Easy to Use Financial Tools for Effective Decision Making Paul M. Dooley President Optimal Connections, LLC P: (949) 305-3544 E: [email protected]

Easy to Use Financial Easy to Use Financial Tools for Effective Tools for Effective Decision MakingDecision Making

Paul M. DooleyPaul M. DooleyPresidentPresidentOptimal Connections, LLCOptimal Connections, LLCP: (949) 305-3544P: (949) 305-3544E: E: [email protected]@optimalconnections.com W: W: www.optimalconnections.comwww.optimalconnections.com

Optimal Connections, LLCOptimal Connections, LLC

Typical Decision Typical Decision Challenges You May be Challenges You May be FacingFacing Should I remain with the status quo, or Should I remain with the status quo, or

implement a new Service Management System implement a new Service Management System (SMS)?(SMS)?

If I implement a new SMS, which one If I implement a new SMS, which one should I choose? should I choose?

Is it worthwhile for me to implementIs it worthwhile for me to implementa Knowledge Management System?a Knowledge Management System?

Should I invest in Remote Access Tool Should I invest in Remote Access Tool A, B ..or C?A, B ..or C?

Is it wise for me to consolidate our multiple Is it wise for me to consolidate our multiple help desks to a centralized Service Desk, or help desks to a centralized Service Desk, or should we remain decentralized?should we remain decentralized?


AgendaAgenda

Decision Making ChallengesDecision Making Challenges How to Use Financial Tools to Help:How to Use Financial Tools to Help:

– Cost/Benefit Analysis (CBA)Cost/Benefit Analysis (CBA)– Return on Investment (ROI)Return on Investment (ROI)– Total Cost of Ownership (TCO)Total Cost of Ownership (TCO)

7 Steps in Applying the Tools7 Steps in Applying the Tools Valuable ResourcesValuable Resources SummarySummary


Someone Once Said …Someone Once Said …

““Success in life often depends on Success in life often depends on the the

choices we make.”choices we make.”

Take advantage of best practices and available financial tools that can

help you make better quality decisions

How do you make the

right choice?


How Do I Know Which How Do I Know Which Course of Action to Take?Course of Action to Take?

Let’s see, I could …Let’s see, I could …– GuessGuess– Pick one, based on the ‘Pick one, based on the ‘good old boygood old boy’ ’

networknetwork– Focus on the ‘Focus on the ‘coolest’coolest’ technology technology– Pick the one that’s Pick the one that’s cheapestcheapest (up front) (up front)– Choose the one that’s got the most Choose the one that’s got the most

‘‘featuresfeatures’’– Base my decision on what my Base my decision on what my management management

thinks (what – consider the users?)thinks (what – consider the users?)


Why Not A More Why Not A More Business Business LikeLike Course of Action Course of Action Follow a Follow a best-practice selection processbest-practice selection process Use a Use a combination of financial toolscombination of financial tools to to

improve the quality of your decisionimprove the quality of your decision– Do the benefits really justify the cost?Do the benefits really justify the cost?– How long will it take to recover our investment?How long will it take to recover our investment?– It the investment really worth it?It the investment really worth it?– What is the true total cost over the life of the What is the true total cost over the life of the

asset?asset? These tools are not new – they have been These tools are not new – they have been

used for decades by organizations of all kindsused for decades by organizations of all kinds Applying them to IT Services is simply Applying them to IT Services is simply good good

business practicebusiness practice


What’s In It For You?What’s In It For You?

Demonstrate a ‘Demonstrate a ‘business approachbusiness approach’’ Minimize risk and costsMinimize risk and costs through informed, through informed,

higher quality decisionshigher quality decisions Increased credibilityIncreased credibility with management with management Build stronger Build stronger Business CasesBusiness Cases for proposals for proposals A more A more strategic strategic approach, aligning with approach, aligning with

business goalsbusiness goals Help Help ensure successful business outcomesensure successful business outcomes

for customers, through improved service for customers, through improved service provisioningprovisioning

Be a Be a good stewardgood steward of investments in IT services of investments in IT services


Tools to Improve the Tools to Improve the Quality of Your Decision Quality of Your Decision MakingMaking The three tools we will focus on are:The three tools we will focus on are:

– Cost/Benefit Analysis (CBA)Cost/Benefit Analysis (CBA):: Weighing Weighing costs vs. benefits, and calculating paybackcosts vs. benefits, and calculating payback

– Return on Investment (ROIReturn on Investment (ROI):): is it worth is it worth the investment?the investment?

– Total Cost of Ownership (TCOTotal Cost of Ownership (TCO)) – what – what is the total cost of ownership over time?is the total cost of ownership over time?

Using these tools Using these tools in concertin concert will help you make will help you make better quality decisions and build stronger better quality decisions and build stronger

business cases for proposals!business cases for proposals!


Cost/Benefit Analysis Cost/Benefit Analysis (CBA)(CBA)OverviewOverview Technique for deciding whether or not a Technique for deciding whether or not a

change is change is worthwhileworthwhile Add up the value of the Add up the value of the benefitsbenefits of a course of a course

of action, subtracts associated of action, subtracts associated costscosts, and , and come up with an advised decisioncome up with an advised decision– Costs: one-time, and on-goingCosts: one-time, and on-going– Benefits: usually realized Benefits: usually realized over timeover time

A time factor is built by considerationA time factor is built by considerationof a “of a “pay back periodpay back period” ”

Key: assign a financial value to both Key: assign a financial value to both tangibletangible and and intangible benefitsintangible benefits– Placing a financial value on intangibles needs to be Placing a financial value on intangibles needs to be

justifiablejustifiable


How to Do a Cost/Benefit How to Do a Cost/Benefit Analysis (CBA): Analysis (CBA): StepsSteps1.1. Establish a Establish a common unit of valuationcommon unit of valuation ($) ($)2.2. Identify all of the Identify all of the tangibletangible costs costs

– Hardware, software, training, documentation, Hardware, software, training, documentation, maintenance support, consulting, opportunity costsmaintenance support, consulting, opportunity costs

3.3. Total all of the costsTotal all of the costs4.4. Identify all of the Identify all of the benefitsbenefits

– Tangible Tangible benefits (where it is easy to quantify the benefits (where it is easy to quantify the savings)savings)

– Intangible Intangible benefits (assign values based on benefits (assign values based on estimates, justifiable assumptions)estimates, justifiable assumptions)

5.5. Total the value of benefits in year 1 and Total the value of benefits in year 1 and beyondbeyond

6.6. Determine Determine payback timepayback time: divide [costs] / : divide [costs] / [benefits][benefits]


Cost/Benefit Analysis Cost/Benefit Analysis (CBA) (CBA) Consider aConsider a ScenarioScenario A support center manager is deciding whether to A support center manager is deciding whether to

implement a new computer-based incident implement a new computer-based incident management system.management system.

His help desk is in start up mode, withHis help desk is in start up mode, withmostly new support associates.mostly new support associates.

He is aware that with a more He is aware that with a more automated incident tracking system automated incident tracking system he will be able to handle calls more he will be able to handle calls more effectively and efficiently, with a highereffectively and efficiently, with a higherlevel of quality and faster delivery.level of quality and faster delivery.


Cost/Benefit Analysis Cost/Benefit Analysis (CBA) (CBA) Estimating Estimating CostsCosts - - ScenarioScenario New help desk computer equipment: $36,200New help desk computer equipment: $36,200

– 10 network PCs with software @ $2,450 ea.: $24,50010 network PCs with software @ $2,450 ea.: $24,500– 1 server @ $3,500 1 server @ $3,500 – 3 printers @ $1,200 each: $3,600 3 printers @ $1,200 each: $3,600 – Cabling & Installation @ $4,600 Cabling & Installation @ $4,600 – On-goingOn-going maintenance costs maintenance costs

after 1after 1stst yr: $3,930/yr yr: $3,930/yr Software:Software: $15,000$15,000

– IMS Software, 10 user license @ $15,000 IMS Software, 10 user license @ $15,000 (includes 1(includes 1stst year support) year support)

– On-goingOn-going support (Silver): $2,700/yr support (Silver): $2,700/yr Staff training costs: $14,800Staff training costs: $14,800

– Customer Service Skills - 10 people @ Customer Service Skills - 10 people @ $400 each: $4,000$400 each: $4,000

– Incident Mgt. System - 12 people Incident Mgt. System - 12 people @ $900 each: $10,800@ $900 each: $10,800


Cost/Benefit Analysis Cost/Benefit Analysis (CBA) (CBA) Estimating Estimating CostsCosts Other implementation costs: $48,000Other implementation costs: $48,000

– Lost time: 40 man days @ $200 / dayLost time: 40 man days @ $200 / day– Lost productivity through disruption: estimate: Lost productivity through disruption: estimate:

$20,000 $20,000 – Lost sales through service inefficiency during first Lost sales through service inefficiency during first

months: estimate: $20,000 months: estimate: $20,000 Total costs (1Total costs (1stst year): year): $114,000$114,000

But what are the benefits, and theBut what are the benefits, and thevalue of these?value of these?

And what’s the payback time?And what’s the payback time?


Cost/Benefit Analysis Cost/Benefit Analysis (CBA) (CBA) Estimating Estimating BenefitsBenefits Estimate the Value of Tangible Benefits:Estimate the Value of Tangible Benefits:

– Handle Handle more workmore work with same staff – savings: $40,000/yr with same staff – savings: $40,000/yr– Improved uptime through Improved uptime through preventionprevention - estimate: $20,000/yr - estimate: $20,000/yr – Improved Improved efficiency efficiency and reliability of call handling - estimate: and reliability of call handling - estimate:

$50,000/yr $50,000/yr – Improved Improved serviceservice and retention - estimate: $30,000/yr and retention - estimate: $30,000/yr – Improved Improved accuracyaccuracy of information - estimate: $10,000/yr of information - estimate: $10,000/yr – More ability to More ability to support salessupport sales effort: $30,000/yr effort: $30,000/yr

Do the Same with Intangible Benefits:Do the Same with Intangible Benefits:– Higher employee morale = higher productivityHigher employee morale = higher productivity

Total Benefits: $180,000/yearTotal Benefits: $180,000/year Payback time: $114,000 / $180,000 = 0.63 of Payback time: $114,000 / $180,000 = 0.63 of

a year = approx. a year = approx. 8 months8 months!!


Cost/Benefit Analysis Cost/Benefit Analysis (CBA) (CBA) Key Point: Payback Key Point: Payback TimeTime Payback time is often known as the Payback time is often known as the breakbreak

even pointeven point– Time it takes to recover the cost (sooner theTime it takes to recover the cost (sooner the

better!) better!) Found graphicallyFound graphically by plotting costs and by plotting costs and

income on a graph of output quantity income on a graph of output quantity against $. against $. – Break even occurs Break even occurs at the point the two lines cross.at the point the two lines cross.

Bottom line: Although the estimates of the benefits Bottom line: Although the estimates of the benefits given by the new system are quite subjective, the IT given by the new system are quite subjective, the IT Director is very Director is very likely to approvelikely to approve the proposal, the proposal, given the given the short payback timeshort payback time..


Cost/Benefit Analysis Cost/Benefit Analysis (CBA) (CBA) Key Point: Key Point: Time Time Value of $Value of $ For longer payback timesFor longer payback times, the “, the “time valuetime value” of money ” of money

should be factored in!should be factored in!– A dollar 5 years from now is not worth the same as it is A dollar 5 years from now is not worth the same as it is

today!today!– A dollar available now can be invested and earn interest for A dollar available now can be invested and earn interest for

five years and would be worth more than a dollar in five five years and would be worth more than a dollar in five yearsyears

When the dollar value of benefits at some time in the When the dollar value of benefits at some time in the future is multiplied by the discounted value of one dollar future is multiplied by the discounted value of one dollar at that time in the future, the result is the at that time in the future, the result is the discounted discounted present valuepresent value of that benefit of the project. of that benefit of the project.

The same thing applies to costs – future costs have to be The same thing applies to costs – future costs have to be brought back to their ‘brought back to their ‘net present valuenet present value’’

Net Present ValueNet Present Value: : sum of the presentsum of the presentvalue of the benefitsvalue of the benefits less less the present value the present value of the costsof the costs


Cost/Benefit Analysis Cost/Benefit Analysis (CBA) (CBA) SummarySummary Cost/Benefit Analysis is a Cost/Benefit Analysis is a powerful, widely powerful, widely

used and relatively easy tool to useused and relatively easy tool to use Doing it well:Doing it well: include all the costs and all the include all the costs and all the

benefits, and quantify them!benefits, and quantify them! Where costs or benefits are Where costs or benefits are

realized realized over timeover time, work out , work out the the payback periodpayback period

Include Include time valuetime value of money of money Including intangible items within Including intangible items within

the analysis requires you estimate a value for the analysis requires you estimate a value for these; supply these; supply justifiable valuationsjustifiable valuations for these for these items.items.


Return on Investment Return on Investment (ROI)(ROI)OverviewOverview Purpose:Purpose: compare the costs of a project (investment), compare the costs of a project (investment),

with the with the value of its resultsvalue of its results– Am I getting my Am I getting my expected return?expected return?– Evaluate Evaluate one investment vs. anotherone investment vs. another

ROI ROI is expressed as a is expressed as a percentagepercentage– Example:Example: a 25% annual ROI means that a a 25% annual ROI means that a

$100 investment would return $25 in one year$100 investment would return $25 in one year A basic equation for calculating the ROI: A basic equation for calculating the ROI:

ROI = [(Payback - Investment)/Investment)]*100ROI = [(Payback - Investment)/Investment)]*100

– InvestmentInvestment relates to the amount of resources put in ($, relates to the amount of resources put in ($, time)time)

– PaybackPayback is the amount of money earned from your is the amount of money earned from your investmentinvestment


Return on Investment Return on Investment (ROI)(ROI)ConsiderationsConsiderations Managers often underestimate the amount of Managers often underestimate the amount of

investment investment requiredrequired– Hence ROI calculations can be Hence ROI calculations can be skewedskewed

Common mistake: not factoring in Common mistake: not factoring in employee employee timetime required to implement required to implement – Resources includes money, as well as human Resources includes money, as well as human

resources or “time”. Don’t under value resources or “time”. Don’t under value time!time! Another mistake: not factoring in the Another mistake: not factoring in the “cost of “cost of

capital”capital” – a $ today is not worth the same as it – a $ today is not worth the same as it will be tomorrow!will be tomorrow!– Present Value (PV) of future costs and benefits needs Present Value (PV) of future costs and benefits needs

to be calculated, using your organizations “cost of to be calculated, using your organizations “cost of capital”capital”

– Net Present Value (NPV) is PV of Benefits – PV of CostsNet Present Value (NPV) is PV of Benefits – PV of Costs


How to Calculate Return How to Calculate Return on Investment (ROI): on Investment (ROI): StepsSteps1.1. Determine the total amount ofDetermine the total amount of

investmentinvestment requiredrequired– Resources – financial, people (time), etc.Resources – financial, people (time), etc.

2.2. Calculate the amount of Calculate the amount of returnreturn– Savings, revenue & productivity growthSavings, revenue & productivity growth

3.3. If calculating over time,If calculating over time, calculate thecalculate the Present Value of future costs and Present Value of future costs and returnsreturns by your organization’s discounted by your organization’s discounted cost of capitalcost of capital

4.4. Calculate the Calculate the ROI ROI by dividing the return by by dividing the return by the investment, and multiply by 100 to the investment, and multiply by 100 to express as a percentageexpress as a percentage


Calculating Return on Calculating Return on Investment (ROI): Investment (ROI): ScenarioScenario What’s the 1What’s the 1stst yr ROI on our scenario? Givens … yr ROI on our scenario? Givens …

– Total Costs = $114,000Total Costs = $114,000– Total Benefits: $180,000/yearTotal Benefits: $180,000/year– Calculating ROI for Calculating ROI for 11stst year only year only (since rapid payback) (since rapid payback)

Applying our ROI formula for Applying our ROI formula for the 1the 1stst year year yields: yields:– ROI = [(Payback -Investment)/Investment)]*100ROI = [(Payback -Investment)/Investment)]*100– ROI = [(180,000 - $114,000) / $114,000 ] * 100ROI = [(180,000 - $114,000) / $114,000 ] * 100– ROI = ($66,000 / $114,000) * 100ROI = ($66,000 / $114,000) * 100– ROI = .578 * 100 =ROI = .578 * 100 = 57.8%57.8%

CBA showed payback time: $114,000 / $180,000 CBA showed payback time: $114,000 / $180,000 = 0.63 of a year = approx. = 0.63 of a year = approx. 8 months8 months


Return on Investment (ROI) Return on Investment (ROI) Key PointsKey Points

ROI ROI can be expressed for can be expressed for different time periodsdifferent time periods: be : be sure to stipulate your time period!sure to stipulate your time period!

Use a Use a spreadsheet toolspreadsheet tool to automate the process, to automate the process, ensure accuracy, and compare alternativesensure accuracy, and compare alternatives

RememberRemember – one option is always to ‘ – one option is always to ‘do nothingdo nothing’. ’. Ensure you calculate this ROI!Ensure you calculate this ROI!

Be thorough: include Be thorough: include all factorsall factors … …– All All investments investments required (people, time, money, etc.)required (people, time, money, etc.)– ‘‘Opportunity costs’Opportunity costs’ – people not able to do their regular – people not able to do their regular

job due to being involvedjob due to being involved– All returnsAll returns (savings realized, revenue enhancements, (savings realized, revenue enhancements,

increased productivity, employee and customer satisfaction)increased productivity, employee and customer satisfaction)


Total Cost of Ownership Total Cost of Ownership (TCO): (TCO): OverviewOverview Definition: Definition: all costsall costs of owning and operating an asset of owning and operating an asset

over its expected useful lifeover its expected useful life.. TCO ensures that you TCO ensures that you accountaccount for all associated costs for all associated costs

over a given time period when you are considering a over a given time period when you are considering a decision, or assessing one option vs. another decision, or assessing one option vs. another

Benefits:Benefits:– Accounts for not only the Accounts for not only the initial investmentinitial investment, but all the , but all the

other costs associated with other costs associated with further usefurther use of the asset. of the asset.– Factors in ‘Factors in ‘useful lifeuseful life’ of assets, usually 3, 5 or 7 years ’ of assets, usually 3, 5 or 7 years – Ensures a comprehensive analysis of long term effects Ensures a comprehensive analysis of long term effects

and helps account for and helps account for hidden costshidden costs– Enables a total cost comparison of one option vs. anotherEnables a total cost comparison of one option vs. another


Total Cost of Ownership Total Cost of Ownership (TCO): (TCO): OverviewOverview Challenges:Challenges:

– Does NOT consider Does NOT consider benefitsbenefits of various optionsof various options– Does not factor in the Does not factor in the ROIROI (or value) (or value) of one option of one option

vs. another – only total costs over timevs. another – only total costs over time– Does not provide insight into the Does not provide insight into the

timingtiming of costs: of costs:

Product AProduct A, which may have , which may have a lower a lower acquisition costacquisition cost and high on-going and high on-going maintenance costs, is likely to be maintenance costs, is likely to be less attractiveless attractive than than

Product BProduct B, which may have a higher acquisition cost, but , which may have a higher acquisition cost, but lower ongoing maintenance costslower ongoing maintenance costs; ;

Yet both may have a Yet both may have a similar TCOsimilar TCO over the period over the period analyzed!analyzed!


Total Cost of Ownership Total Cost of Ownership (TCO): (TCO): OverviewOverview Other challengesOther challenges::

– Only a Only a general formulageneral formula: : calculate the total costs of calculate the total costs of ownership over the life of the assetownership over the life of the asset

– No help for how to value “intangible assets”No help for how to value “intangible assets”– Does not provide any insight to Does not provide any insight to relative riskrelative risk of options of options

Companies that rely solely on TCO end up Companies that rely solely on TCO end up following a strategy that following a strategy that minimizes expenditure minimizes expenditure rather than maximizes returnrather than maximizes return!!

Why this tool needs to be combined with CBA Why this tool needs to be combined with CBA and ROI for and ROI for quality investment decisions!quality investment decisions!


How to Calculate Total How to Calculate Total Cost of Ownership: Cost of Ownership: StepsSteps1.1. Employ a Employ a spreadsheet toolspreadsheet tool

that meets your needsthat meets your needs2.2. Gather Gather ALL relevant costsALL relevant costs

– All typesAll types: hardware, software, : hardware, software, installation, conversion…installation, conversion…

– InitialInitial costs and costs and on-goingon-going costs over the life of the assetcosts over the life of the asset

– Note: useful life must be the Note: useful life must be the samesame for for comparisons!comparisons!

– Which costs should you use? Depends on what Which costs should you use? Depends on what the asset is and where it will be usedthe asset is and where it will be used

– Costs for most IT investments are usually broken Costs for most IT investments are usually broken down into ‘direct’ and ‘indirect’ costsdown into ‘direct’ and ‘indirect’ costs


How to Calculate Total How to Calculate Total Cost of Ownership: Cost of Ownership: StepsSteps Compile Direct Costs: Compile Direct Costs: chargeable chargeable directly to directly to

projectproject– Hardware & Software Hardware & Software – capital expenditures for – capital expenditures for

various HW & SWvarious HW & SW– Management SupportManagement Support – time required, maintenance – time required, maintenance

contracts, professional services or outsourcingcontracts, professional services or outsourcing– Technical SupportTechnical Support - support staff time, training time - support staff time, training time

and costs, travel, support contractsand costs, travel, support contracts– ImplementationImplementation – customization, integration), testing – customization, integration), testing– Communication CostsCommunication Costs – LAN, WAN, leased lines – LAN, WAN, leased lines

.. And Indirect Costs: .. And Indirect Costs: not tied directlynot tied directly– End userEnd user - training, informal support outside recognized - training, informal support outside recognized

IT support channels, local self-supportIT support channels, local self-support– DowntimeDowntime - lost productivity due to planned and - lost productivity due to planned and

unplanned network, system, and application unplanned network, system, and application unavailabilityunavailability


How to Calculate Total How to Calculate Total Cost of Ownership: Cost of Ownership: StepsSteps3.3. Fill in all the dataFill in all the data

– Direct costsDirect costs– Indirect costsIndirect costs– First year and re-curing costs over the useful life of First year and re-curing costs over the useful life of

the asset (example – 3 years).the asset (example – 3 years).

4.4. Use the tool to calculate the Total Cost of Use the tool to calculate the Total Cost of Ownership Ownership over the useful lifeover the useful life of the asset of the asset

5.5. Optionally, compare the TCO of this option with Optionally, compare the TCO of this option with that of another option, and the TCO of the ‘status that of another option, and the TCO of the ‘status quo’quo’

6.6. Determine which option has the Determine which option has the lowest TCOlowest TCO

Here is what our sample nets out to (next slide)….Here is what our sample nets out to (next slide)….


Sample Tool: TCO Calculator, from Info-Tech Research Group

3 Year Life-cycle, with upfront and recurring costs



TCO Calculation: TCO Calculation: Applying to our Applying to our ScenarioScenario How does TCO relate to CBA and ROI? How does TCO relate to CBA and ROI? TCO shows long term costs, not TCO shows long term costs, not cost vs. benefitscost vs. benefits, or , or ROIROI To arrive at a quality decision, we need apply all three To arrive at a quality decision, we need apply all three

tools and account for the tools and account for the time valuetime value of money: of money:

– Assume a Assume a 5%5% required required rate of returnrate of return– CBA payback:CBA payback: $114,000 / $180,000 = approx $114,000 / $180,000 = approx 8 months8 months– Costs Costs of $129,860of $129,860 over 3 yrs discounted to over 3 yrs discounted to Present ValuePresent Value = =

$123,676$123,676– BenefitsBenefits of $540,000 over 3 yrs discounted to of $540,000 over 3 yrs discounted to Present Value = Present Value =

$514,287$514,287– ROIROI: : 57.8% 57.8% for 1for 1stst year, year, however however 3 years3 years ROI is ROI is much greatermuch greater::

NPV of 3 yr Benefits vs. Costs: $514,287 - $123,676 = $390,611NPV of 3 yr Benefits vs. Costs: $514,287 - $123,676 = $390,611 $390,611 / $123,676 = 3.158 * 100 = $390,611 / $123,676 = 3.158 * 100 = 315% ROI315% ROI over 3 yrs! over 3 yrs!

Bottom lineBottom line: rapid payback of initial investment, and : rapid payback of initial investment, and high ROI over the life of the asset, with acceptable TCO. high ROI over the life of the asset, with acceptable TCO. GO for it!GO for it!


Applying the Tools: a Applying the Tools: a Best Practice Selection Best Practice Selection ProcessProcess Step 1:Step 1: Form a team, project and do a Form a team, project and do a needs needs

analysisanalysis Step 2:Step 2: Prepare a Prepare a Requirements DefinitionRequirements Definition Step 3:Step 3: Go through a Go through a diligentdiligent selection selection

process to evaluate proposalsprocess to evaluate proposals Step 4:Step 4: Arrive at ‘ Arrive at ‘short listshort list’ of suppliers’ of suppliers Step 5:Step 5: Apply the Apply the financial toolsfinancial tools we we

discussed to build a business case for the best discussed to build a business case for the best decisiondecision

Step 6:Step 6: Make the Make the decisiondecision and negotiate and negotiate Step 7:Step 7: Implement Implement and track your resultsand track your results


Step 1:Step 1: Form a Form a TeamTeam and and Do a Do a Needs AnalysisNeeds Analysis Form a Form a cross-functional cross-functional teamteam Appoint a Appoint a project leadproject lead, and develop a , and develop a project planproject plan with with

milestones, resources and time framesmilestones, resources and time frames Conduct Conduct kick offkick off meeting to define and prioritize needs meeting to define and prioritize needs Set expectations, and Set expectations, and communicate!communicate! Do aDo a Needs Analysis Needs Analysis: allows you to analyze the situation to : allows you to analyze the situation to

see whether the technology is truly needed immediately. May see whether the technology is truly needed immediately. May include…include…– Surveys, interviews and observations Surveys, interviews and observations

to gather detailed inputto gather detailed input– Reviews of past metrics – performance,Reviews of past metrics – performance,

customer, employeecustomer, employee Establish a Establish a baselinebaseline (KPIs) for later (KPIs) for later

comparisoncomparison Consider best practices for the area, Consider best practices for the area,

as well as industry analystsas well as industry analysts

Source: HDI SCM


Step 2:Step 2: Prepare a Prepare a Requirements DefinitionRequirements Definition Document all Document all requirementsrequirements for the proposed for the proposed

system or toolsystem or tool– BackgroundBackground– Customer end-user requirementsCustomer end-user requirements– Current support processesCurrent support processes– Desired features and functionsDesired features and functions– Other: usability, scalability, portability, or complianceOther: usability, scalability, portability, or compliance

CategorizeCategorize requirements, and list requirements, and list prioritiespriorities (must have, nice to have, optional/plus)(must have, nice to have, optional/plus)

Weight requirements, use Weight requirements, use numbersnumbers to quantify to quantify Factor in optional additional information: Factor in optional additional information:

– Special requirements from key stakeholdersSpecial requirements from key stakeholders– Available budget allowancesAvailable budget allowances– Anticipated volume of transactions for scalabilityAnticipated volume of transactions for scalability– Number and type of support staff requiredNumber and type of support staff required

Source: HDI SCM


Step 3:Step 3: Conduct a Conduct a Diligent Selection Diligent Selection ProcessProcess IdentifyIdentify vendors/suppliers who potentially can meet vendors/suppliers who potentially can meet

your needsyour needs Send Send a RFPa RFP out to target suppliers, gather responses out to target suppliers, gather responses Use a Use a checklistchecklist to process responses to process responses Considerations during the process:Considerations during the process:

– Investigate quality of vendor technical supportInvestigate quality of vendor technical support– Review demonstrations by selected vendorsReview demonstrations by selected vendors– If you opt for a ‘trial’, for testing consider:If you opt for a ‘trial’, for testing consider:

Conformance testing to requirementsConformance testing to requirements Load testingLoad testing End-user testingEnd-user testing

Communications – notify stakeholders in advance of Communications – notify stakeholders in advance of changes in the works, and keep them informed!changes in the works, and keep them informed!

Source: HDI SCM


Step 4:Step 4: Arrive at the Arrive at the Short ListShort List of Suppliers of Suppliers Schedule interviews for the Schedule interviews for the short listshort list of vendors of vendors Considerations:Considerations:

– Use a ‘script’Use a ‘script’ to guide the interviews to guide the interviews– Include your team in the demonstrationsInclude your team in the demonstrations– Determine if you can get trial or pilot use Determine if you can get trial or pilot use

Visit vendor customer sites, explore serviceVisit vendor customer sites, explore servicequality, check on industry reputationquality, check on industry reputation

Also check Also check the companythe company – depending on the – depending on the investment, sometimes the company you are dealing investment, sometimes the company you are dealing with is also an important consideration!with is also an important consideration!

Based on the proposals returned in answer to your Based on the proposals returned in answer to your Requirements Documents, which products/service Requirements Documents, which products/service providers providers most closely fulfill your needsmost closely fulfill your needs??


Step 5:Step 5: Apply the Apply the Financial Tools Financial Tools in in CombinationCombination Apply the Financials ToolsApply the Financials Tools to this short list of to this short list of

solutions:solutions:– Cost/Benefit Analysis (CBA)Cost/Benefit Analysis (CBA)– Return on Investment (ROI)Return on Investment (ROI)– Total Cost of Ownership (TCO)Total Cost of Ownership (TCO)

Considerations:Considerations:– Net tangible and intangibles to a common financial Net tangible and intangibles to a common financial

metric (usually $)metric (usually $)– Account for the time value of moneyAccount for the time value of money– Which provides the best cost to benefits ratio?Which provides the best cost to benefits ratio?– Which provides the best return for the money?Which provides the best return for the money?– Which provides the lowest total cost of ownershipWhich provides the lowest total cost of ownership

over the life of the investment?over the life of the investment?– Bottom line: which is the best decision?Bottom line: which is the best decision?


Step 6:Step 6: Document the Document the Business CaseBusiness Case for the for the DecisionDecision All three toolsAll three tools should be used together to help should be used together to help

assess which action is best to take!assess which action is best to take! Document your Document your Business CaseBusiness Case based on the result based on the result

of the selection process, and the output of the of the selection process, and the output of the financial tools …financial tools …– Include exec summary, goals & Include exec summary, goals &

objectives, supporting evidence: objectives, supporting evidence: CBA, ROI and TCO of alternatives,CBA, ROI and TCO of alternatives,with recommendationswith recommendations

– Review with your management Review with your management and gain their supportand gain their support

Negotiate with preferred vendor to Negotiate with preferred vendor to arrive at final feature set, with pricing and delivery arrive at final feature set, with pricing and delivery termsterms


Step 7:Step 7: ImplementImplement the the Decision and Track Decision and Track ResultsResults Key:Key: follow best-practice follow best-practice project mgtproject mgt. practices. practices

– Qualified project leadQualified project lead– Committed, cross-functional teamCommitted, cross-functional team– Solid project plan with milestones, assigned and Solid project plan with milestones, assigned and

budgeted resources, and time framesbudgeted resources, and time frames– Communicate effectively: across the team, and to Communicate effectively: across the team, and to

affected stakeholdersaffected stakeholders Prioritize early, easy wins!Prioritize early, easy wins! Drive the project, accomplish the milestones, and Drive the project, accomplish the milestones, and

report on the benefitsreport on the benefits Compare the results to your baseline(s), and Compare the results to your baseline(s), and

report results. report results. Celebrate success with your team!Celebrate success with your team!


SummarySummary: Using the : Using the Financial Tools Together Financial Tools Together Help You…Help You… Use a ‘Use a ‘business approachbusiness approach’ to decision making’ to decision making Minimize Minimize riskrisk and and costscosts through informed, through informed,

higher quality decision makinghigher quality decision making Increase Increase credibilitycredibility with management with management Build stronger Business Cases for proposals to Build stronger Business Cases for proposals to

management, increases chances for management, increases chances for approvalapproval AlignAlign with business goals, and support the vision with business goals, and support the vision

and mission of the businessand mission of the business Ensure Ensure successfulsuccessful business outcomes for business outcomes for

customers, through effective and efficient service customers, through effective and efficient service provisioningprovisioning

Be a Be a good stewardgood steward of investments in IT services of investments in IT services


Valuable Resources to Valuable Resources to Take Advantage Of!Take Advantage Of! Handout: CBA TemplateHandout: CBA Template Calculating Cost/BenefitCalculating Cost/Benefit

– Mind Tools CBA Tool: Mind Tools CBA Tool: www.mindtools.comwww.mindtools.com Calculating ROICalculating ROI

– Guidelines: Guidelines: www.silberperformance.comwww.silberperformance.com– Tips: eHow.comTips: eHow.com– Online Tutorial - ZDnet.com: Online Tutorial - ZDnet.com:

http://news.zdnet.com/2422-13569_22-153325.htmlhttp://news.zdnet.com/2422-13569_22-153325.html– ROI Calculator: ROI Calculator: www.solutionmatrix.comwww.solutionmatrix.com

Calculating TCOCalculating TCO– Info-Tech Free TCO & ROI Calculator: Info-Tech Free TCO & ROI Calculator:

www.infotech.comwww.infotech.com


Happy Decision Making!Happy Decision Making!

.. Any questions?.. Any questions?

Thank you for attending this session. Please fill out a session evaluation form.

Paul M. DooleyPaul M. DooleyPresidentPresident

Optimal Connections, LLCOptimal Connections, LLCP: (949) 305-3544P: (949) 305-3544

E: E: [email protected]

W: W: www.optimalconnections.com