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now. Issue 7Executive InsightsRevenge Of The ROIWith profitability and cost management back in the limelight against thecautious backdrop of a fragile recovery economy, how can Small- andMedium-Businesses (SMBs) justify their prudence in IT investmentseffectively?SHOW ME THE MONEYThe job of the CIO is getting tougher. Ever since the financial meltdown of 2008, calls for moreaccountability and audit has been ever-increasing in direct proportion to shrinking budgets. Your businessdepartment is at it again, asking for more proof of a credible justification for your latest IT investmentproposal. With the advent of the “immeasurables”, Return on Investment (ROI) – or the performancebenchmark used to evaluate the efficiency of any investments1 – has only proven to be more thanelusive ever especially in the current age of fiscal volatility. Now, bundle in the huge capital outlays, longimplementation lead times and intense cultural changes into the equation and you have the impossible taskof justifying the value and benefits in your proposed IT investment project – not without gnawing your armoff. Or risk having your proposal dumped and forgotten together with the rest of the KIV pile.THE BUDGET VERSUS INVESTMENT PARADOXAsk not how much budget your organization can offer for your investment, but how much value yourproposed investment can contribute to your organization’s direct bottomline.It’s just ROI, not rocket science.Firstly, the ROI concept is not a difficult one. Rather, it is the measurability of metrics or dollar value thatbanishes any attempts to define – into obscurity. The revenue (return) of the product is compared with thecosts (of the investment) – with the final value minus the initial value of the investment divided by the initialvalue of the investment. Or simply,r (Vf - Vi)/ViThis number will be returned as a percentage. ROI is important because IT spending decisions are made1ROI definition, 80/roiAll contents are Copyright 1992 - 2010 Cisco Systems, Inc. All rights reserved. This document is Cisco Public Information.Page 1 of 6
now. Issue 7Executive Insightsbased on it. The budgeting process has more farreaching consequences with forecasts and plans forfuture investments in staffing resources, IT initiativesand projects being dependant on it. Unfortunately,not every metric is a monetary metric and thus, notquantifiable. For example, in the case of calculatingROI for a social media tool, the metrics are qualitativeimpact metrics (i.e. clicks, impressions of thewebsite, number of followers, etc) and not assignedany monetary value. The paradox lies here – youcannot measure or justify the investment value. On the other hand, you know you cannot do without thatsocial media tool. Many SMBs face the difficulty of defining the drivers of cost and profitability for the ITinvestment and effectively align technology with respective business needs.With a cautious IT spending trend predicted for the recovering economy in 2010, escalating competitionhas limited SMB interest only for investment categories which benefit their business bottomline directly.2This has cast the spotlight back on ROI measurement and justification with a cost-conscious focus onreduction of operating costs, improvement in employee productivity, or increasing customer acquisitionand retention.3 Which are the tools that can help you measure ROI effectively? Are you prepared torespond to any strategic questions from your functional management team with regards to IT investments?ENTER ENTERPRISE RESOURCE PLANNING (ERP)ERP is more than a necessary infrastructure that forms the transactional system of record for whichyour business is based.4 It is a potential source of operational improvements and cost savings for SMBsthrough innovation. ERP enables greater visibility in your organization and positions your business toprovide immediate transparency to your respective stakeholders. However, a recent ROI study hasfound that SMBs are paying too much attention to Total Cost of Ownership (TCO) and not enough to ROIduring the implementation of ERP. The study also revealed that despite the high level of organizationalcosts involved with most ERP projects, 52 per cent of SMBs “sometimes” or “never” estimate ROI in orderto cost-justify it. After post-rollout, 75 per cent “sometimes” or “never” measure ROI after the completionof these projects. Many SMBs feel “compelled to make this investment because they felt that ERP wasnecessary for the support of their businesses.5 How can SMBs optimize ROI to avoid this costly mistake?RULE # 1: ABCS OF PROFITABILITY AND COST MANAGEMENT (PCM)What was first known as activity-based costing (ABC) or activity-based management (ABM) has evolvedinto a Profitability and Cost Management (PCM) approach which has become increasingly relevanttowards justifying ERP today. PCM is a multidimensional exercise which displays profitability (revenueand costs) for various customer (segments) and product (groups), time period, channel, etc. What used tobe pure financial focus has now extended into various business domains. PCM is becoming increasinglyrelevant because of a rise in indirect costs. In addition, more SMBs are recognizing the benefits ofe-enabling in customers through self-service business channels. For example, customers can now2345State of SMB IT April 2010, B IT spending recovers: looking for ROI and diagnostic guidance, 22 April mb-it-spending-recovers-looking-for.htmlMeasuring the ROI of ERP in SMB, Cindy Jutras, Mar 2009, Aberdeen Group White /RA-enterprise-resource-roi-smb.aspxSMB ERP Projects: don’t forget the ROI, Thomas Wailgum, 6 April 2009http://www.cio.com.au/article/297824/smb erp projects don t forget roi/All contents are Copyright 1992 - 2010 Cisco Systems, Inc. All rights reserved. This document is Cisco Public Information.Page 2 of 6
now. Issue 7Executive InsightsDo you measure the ROI of ERP projects?In Operation38%ALWAYS56%SOMETIMEScheck themselves in via the Web, a call center ormachines at airports. Every unique specification andRSource: Aberdeen Group, March 2009RE R P6%NEVERpreference represents an impact in all dimensionsof profitability, including customer, product, andchannel profitability. Most importantly, PCM helpsenable business performance by identifying thedrivers of cost and profitability, empowering SMBswith visibility and flexibility, thereby improvingresource alignment on organizational levels.6KNOW THE RULES: ROI TOOLS AND METRICSReasons for not Measuring ROIMany SMBs lament the lack of tools to measure ROI.Yet, in reality, most of these tools exist within theapplications for which the ROI should be measured.The following illustrations display the various tools andsaving factors that SMBs can use to measure ROI. MostWe simplymanageagainst ourIT budgetERP is viewedas a necessarycost of doingbusinessDon’thave thenecessarytools29%33%24%ERP solutions include embedded Business Intelligence(BI) capabilities (i.e. dashboards). However, regardlessof the types of analytics or BI tools embedded, the realchallenge for SMBs here is to display data effectivelyfrom installed applications in real time, without havingto synchronize or batch data.48%% All SMB RespondentsRULE # 2: MEASURING ROI FOR VIRTUALIZATION PROJECTSTools for measuring ROISaving Factors Considered in ROIAdvanced analytics andBusiness Intellenc (BI)79%Reporting capabilities ofthe installed applicationReduction inoperational costs74%95%IncreasedProfits84%Dashboards displayingdata from installedapplications in real-time58%Better utilization ofresources84%Custom reporting58%Reduction of generaladministrative costs84%SpreadsheetsAd hoc report writerand query capabilities53%Reduction ininventory costs47%Source: Aberdeen Group White PaperReductionin Waste79%74%Increase in value-adddelivered to customers68%Reduction orredeployment ofheadcount68%Source: Aberdeen Group White Paper6The need for profitability and costs management, Sep 2008, Oracle Leadership White .do?accessId 12470599All contents are Copyright 1992 - 2010 Cisco Systems, Inc. All rights reserved. This document is Cisco Public Information.Page 3 of 6Source: Aberdeen Group, March 2009ROI is too hardto measure
now. Issue 7Executive InsightsThe proliferation of Virtualization technologyin 2009 could be attributed to its natural abilityto satisfy cost management policies duringthe downturn. As we trudge along the roadto recovery, this exciting technology is hereto stay. Moreover, a cautious spending trendamongst SMBs now triggers the need to proveROI for any planned Virtualization projectsmore than ever. A recent study discussed thediverse nature and many layers of Virtualization– from server and storage to desktops and application – which requires a change of metrics whencalculating ROI. Virtualization provides solid ROI, but how can you ensure your business is gettingthe most out of it? What are the elements to consider (i.e. hard and soft cost savings) before youimplement the Virtualization strategy?Potential and real cost savings from server virtualizationCATEGORYPOTENTIAL SAVINGSPower savings 300 to 600 per virtualized serverCooling savingsUp to 400 per virtualized serverHardware savingsFrom 2,500 or more per virtualized server, depending on physicalserver typeLicense savings(Microsoft Windows Server)75% of Enterprise license per virtualized serverLicense savings (open source)Nothing, except for support costsPower rebates (selected utilityorganizations)Up to 50% of the total cost of the projectGovernment rebates (federal,provincial and state)Variable reduction rates (income tax reductions, sales tax rebatesand more)Space savingsMore than 90% space reduction (based on an average of 10 virtualmachines per physical host)Soft dollar savings might be difficult to proveHow much do you value the time you save in preparing a virtual versus a physical server? Avirtual server can be prepared in minutes but for a physical server – this might take weeks.How much do you value the automation of standard testing and development environmentpreparation? You can deploy and manage your own test environments with Virtualizationtechnologies in place.Is flexibility in your a virtual infrastructure important or relevant for your business? With theability to deploy new applications quickly, your organization is now able to react accordingly andeffectively to evolving business needs.All contents are Copyright 1992 - 2010 Cisco Systems, Inc. All rights reserved. This document is Cisco Public Information.Page 4 of 6
now. Issue 7Executive InsightsBREAKING THE RULES: INNOVATIVE MODELS FOR MEASURING ROIAs mentioned earlier, qualitative metrics for IT investments such as social media tools are difficult todefine, making ROI measurement an uphill task. For example, a recent Forrester report, The ROI of OnlineCustomer Service Communities, noted that value or benefits to the business from the customer serviceapproach to social Customer Relationship Management (CRM) could be gauged by elements such as:reduction in call volume, increase in productivity, increase in product idea generation, etc. For otherareas such as IT security investments, it is even tougher to assign “risk” a tangible cost value. Six Sigmahas devised a five-step approach to define “what can, and should be measured” in any IT investmentdisciplines7 :Define – performance improvement goalsMeasure – the existing system under evaluationAnalyze – to eliminate gapsImprove – the process, be creativeControl – institutionalize the improved systemROI RULES IN TIMES OF RECOVERYIn the current delicate period of uncertainty, cost-efficiency still reigns supreme with ROI providing thekey towards greater organizational visibility. However, as IT progresses with new emerging technologiesby the second, traditional classic ROI measurement models can no longer cope, and SMBs shouldinnovate by researching and studying vigilantly into new methods of proving ROI. Rather than toss thenext IT investment project out the windows, instead, we should seek ways to justify “why it shouldNOT be implemented”. It is now more imperative than ever to give these cost-saving and productivityenhancing proposals a chance and more critical than ever to keeping innovation alive.7Forget ROI – use Six Sigma to proven business value, Tom Bowers, 8 Jan t-roi-use-six-sigma-prove-business-valueAll contents are Copyright 1992 - 2010 Cisco Systems, Inc. All rights reserved. This document is Cisco Public Information.Page 5 of 6
now. Issue 7Executive InsightsKEY SUMMARYThe new cautious spending trend in 2010 has brought ROI measurement back into the limelight witha cost-conscious focus on reduction of operating costs, improvement in employee productivity, orincreasing customer acquisition and retention.Most SMBs face the difficulty of defining the drivers of cost and profitability for their IT investmentand effectively align technology with their respective business needs.Most ROI measurement tools are available, and exist within the applications for which the ROI shouldbe measured.With today’s period of uncertainty, cost-efficiency should remain a top business priority with ROIproviding the key towards greater organizational visibility.Traditional classic ROI measurement models can no longer cope, and SMBs should innovate byresearching and studying vigilantly into new methods of proving ROI.Copyright & Reprints:All materials in now are protected under the copyright act. No material may be reproduced in part or whole without the prior consent of the publisher and thecopyright holder. All rights reserved.Disclaimer:The views and opinions expressed by contributors are not necessarily those of Cisco System. Whilst every reasonable care has been taken to ensure theaccuracy of the information within, neither the publisher, editor or writers may be held liable for errors and/or omissions however caused.Americas HeadquartersCisco Systems, Inc.170 West Tasman DriveSan Jose, CA 95134-1706USAwww.cisco.comTel : 408 526-4000800 553-NETS (6387)Fax : 408 527-0883Asia Pacific HeadquartersCisco Systems, Inc.168 Robinson Road#28-01 Capital TowerSingapore 068912www.cisco.comTel: 65 6317 7777Fax: 65 6317 7799Europe HeadquartersCisco Systems International BVHaarlerbergparkHaarlerbergweg 13-191101 CH AmsterdamThe Netherlandswww-europe.cisco.comTel: 31 0 800 020 0791Fax: 31 0 20 357 1100Cisco has more than 200 offices worldwide. Addresses, phone numbers, and fax numbers are listed on the Cisco Website at www.cisco.com/go/offices.Copyright 2010 Cisco Systems, Inc. All rights reserved. Cisco, Cisco Systems, Cisco Systems Capital and the Cisco Systems logo are registered trademarks or trademarksof Cisco Systems, Inc. and/or its affiliates in the United States and certain other countries. APAC 022009All contents are Copyright 1992 - 2010 Cisco Systems, Inc. All rights reserved. This document is Cisco Public Information.Page 6 of 6
Cooling savings Up to 400 per virtualized server Hardware savings From 2,500 or more per virtualized server, depending on physical server type License savings (Microsoft Windows Server) 75% of Enterprise license per virtualized server License savings (open source) Nothing,
