Your ROI estimate tells you what to expect. But have
you planned for the worst-case scenario?
Before facing a large investment decision, many IT
executives calculate a return on investment (ROI) analysis to justify the
project to upper management. While the ROI analysis is a useful measure of
the value of a project, many other factors must be considered before
you're in a position to make a wise decision. If you're considering
migrating your users to Windows NT and would like to calculate your ROI,
this month's ROI tutorial might prove a useful starting point (see
Resources).
Quickly calculating your ROI is a very worthwhile
exercise, and will give you a good initial estimate. Since the expected
ROI is based on a collection of estimated figures, it's important to
realize that it is only an approximation, based on either your estimates
or estimates calculated by market researchers or consultants. To more
accurately reflect the inherent uncertainty of your estimates, there are
various possible approaches, all of which involve probability theory to
some degree. Since you may not remember—or may not wish to remember—your
probability classes, one of the simplest ways to reflect the uncertainty
is to calculate best-case, worst-case, and expected estimates.
Your first estimate is a reasonable ROI based on what
you expect will happen. You'll probably want to calculate the best-case,
or most optimistic, scenario next, saving the worst-case scenario for
last. If the project involves a large, up-front investment before any
return is seen, as is often the case with software development projects,
there is some chance that the project could be cancelled before you see
any return (you decide how likely this is). This could result in a
worst-case ROI estimate of 0—that is, zero return for a large initial
investment. Clearly, this wouldn't be good.
With a migration to Windows NT, you may decide to
upgrade some of your end users' hardware early on in the project. In this
case, even if the migration project were cancelled before completion, your
users would still be able to realize some—albeit small—return from the
investment. This may result in a small, yet greater than zero, ROI
estimate.
Once you've calculated the best-case, worst-case, and
expected ROI values, it's helpful to determine the probability of
occurrence for each of these potential outcomes. For example, if you feel
there is a 10 percent chance that the project may be cancelled—as in the
worse-case scenario—make note of this in your worst-case ROI. Similarly,
estimate the likelihood of the best-case scenario and the expected
scenario.
It's possible to go one step further, calculating for
all scenarios the probability multiplied by the ROI. This gives a weighted
ROI, which helps reflect some of the uncertainty of your
estimates.
The business perspective
In addition to
calculating the uncertainty of your ROI estimate, you should also look at
performing a more detailed cost-benefit analysis. In your project report,
assess all expected costs along with all potential benefits. The benefits
typically will fall into one of the following business
categories:
- Cost cutting
- Cost avoidance
- Revenue maintenance
- Revenue enhancement
- New market entry
- Marketshare gain
Think about each of these areas and try to determine
what benefits your project will deliver, not from the IT perspective, but
from the business perspective. This will gain you much credibility in the
eyes of upper management, since their focus is on the value the project
can deliver to the business and its shareholders. By highlighting the
benefits in their terms, you'll not only gain more support from them,
you'll come across as a stronger business person, not just a computer geek
who wants to play with the latest-and-greatest technology.
To realize the benefits of a project, it's sometimes
necessary to change the way you do business. This isn't always a trivial
exercise. However, if you can demonstrate that you have a plan for
switching over to the new business model, including end user buy-in and
training, it will be apparent that you've thought through the business
side of the project.
Good luck with that new project proposal!
About the author: Steven Gould currently works as a lead
consultant for an international consulting company. Based in Dallas, TX,
he develops primarily in C++ and Java under Windows NT and various Unix
platforms. He is a Sun Certified Java Developer and Microsoft Certified
Solution Developer. He can be reached at
steven.gould@stevengould.org.
Resources
- "A quick ROI analysis can help you make key NT
migration decisions," Shari L. Jones (Windows NT Advantage, July
1999). In this first half of a two-part ROI tutorial, the author
explains the business reasons for conducting an ROI analysis and how to
make the right technology decisions as you add and deploy new systems.
In the second half you, will be able to use our interactive ROI
calculator to estimate the ROI for a Windows NT migration:
http://www.windows2000advantage.com/tech_edge/07-01-99_roicalc.asp
