ROI is Back

Copyright 2001 Marcoccio Consulting

Lou Marcoccio 10/22/01

Copying or reprinting of these materials is not permitted without the written permission of Lou Marcoccio

While CIO’s are Bracing forWhile CIO’s are Bracing forFurther Economic Impact;Further Economic Impact;ROI is Back…ROI is Back…

Lou MarcoccioLou Marcoccio Consultant & Advisor





Lou Marcoccio formerly of GartnerGroup

• Consultant – IT, Web/Internet, Application Development, Business Optimization, Business Analytics, Investment Analysis, IT Management, and Business Continuity• Head of Market and Business Research – Consortia & Research Groups

• Advise Companies, Governments, Vendors, & Investors• Testify to U.S. Congress, Governments, & Commissions• Research & Monitor Best Practices and Trends Worldwide • Appear on ABC News, CBS News, CNN, Wall St Journal Report, Today Show, Wall St Journal, London Times, N.Y. Times, and USA Today• Author, “Internet Hype-Cycle Madness”, “Developing Software in 2010”, and “Succeeding as CIO in a Downturn Economy” • Chair Several Software & CIO Best Practices Committees

Background – Gartner Analyst, IT Management Advisor, IT and Management Consultant, Business Intelligence, eCommerce, Web/Internet, CRM, Application & Data Integration, Software Development Practices, Software Market Strategies, Systems Integration, and Offshore Outsourcing Strategies

While CIO’s are Bracing for Further Economic Impact;ROI is Back…

• IT Trends Driving Renewed Focus on ROI• Measuring ROI

email: [email protected] Phone: 508-366-9880




Information Sources

• University Research Consortia – surveying (8,000)• Joint research with Esterline Marketing – surveying (400)• Global 200 Best Practice Consortia (73)• U.S. CIO Best Practices Consortia (187)• Enterprise Transformation Group (62)• Client companies




2001 – IT Trends

Results of Survey – 8,000 Companies, 27 Industries

• IT Spending + 3% - 18%

• Profitability Pressures + 8% + 14%

• Number of IT Specializations Req’d + 11% + 19%

• Need for Offshore Outsourcing + 9% + 14%

• Number of IT Resources Required + 9% + 2%

• Software Quality + 1% + 2%

• Vendor Contract Management + 7% + 1%

• ROI Used to Justify IT Projects + 9% + 23%

• Rate of Business Changes + 8% + 8%

• US – People to Fill IT Jobs - 14% - 6%

March October 2001




IT, incl. Web/Internet

Mainframe

Client/Server

Web/Internet

1960 1970 1980 1990 2000 2010

1960 1970 1980 1990 2000 2010

IT Capital Spending

Trends – U.S. IT Spending as a Percent of Revenue

10%

5

0

75%

50

25

0

Y2K




Q199 Q299 Q399 Q499 Q100 Q200 Q300 Q400 Q101 Q201 Q301 Q401 Q102

0

10%

5% $300B

$250B

$200B

IT Spending – U.S.

IT Spending as % of Revenue – U.S.

Re-evaluate Projects

Year 2000 Hype and Spending for Risk Avoidance

eBusiness Hype and Spending forMarketbreaker Defense:4-8 Q Payback

Projects Require1-3 Q Payback

Feds and inflated economy reduce confidence in eBusiness/eCommerce and new business models

Using Basic ROI Measurements11%

27%

$227B

$307B

($80B Drop – 26%)

Trends – U.S. IT Spending




Trends – Q401 U.S. CIO Strategy & Goals

• Keep systems and infrastructure at high-availability• Develop/implement contingency plans, business continuity plans, and disaster recovery plans and strategies• Increase priority on security systems, solutions, and strategies• Focus limited projects on shorter-term ROI benefits: 1-3 quarters• Significantly reduce expenses and reduce budget/spending by x %• Consider capital spending on hold• Get limited projects completed faster to aid business and keep spending down, since budgets will continue to decrease through ‘02• Outsource for lower cost labor where possible• Capitalize on labor market for just a few specialized resources

Priorities1. Restructuring, Justifications, and Cost Reductions2. Disaster Recovery & Contingency Planning3. High Availability4. Security5. Mission Critical Applications Support & Maintenance6. CRM, Business Intelligence, Web Services




Trends – Changing Face of IT:Expanding Specialties Required

MainframeClient/Server“C”ERP/MRPPCDatabaseSupport

MainframeClient/ServerC++/ObjectsERP/CRMData WarehousePCDatabaseSupportIntegrationMailY2KUNIX/Win/NT

MainframeClient/ServerC++/JAVA/JSP/ASPERP/CRM/BIPCSecurityeCommerceIntranet/InternetWeb App ServersWeb Apps/EJBDatabase/DataIntegration/EDI/XMLStorageAnalyticsContent MgmtPersonalizationBusiness ObjectsWAPsMailUNIX/NT/MF/Others

1990/1993 1995/1998 2000/2003

Time

IT S

peci

alti e

s




Measuring IT ROI

In times of major economic declines, reduced company revenues, reduced investor confidence, and added business continuity risks, IT cost analysis and ROI become essential to investors, BOD’s, and prudent management.

Best Practices:

• Define and implement an IT Cost of Ownership and ROI process• Create and maintain an IT Cost of Ownership strategy for each IT function• Have key IT vendors and outsource companies participate in analysis

Cost vs. Benefit

Conservative vs. Optimistic




Measuring IT ROI

Build ROI Measurement Data for EachIT Focus Area

Build ROI Measurement Data for EachIT Focus Area

Infrastructure

Desktop

Data Center

Help Desk

ApplicationsDevelopment

Appl Support & Maint

Security

Voice Telecom

Operations

Audit

Customer Satisfaction

Internet Services

Content Management

Data Integration

Appl Integration

Research/Adv Technology

Business Intelligence and Analytics

Client Partners

Solution Deployments




Measuring IT ROI

Cost of Ownership General Method

Analytical Method Perceived Value

• Full life cycle costs are defined and monitored• Cost of Ownership defined for each IT key function area• Includes monitoring, analysis, and strategy revision• Direct and indirect cost estimates can more accurately be made quickly

• Swags and guestemates• Most are not analyzed, confirmed, or measured• Example, “in general, sales revenue will increase 40%”

• More than 2000 investment analysis tools available• Typically requires systems, business, and/or finance analysts to create and maintain data & assumptions• Focus is on financial analysis of direct and indirect benefits and costs.

• Typically assumed by executive management• Solution sold to executive level and mandated without any formal analysis or justification• Value is assumed due to expected new features, processes, control, reporting, or business rules

Cost vs. Benefit

Conservative vs. Optimistic




Example - CRM ROI Financial Metrics Cost of Ownership + Analysis Method

Revenue Growth Profit Margin Market Share Cash Flow Volume Liquidity

Selection Acquisition Retention Extension

Market segmentation Lead management Order management Customer business analysisCampaign planning Needs assessment Installation Needs assessmentBrand/account planning Sales cycle mgmt Inquiry handling Upsell/cross-sellNew product launch Proposal generation Problem resolution Campaign mgmt Closing the deal

Number of new customers Cost per lead Involuntary attrition rate/cost Ave increase in order sizeRevenue per new customer Quote-to-close time Voluntary defection rate Cross selling rate/customerAverage acquisition cost Pipeline volume calls/day Lifetime value of customer Upselling rate/customerResponse rate Calls/day Transaction errors/agent Revenue/sales person Average order size Number of deals Cost of sales call Cost of interaction

Customer Loyalty & Satisfaction

CRM

Customer Life Cycle

Enterprise

Domain

Source: GartnerGroup




ROI Opportunities: Real or Elusive

1985 1990 1995 2000 2005

Client/Server

• eProcurement• SCM• ERP Front End• Intranet• eCommerce• Content Mgmt• Online Ads

ERP

• Integration• Legacy Extensions• Rebuilding Infrastructure Systems & Processes• Self-Service• Leveraging Existing Data• Business Intelligence• Analytics & Event Management• Outsourcing

Web/Internet

CRM

Business Intelligence

AnalyticsAnalytics

SelfService

Claimed to be low hanging fruit:

Real payback:

PC’sMainframe




ROI Benefits - Example

One Face for All Products & Services

Customers

Little Change to Infrastructure & Processes Outside of WebPresence, Independent Apps, & Few Transactions

Limited or No Integrated with Infrastructure

Business IntelligenceBusiness Intelligence

$$

A B

Community

One Company, One Infrastructure

• Sales Contracting• Sales Targeting• Sales Negotiating• Transactions• Customer Satisfaction• Business Intelligence• Personalization• Self-Service

• Commerce Intelligence• Community Interests• Intelligent Service• Monitor Satisfaction• Measurements• Staffing/Planning• ROI Analysis

Analytics, Integration, Decision Support

Legacy Infrastructure and Processes




Summary

• Due to economic conditions, CIO budgets are under tremendous justification pressure• IT spending is down 26% from 24 months ago• CIO priorities have been significantly changed during the past 6-8 months• Best Practice Enterprises are building ROI and Cost of Ownership measurements into routine planning and project management• Be aware of the 4 basic types of ROI justification – focus on analysis and Cost of Ownership and keep away from guessing• When possible, obtain help or expertise in developing ROI analysis; typically 2-5% of project cost• Be skeptical when vendors claim ROI low hanging fruit• During past 6 months, best practice companies have shown highest degree of ROI payback has been experienced by focusing on infrastructure, integration, and business intelligence

QuestionsQuestionsemail: [email protected] phone: 508-366-9880

Documents

ROI is Back