White Paper

							              White Paper

                                                      Measuring the Value of
                                                      Business Intelligence and
                                                      Data Warehousing
                                                      Initiatives




Knightsbridge Solutions LLC  500 W. Madison, Suite 3100  Chicago, IL  tel 312.577.0210  fax 312.577.0228  www.knightsbridge.com
Measuring the Value of Business Intelligence and
Data Warehousing Initiatives


WHY MEASURE THE VALUE OF YOUR B I AND DW IN IT IA T IVE?
Corporate executives are constantly evaluating the cost versus the benefit of different
business decisions. A typical question is: “Which initiative will yield the greatest benefit
to the organization?” Understanding and quantifying each initiative’s costs and benefits
is necessary to make an informed decision. Business intelligence (BI) and data
warehousing (DW) initiatives are no exception to this rule, although many organizations
have been reluctant quantify the value of their BI and DW efforts in the past. This may
be because they either didn’t know how or because they did not feel a demand for such
information from executive management. However, limited budgets have led project
sponsors to begin requiring an estimate of financial benefits before approving funding for
any IT project. The ability to measure the value of an initiative is becoming a critical
skill for BI and DW project managers.


When assessing the value of BI and DW initiatives, the most commonly accepted
financial measure is the calculation of return on investment (ROI). There are two primary
reasons why ROI is calculated: to build a business case for a proposed initiative or to
assess the value of a project that has already been completed. In the instance of
developing a business case, ROI provides a financial measure that quantifies the potential
financial rewards of a BI and DW initiative. By calculating ROI, managers can evaluate
and prioritize various information technology initiatives within their organization.


On the other hand, at the completion of a BI and DW initiative, project managers can
calculate the ROI of the project as a post-implementation assessment. The purpose of the
post-implementation assessment is to evaluate the original ROI calculation performed in
the development of the business case. Were the original ROI and assumptions correct?
What factors were identified during the course of implementing the BI and DW initiative
that impact the original ROI calculation? During the implementation of the BI and DW


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initiative, ROI can also be used as a means of promoting the financial benefits to the
organization, customers, and partners.


This white paper will help you begin to accurately assess the financial benefits of your BI
and DW initiatives by:
             •   Describing the different types of costs and benefits associated with BI and
                 DW initiatives
             •   Showing you how to calculate the financial measures most commonly used to
                 quantify financial impact
             •   Discussing the non-financial considerations that should be addressed


Also included is a case study that demonstrates how value measurement can be
practically applied to develop a business case for and measure the post-implementation
results of a BI and DW initiative.


ID ENT IF YING TH E CO STS IN VO L VED IN A B I AND DW IN IT IAT IVE
The first step toward measuring the financial impact of your BI and DW initiative is
understanding the types of costs involved. Obtaining an accurate picture of costs is
important for accurately gauging how much actual benefit your organization will receive
after its upfront and ongoing investments in the initiative are considered.


Costs can be classified into one of three categories: hardware, software, and labor.
Hardware costs relate to the information system devices that are required by the BI and
DW initiative, such as server system(s), client systems, and network communication.
Software costs include the software applications required by the project such as the BI
application, the data integration application (a.k.a., ETL), and the relational database
management system (RDBMS) license fees. Labor costs pertain to the use of internal
and external resources dedicated to the initiative. Individuals working on the BI and DW
initiative fill the following roles: project manager, business analyst(s), BI application
specialist(s), database administrator, systems administrator, and trainer(s).



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Costs can be further divided into two categories: initial and recurring. Initial costs are
those costs an organization incurs for the BI and DW initiative once. These costs include
hardware costs for the project, software license fees, and labor costs to configure and
implement the system, as well as initial training of users on the BI application. Recurring
costs are those costs that will continue to be incurred after the BI and DW project has
been completed—for example, the cost of the personnel needed to administer the
solution. An estimate for each of the cost components involved in a BI and DW
initiative—such as software costs, maintenance or support fees, and average
configuration cost—can be obtained from external resources such as software
vendors/resellers and professional services firms.


UND ER STAND ING TH E POTENTIA L B ENEFIT S OF A B I AND DW IN IT IAT IVE
While the costs involved in a BI and DW initiative are reasonably easy to quantify,
benefits can be much more difficult to pinpoint. The process of identifying benefits can
be simplified by separately considering the two primary categories of benefits: revenue
enhancements and cost savings.


Revenue enhancements
If the BI and DW solution is not an integral part of the core revenue generation activities
of the business, identifying the solution’s impact on revenue enhancement activities is
difficult because there is no direct attribution. For example, a sales BI and DW solution
for a retail organization might be used to identify trends and new business opportunities.
The impact of decisions that were made based on information provided by the sales BI
and DW solution can be identified, monitored, and quantified. However, broader
assumptions must be made regarding whether a specific decision can be attributed to the
information that the sales BI and DW solution provided. Would the same decision have
been made without the information from the sales BI and DW solution?




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There are several examples of benefits that can be attributed to revenue enhancement:

     •       Increased revenue
     •       Identification of new business opportunities
     •       Improved customer service/satisfaction
     •       Improved time to market
     •       Enhanced speed of new product development
     •       Improved decision making
     •       Increased ability to contend with competitors

Cost savings
Benefits associated with cost savings are easier to identify than revenue enhancements
because of the ability to compare the new BI and DW solution to the old reporting
environment. In addition, the assumptions needed to identify cost savings are not as
broad as those needed to estimate revenue enhancements.


There are several examples of benefits that can be attributed to cost savings:

     •       Reduced operating costs
     •       Automation of manual processes
     •       Improved operating processes
     •       Increased organizational agility
     •       Improved information dissemination
     •       Improved analysis
     •       Informed decision making


HOW TO CALCULATE FINANC IAL MEA SUR ES
Now that we’ve defined the types of costs and benefits associated with BI and DW
initiatives, we can move on to explaining the actual financial calculations involved in
quantifying the value of an initiative. This section outlines several financial measures
that are commonly acceptable in evaluating the financial impact of BI and DW initiatives.




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As you read through this section, keep in mind that each of these measures builds on the
other, and that they ultimately combine to help you calculate the ROI of an initiative.


Total value of ownership (TVO)
The total value of ownership calculates the cumulative benefit of the BI and DW
initiative from inception to retirement of the solution. The cumulative benefit is typically
defined as the total cost savings and revenue enhancements achieved by the organization.
Cost savings are defined as the difference in the costs associated with the new BI and
DW initiative versus the costs associated with maintaining the existing information
environment. Revenue enhancements are defined as the beneficial activities and events
that result from decisions individuals make by using information from the BI and DW
solution. The TVO formula is as follows:


TVO = Σ (Cost savings + Revenue enhancements)


Total cost of ownership (TCO)
The total cost of ownership is the cumulative cost of the BI and DW initiative from
inception to retirement of the solution. The cumulative costs consist of the hardware,
software, and labor that were required to design, develop, implement, deploy, and
maintain the BI and DW solution. The TCO formula is as follows:


TCO = Σ (Hardware + Software + Internal Staff + External Services)


Net present value (NPV)
The NPV calculation allows you to determine the value of one dollar one or more years from
the date of the calculation. What would you rather have, one dollar today or one dollar one
year from now? One dollar in today’s currency is worth one dollar. However, one dollar one
year from now is worth less than one dollar today because of the time value of money. For
example, assuming that the discount rate or investment yield rate is 10%, one dollar a year
from now is worth only $0.91 in today’s dollars. This is because the interest earned on the net
present value of $0.91 over the course of a year at the investment yield rate of 10% would be



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$0.09. Adding the interest earned during the year of $0.09 to the net present value as of today
of $0.91 equals $1.00 one year from now. Conversely, assuming that the investment yield
rate is 10%, one dollar today will be worth $1.10 one year from now.


Calculating NPV allows you to determine the discounted projected cash flows for your
BI and DW initiatives. The formula for NPV is as follows:


NPV =          CF1          +      CF2         +     CF3         +… +       CFn
                        1                  2                 3
              (1 + r)            (1 + r)           (1 + r)              (1 + r) n


Legend
CF           The net cash flow for each year that the NPV is to be applied. The net cash flow
represents the difference between the annual costs of the BI and DW environment and the
annual costs of the existing reporting environment.
r            The discount rate or investment yield rate for the organization at the time the NPV
is being calculated. Other options for choosing a discount rate include the cost of capital
and the return rate of alternative projects.
n            The total number of years for which the NPV calculation is to be applied. The
calculation is performed for each year being considered.


Payback period
The payback period calculation determines the number of years that are required for the
discounted projected cash flows (determined by the NPV calculation) to equal the initial
investment. For example, assuming that the initial investment for a BI and DW initiative
was $1,000,000, and the average annual NPV of the TVO of that BI and DW initiative
was $250,000, then the payback period for the BI and DW initiative would be 4 years, or
$1,000,000 / $250,000. The payback period formula is as follows:

Payback period =                   Initial Investment
                                (NPV of TVO / Years n)




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Legend
n            The total number of years for which the NPV calculation was applied.


Return on investment
The ROI calculation originated from financial analysts’ desire to measure the yield of one
financial investment against another without considering any other non-financial factors.
While the ROI calculation is therefore very appropriate for evaluating financial
investments, it is misleading when applied to projects. In order to resolve this difficulty
and adjust to the requirements of BI and DW initiatives, there are two ROI calculations
presented in this paper: project-perspective ROI and investment-perspective ROI.


Project-perspective ROI
With project-perspective ROI, one can assess the benefit of a project over the initial
costs. The project-perspective ROI calculation evaluates the NPV of the TVO generated
by the BI and DW initiative divided by the initial investment. For example, assuming that
the total NPV of the TVO of a BI and DW initiative was $1,500,000, and the initial
investment was $1,000,000, the ROI for the BI and DW initiative would be 150% of the
initial investment. The project-perspective ROI formula is as follows:


ROI =          NPV of TVO x 100
             Initial investment


This calculation is more appropriate for project analysis since it evaluates the TVO
against the initial investment.


Investment-perspective ROI
The investment-perspective ROI calculation evaluates the NPV of the TVO generated by
the BI and DW initiative less the initial investment, divided by the initial investment.
With this financial measure, you can assess the investment yield of the initiative over the
initial costs. For example, assuming that the total NPV of the TVO of a BI and DW
initiative was $1,500,000, and the initial investment was $1,000,000, the ROI for the BI



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and DW initiative would be 50% of the initial investment. The investment-perspective
ROI formula is as follows:


ROI =        NPV of TVO – Initial Investment x 100
                    Initial Investment


This calculation is more appropriate for comparing one investment alternative against
another.


A B U S IN ES S C A S E D E V EL O PM EN T EXAM P L E
To help you understand how to put all of this information together and apply it to a BI
and DW initiative, let’s walk through an example of a fictional organization that needs to
build a business case for a proposed BI and DW initiative.


Company K is interested in implementing a BI and DW solution to solve its needs for
general ledger and purchasing information. The project sponsor wants to know the costs
and benefits of the initiatives. The first thing Company K needs to calculate is the initial
costs for implementing the BI and DW system. Company K estimates its hardware costs
for the project at $125,000, its software costs at $1,250,000, and its labor costs (based on
a consultant proposal) at $1,071,600. Adding these three categories shows that the initial
cost for implementing the BI and DW system will be $2,446,600.


Next, Company K needs to calculate the recurring costs for the BI and DW initiative.
Company K estimates that it will spend $250,000 per year for software license and
maintenance fees. It will also spend $1,040,00 per year for personnel to provide ongoing
support for the BI and DW system. Therefore, Company K’s recurring cost for its BI and
DW initiative will be $1,290,000 per year.




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Company K’s TCO for its BI and DW initiative (including both initial and recurring
costs) is outlined in the chart below. The TCO is projected for a period of three years and
adjusted for an inflation rate of 1.5%.




                                  Year 0      Year 1           Year 2            Year 3
Hardware                      $     125,000 $         -    $         -       $         -
Software                      $   1,250,000 $ 250,000      $ 250,000         $ 250,000
Labor                         $   1,071,600 $ 1,040,000    $ 1,040,000       $ 1,040,000
Total cost                    $   2,446,600 $ 1,290,000    $ 1,290,000       $ 1,290,000
Inflation @ 1.5%              $          -   $   19,350    $     38,990      $      58,925
Adj total costs               $ 2,446,600    $ 1,309,350   $ 1,328,990       $ 1,348,925

In order to calculate the TVO of its initiative, Company K must also determine the costs
it will incur if it does not implement a BI and DW system and continues with its current
reporting environment. Company K estimates that it will incur a total of $4,732,000 in
personnel costs each year to continue supporting its current reporting environment.
These costs are projected for a period of three years and are adjusted for an inflation rate
of 1.5% in the following chart:


                                Year 0         Year 1        Year 2            Year 3
IT support                    $ 2,080,000    $ 2,080,000   $ 2,080,000       $ 2,080,000
Business analysts             $ 2,652,000    $ 2,652,000   $ 2,652,000       $ 2,652,000
Total cost                    $ 4,732,000    $ 4,732,000   $ 4,732,000       $ 4,732,000
Inflation @ 1.5%              $          -   $   70,980    $    143,025      $     216,150
Adj total costs               $ 4,732,000    $ 4,802,980   $ 4,875,025       $ 4,948,150

Now that Company K knows the TCO associated with implementing a new BI and DW
system and the TCO of its current system, it can calculate TVO. To do this, Company K
determines its total cost savings by subtracting the cost of the new system from the cost
of the current system, starting in Year 1, as demonstrated in the following chart:




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Company K with a BI/DW reporting solution
                        Year 0           Year 1          Year 2            Year 3
Adj total cost $ 2,446,600 $ 1,309,350 $ 1,328,990 $ 1,348,925

Company K without a BI/DW reporting solution
                        Year 0           Year 1          Year 2            Year 3
Adj total cost $ 4,732,000 $ 4,802,980 $ 4,875,025 $ 4,948,150

Total Value of Ownership               $ 3,493,630 $ 3,546,035 $ 3,599,225

Next, Company K must apply the NPV calculation to the TVO numbers in the chart
above. This will determine the discounted cash flows from the new BI and DW system.
Company K assumes that its borrowing rate is 7.0%. The NPV calculation is outlined in
the following chart:


                              Year 0        Year 1            Year 2               Year 3
TVO                                      $ 3,493,630      $ 3,546,035         $ 3,599,225

Discounted
TVO at 7.0%            $          -      $ 3,265,075      $ 3,097,244         $ 2,938,040

      NPV                                = $3,493,630     = $3,546,035        = $3,599,225
    formula                              x 1 / (1+.07)    x 1 / [(1+.07)      x 1 / [(1+.07)
                                                          x (1+.07)]          x (1+.07)
                                                                              x (1+.07)]


Total discounted TVO at 7.0%                                                  $ 9,300,359

Company K now knows that its total discounted TVO for the BI and DW initiative is
$9,300,359. With this number in hand, along with the initial investment of $2,446,600



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determined above, Company K can calculate project-perspective ROI for the three-year
time horizon it is looking at. This calculation is as follows:


($9,300,359 ÷ $2,446,600) ∗ 100 = 380%

Company K now knows that it will achieve 380% ROI for its BI and DW initiative over a
period of three years.


Company K has one last measure to calculate: payback period. The numbers Company K
needs to do this are its discounted TVO of $9,300,359 and its initial investment of
$2,446,600. Keeping in mind Company K’s time horizon of three years, the payback
period calculation is as follows:


$2,446,600 ÷ ($9,300,359 ÷ 3) = 0.79


This means it will take Company K 0.79 years to recoup its initial investment, which
translates to approximately nine and a half months.


HOW TO PERFORM A SENSITIVITY ANALYSIS
After applying financial measurements to a BI and DW initiative for business case
development, a sensitivity analysis should be performed to account for different possible
outcomes. A BI and DW initiative could have three potential outcomes: a successful
implementation, a partially successful implementation, and a failed implementation.
After determining all potential outcomes, a percentage should be assigned to each
commensurate with the likelihood that the outcome will occur. The probability
percentages must total to 100%. Note that if the percentage assigned to a successful
outcome is less than 50%, the initiative should not be undertaken until those factors
impacting the success of the initiative are addressed and resolved.


Let’s continue with the Company K example to illustrate how to perform a sensitivity
analysis. Company K believes that it has a 60% probability of a successful BI and DW


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implementation, a 30% probability of a partially successful implementation, and a 10%
probability of an unsuccessful implementation. Company K must now determine the
financial gain or loss associated with each of the three outcomes. Company K decides
that if its implementation is successful, it will achieve its total discounted TVO of
$9,300,359 as determined above. If the implementation is only partially successful,
Company K will lose its initial investment of $2,446,600. And if the implementation is
unsuccessful, Company K will lose both its initial investment and the yearly cost of its
current reporting environment, for a total loss of $7,178,600. Company K must now take
each of these three gain/loss numbers and multiply it by its associated probability
percentage, and then total the resulting numbers to arrive at the overall weighted
outcome. This is shown in the chart below:


                                  %                                 Weighted
     Outcomes                 Probability       Gain/(Loss)         Outcome
Successful                              60%    $ 9,300,359        $ 5,580,215
Partially successful                    30%    $ (2,446,600)      $ (733,980)
Failure                                 10%    $ (7,178,600)      $ (717,860)

Totals                                  100%                      $ 4,128,375

Company K has determined that its total weighted outcome is a $4,128,375 gain. But
what does this number mean for the decision about whether to go ahead with the
implementation?


The following guidelines can be applied to the total weighted outcome to determine
whether to undertake an initiative:
     •       If the total weighted outcome is less than $0: Do not undertake the initiative. Risk
             of failure is too great.
     •       If the total weighted outcome is greater than $0 but less than the initial
             investment: Carefully evaluate non-financial or qualitative factors. While the risk
             of failure is less than 50%, the financial benefits may not justify the initiative.




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     •       If the total weighted outcome is greater than the initial investment: The financial
             benefits justify doing this initiative.


Based on these guidelines, Company K’s proposed BI and DW initiative is justified by
financial benefits.


You can see that there are several assumptions that must be made with a sensitivity
analysis, such as:
     •       The different possible outcomes,
     •       The probability of each possible outcome, and
     •       The gain or (loss) that should be associated with each possible outcome.


Ideally, these assumptions should be based upon empirical evidence that is obtained from
independent third-party research firms such as the META Group, Gartner, or Ventana
Research.


Applying sensitivity analysis to ROI calculations helps executives evaluate the risk and
potential gain or loss associated with the BI and DW initiative. Other sensitivity analyses
can be performed that focus on changes in recurring savings, recurring costs, discount
rate, and initial costs.


A PO ST - IM P L E M EN T A T I O N A SS E S S M ENT E XA M P L E
Let’s briefly return to the example of Company K to understand how ROI calculation
changes slightly in the case of a post-implementation assessment.


Company K has successfully implemented its BI and DW solution, and now the project
sponsor wants to know the actual financial benefit the solution has provided before
approving additional phases and funding. Company K must now go back and determine
actual costs and benefits to find out whether ROI measures up to initial estimates.




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Through its post-implementation assessment, Company K finds that some things have
changed from its initial estimates:
             •   The hardware cost for the initiative was actually $250,000 and the labor cost
                 was actually $1,181,800, bringing the total initial investment up to
                 $2,681,800.
             •   The recurring labor cost was actually $1,456,000 per year, bringing total
                 recurring cost up to $1,706,000 per year.
             •   The cost to support Company K’s old reporting environment was actually
                 $5,395,000, significantly higher than initially estimated.


This revised cost information is vital for completion of the post-implementation
assessment, but does not present the whole picture. Company K has also gained some
new information about the benefits the new BI and DW solution has provided:
             •   The cost of paper, toner, and maintenance of printers and copiers has
                 decreased $13,000 per month.
             •   Purchasing patterns were examined and consolidated, resulting in savings of
                 $24,000 per month.
             •   Business analysts now spend only one hour per week gathering data and
                 updating spreadsheets, down from the six hours per week they spent with the
                 old reporting environment. Company K employs 125 business analysts at a
                 labor rate of $85 per hour, which means this improved efficiency has resulted
                 in a cost savings of approximately $230,000 per month.


Company K factors this new cost savings information into its TVO calculations for the
post-implementation assessment, along with the revised data on initial and recurring
costs. After applying the NPV calculation to the new TVO number, Company K
discovers that it has actually achieved a project-perspective ROI of 695% over three
years.




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ACCOUN TING FOR NON- FINANC IAL C ONSID ERATION S
While the ROI calculation is one measure to evaluate a BI and DW initiative, there are
other non-financial considerations that should also be addressed. These non-financial, or
qualitative, considerations may include the following:
     •       Improved information dissemination
     •       Improved information access
     •       Propagation of knowledge about the organization through training and the use of
             the BI application

When developing a business case, qualitative aspects of a BI and DW initiative may be
difficult to quantify without very broad assumptions. A conservative approach is
recommended. It is best to identify these items and quantify them after the BI and DW
solution has been implemented.


CONC LU SION
The quantitative and qualitative benefits of a BI and DW initiative need to be evaluated
both before the project is undertaken and after it has been completed. Calculating the
ROI of a BI and DW initiative is an important means of measuring the benefits to the
organization and securing “buy-in” from executive leadership and business users.
Earning this support is essential to the success of any BI and DW effort.


Knightsbridge has created an ROI calculator that can help you apply what you’ve learned
in this white paper to estimate the financial benefits of a proposed BI and DW initiative.
To download the calculator, go to http://www.knightsbridge.com/ROI_BI.




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This paper was authored by:
Knightsbridge Solutions LLC
500 West Madison, Suite 3100
Chicago, IL 60661
Phone: (800) 669-1555
Fax: (312) 577-0228


Knightsbridge Solutions is the largest professional services firm exclusively focused on
business intelligence and data warehousing solutions. The company offers services in
information strategy, data integration, business intelligence, and data warehousing, with a
specialization in “big-data” solutions for those with high data volumes or complex
information challenges. Knightsbridge serves Fortune 1000 clients in financial services,
insurance markets, retail and consumer products, health and life sciences, high
technology, entertainment, federal government, and other industries.


For further information or additional copies, contact Knightsbridge at (312) 577-0210
ext. 5258.




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