Programme and Project Portfolio Management Blog (PPM)

Measuring ROI and ROO

ROI/ROO Analysis

The rationale behind any project carried out by a commercial organisation should be either to deliver cost savings, or an improvement in revenues, or both. However, it is only effectively managed projects that retain a link to strategic initiatives that can deliver on the above. Cost savings can either be delivered by a reduction in headcount, or savings gained through efficiency improvements can be used to enhance customer service, vendor management, or less tangible activities such as training, mentoring and the like.

This type of quantitative, financially based requirement for return is a very compelling driver for change, yet is only part of the overall picture when looking at both potential tangible and intangible benefits. Therefore return on opportunity (ROO) analysis helps organisations define and quantify potential top line benefits from deploying new business processes, including in respect of revenue, market capitalisation, an increased customer base and decreased attrition. ROO analysis is most effective when it crosses departmental boundaries, integrates disparate capabilities and provides capabilities that an organisation did not have or had not addressed before.

Using an ROI/ROO calculator model is an effective way of measuring the organisation’s key project and programme cost and time data to identify potential cost savings over five years.

Building an ROI/ROO model

Once the stakeholders have identified the common activity conducted within their control and understood the percentage split and breakdown of activity, time efficiency calculations can be made to identify the potential ROI and subsequently the ROO that are achievable. This is simply based on time savings against the ‘now status’ way of working and processes. These can be compared with representative savings once PPM has been implemented and adopted through an effective change programme.

Research has demonstrated that work practices without a PPM solution in place can incur a workplace productivity wastage of as much as £650 per person per month, which in turn could represent an annual wastage, within a department of 100 staff, of approximately £780,000. It is important to note that enterprises rarely cull people, but rather move savings into value creation activities such as a new or different corporate initative.

These are the steps that need to be followed:

Step 1: Work days and staff costs
Step 2: Project/programme related activity costs
Step 3: Calculating potential ROI
Step 4: Calculating potential ROO

The Health Check

The health check is conducted in cojunction with the selected vendor, is the first step in assessing the needs and requirements of the business, and is designed to be a low risk engagement model. The health check allows the business to analyse key processes underpinning the delivery of projects within the organisation in order to make certain that the solution and process will deliver value.

A typical health check exercise includes:

• Review of a number of agreed key processes, typically including:

- portfolio management
- management reporting
- project resourcing
- milestone/delivery reporting
- scenario modelling
- project/programme management
- time recording

• review of document processes, including inputs/oututs and data flows

• identification of timings for processes

• understanding and documentation of business issues and constraints

Business case considerations

Identifying the need for PPM comes from understanding how the business operates, its projects management maturity level, and the processes used.

The overall objective of any PPM process is to balance project investment and expenditure across the business so that the enterprise can quickly make decisions around trusted information, aiding the change of direction within the business. In other words, the purpose of PPM is to enable the enterprise to identify projects not aligned with agreed strategy, and redirect resources to other value creation activities within the strategy. Therefore a key component of developing the initial business case is providing a breakdown of business-as-usual activities compared with project-centric activities. Doing so will allow key sponsors to understand strategic alignment issues and those projects that provide value to the corporate strategy and objectives. Management’s goal should be to break up the investment into pots of tactical spend to support the strategy, making sure the spend is correctly directed into strategic value and stakeholder value coupled with shareholder value.

PPM should be delivered into the business as a change management project. The business case needs to explain how the scope of the proposed PPM project fits within the existing business strategies and develop a compelling case for change, in terms of the existing and future needs of the organisation. The business case then needs to balance the costs, benefits and risks of delivering PPM. It needs details of proposed commercial arrangements; a cost/benefit analysis ideally including analysis of ’soft’ benefits, in other words those that cannot be qualified in financial terms; preferred options and any trade-offs. Also needed is an assessment of affordability and available funding linked both to proposed expenditure and to available budget and existing commitments.

The business case also needs to address ‘acheivabilit’. It needs to set out the actions which will be undertaken to support the achievement of intended outcomes, including procurement activity such as the purchase of consultancy and software. This is supported with a plan for achieving the desired outcome, identifying the key milestones, dependencies, roles, contingencies, risks, skills and experience required.

Therefore the typical business case will take the following form:

• strategic objectives and scope

• benefits realisation

• resources required

• cultural impact

• revenue/savings

• capital and operating costs

• timescales

• appraisal

The development of any business case needs to address the following key issues and calculate their potential ROI and benefits:

• People, process improvement and productivity

• Profitability

• Performance

• Customer/partner satisfaction

• Management information

Vendor Selection Process

With the initial RFI under way, a detailed list of requirements can be built up, supported by the business case and ROI model. Although meeting all the main requirements is important, it should not be the deciding factor in vendor selection. Some vendors will be able to do everything, but superiority in implementation times, costs, software functionality and process restrictions may outweigh the value of some of the other requirements. Often a detailed requirements capture is designed to understand everything available but is then mistakenly used as a bible to which all vendors should adhere. This mistake may cause software featureand process bloat, meaning that gainig actual value will be difficult and the implementation will fail. Look at the key areas of the ROI, assess which parts of the software solution and business process add most value in relation to each vendor, then a best fit across all the variables can be found. The most balanced vendor for your business needs will rarely be the one with all the bells and whistles.

Key areas to address when reviewing a vendor as part of a RFI are:

• methodology support

• process enforcement

• whether an evaluation budget is required

• whether the software is functionally supported

• integration (financials, billing, HR, and so on)

• the vendor’s experience in the sector (IT, PSA, engineering, construction, and so on)

• the vendor’s core values, parent company, and so on

• the business case for the solution in general and for each vendor

• ROI and ROO projections for each vendor

• feature functionality: whether the vendor promotes ‘bells and whistles’ or demonstrates core strengths that will add long term value to the business

• strategy: how the vendor sees the future of their technology, and business process enforcement methodologies

• where the vendor’s solution comes from, how much time they have spent on it, and so on

• how the vendor’s customers are supported at every stage of a partnership

• culture: whether the vendor is customer focused, part of a sales organisation, part of a PLC

• whether the vendor can provide customer references relevant to your business

• track record: where the vendor’s strengths lie. their history of successful installations

• market position: whether they are market leaders, have an extensive product-set, whether PPM is a core part of their business

• partnership strategy: whether they treat the customer as a sale or more of a development partner working towards a best-of-breed solution
  focus and vision: where the vendor’s focus lies in relation to their products and their future

• value added after implementation: whether they will leave, or work with you to continuously improve and develop the solution for the business

Seven resaons why IT projects fail.

1. Poor or undefined project objectives, roles and responsibilities, leading to unrealistic expectations being set.

2. Lack of communication between IT and the business, resulting in a mismatch of requirements and expectations.

3. No senior business sponsor and separate project manager.

4. Technology put before people: no or minimal involvement of key users during the “scoping” phase and lack of regular communication with them throughout the project implementation

5. No project sucess metrics.

6. No risk assessment or contigency plan.

7. Lack of regular checks to ensure the project is on track – to time and budget.