Business_Integration_ROI

Business Integration ROI Building The Business Case For Integration January 2005 Copyright © 2005 webMethods, Inc. All rights reserved. Trademarks The webMethods logo and Get There Faster are trademarks or registered trademarks of webMethods, Inc. Other product names used herein may be trademarks or registered trademarks of webMethods or other companies.Statement of Conditions WEBMETHODS, INC. PROVIDES THIS PUBLICATION "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 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RESTRICTED RIGHTS LEGEND: Use, duplication, or disclosure by the U.S. government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of the Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 (October 1988) and FAR 352.227-19 (June 1987). TABLE OF CONTENTS TU EXECUTIVE SUMMARY ........................................................................................................... 4 UT TU INTRODUCTION ........................................................................................................................ 5 BROAD BUSINESS VALUE ..................................................................................................... 5 TANGIBLE AND INTANGIBLE BENEFITS .................................................................................... 6 UT TU UT TU UT UT TU AREAS OF RETURN FROM INTEGRATION ........................................................................... 7 IT-BASED RETURNS ............................................................................................................. 7 BUSINESS OPERATIONS RETURNS ........................................................................................ 8 CORPORATE RETURNS ......................................................................................................... 9 TU UT TU UT TU UT TU AREAS OF COST FOR INTEGRATION ................................................................................. 11 IT COSTS .......................................................................................................................... 11 BUSINESS IMPACTS AND COSTS .......................................................................................... 12 UT TU UT TU UT TU BUILDING THE BUSINESS CASE ......................................................................................... 13 UT TU APPENDIX: INTEGRATION ROI CHECKLIST ....................................................................... 14 UT ©2005 webMethods, Inc. All rights reserved. Page 3 EXECUTIVE SUMMARY Business integration is becoming increasingly important for many companies, with the need to streamline processes for efficiency and productivity while at the same time leveraging years of IT investments and becoming a more agile business that can move swiftly to exploit market opportunities and beat competition. Agility can only be achieved by ensuring that business processes can be changed nimbly, and this in turn is only possible when the in-place IT assets are integrated flexibly to accommodate the required speed of change. But how should companies go about building the business case for investing in integration software? How can IT management gain financial backing for integration projects, and then ensure the optimum return on investment (ROI)? What factors should be part of the business case justification? This white paper introduces the topic of integration ROI, providing decision-makers with guidance on the critical factors that will affect a business case for investing in integration software. This document is intended to provide the reader with guidelines and recommendations for creating a balanced justification that considers all aspects of returns and costs when companies implement an integration solution. Three key area of integration payback are assessed: IT savings Enhanced operational performance Achievement of corporate goals Each area is discussed, highlighting particular sources of integration value such as IT savings from reduced resource requirements, operational improvements such as faster responsiveness to competitive pressures, and enhanced customer satisfaction at the corporate level. Of note is this discussion goes beyond just IT savings. Many IT organizations today try to justify integration spend based purely on this factor, but this undervalues the tremendous gains to be made from the business benefits accruing from more integrated, automated and agile processes, without which corporate growth may be inhibited. Instead, it is necessary to consider all three areas to build an accurate business case assessment and therefore make the optimal decision for the business as a whole. Finally, to balance the discussion on benefits, the investment side of the equation is also considered both in terms of cost and business impact. ©2005 webMethods, Inc. All rights reserved. Page 4 INTRODUCTION Integration remains a top priority for companies, remaining one of the top three CIO concerns for a number of years. In the early days, the focus on integration was often one of making the IT organization more responsive and efficient, but companies have gradually become more and more aware that integration can help to make the business more agile and competitive. At the same time, buyers have moved from “early adopter” type of companies to the pragmatists who expect to see clear, economically justified business cases. The result is that most companies now consider return on investment (ROI) as an essential part of any investment decision. Broad Business Value Integration is a complex subject and a number of different factors need to be taken into account when considering the justification for an integration investment. Firstly, companies have become aware that integration benefits are found in three different aspects of company operations: In IT, where it can reduce cost and time-to-market while improving efficiency In business operations, where it can enable streamlined operations, better customer service and faster response to competition In company brand value, where it can enable modern, consumer-oriented solutions and a higher degree of service quality When trying to evaluate the benefits brought about by integration, it becomes progressively more difficult to put a figure on the returns as these different areas are considered. Nevertheless, business cases for integration should reflect a combination of tangible returns in hard dollars and more intangible ones which, although difficult to enumerate, can often prove to offer sustainable business value. It is also necessary to decide the baseline against which the costs and benefits should be measured. Many companies have found integration a necessity in the past, even before the advent of commercially available technologies with which to address the problem. Mechanisms such as point-to-point interfaces, extract/transform/load (ETL) processes, and data replication procedures have become commonplace. Therefore, it is often necessary to compare the business case for purchasing an integration software solution against the do-it-yourself alternative. Corporate goals may also have a bearing on evaluations. For example, some companies are in a “cost-out” mode, where the only benefits that can be considered in a justification are cost reductions. Finally, companies looking at integration are almost always keen to show not only a return on any investment to be made, but also a return on current assets. These assets might be IT systems that have had billions of dollars of investment to date, skilled and trained staff, or even an established business partner community. In reality however, it is hard to classify any particular company into any of these categories. Instead companies should take individual views on benefits based on their own situations across different spheres of their business activities. ©2005 webMethods, Inc. All rights reserved. Page 5 Tangible and Intangible Benefits Because of the complexity of integration, and the mixture of tangible and intangible benefits, it is rarely possible to build an integration value case that is purely financially based. Instead there are likely to be three parts to the overall evaluation case: Actual dollars tied to tangible benefits or costs Estimated dollars chosen to represent a more intangible benefit or cost Intangible factors that have to be considered as additional weight in any judgment Real dollar benefits are very valuable in any ROI case, because of the level of certainty attached to them. Obviously, an estimate of the quantifiable dollar gain has to be made initially but it is usually straightforward to measure the actual benefits as a project rolls out to validate the initial estimates. Examples in this first category might be: Reduced development work for new projects (design, coding, testing) Reduced maintenance costs Reduced resource needs These areas should be closely examined and potential benefits calculated based on such factors as loaded people costs saved or contractor rates. As experience is gained, this methodology can be refined as real benefit data is gathered. Assigning values to the second group of benefits, for business case purposes is a little trickier. The key is to ensure that the affected departments agree with the assessed benefit value. For example, if improved integration delivers a more just-in-time process for a manufacturing company, one of the benefits will be a reduction in inventory due to the more efficient process. On this basis, the manager in charge of inventory will be able to assess the benefit in terms of a value estimate. Once again, as the project is deployed it should be possible for this figure to be validated. The third part of the justification is the most difficult to address. Suppose the integration project delivers a more responsive customer self-service system. One of the benefits should be improved customer satisfaction and, hence, customer loyalty. Though an important corporate goal, it is difficult to assign a dollar value to this benefit. Another example might be where the integration project is part of fulfilling legislation such as Sarbanes-Oxley requirements. Again, it is hard to place a dollar value on this, though the implications of non-compliance have significant meaning to the business. This last factor means that evaluating integration projects has an element of “art” as well as “science”, in that it relies on a value judgment in addition to hard numbers. Nevertheless, decision makers can still obtain a meaningful broad-brush feel to whether the investment makes sense, and later refinement will make the case more accurate even if some benefits remain intangible and subjective. ©2005 webMethods, Inc. All rights reserved. Page 6 AREAS OF RETURN FROM INTEGRATION As discussed, returns from an investment in integration technology and projects are likely to include solid dollar gains as well as subjective business value enhancements. The chart below summarizes the typical spectrum and areas of return. Benefits of Integration – Areas of Return IT Reduced resources Reduced skills requirements Responsiveness Flexibility Business Process efficiency and productivity Competitive performance Operational effectiveness Corporate Customer satisfaction Compliance Access to new opportunities Expansion of intellectual capital Tangible Benefits Intangible Benefits IT-Based Returns From an IT perspective, the major return areas stem from adopting a vendor-based integration solution rather than doing everything “manually” (i.e., one-off, internallydeveloped integration solutions for each project requirement). In the past, customers were sometimes challenged to justify an off-the-shelf solution because of the initial infrastructure investment required to establish a base on which to build subsequent integration projects, and the difficult of tying this investment to the first project to utilize the infrastructure. However, this has become less of an issue as integration software vendors have moved to support an incremental deployment model where customers can invest in only the necessary infrastructure for an integration project, with the knowledge that as the number of projects grows, the infrastructure will scale seamlessly and consistently to create an enterprise-wide platform. IT returns generally fall into the following areas:Reduced resource requirements Reduced skills requirements Faster response to requests for change Flexibility to accommodate new technologies Of these areas, the first two usually are both the easiest to quantify and the largest in terms of hard benefits, and therefore, are the main focus of emphasis in this section. One major area of IT benefit comes from the fact that integration software provides a single interface point to individual applications. Instead of a new interface having to be ©2005 webMethods, Inc. All rights reserved. Page 7 developed between any two components when the business needs them to be integrated, each component has a single interface to the integration software which acts as a “broker”, thereby drastically reducing the number of interfaces required. This reduces the number of interfaces needing to be developed and maintained. It also makes it easier and quicker to develop interfaces, using the integration software tools, and also reduces rework time because reusing interfaces rather than developing afresh results in fewer bugs (and, therefore, reductions in testing effort). Furthermore it reduces skills requirements because, typically, the integration software shields developers from having to deal with many underlying technicalities. The standard approach enabled by using an integration suite benefits not just the implementation process, but also operations, further reducing the requirement for special skills. This reduction may avoid the need to hire or contract expensive specialist personnel. Also, since a vendor is now responsible for the integration mechanism between components, the vendor can be relied on to adapt to new technology advancements (for example, ensuing that connectivity to new versions of an application such as SAP or Siebel are maintained). The second area of IT benefit is that of increased responsiveness to the business. The fact that new business processes can be deployed more quickly because of the reduced effort and the reusability offered by integration provides real business benefits, but also enables IT to strengthen its position as a business enabler. As more and more integration projects are deployed, cost and time-to-deployment will continue to reduce due to improving skill levels of IT staff with the integration tools and general economies of scale. Finally, as new technologies such as Web services take hold, a coherent integration architecture delivers an enhanced level of system flexibility, enabling these technologies to be embraced and exploited more quickly and for less cost. And, of course, the use of vendor-supported integration technology means that the vendor has to meet the new technology challenges rather than the IT department. Business Operations Returns Business units driving integration projects are typically motivated by drivers that fall into the following categories: Enhanced process efficiency and productivity Improved competitive performance Increased operational effectiveness Considering process efficiency and productivity first, the key is that integration is able to increase levels of automation and reduce human intervention. Examples might be reducing order times by removing manual order re-entry at different stages of the processing cycle, cutting the percentage of failed funds transfer requests due to input errors, or improving the speed of information sharing between different departments. The result is a reduction of expenses, for example due to staffing reductions from the increased level of automation or use of a more productive process. In addition, ©2005 webMethods, Inc. All rights reserved. Page 8 process efficiency may also allow a reduction of inventory through just-in-time processes that rely on a high degree of automation. This becomes even more feasible when the process efficiency is extended to encompass suppliers and distributors, and this can also have the side-effect of reducing procurement costs as well. Of course, improving process efficiency also plays into competitive performance. Being able to serve customers’ needs faster and cheaper improves the business’ chances of beating the competition. In addition, the ability for process changes to be implemented faster at the operational level, through underlying IT mechanisms that are more flexible to change due to integration, enables business operations to respond to competitive action more quickly. Indeed, it may well enable a business unit to lead with new differentiating initiatives. These competitive gains can be evaluated in monetary terms by making an assessment of the likely market share increase resultant from operational efficiency and speed of reaction. Quantifying operational effectiveness is more difficult though not impossible. Integration can definitely help to make a business more effective by improving business intelligence and its dissemination. For example, the ability to pool information about a particular prospect from different parts of the business may make cross-selling or up-selling possible. Or the ability to provide comprehensive feedback information on product performance directly from customers to engineering may enable new processes to be developed to improve product quality. Assessing the ROI will depend on the specifics of the situation; for example, benefits might be realized by reducing cost of sale or increasing sales volumes, for instance. Corporate Returns Finally, there are the returns at the corporate level. Of course, the two areas already described have an effect on the overall corporate performance, but this section concentrates on areas that more specifically apply to the corporation as a whole, reflecting the brand value across all aspects of the business. These include: Customer satisfaction Compliance Access to new opportunities Exploitation of the corporate knowledgebase The first two areas are both extremely important, if hard to relate to financial gains. Integration can contribute a major benefit to customer satisfaction, through a range of uses. One of the most important is the ability, using integration, to gain a complete, corporate-wide single view of the customer in real (or nearly real) time. This can include current product sales, product experiences, reported issues, outstanding deliveries and many other facets of customer-related information. This capability allows the company to provide a much higher level of service to the customer, for example through the call centers or help desks. Customer satisfaction can be related to customer loyalty, which many companies have a way of relating to financial performance, for example by ©2005 webMethods, Inc. All rights reserved. Page 9 comparing the expense of winning a new customer versus retaining existing ones. Regardless of how meaningfully the benefit can be quantified, however, customer satisfaction is an important benefit of integration. On the compliance front, the ability to integrate different information sources improves the understanding of company operations and procedures, and, particularly with some of the most recent forms of legislation such as Sarbanes-Oxley and Basel II, enables companies to build sophisticated audit trails of all operations. The monetary benefit of compliance can be looked at from the other direction, i.e., as a way of avoiding a heavy financial penalty, though, in reality, any integration project that plays a key role in meeting compliance is likely to be justified on a non-financial basis (indeed, it is often a case of corporate survival). With regard to access to new opportunities, integration can link the entire value chain together, both within the company and outside to partners and even customers. This wide-reaching integration makes it possible to introduce new business products or initiatives. In fact, there are many examples of companies using integration to offer new services to new markets. Finally, integration can bring together knowledge from all of a company’s business units, making it available for sharing and thereby increasing the overall value of the corporate knowledgebase. This can have paybacks in improved corporate efficiency, more rational organizational structures and a more effective workforce. For example, providing employee portals that give information on corporate processes and procedures such as health and safety may reduce education costs for new employees, while at the same time helping to improve employee morale and compliance to legal requirements. ©2005 webMethods, Inc. All rights reserved. Page 10 AREAS OF COST FOR INTEGRATION In order to evaluate return on investment, the benefits accruing from the integration project have to be balanced against the costs incurred. Broadly, the IT costs tend to be grouped around the provision and support of the IT changes required to implement the desired operational changes. In contrast, business unit and corporate costs tend to be expressed in terms of the change required to adapt to the new operational processes and procedures. It is important to remember that both are relevant, although the costs from the business side of the company are a little harder to evaluate. Companies that forget the impact to business personnel generally suffer as the result of the oversight. IT Costs IT costs resulting from an integration project are likely to fall into three categories:Infrastructure costs People costs Services On the infrastructure front, there are the expected software license and maintenance costs. These are needed to cover the integration solution selected, any new application packages and any other new pieces of infrastructure software required. There may also be the need to acquire additional hardware, to handle additional capacity generated by the solution or to provide local processing power as needed. Clearly there will also be a wide range of people costs to include in any evaluation. These span the traditional range of project development encompassing planning, design, development, test, deployment and support. At the planning and design levels, it is important to have both IT and business skills since integration projects have to deal with both aspects (e.g., business processes have to be defined or modified to produce the required business return and this must be explained to the IT team). It may also be that business domain knowledge is required to help IT understand the business standards, such as RosettaNet, that need to be taken into account in the solution. The design phase will need to consider not just the technical architecture and approach but also the operational processes and workflows needed to support the solution. Development resources are required to build the interfaces to the components that are to be integrated, to modify the relevant IT infrastructure, and to supply essential mechanisms such as audit and problem determination trails. In addition the integration software itself will have to be configured for the operational environment. The test phase may require specific hardware and software, for instance to validate performance requirements and to provide a thorough quality assessment of the new software implementation. Personnel will be required to carry out the testing and to resolve and rework problems as required. Finally, deployment and support costs must include items such as help-desk and operations staffing and training, quite possibly with business as well as technical skills, to ensure successful operations. ©2005 webMethods, Inc. All rights reserved. Page 11 Throughout the entire range of project activities, it may also be necessary to consider third party service costs. Some companies may decide to utilize systems integration experts to provide valuable guidance in the planning and design phases of the project. Also, there may be parts of the project that need to deal with a specialized area of technology knowledge, where it is more financially viable to contract the skills rather than retrain existing IT staff. Examples might be the need to integrate a particular software package, or to retain someone skilled in the particular integration technology selected. Business Impacts and Costs From a business cost perspective, the three areas most likely to be taken into account in this area are: Resources to support project implementation Education and training of end users Operational risks The first area has already been described in the previous section. Because integration projects span business and technical disciplines, resources to support planning, design, implementation and deployment activities will be required. These resources will be necessary not just to ensure the right solution has been built, but that the deployment of the new solution is carried out in a controlled fashion in order to minimize disruption and business risk. Another area of cost on the business side is the education and training of the end-user community. If the integration project is simply automating some back room operations then the end user experience and procedures may be unchanged. But if some new or changed business processes is being implemented, then retraining is an essential element to be considered. Also, if the integration project spans business partners as well as internal departments, the partners may also need education. The area of risk covers aspects such as the loss of productivity during the retraining and changeover to the new process, and potential service disruption due to technical problems or user errors experienced as the solution becomes fully established. Since it is hard to determine to what extent these issues will be an impact, and what cost should be associated with them, decision-makers may simply want to note them as part of their overall evaluation criteria. ©2005 webMethods, Inc. All rights reserved. Page 12 BUILDING THE BUSINESS CASE At first glance, it may seem a daunting task to assemble a return on investment evaluation for integration projects. But, as this white paper has attempted to demonstrate, this may be easier in practice than it might appear. Having given some thought to the returns and costs of an integration project, it is worth considering the process of building the evaluation case to determine the overall return on investment and payback period. Although in principle this is simply a matter of evaluating the cost and benefit checklists, there are additional considerations to be borne in mind when carrying out this type of evaluation. The general approach should be as follows: 1) Use the previous sections in this white paper to guide the creation of a checklist for potential areas of benefit and cost (the appendix provides a summary). Entries that are not relevant can be dropped, while attempts can be made to assign numbers to other soft benefit areas as previously discussed. 2) To the extent possible, calculate hard dollar figures for both returns and costs. Where feasible, use the suggestions described in this white paper for quantifying the intangible benefits. 3) If it is not possible to get the business to assign numbers to a particular intangible benefit, it is still worth keeping it on the list as an “added value” factor. Although the company might have difficulty allocating a financial return equivalent to these soft benefits, they may be of such importance that they ultimately outweigh the tangible benefits. 4) Establish an ROI baseline. It is common to find that companies are already carrying out a certain amount of IT integration today to support required business initiatives, but doing so in a piece-meal fashion. In other words, IT is achieving the business goals by developing homegrown, one-off solutions to each requirement with technologies such as file transfer, file replication, and the development of one-one interfaces. But as layer upon layer of one-off solutions are implemented it is becoming increasingly expensive, difficult, and risky to do. In this scenario, the return on investment evaluation calculations should include the added efficiency—and, hence, reduced expense—of using commercially available integration tools to achieve the same integration objectives, and also the fact that once an integration infrastructure is in place, it becomes much easier to complete future projects. One key to success is to adopt an iterative process, moving from a largely instinctive assessment to a more numbers-driven one. However, it is also important to avoid attempting to assign artificial monetary values to all benefits, because there may be some intangible benefits that are so substantial that they outweigh the costs on their own. Finally, engage potential software vendors in this process, both to leverage their experience and to obtain a deeper understanding of how they derive the value that they promise to deliver to you as a customer. ©2005 webMethods, Inc. All rights reserved. Page 13 APPENDIX: INTEGRATION ROI CHECKLIST IT RETURNS Reduced resource requirements Single on-off ramp for components – Fewer interfaces needed – Less effort to develop Use of vendor integration tools – Less complexity, less rework – Improved level of reuse Use of standard networks (e.g. Internet) U IT COSTS Infrastructure costs Software license and maintenance costs Possible hardware costs U Reduced skills requirements Use of vendor technology Simpler operations Faster response to requests for change Improved level of reuse Use of vendor technology Reduced effort & skills requirements Flexibility to accommodate new technology Use of vendor technology Simpler infrastructure` BUSINESS OPERATIONS RETURNS Enhanced process efficiency and productivity Increased automation – Reduced staff costs – Faster process execution Inventory reduction Reduced procurement costs U People costs Planning Architecture & Design Development Test / Quality Assurance Deployment Support Third-party services Planning and design expertise Specialized skills – Software package knowledge – Integration tool expertise BUSINESS IMPACT Resources to support implementation Business skills to support IT project staff – Process design – Workflow requirements – Knowledge of business operations Ongoing support resources U Improved competitive performance Faster reaction to market needs Faster response to competition Increased operational effectiveness Cross-selling, up-selling Enhanced quality of service Lower cost of sale CORPORATE RETURNS Improved customer satisfaction Single view of the customer Enhanced quality of service Compliance Access to new opportunities Ability to offer new products/solutions Leverage of corporate knowledgebase U Education and training of end users New processes, procedures and user interfaces Operational risks Lost productivity – Retraining requirements – Changeover procedures Disruption of service ©2005 webMethods, Inc. All rights reserved. Page 14 Worldwide Headquarters 3930 Pender Drive Fairfax, VA 22030 USA Tel: 703 460 2500 Fax: 703 460 2599 US West Coast 432 Lakeside Drive Sunnyvale, CA 94088 Tel: 408 962 5000 Fax: 408 962 5329 ABOUT WEBMETHODS, INC. webMethods is a leading provider of business integration software to the Global 2000 and large government agencies. Our technology lets our customers integrate, assemble and optimize available IT assets to drive business process productivity. Currently, more than 1,200 customers are meeting customer demands, reducing costs, creating new revenue opportunities and reclaiming ROI. Faster. webMethods is headquartered in Fairfax, Va., with offices throughout the United States, Europe, Asia Pacific and Japan. More information about the company can be found at www.webMethods.com. NASDAQ: WEBM. European Headquarters Barons Court 20 The Avenue Egham, Surrey TW20 9AU United Kingdom Tel: 44 0 1784 221700 Fax: 44 0 1784 221701 Asia-Pacific Headquarters Level 15 Philips Building 15 Blue Street North Sydney NSW 2060 Australia Tel: 61 2 8919 1111 Fax: 61 2 8920 2917 webMethods Japan KK Izumi Garden Tower 30F 1-6-1 Roppongi, Minato-ku Tokyo 106-6030 Japan Tel: 81 3 6229 3700 Fax: 81 3 6229 3701 www.webMethods.com ©2005 webMethods, Inc. All right reserved. The webMethods logo and Get There Faster are trademarks or registered trademarks of webMethods, Inc. All other names mentioned are trademarks, registered trademarks or service marks of their respective companies.