 to $14.40 per PC per year.
IT Deployment Investment – the Cost of Change
Looking at the cost for deploying Vista, we find that depending on the scenario used, costs can vary widely.
One strategy to achieve Vista immediately is to perform an in-place migration where systems are upgraded now to the new operating system without replacing the systems with new PCs, often using automated software distribution tools. In such a strategy, if hardware upgrades are not needed, the migration is expected to be around $190 per PC including $150 for the Vista license, and $40 per PC for upgrade planning, migration and upgrade, IT training, and application compatibility testing and remediation. For this scenario, if a zero-touch deployment using automated software distribution is not used to make the in-place upgrade less labor intensive, costs could be 20 to 40% higher due to having to use labor to manually install the OS on each PC. If the Vista license is part of corporate licensing, these costs could be significantly lower per PC.
If hardware upgrades to memory, disk drives or video cards are required, in particular so that the Aero interface can be supported, or to upgrade old systems to meet minimum requirements costs can increase an additional $100 to $120 per PC including both the hardware and the labor to perform the upgrade. In most environments, it is estimated that at least 1/3rd of the systems require replacement or upgrade in order to adequately support the new OS.
These deployment costs only refer to the IT capital and labor costs, but often there are user related costs to any upgrade, and these costs could be even higher than the direct costs depending on the upgrade scenario. When an upgrade is performed, some organizations offer training for users, although experience with Windows XP illustrated that most users were upgraded without formal training programs. However, even without formal training, users will need independent learning time, and this labor should be accounted for as part of the migration costs. Some upgraded users may also have to migrate there own data or settings (if tools are not used to automate this process), or may not be upgraded correctly and experience issues – having to call the help desk for problem resolution, resulting in downtime. On average the additional costs are expected to be $30 to $250 per PC.
In total, an accelerated upgrade to Vista is expected to cost from $190 to $310in direct IT costs, and an additional $30 to $250 in indirect costs.
A less expensive way to achieve migration is to let the upgrade occur naturally – obtaining Vista only when PCs are replaced / preinstalled from the PC vendor, often called managed diversity. Under this program, PCs are replaced as they mature with new hardware, and when this hardware is configured, it arrives with Vista already included in the purchase price and installed. However, the hidden cost of this strategy is the lack of standardization – where the IT organization will need to support a mixed environment of legacy Windows XP / XP SP2 desktops with new Vista platforms.
The Bottom-Line: Real ROI from Vista?
From these reviews, Vista is by all accounts a better operating system than any prior Windows version, however from a business case perspective, the view is not so clear.
Crunching the numbers for a typical Standardized company, the investment for an immediate in-place Vista migration will require organizations to spend a minimum of $190 in direct migration labor, licensing and IT training per PC (without consideration for hardware upgrades or soft costs).
With between only $53 to $71 in expected annual IT labor savings for Vista, comparing the ratio of net direct IT savings to in-place migration costs over a three year analysis period yields a marginal ROI of between -14% to +15%. It is difficult, if not impossible to make the case for Vista on IT labor savings or other direct IT cost savings alone.
It is clear that for the business case for Vista to be compelling, the analysis needs to extend beyond just IT labor savings, and include user / business benefits such as the potential for enabling new applications, performance improvements, improved search productivity, power management savings, improved systems availability and security improvement, and reduction in end user operations costs. Perhaps including the benefits of the Vista upgrade with Office could provide a more compelling case.
However, including these benefits is difficult in a credible business case. Even though many of these benefits can be achieved with Vista, the quantification of the value of these improvements is difficult to project and realize as true bottom line or competitive improvements. Including these softer benefits can yield up to $150 per PC per year in incremental benefits ($68 potential savings from power management improvements alone). With these benefits included, the ROI jumps to almost 200% plus, but when the soft costs are also included to offset the soft benefits, again the business case for accelerated Vista deployment becomes more marginal.
Although many want to deploy Vista early to help reduce IT costs, and may be considering an accelerated upgrade, it is difficult to make the case for Vista alone on this basis. The following is clear from our applying early research and modeling of various upgrade scenarios:
1. With only $53 to $71 in available IT savings, Vista deployment costs need to be kept as low as possible in order to generate a positive business case. Migration is using a managed diversity approach (when systems age, replace them with Vista already installed from the PC vendor at no additional charge) may be the way organizations can best keep costs minimal and achieve a positive business case.
2. Vista used as a key component to help implement infrastructure optimization best practice improvements can yield significant benefits of up to $430 per PC per year, easily justifying most upgrade costs. Vista has clearly demonstrated the ability to make these practices less expensive to implement and more sustainable.
3. The business case for Vista can be better if the organization can substantiate end user savings and business improvements in conjunction to direct IT labor savings. Including end user and business benefits such as reduced power consumption, improved availability and search can help justify an accelerated upgrade. Including the upgrade and value from an Office upgrade performed in conjunction with Vista could provide additional business benefits that offset the cost of change.
The view of Vista can include ROI, but in order to see real value requires a change of perspective – one which includes Vista as part of a natural migration, broader infrastructure optimization or business productivity initiative.
Examining IT spending and effectiveness metrics on 21,000 companies in 37 different industry segments worldwide. , the results show that there are several significant findings to examine in relation to your own budgeting process, including:
1) Innovation spending is up sharply by 43% since 2003 and will likely continue to grow
2) IT efficiency has increased 10% allowing companies to do more with less
3) But when examined in relation to revenue growth, overall IT spending has lagged for the second year in a row declining to only 3.3% of revenue
4) Overall IT spending, even though lagging revenue growth, is driving superior corporate performance in the majority of industries, and has improved 67% from 2003.
Let us examine each of these four trends in detail and what they will mean for your organization in 2007.
Innovation is the focus, and it shows
Even though budgets have increased, many IT organizations struggle to obtain enough funding to implement as many new applications and functions as they would like and as business units demand. The good news is that increasing IT budgets and corporate initiatives to reduce operating costs have resulted in increased innovation investments, rising from a scant 10.2% of the average IT budget in 2003 to over 14.6% in 2005 – a whopping 43% increase. As a result of conscious efforts to innovate more, innovation spending increases far exceed budget increases over the past 4 years.
Keeping the lights on still consumes too much of the average budget, at around 60%, while migrations and upgrades to existing systems costs 26% of total budgets, but the rise in innovation investments is promising. And the effects are wide reaching in that innovation spending is up in 78% of all industries (29 of 37 total).
Across the 37 industries in the study group, innovation investments were up sharply in several segments including Aerospace and Defense firms, Specialty Manufacturing and Professional Services, Transportation and Utilities. Industries where increases in innovation were surprisingly low or flat included Financial Services / Banks which overall has the highest level of average innovation at 18% but with flat growth) and Insurance. Industries with drastically lower innovation rates included Telecommunications, Real Estate, Paper Manufacturing, and General Manufacturing.
The key for future spending on innovation is to demonstrate how the reallocation of budget towards these new project has yielded tangible value to the business, enabling even more to be budgeted for 2007 and beyond.
Doing more with Less: IT Efficiency is up Sharply
Overall, IT labor or outsourced equivalents consume the majority, 56% of the average IT budget. Being able to utilize these resources to best effect, particularly being able to manage more employees and knowledge worker per staff member provides greater IT efficiency, and enabling the resources to move from mundane tasks to value added innovation is important to improving IT effectiveness.
In over 70% of industries IT efficiency increased substantially, increasing the number of knowledge workers supported per IT FTE resource. On average, 45 knowledge workers can be managed per IT FTE, while 130 employees overall can be managed per IT FTE. This represents a 10% improvement in ratios and reallocation of labor costs over 2003 spending levels. Consolidation, standardization, virtualization and management tools all contributed to the efficiency and productivity increases.
This has resulted in a reduction of overall IT costs per employee to $4,818, while costs per knowledge worker have been reduced to $8,685 on average worldwide.
Industries with the best increases in IT staff efficiency include Financial Services and Banks, Food and Beverages, Healthcare, Insurance, Professional Services, Real Estate, Wholesale, Government and Education. Industries that did not see improvements and have declining management efficiencies (less knowledge workers managed per IT FTE) include Automotive and Vehicle Manufacturing, Construction, Steel Manufacturing and Transportation.
The key for 2007 is further improving IT productivity and efficiency, helping to reallocate more and more budget from keeping the lights on to address the backlog of business projects, improve service levels and drive innovation investments.
IT spending not keeping pace with revenue growth
IT spending has not kept pace with company’s revenue growth in many industries declining for the second year in row, from a peak of 3.9% of revenue in 2004, to only 3.3% in 2006. A slight majority, 56% of industries, saw their IT spending increase relative to increases in revenue, but the database average overall still saw a decline.
Industries with increases in IT spending relative to revenue included Financial Services and Banks, Healthcare, Insurance, Professional Services, Publishing and Printing, Telecommunications, Tobacco and Wholesale.
For 2007, CIOs need to prove the value of IT investments to the organization in order to gain a higher portion of the budget and maintain IT spending growth to drive additional business strategic advantage and revenue opportunities while improving business operating efficiency for greater bottom-line gains.
Modest Return on IT (ROIT) Performance Leaves Room for Improvement
Measuring IT spending is only part of the equation. Although IT may be getting more efficient, is it any more effective than before – or are cost cuts taking their toll?
The good news is that 56% of the industries had increased ROIT rankings (the ratio of Economic Value Add (EVA) to IT Spending), and performance improved some 67% from 2003.
As the economy grew all ships were buoyed by the rising tide. But at the same time, organizations were getting more from their IT investments, yielding a greater ratio between the net rewards (EVA) and the investment (total IT spending)
Industries with the largest ROIT gains include Aerospace and Defense, Entertainment Services, Healthcare, Technology, Hospitality, Specialty Manufacturers, Medical and Lab Equipment, Pharmaceuticals, Oil and Gas, Mining, Publishing and Printing, Tobacco, Retail and Wholesale. Many of these large performance gainers were in industries that benefited greatly from economic conditions (such as oil and gas), and/or were well correlated with increased innovation investments.
For 2007, IT executives need to continue to align IT investments to achieve key business goals and initiatives to assure that performance improvements continue.
Our research proves that overall IT spending is growing steadily, but perhaps more conservatively than expected. It is clear that overall spend levels have not kept pace with revenue growth. Focus on consolidation, standardization, virtualization and management tools has led to continued IT efficiency gains, up over 10% from prior years, which have helped organizations do more with less and freeing up IT staff for higher impact, more innovative initiatives. As a result, innovation investments are up a whopping 43% as a percentage of overall spending, helping to drive continued business improvements and growth. The yield from IT spending, ROIT continues to improve, garnering the largest year over year gains since we began tallying this metric in 2003.
The IT spending trends into 2007 will be shaped by the overall macro-economic environment and sentiment. Current predictions are that the overall economic picture is unclear. This will constrain IT spending increases until the risks of a slowdown disappear. However, with the success of prior investments, the continued efficiency improvements and shifting of budgets to more innovation will continue unabated into 2007.
Wednesday, November 08, 2006
These same customers, even though they require formal justification, admit that they don’t have the time or resources to properly prepare business cases for all of the pitches and proposals they get, and as a result, many never get the fair consideration they deserve. Many fully expect vendors step up with their own justification. Vendor analysis is so important that over 61% rate a vendor’s ability to deliver an ROI business case justification as an important differentiator or requirement in the selection process.
The bottom line message for vendors – if you want your sales proposal to be a priority, it needs to be justified in quantifiable terms. The demand for business value selling is a fundamental and permanent shift.
In response, most sales forces have instituted initiatives to help align with a more demanding and frugal customer base. These programs have consisted of:
1. Solution or value selling methodology training and processes including CRM integration to help track the process
2. Value oriented advertising, direct mail, collateral, case studies and white papers,
3. Account intelligence tools to help understand customer issues and engage on a consultative basis
4. Dynamic ROI / TCO sales tools to make the case for specific projects and initiatives
We have seen many of these programs reap early rewards, but for some vendors, these initiatives seem to lose steam. For example, a large IT vendor we know of instituted a value selling methodology and asked sales professionals to track deals through progressive value steps. The program included tools to help engage customers on value opportunities and also help in developing ROI business cases.
The first year, intense training was conducted and adoption was driven through champion initiatives and management mandates– reaching 70%+ awareness in the sales force, but only around 1/3rd sales force adopted the program to even the most basic level. Why reluctance to adopt initially? The team found that it was not a demand issue – customers were asking for help – but the following internal issues:
1. Many of the sales team did not have prior experience in value selling methods or formal training – this was mostly new, and in many cases overwhelming the first time through
2. Many of the sales professionals being trained were new to the company – with over 30% having less than one year of service. Open to new programs, but overwhelmed with other education worries, the new way to sell and tools to help were often just one more thing to worry about.
Even with these hurdles, those who adopted the techniques and tools had quantifiable improvements via competitive wins, and additional revenue. The programs had positive ROI and a great value add for customers.
So how was the progress the second year? Because the sales team had other investments to make in staff, systems and programs, and because so much effort was put forth in year one, the second year education and program management budget was reallocated to other programs. By the third year with even less focus by education and program management, use of the new program was almost non-existent.
Why when the demand was so high and growing from the customer base for these value-based sales programs did the program not stick?
For IT sales forces, the average sales turnover rate as measured for 2004, 2005 and projected into 2006 is expected to be a lofty 30% according to well respected human resources research firm Culpepper. Each year, one in three sales professionals is new. For some companies, over a three year period only a few veterans remain. Over the course of three years, it is no wonder why any program that is not reinforced continually, supported by training, tools and management focus disappear.
We have seen many companies invest millions in value selling training programs and tools, but fail to advance this revolutionary change through centralized program management focus and education / support change.
As such, we recommend the following best practices
1. Revolutionizing the sales process – moving from well practiced feature, function and price selling to business value is not going to happen overnight. Such significant change requires significant training and tools.
2. Value selling programs should be kept simple in order to improve the chances for early adoption and usage.
3. Instituting change while attrition is in the 30% range is difficult, therefore, program investments need to occur over some time and be reinforced continuously
Too often we see company’s focusing their investments on quick payback periods – implementing projects and initiatives that in the short term may tyield a quick ROI –saving the company money or driving short term sales – but in the long run yield strategic issues. Return on Customer is a specific measure to help companies overcome two issues we have seen with CRM business cases:
focus their CRM initiatives and the entire company on what counts most – the customer – versus saving money or optimizing resources
balance short term gains versus longer term impacts of CRM programs – getting the organization to think not about the quarter by quarter financials, instead, thinking more for the long term. With this mindset would companies have rigid return policies – such as the miserable penalties that existed at Blockbuster and forced me out as a customer, or the damage that short term aggressive telemarketing campaign might have on future loyalty versus short term temporary revenue gains.
Most CRM ROI oriented business cases focus too much on the near term, counting only direct “hard” benefits and ignoring the more important soft benefits that relate to customer satisfaction, retention and lifetime value optimization. Pepper’s and Rogers say it best in that: “Customers are the only reason you build factories, hire employees, schedule meetings, lay fiber-optic lines, or engage in any business activity. Without customers, you don't have a business.” Therefore, the CRM business case should be focused much more on the softer benefits, especially maximizing customer lifetime value, and the ROC measure is one way to help the team balance the short term and long term investments and impacts around this initiative.
Return on Customer is calculated as the firm's current-period cash flow from its customers, plus any changes in the underlying customer equity, divided by the total customer equity at the beginning of the period. Customer equity is the net present value of all the cash flows a company expects its customers to generate over their lifetimes.
The formula takes into account the short term sales from customers, as well as factoring in changes to lifetime expectations. Even though sales may be good today, if a customer decides to not purchase in the future because of something that damages the relationship with the customer, a market brand issue or a competitive trump, the formula takes this into account by lowering the return on customer.
The hard part in working with the ROC formula however is that the expected lifetime customer value is often hard to estimate, and therefore the equation has risk in its accuracy, and folks tend to be uncomfortable with these estimates. This is especially true when the team is asking for large hard dollar investments to be made today, with a prediction of some future value.
With ROC the value of using the equation outwieghs these risks. Using ROC as an important element in the CRM decision process can help the team maintain customer focus and better balance investments for long term value acheivement.
How important is improving data management/data architecture processes before implementing CRM in order to achieve better ROI in a faster timeframe?
Without a good data architecture and integrity plan – what data is to be collected and integrated and how it is going to be used – the CRM solution may not prove as useful as possible, may prove unreliable, or may undergo overhauls midstream. It is important that a data management / data architecture be developed prior to CRM implementation and deployment in order to support the business goals, drive a customer centric implementation, and deliver a more reliable return on CRM investment.
As a rule of thumb, projects which take more than 12 months to achieve payback – where the cumulative benefits exceed the costs – is typical, even on CRM projects. Any project where the payback is more than 24 months out, I would suggest the team break into smaller, less ambitious projects – where the investment is smaller, and the initial benefits acheivements can help to pay for next round of investments.
On any project you should expect to see some immediate benefits in the first couple of months after deployment, and use. Waiting until after the users are trained and begin using the system is required, but soon after some of the hard (direct) benefits should be apparent and quantifiable. If the project is not showing some quantifiable improvements in key performance indicators after training and adoption begins the project team should regroup to discuss why and try to remedy the situation. Measuring these consistently over the first several months of the deployment is important. In the beginning of the CRM deployment tracking awareness and training is the first step, then adoption and usage, then results – the expected impact from using the solution - in progression.
For users of these calculators, they can provide a quick idea as to what savings could be achieved, particularly those calculators which let the user delve deeper and change all assumptions and defaults (not black box with magic results that always come out positive), and those which are supported by direct research as to the benefits achieved by other customers.
These calculators have proven valuable as landing pages for direct marketing campaigns and for educating and capturing leads. The results are real, and quantifiable, as we surveyed many vendors with calculators, for example, a major software vendor achieved the following with an ROI calculator:
> Resulted in 15% visit-to-sale conversion rate (versus 5% for regular registrants)
> Produced 2 times as many qualified leads as all other web promotions combined
> Increased length of stay by 340% (17 minutes vs. 5 minutes for regular visitors)
> Increased average page views by 314% (22 per visit vs. only 7 for regular visitors)
The keys to the program working for the vendor?
> Third party credibility by having tool developed by someone other than vendor
> Including a white paper case study content from existing customer results to backup all of the benefit claims
> User capability to review and change all key assumptions so they were comfortable with the ROI results (no black-box)
> Featured as part of an overall value oriented campaign – attracting the right audience who care about ROI and business value.
> Simple use up-front in order to get results in a few minutes or less, but with some depth so that users can fine-tune results to match their own unique opportunity
> Reports so that the results could be shared with other stakeholders and decision makers
Visit http://www.alinean.com/P_ROIcalculator.asp for several sample calculators we have developed for various leading IT solution providers.
1. Consolidating existing system and avoiding having to continue to pay support contracts on the replaced assets
2. Automating a specific tasks and eliminating the manual effort
3. Moving the task from a highly skilled expensive resource to less expensive resources
The direct benefits are often easy to quantify, and as such there is usually little risk in considering 100% of the expected cost avoidance or productivity improvements in the ROI calculation (ROI = net benefits / cost).
Soft benefits are less easy to quantify and rely on in a business case. Soft benefits are often referred to as indirect, because they rely on a number of steps in order for the benefit to be realized. Improved up-sell / cross-sell is a good example of an indirect benefit from a new CRM system that helps the call center improve its interaction with customers. In order to realize the up-sell / cross-sell benefit, the call center staff needs to use the solution as expected, this changes the relationship with the customer, and the customer reacts by purchasing more – a complex set of cause and effect in order for quantifiable benefit to be achieved. Some other examples of indirect (soft) benefits include:
1. Most revenue benefits like improving lead conversion rates or reducing sale cycle length
2. Productivity benefits where there is not a direct automation or elimination of a process step or task
3. Reduce business risk from implementing new security systems, compliance management or disaster recovery solutions
4. Reduce downtime by improving server or system availability
Because indirect benefits are harder to quantify reliably, and cannot be counted on the same way as hard benefits they should be discounted before adding them up in the ROI equation. We typically only include 10-40% of these indirect benefits in order to create a more reliable – take it to the bank – business case. In many instances the indirect benefits are very important at achieving goals and in some cases are the reason for implementing the proposal in the first place, so we feel strongly that they should always be included, they should be quantified, but need to be substantially risk adjusted.
Visit http://www.alinean.com/ITexecs.asp for free access to a CRM tool which can help to quantify both the hard and soft benefits (registration required).
Many organizations that produce, distribute, handle or sell goods are researching what RFID can do to improve operating efficiency, reduce business risk and drive additional revenue opportunities. According to our research these early RFID projects could cut supply chain costs by 3 to 5 percent and achieve a 2 to 7 percent increase in revenue, thanks to the better visibility and accuracy RFID provides.
Alinean studies show that on average, more than 90 percent of projects require a formal business case justification in order to gain approval. For an organization considering RFID projects that might require significant up-front investment, how can these general early adopter guidelines and case studies be used to ensure that individual programs generate positive business benefits and a tangible ROI? Most importantly, does the value of RFID tagging exceed the implementation costs?
RFID is being implemented, along with key business-process improvements in many industries, to reliably track goods of all kinds—from cases, pallets and individual items in manufacturing, wholesale distribution and retail applications, to equipment and supplies in government applications, to overnight mail packages and passenger luggage in transportation and shipping. Many of these early adopters have experienced the benefits of bar codes, but realize that RFID can take supply-chain management to the next level. The network effects of a synchronized supply chain will result in numerous benefits, including improved scan reliability, process automation and real-time information access.
RFID provides persistent, real-time identification information with minimal human intervention, allowing more frequent data collection and greater information capture. With RFID, a dock door, conveyor, forklift or workstation becomes an important data-collection instrument that can read and help reconcile the location and status of goods in the supply chain. Armed with RFID, businesses benefit from more accurate insight and improved decision-making capabilities.
The key to an effective RFID business case is to find applications and processes where bar-code scanning efficiency can be increased. The capture of information on products and assets in motion, reduction of human errors from manual scanning operations and improvement of integrity and security are some of the incremental benefits RFID can provide over existing systems.
How Does RFID Drive Tangible Benefits?
RFID technology as a key component of an enterprise mobility solution, combined with appropriate business-process improvements, can result in clear benefits in the following key areas:
Automation — reducing manual processes through automated scanning and data entry improves productivity, thus allowing resources to be reallocated to higher value activities.
Integrity —improving the integrity of real-time supply-chain information, with increased authentication and security and tracking capabilities, thereby reducing errors, shrinkage and counterfeiting while improving customer satisfaction.
Velocity - minimizing the time spent finding and tracking needed assets, in turn increasing product flow and handling speeds.
Insight - providing the real-time information needed to make faster, better-informed decisions and the ability to be more responsive to the customer.
Capability - providing new applications and quality to meet supply-chain partner demands and enhance customer experiences.
How Are The Benefits Realized?
RFID can deliver tangible benefits for many types of enterprise businesses:
Warehouse and Distribution Productivity: Companies can replace the point-and-read, labor-intensive process of tracking pallets, cases, cartons and individual products with an RFID process. RFID sensors can track these items as they move from various key locations. Because the process is automated, labor costs can be reduced, improving productivity, and enabling the reallocation of resources for more strategic tasks and better scale operations. Productivity improvements can be significant, delivering realized labor costs reductions of 7.5 percent or more in warehouse applications, and 5 to 40 percent in regional distribution centers. For example, as cited in an article appearing in World Trade Magazine ("RFID: Taking Stock of the Wal-Mart Pilot," by N. Shister), experienced a dramatic reduction of pallet-build from an existing 90 seconds to an even faster 11 seconds—a reduction of almost 90 percent.
Retail and Point-of-Sale Productivity: The use of RFID at the product level can help retailers reduce the labor costs and service fees of regular stock management and store-shelf inventory. As one example, handling out-of-stock restocking and replenishment tasks can be reduced by 15 percent to 20 percent with RFID.
Out-Of-Stocks: When an item is out-of-stock, 20 percent of the time the customer either does not buy it or else buys a competitive product (according to Jon C. Stine, Intel Retail Consumer Package Goods: Industry Field Primer, Oct. 28, 2005). In grocery stores, as much as 8.3 percent of revenue is lost each year due to out-of-stock conditions. In broader studies of the retail marketplace, the overall economic impact is estimated to be $69 billion in lost revenue due to out-of-stocks (“Retail Out of Stocks: A Worldwide Examination of Extent, Causes and Consumer Response"). Eliminating out-of-stock conditions via better RFID product tracking, inventory visibility and forecasting can have an immediate impact on top-line revenue by retaining lost sales and recapturing lost market share. AMR research of Boston, suggests item-level RFID tagging can yield significant benefits today if managed correctly. When targeted at specific consumer goods categories, item-level tagging can yield an astounding 50-percent improvement in stock availability (see report by Scott Langdoc and Kara Romanow). And the benefits are not isolated just to select consumer goods. RFID is proven to deliver an average 16-percent reduction in product out-of-stocks report, "Study of Retail Loss Prevention."
Inventory Management: Inventory accuracy is important to help improve visibility and insight into what specific raw materials have arrived, helping to assure the right materials are available and to better manage just-in-time production models, track work-in-process and speed finished goods through the supply chain. The use of RFID improves these processes and helps minimize costly inventory errors, reducing production delays and lowering production reconfiguration costs that often result from material or demand-planning issues. Additionally, visibility can be improved into distribution and retail channels to track delivered goods more accurately and in real time, and to manage and match demand better. Accurate and real-time visibility throughout the supply chain helps to improve inventory forecasting, manage just-in-time workflow and eliminate excess inventory. Savings are realized by reducing required inventory via lower safety stock requirements, a net 10- to 30-percent savings, according to a 2003 report, "Auto-ID on Demand: The Value of Auto-ID Technology in Consumer Packaged Goods Demand Planning." Better inventory management also leads to proportional reductions in out-of-stock, lower inventory carry costs and reduced write-downs on obsolete inventory.
Shrinkage: Losses due to theft are estimated to cost retailers over $30 billion per year, and are estimated conservatively at 1.7 percent of overall sales, according to Ernst & Young. With RFID, pallets, cartons and individual products can be tracked through the supply chain to pinpoint product location and eliminate inventory errors that can cause shipments to go missing. Better yet, it enables one to find where in the process the product was lost. AMR Research's Langdoc and Romanow estimate an 18-percent average reduction in shrinkage using RFID.
Supply Chain Errors: By replacing manual bar-code scanning with automated RFID information capture, one can eliminate data-entry errors, reducing not only inventory and tracking mistakes, but also the costly labor required to resolve such mistakes. Additionally, because RFID automates data entry, more collection and tracking can occur throughout the process, helping to pinpoint asset location and workflow more specifically. And not just labor costs are driven higher by mistakes—retailers and manufacturers each lose $2 million for every $1 billion in sales due to bad data. The prediction is that eliminating bad data could save $10 billion per year, according to 2003 report by ("RFID/EPC: Managing the Transition").
Capital Asset-Tracking and Management: In many businesses, important assets such as shop equipment and containers are often difficult to track, maintain and secure. RFID can be used effectively to locate movable assets better, ease maintenance scheduling and assure maintenance performance, as well as help prevent loss. In applications such as warehousing and distribution, where containers and tugs need to be tracked, scheduled and maintained, workflow can be optimized by 20 percent or more and losses prevented, according to studies by Alinean.
Counterfeiting and Improve Security: In many industries, counterfeit or non-secure goods introduced into the supply chain cause large direct losses of revenue. RFID increases brand protection and helps mitigate safety, security, regulatory and liability risks. Improved tracking using RFID can identify and isolate issues more efficiently and effectively than manual bar-code scanning by introducing automated and more frequent checks and balances.
Accounts Receivable:With more accurate and real-time tracking of what has shipped, the accounts-receivable process can become much more efficient, with shorter billing and payment cycles. For example, RFID allows vendors to produce customer invoices automatically as soon as items are shipped. It also enables payment automation. This helps reduce the time to collect, while the improved accuracy and elimination of manual data entry or tracking errors helps reduce AR disputes. The results surveyed include a dramatic reduction in accounts receivable, down from 30 to 45 days to just minutes.
Market Mandates and Revenue Opportunities: Many industry leaders have set the stage by mandating RFID functionality and compliance in order to participate in their ecosystem. RFID can help meet these mandatory requirements, or provide an advantage for those who proactively implement the technology over those that are struggling to meet these new market demands. Longer-term, RFID can help create new revenue generating applications and innovation to help grow market share. In many cases, RFID is not just a business benefit, but a requirement for doing business.
Customer Experience: RFID can help to improve the overall customer experience. First, RFID enables better management of inventory; ensures proper deliveries and shipments; improves demand forecasts, promotions management and new product introductions; and reduces out-of-stock conditions. Elimination of supply-chain issues and product availability results in customers getting what they want, when they want it. In one case, a documented 29-percent increase in promotional execution resulted in a projected 20- to 60-percent increase in sales.
RFID Costs and Considerations
RFID is a significant business investment for most organizations, requiring a commitment to a particular solution and the dedication of resources and funding to implement the project. There are several considerations for RFID solutions today, including:
Tags: The cost per RFID tag has come down significantly over the past several years, reaching 10 cents per tag in 2006 versus 25 to 30 cents per tag in 2004. The good news is that with demand increasing—yielding economies of scale—and production costs declining, tag prices are expected to reach even lower levels over the next few years. For the short term, it typically makes sense to place the tags only at the packaged product level (pallet or carton) and on high-margin products, with the current standard being where the tag represents less than 1 percent of the total cost of good sold.
Readers: Reader costs are modest, between $2,000 and $3,000 per reader, including installation and accessories such as repeaters, multiplexers and networking costs.
Tag and Reader Survivability: Many warehouse, distribution and retail environments are hostile and can result in damaged tags or readers. These damaged systems might fail to work as expected. Error-detection and repair budgets should be in place to help minimize the impact and costs of downtime. The most resilient RFID solutions should be purchased from RFID suppliers with proven reliability. Over time, dealing with equipment failures or errors on the back end will be more expensive than making the proper up-front investments in reliable equipment and solutions.
Software and Integration: The cost for software and integration is higher, averaging $500,000 for a small deployment to $2 million or more for a large installation. An additional 18 to 20 percent should be budgeted for ongoing maintenance and support. Special customization can drive the initial costs higher, depending on the complexity of the application development and integration project.
Data Warehousing: Many organizations may not be ready to transmit, store, process, interpret or integrate with current supply-chain management and enterprise systems, or the mountains of real-time data that RFID will produce—the location of pallets, cases, cartons, totes and individual products in the supply chain; the activities of picking, packing and shipping; and the tracking of expiration dates and recalls are just a few examples. An investment in RFID requires modification investments in data warehouse and database systems, as well as the business intelligence applications and dashboard systems they support, in order to analyze the metrics to turn data into information.
Business Processes and Systems Integration: The business processes around data collection and information processing are often not in place, and key systems need to be connected and integrated with the collection and database systems. The process changes and integration need to be developed in order to take advantage of many of the benefits.
Edge Computing Power: At the distributor or retail level, most remote systems are not powerful enough or configured to handle the data and information workload required to make RFID effective at the product level. In order to reap the rewards, a large investment in computing power, bandwidth, storage, IT operations and administration per location will need to be made.
Redundancy With Existing Bar-code Systems: Often, the RFID solution does not replace current bar-code systems, requiring that companies maintain both data-collection systems and processes. In some applications, RFID will eventually supersede the bar-code system. In others, the investment will be maintained. It is important not to overstate the system cost avoidance or current bar-code scanning labor savings if both systems are still maintained.
The Bottom Line
The competitive advantage and bottom-line business benefits are significant to the supply chain that implements RFID to its advantage. Early estimates indicate that a comprehensive RFID solution can generate an additional 2- to 7-percent increase in revenue, improve handling productivity by 20 to 30 percent, reduce operating expenses by 2 to 5 percent and reduce days in inventory by 1 to 2 percent. Financial improvements such as these are significant, and it is for this reason that many companies are moving forward with RFID, sooner than later.
Although RFID implementations are not without costs and risks, typical companies in manufacturing, warehousing and distribution and retail have been known to achieve 200-percent ROI (net benefits divided by costs) or more from these projects. What this means is that for every dollar invested in RFID, companies are getting back $2 in incremental benefits (the original dollar invested, plus two more). The high ROI and relatively short payback periods provide the fuel to move from having RFID as a project under consideration, to one where a pilot program is mandatory.
Budget growth likely consumed by infrastructure requirements
This year security and business resilience spending needs to be increased once again in light of increasing frequency and severity of threats, and renewed awareness as to the impact of disasters on the business. Infrastructure upgrades are still sorely needed in many organizations where technology refreshes have been delayed to help reduce costs. Corporate and IT compliance programs require extra spending as well. Shadow projects, stealthily hidden by the business units because formal IT spending wasn’t available to for essential business projects, are emerging from the business units and are in need of central IT support, evolution and integration.. And then there’s the project backlog where many IT groups are still not close on catching up to business unit requirements for new solutions, enhancements or upgrades. Unless IT executives put together a compelling case, these projects will easily consume the increase in IT spending and then some.
The Seven Steps for Setting the Stage
Justifying the IT budget and getting the right spending increase will take some careful measurement, collaboration and a great presentation to win a fair share of corporate spending. Unfortunately, many IT budget presentations fall short of the mark, with slide after slide of project plans, technical architectures and spending requests without nary a mention of prior successes, proven business value contribution, peer comparison or risk analysis.
Like a storyteller, a good CIO will first lay out a compelling reason to invest in the future by documenting the successes of the past. It is essential that the team have faith that prior investments have been managed successfully. Proving a solid foundation of prior success, here are the questions that most Cx level executives expect to have answered at the start of any budget presentation to prove prior performance and justification, before requests are made for new project funding or additional spending requests:
1) What is the current IT spending and trends? – As the first part of the IT budget presentation, IT executive should lay the groundwork for the board by documenting how much has been spent on IT over the past three years. Most organizations, particularly larger corporations where spending is spread across operating units, formal IT and business units, do not have a good handle on their IT spending totals. By documenting the total spending, and spending by operating unit, as well as spending trends, the CIO will demonstrate a responsible awareness and management of the total spending picture.
2) What has this spending been on? – Many organizations do not understand the full scope of spending, such as which projects consumed the most budget, or how much it costs just to keep the lights on. To help visualize the investments, IT groups can analyze and present the spending using different taxonomies to provide insight that the team might not have had prior. Here are some suggested analysis groupings:
* The average company typically spends only 10% of their IT budget on innovation – new business functions or IT enabled businesses. The highest performers spend almost 20% per year while the laggards approaching only 5% on innovation. Measuring the percentage of spending on innovation investments vs. migrations / upgrades vs. on-going operations and support can shed light on how IT cost reduction programs have been helping to reduce IT TCO, reallocating spending to innovation.
* Determining how much is being spent on business operations versus the customer is often useful. Analyzing spending on front office versus back office can be insightful and can help the team focus on a healthy mix of driving revenue through customer facing applications while reducing operating expenses through back office solutions.
* Determining how much spending has been contributing to specific corporate / business goals can show how IT is aligned with the business. By goal, listing the major projects and spending over the past three years can show how IT is focusing on business success.
* With the focus on optimizing scarce resources, IT executives should document the current mix and trends in spending between in-house versus outsourced.
* The average company often spends too much on IT infrastructure projects and not enough on business process improvement or higher-order investments. Analyzing a mix of investments according to a hierarchy of needs from a solid foundation and low cost IT infrastructure and set of Mandatory/Compliance projects to Process and Transaction Optimization projects, to Information Optimization projects and at the pinnacle, Business Transformation projects. The best performers build upon a foundation where they seek to lower the cost of ownership while maintaining solid service levels in the IT infrastructure, investing in competitive projects to help reduce business operating expenses and turn information into actionable advantage.
* If you have an executive team that likes the details, understanding the mix of IT Spending according to traditional TCO categories can provide insight into where the majority of IT spending is going – capital, services, labor or overhead. Categories to analyze spending on include: data center servers and client computers, purchased software, purchased services, data and voice communication, application and software development, IT operations and administration and facilities and overhead.
Categorizing the spending can help the team realize why certain requests are being made, why certain limitations exist, and the strengths of the current plan, and weaknesses that require addressing. By proving that the team has been good stewards of past investments, justifying current plans will be easier.
3) How risky have the investments been in the past? – Spending more on IT will require that the team be able to manage more projects effectively. Proving project management performance is key to successfully getting the most from each investment and assuring that incremental spending will not get squandered prior to project launch. Measuring and presenting past project success is essential. At a minimum, it is recommended that the team measure project success / failure rates using the following allocation categories: On-Time Project Delivery, On-Budget Project delivery, feature complete project delivery, achieved or exceeded value targets versus plan (subjective if not measurable).
4) How have prior investments contributed to corporate value? - Unfortunately according to IDC Alinean surveys, 6 months after project approval less than 80% of companies do not go back and measure how well they performed versus plans. Of the ones that do, most only measure actual costs versus budget plans, with only 5% measuring whether the project delivered expected cost avoidance, productivity improvements, incremental revenue or meeting other expected business value improvements. The best budget presentations focus less on spending and more on value contribution. For each project it is essential to put in place simple measurements of performance – key performance indicators which can help determine whether value goals have been met. For example, if a cost avoidance is expected, the team should measure that the expenses have been reduced. If a productivity improvement is expected, there should be a measurable reallocation of staff, staff growth avoidance or staff reduction. To start with, the team should demonstrate how several key project met value goals.
5) How does current spending compare to peers? – Inevitably, the best budget presentations are often met with skepticism because the Cx level executives are not aware of what other companies are doing. Many times budget presentations are stopped by an executive who claims that the company is wildly overspending, at 4.6% revenue on IT for example, compared to reported average IT spending, for example according to Gartner’s average of 3.6% of revenue on IT. A good budget presentation will clearly show how the companies three year spending trends compare to peers and specific industry averages. For an average manufacturing company the executive would be correct in saying the company is overspending when the average spending is only 2.6% of revenue, but if the company is a financial services company where averages are 5.6%, or a brokerage where averages are over 6%, the spending would be too low. It is essential that the company compare to names peers with similar business models, industry leaders that the company would like to emulate, and precise industry averages for their segment of the market.
6) How does current performance compare to peers? As important as understanding spending, is understanding how competitors are performing in light of their investments. Comparing ratios of IT spending to key business measures such as EVA, Return on Equity, Net revenue and income growth, return on assets can provide insight into whether the company needs to scale up spending to improve particular business performance metrics, or reduce costs because prior investments have been successful. Graphing comparative companies in a quadrant analysis where IT spending and performance are platted in a matrix with peer averages forming the X and Y axis. This mapping can help drive perspective on competitive positioning and challenges. Providing competitive perspective can provide the team with the competitive knowledge to see that prior spending and proposed plans are driving correct improvements – either throttling up spending to drive competitive advantage, or reducing spending to bring it in line with competitors.
7) How has the team performed against subjective performance measures? – Many IT organizations are using subjective measures to help prove performance. Measures such as ITIL capability and maturity improvements, user satisfaction surveys, business unit manager surveys, and customer surveys are used to prove that the organization is trending towards improvement, or needs help.
The Bottom Line
Very rare is the CIO who is happy post the budgeting process. This annual right of passage for IT executives is fraught with strife, struggles and an occasional victory, but more often than not its one of the reasons why CIO tenures are so short. If a CIO uses the first part of the budget presentation to set the stage for the incremental request by proving responsible management of prior budget requests, highlighting opportunities for improvement, and demonstrating business value success, the budget process will be smoother. And although there are no guarantees for a budget increase, presenting past success in the language of Cx executives and the board can help drive needed increases or justify allocations to improve weaknesses.
Often these resources are called IT CFOs, IT Finance Controller, IT Investment/Finance Managers or IT Value Management Officer. Many Cx level executives think that these business savvy managers hold the key to achieving the elusive silver bullet for improving the ROI from IT. Unlike most IT managers and executives, these financial experts haven’t worked their way up the IT organization with their technical and project management skills.
These new business re-engineering champions within IT are often experienced CFOs or financial analysts, controllers or accountants, and are almost always MBAs. They are being hired to put financial tools and metrics in place in order to assess business priorities, assure business alignment and generate business cases (ROI and TCO analysis) on proposed investments.
Most enjoy early wins around the creation of rudimentary infrastructure for value management – most often developing home grown spreadsheets in order to provide a standard template for investment assessment. However very receive the support and resources necessary to implement bona fide IT portfolio management scorecards which can be used to track project success, project risks, spending and contribution of the projects to business goals – proving IT alignment.
The most common obstacle is that most IT organizations lack the capability and maturity to readily understand, adopt and use these tools to drive fundamental and substantive change. These initiatives often face resistance from technical managers, most of who do not have an MBA or financial analysis background , and who do not always understand the benefits of, or what is needed to create a successful business case. Secondly, the collection of company-specific data is a challenge, particularly when a fundamental understanding of the business and key performance indicators is required or when greater complexity such as discounted cash flow analysis and business process improvement metrics are involved.
The fundamental change management issues faced by many companies we have analyzed suggest that most technical staff are extremely resistant to the financial due diligence process, whether that be business case analysis, scorecards or portfolio management. Without strong executive sponsorship and mandated adoption, the technical staff tends to perpetuate avoidance of disciplined investment analysis that has been the norm for decades of IT spending growth, usually coming up with reasons to not comply with IT investment analysis procedures nor contributing to the changes necessary to make the process effective.
Even in cases where technical staff is supportive of IT investment analysis, it is often difficulat for business unit managers to collaborate and reach consensus and mutual buy in on opportunity analysis, project costs and risks and ultimate benefit projections.
Based on decades of prior conditioning, technical staff are most comfortable playing the role of technology subject matter expert, focusing on technical features and functions rather than business value. Hiring financially savvy resources will not yield instant results without apply education and change management to existing technology staff.
Although the achievement of success does not occur overnight, a few key actions can be used to ensure that these new IT financial managers are successful:
Start with simple, easy to use tools and selective projects (to achieve early demonstration of the value of IT investment analysis) rather than attempting to boil the ocean multi-million dollar portfolio management projects
Pre-populate analyses with as much standardized internal data as possible
Use industry standard third party metrics at first to ease data collection
Implement financial and tools training
Communicate and reaffirm executive sponsorship regularly
Celebrate success around “better decisions” and “improved contribution to business goals”
Require business case analysis for all projects above a certain investment value
Provide assistance and support throughout the analysis and assessment process
The Bottom Line:
The new breed of IT professionals, ones with financial management of IT experience, is here to stay, and this new career path promises to be a good one, but one which will take time to catch on - not with management, who are quickly reorganizing to add these valuable resources, but with the rest of the IT team members.
One of the biggest issues the new IT finance manager faces is that as Venusians, they are very different from the rest of the Martian IT team. As such, they will initially face resistance to their improvement initiatives.
In order to ensure success, these IT finance managers must have unwavering management backing and clear policies that support their mission. By keeping things simple and focusing on an ongoing process of incremental improvement they are much more likely to create sustainable change within today’s context of full plates for most technical staff.
Providing technical staff with 101 level IT investment training, celebrating and communicating success, and offering frequent assistance to Martian technical staff that explore the Venusian world will eventually make traditional technical staff as savvy at managing the value of IT as they are technically proficient.
 Growing IT Contribution: The 2006 CIO Agenda; Gartner EXP Survey of 1,400 CIOs worldwide.
As platforms continue to evolve in the technology industry, a central concern for IT executives is implementing the right systems to maximize the return on each investment. Since labor costs and equivalent outsourced services dominate most IT budgets -- over 56% of IT spending on average -- selecting platforms with lower implementation and ongoing management costs can significantly improve overall IT efficiency. More importantly, since innovation is only 10% of the typical IT budget today, reducing ongoing management costs can help reallocate precious resources and budgets to more innovative tasks and projects – delivering true business value.
One of the most important infrastructure investments is a database platform. Two of the leading choices are Microsoft SQL 2005 and Oracle Database 10g. So, for those seeking to reduce overall costs and reallocate labor investments to more innovative tasks the obvious question is, "Which has the lower total cost of administration (TCA)?"
To determine the comparative TCA of these platforms, Alinean conducted independent, in-depth interviews with 100 directors of database administration and senior-level database administrators regarding their database environments, user populations and database administration activities. The results of the survey can be found at: http://www.alinean.com/PDFs/Alinean-MicrosoftAndOracleTCAStudy.pdf
The results revealed that, overall, Microsoft SQL Server 2005 required significantly less effort to install and maintain than Oracle Database 10g. Study participants reported that on average a database administrator could manage over 30 Microsoft SQL Server 2005 databases, while Oracle 10g implementations required one DBA per 10 databases. On average, the annual cost for administration is $2,847 per year per database for Microsoft SQL Server 2005 and $10,206 per year per database for Oracle 10g, more than a 350% savings in annual costs per database for the Microsoft platform.
But was the study revealing a true difference in administrative costs, or just differences that could be attributed to smaller or less mission-critical Microsoft SQL Server 2005 installations? To assure similar comparisons, the study examined potential differences in the application, load and complexity of the database instances. As expected, the Oracle databases supported more users per database (2 to 1) and larger volume size (3.6 to 1) than the Microsoft databases on average. So it makes perfect sense that Oracle would be more expensive to manage on a per-database basis, but the costs were still slightly higher for Oracle than expected in comparison.
Comparing costs per user supported, we found that Microsoft SQL Server 2005 still has a TCA advantage on a per-user basis, $13.09 per user versus $18.05 per user for Oracle. However, when large-volume databases were examined, Oracle 10g had the lower TCA: $46.76 per gigabyte for Oracle 10g versus $66.58 for Microsoft SQL Server 2005.
Comparing the importance of the database environments, participants reported similar levels of business reliance on the two database platforms, somewhat surprisingly, given the greater size and user populations for the Oracle databases. Even though the majority of Oracle 10g installations were geared more toward transaction-based databases versus decision-support databases, Microsoft SQL Server 2005 actually had a slight edge in the percentage of databases classified as mission-critical.
Making the Right Decision
In this study, because of time constraints and data collection concerns with participants, we did not consider some other more detailed elements of size versus administrative costs, including number of transactions per day or number of tables. It is unclear from the prior results what the results might be in high-transaction or high-density databases.
Although maximizing IT labor productivity is a major goal of most IT organizations today, when making the purchase decision, it will be important to analyze all factors and not rely solely on TCA advantages of one platform or the other.
Lower change costs, the cost to develop new database applications or migrating existing databases can be 20% to 30% of any database project’s costs and should be a major consideration. As well, the costs for hardware platforms, software licensing, management utilities and business resilience should be tallied, since these typically consume 40% or more of any database project’s cost.
Harder to quantify are the business-value differences between the platforms, particularly which database helps to deliver better performance and service levels and which supports faster initial deployment, evolution, adaptability and agility.
Combining all of these measures, including TCA, into an overall business value assessment can help the team make the best decision.
The Bottom Line: A Split Decision?
So what do the results reveal for those trying to decide which platform to standardize on for lowest TCA? The results on lowest TCA per database or user were definitive, in that Microsoft is less expensive to administer -- but other measures like size and transaction counts can skew the results more toward Oracle – so as database size, complexity and workload grows, the results begin to even out. And for the largest databases, Oracle appears to be slightly less expensive to administer.
The bottom line: When looking at larger databases where overall size and scalability is the critical factor, Oracle Database 10g appears to takes the lower TCA prize. But where databases are of reasonable size and/or where there are more databases and database users to manage, not unexpectedly Microsoft SQL Server 2005 has the TCA advantage.
In order to achieve a positive ROI, the SOX compliance must have net benefits that exceed the investment to achieve compliance. These benefits cannot be the compliance itself – ie. Avoiding fines and litigation, but they must be the rewards of compliance itself.
While implementing SOX some companies seek not merely to comply, but use the regulations as a catalyst to overhaul their controls programs. These companies examine key financial and management processes, and improve these processes in order to:
1. Streamline the process steps by automating key data collection and entry or transaction recording processes
2. Avoid costly process errors, such as reducing accounting or billing errors3. Reduce cycle times on key process steps such as financial reporting4. Eliminate theft or fraud via tighter controlsAlso, as a result of SOX compliance many companies have improved their decision-making processes by implementing:
- Portfolio management and project management tools to help track project costs (assuring they remain under control) and manage risks
- Dashboards to track key performance indicators (KPIs) to provide greater awareness on business operations, key processes, revenue recognition, spending and risk management.
The benefits of improved management and decision making include faster cycle times on decisions and projects, reduced investment costs, reduced budget overruns, higher yield project returns and reduced failures rates.
However, many argue – and rightfully so -- that these projects were forced by compliance and could have been implemented outside of the compliance program. The reality is that compliance regulations are in place, and rather than just getting by with a compliance program, companies should view this opportunity as the seed to improve visibility, control and process improvement in order to yield these important process streamlining and improved decision-making benefits.
Companies that execute a SOX program that seeks to improve processes and KPI visibility while also meeting compliance rules are the companies that will achieve a positive ROI. Companies which seek just to meet compliance will not move beyond the extra systems and labor "tax" which SOX requires, and will achieve negative ROI on their SOX compliance investment.
Because typical projects have most of the costs up-front and rely on benefit projections over time, the benefits in outgoing years work to offset the initial cost. Visibility in near term costs is often very clear, while benefits in outgoing years becomes progressively fuzzy year over year – thus the risk that benefits are overstated and accumulate in error over longer periods of time – making a marginal investment seem much better during the planning stages if the time horizon is too long for the analysis. S
horter time horizon analysis are less risky because market conditions, competitive influences and company conditions are easier to predict in the nearer term, two to three years out versus five to seven years away. Using a shorter time horizon for analysis, if the ROI numbers (ratio of net benefits / costs) are impressive in the short term, they will typically be even more so in the long term.
For most CRM projects, I recommend that the company use a three year analysis horizon past the initial deployment period. If a project is a Software as a Service (SaaS) or simpler CRM solution and it is going to take only two to six months to implement and deploy, then the analysis should be a three to four year analysis.
If the CRM project is a large one with much integration and custom development, with design, development and deployment taking 12 months or more, the analysis time horizon is more likely going to be four to five years.
Regarding when the project should reach break even, where the cumulative costs exceed the cumulative investment – this should occur for a CRM project somewhere sooner than 12-16 months after deployment. Projects with longer payback periods than this are susceptible to not achieving payback because slight cost overruns, aggressive benefit projections or changing business conditions can alter the predictions on payback – and in fact turn conditions so that the project may not achieve breakeven.
If the CRM project requires a large up-front investment and the payback period is therefore outside of these guidelines, dividing the project into phased investments where each phase is deployed and reaches payback prior to the starting of the next phase can help to mitigate risk and create a self funding project.