Defining Benefits for Regulatory projects - Cost Avoidance

Had an interesting discussion with a colleague today - how do you define real benefits for regulatory projects - ie projects that have to be done due to external regulatory or legal reasons . These are the projects that must be done and do not reduce real costs or generate additional revenue. Normally it is very hard to determine the benefits for these types of projects because there are no obvious ones. However we did find one type of benefit - cost avoidance!

So how would you do this? Well here is a breakdown of a hypothetical example that supposes company ABC has to comply with regulation RC 12. With any regulatory/legal type of compliance there is always a potential cost of non-compliance - eg a fine or inability to do business under current operations which could result in potential lost revenue (estimated to be around x% of total monthly).

Assuming the fine or potential lost revenue can be estimated/determined, which should be as they will be stipulated by the legal folks in the compliance documents. the (hypothetical) breakdown for implementing the project would like:

- Cost to Implement
- Benefits are Avoided cost in future years from implementing this solution = Expenses from implementing the solution (ie normal costs without fines) minus Expenses from not implementing the solution (the fines or lost revenue costs)

The NPV should then be calculated based on the above cash flows (this can be done in a simple excel spreadsheet. Check out the NPV resources on the website). Remember the aim is to get to a Zero NPV for cost avoidance type of projects This is because the avoided costs are not revenue and so if they are incurred you get negative cash flows. That is why you must do 2 NPV, IRR and payback calculations - One for the do nothing scenario and one for the one in which you implement the project.

The goal is to try an minimize your costs so that your payback in terms or avoided costs is the quickest for these types of projects.

Benefits Management Pictorial Overview

Benefits Management is a continuous and dynamic process that requires active management and sponsorship from the sponsors to deliver the business benefits/value. The VAL IT diagram explains the benefits paradigm within the IT governance process per the diagram below. Most organizations have controls/methodology's in place for Strategy/Planning, Architecture and delivery, but little in the way of benefits management to answer the "Value Question". The key criteria described under the value question are what feed into the benefits register and process - see post on this here. I have and am using the process depicted below as a starting point for a number of my clients. It is a great picture to include in benefit management related presentations to senior management.


Source : Val IT

Who is responsible for defining the benefits?

Came across an interesting problem today - which I have encountered at other clients with whom I have worked. Who is responsible for defining the benefits as part of the business case development process? The answer would normally be the "business" or "senior management" that are funding the project and will be the beneficiaries of the benefits/business value realized.

However, as I have seen, IT normally ends up developing the business case because that is how they get money to keep doing their work. Normally during the annual planning process a high level allocation of funds is made by the senior management and finance, of which some goes to IT. If the CIO has a lot of influence, the more he/she gets. What then happens is that when the business complains or the IT people have resources available. a business case is thrown together (normally by the IT employed business analyst or project manager) and then given to a business executive to sign-off - who only cares that the dollars to be spent are within the allocated planning budget. Can you see the problems with this? No wonder the business keep complaining that the IT Project did not deliver the value they thought.

What should really be happening, and the basis for my process map, is that the business initiates the project request and owns the business case process. They can ask for IT to provide a resource to help build the business case, but the business sponsor must play a very hands on role when the business case is being developed. They should especially be involved in developing the benefits and outcomes from the project. IT should also play a pro-active role to ensure that they have the capability to deliver and support the recommended solution. Ultimately, the business case is a contract between IT and the business to deliver a solution for a certain cost to provide a return on investment. It is an important document to set the expectations of all stake holders so that they are not disappointed down the road.

Benefits and Outcomes

Here is another part of the article from  Larry Cooper talking about Benefit Realization:

First let's define the key terms in Benefits Realization:
- Outcomes: the results sought, including either intermediate outcomes in the chain, those outcomes that are necessary but not sufficient to achieve the end benefit, or ultimate outcomes, the end benefits to be harvested.
- Initiatives: actions that contribute to one or more outcomes.
- Contributions: the roles played by elements of the Results Chain, either initiatives or intermediate outcomes, in contributing to other initiatives or outcomes.
- Assumptions: hypotheses regarding conditions necessary to the realization of outcomes or initiatives, but over which the organization has little or no control. Assumptions represent risks that you may not achieve desired outcomes. Any change to an assumption during the course of the benefits realization process should force you to revise your map.
- Results Chain Technique: used to build simple yet rigorous models of the linkages among the four core elements of the benefits realization process: outcomes, initiatives, contributions and assumptions.

Benefits realization is used at the beginning of a project to determine what benefits will accrue to an organization should they choose to execute the project. As all of the potential benefits from a project do not accrue at the same time, or may do so without going through intermediate steps or outcomes, it becomes critical to understand what will be achieved at each project stage, and especially whether any benefits will accrue if a project is cancelled either partially or in its entirety.

The genesis of the benefits realization approach was due to the large number of IT projects that were getting cancelled without delivering any real value (or benefit) to the sponsoring organization. Benefits realization helps you to identify the benefits of doing something and the initiatives that would be needed to be executed to achieve them.

As the initiatives that are needed to be carried out on a project get structured as discrete entities that deliver either a direct benefit or an intermediate outcome, it thus becomes possible to determine, in later project stages, the effects of the cancellation of a specific initiative - i.e. what benefits will we not get if we cancel it. This is a powerful business tool for protecting project investments.

An important point to note with benefits realization is the recognition that not all benefits are accrued upon project completion – many may take years before they can be fully reaped by the organization. To track the benefits accrual, a 'benefits register' is set up which usually contains the following kinds of information about each outcome:

- Description of outcome
- Contribution – what/to whom does it contribute
- Metric/Frequency – how do measure its realization
- Measurement method
- Baseline value
- Target value/date
- Tolerance limits
- Action if outside tolerance limits
- Accountability
- Benefits profile – i.e. increase, decrease, ratio, etc.

This register then becomes like a dashboard that can be used to determine if the results of having conducted the project are in line with the expectations that were established at its inception.

CSF’s, KPI’s and Metrics

Read an article by Larry Cooper which talked abut CSF’s, KPI’s and Metrics. He makes some good points - but the key thing I want to share here are the distinctions he makes in some of definitions of these terms. The full article can be found here.

Critical Success Factors

Critical success factors were first introduced by D. Ronald Daniel in a 1961 Harvard Business Review (HBR) article. Daniel highlighted the types of information needed to support top management activities. He said that an organization’s information system should be selective and center on providing detail around three to six success factors that help the organization achieve success.

Metrics

When we use the term metric we are referring to a direct numerical measure that represents a piece of business data in the relationship of one or more dimensions. A simple metrics statement is the “number of CI’s in error each month”. In this case, the measure would be the number CI’s found to be in error and the dimension would be time (month).

Metrics are not the KPI’s themselves; rather they are needed in order to determine if our KPI’s have been satisfied. The KPI that might use the above metric could be “% reduction in CI’s in error each month” – you need the number actually in error in order to determine the % of reduction over the previous month’s # of CI’s in error.

Key Performance Indicators

Key performance indicators represent a particular value or characteristic that is measured to assess whether an organization’s goals are being achieved. They reflect the critical success factors, stakeholder needs, and the expectations of the organization. For KPIs and their measures to be effective, the organization’s goals need to be specific, measurable, agreed, realistic and time-based. KPI’s can use both financial and non-financial metrics. "KPI’s…need to specific…measurable, realistic, and time based." KPIs must be constructed by people with different viewpoints on the service or process being measured.

KPI’s are used in conjunction with CSF’s and must have a target that is to be achieved. The target for a KPI can be expressed as a percentage, a simple ratio, an index, a composite average or in a statistical context. Whatever is chosen as a KPI and a target must be actually measurable though. At the outset, keeping the number of KPI’s for a single CSF in the range of 3-5 is recommended.

A KPI is a key part of a measurable objective, which is made up of a direction, KPI, benchmark or target and a timeframe. For example: “5% reduction of CI’s in error each month" where “reduction of CI’s in error each month” is the KPI.

Metrics are used in conjunction with KPI’s to measure CSF’s. A KPI then, is simply a metric that is tied to a target to determine if we have met our CSF. Most often a KPI represents how far a metric is above or below a pre-determined target. In the examples above, you are able to determine whether the target for CI’s in error is being met by comparing the metric to the target for the KPI.

Benefits Realization a Key IT Challenge for Fortune 1000 companies

A study by Planview (a provider of IT Portfolio Management solutions) found that Fortune 1000 Companies Say Benefits Realization a Key IT Challenge. Some points to note from the study when you are looking at Benefits realization in your organization. I found a number of parallels with some of the clients/projects I have worked with/on:

- 90 percent said prioritizing projects to align with business strategies and quantifiably measuring and reporting the benefits of those projects were their most pressing initiatives. Accountability is leading to real cultural changes in IT organizations

- Benefits realization is a key component to the clear communication of IT's contribution to the overall objectives of the organization. It begins with the strategic initiative and is reviewed in a disciplined cycle through funding, project definition and execution and product or service deployment to provable benefit realized.

- Seventy-seven percent of respondents stated that IT project benefits are identified at the outset of a project but not at the strategic level and seldom is evaluated during or after project completion. This is the number one problem at the client I am currently working with!

- Implementing a successful benefits realization process includes creating an atmosphere of acceptance throughout the organization so that every project initiator understands the importance and benefit of determining ultimate ROI for the business. The organization should continue to measure benefits long after the IT development work is complete, and that standard metrics are in place and consistently used by every line of business.

Further details on the study can be found at planview.com

IT @ Intel

Found a informative blog overall at Intel which talks about all things IT and in particular about how Intel looks at benefits realization. I have added the blog link on the right pane under "recommended blogs". The post I was talking about can be found here. To summarize, this is what the authors are saying :

- IT managers just don’t want to put in the effort to determine the ROI of an IT solution. If I had a fraction of the ROI I’ve quantified after being told it was too hard to measure, I’d be sitting on a beach in Barbados drinking beer for the rest of my life. Everything is measurable; it is more a question of the reliability and validity of what you decide to measure.

- What this typically comes down to is getting the right metrics identified and operationally defining them. We use metrics called business value dials to document the value of our IT solutions. Value dials (e.g., employee productivity, days of inventory, factory uptime, etc.) represent a standard set of metrics; each has a definition and standard calculation.


- Operational definitions are a core element of measuring business value. It is the step that translates the concept of business value into some type of measurement. For example, if eight people are asked to measure aggression and report their findings, the likelihood that we would see agreement among them is very low, as each person will define and measure aggression in their own way. The solution, use an operational definition. Give the same eight people the following instructions: “Today you are going to measure aggression. To do this you will go to Washington Elementary School, from 1-2 pm, go the sandbox in the northwest corner, and, using this form, count the number of times one child either strikes or pushes another child.”

- When the reports are in, there will be some discrepancies, a concept known as inter-rater reliability, but overall the data will be similar. Operational definitions are necessary to measure business value. Without operational definitions in place, everyone may be measuring, but it is highly unlikely they are measuring the same thing. Operational definitions make measurement independent of a person or group, repeatable by others, and standardize results.

A very interesting and valid perspective.

Measuring and Managing IT's Contribution to Business Value

Got an email from my Information week subscription asking me to participate in a IT Business Value Management (IT BVM) study. I think it will be worth participating and to see how our clients compare to other organizations. Details and link below.

Most companies have made significant progress measuring and managing IT performance and controlling IT costs. However, the capability to measure and manage IT's contribution to business value is far less
mature – despite the fact that delivery of measurable business value is now a strategic imperative of most IT organizations. In collaboration with The Hackett Group, InformationWeek is seeking your participation in an extensive research study to assess the level of maturity of IT Business Value Management (IT BVM) and its relation to company performance.

You can participate in the study by going to:

https://www.thehackettgroup.com/portal/site/hpublic/menuitem.5c8b16b9612010ca46d1b710b7f069a0/?id=1012865

Participation in the study is free of charge. Participants in the research study will receive a customized report that allows comparison of their individual IT BVM performance to their peers and to World-Class performers.  The report of approximately 30 pages will consist of a general analysis of IT BVM capability maturity and performance, and a customized section. The Hackett Group will also conduct a free webcast to present the general analysis results, accessible exclusively to survey respondents. Both the custom report and the webcast are expected to be delivered around January 2008. Other than your own personalized report, no individual company information will be released. All responses will remain confidential and will only be reported in aggregate.

A benefits register for benefits realization

Next week I am starting on developing a benefits register for the project I am on. A benefits register is the primary tool for facilitating the benefits realization process. It should be created prior to the project/change commencing and the primary input to the document would be the business case or investment proposal. You should primarily capture benefits information, but could also use it to capture Critical success factors (CSF's), or other KPI's. Also, as a project may start sometime after the business case development and approval process, the benefits register should have a separate review and approval process. It is key that the accountable party for the benefits accepts the benefit targets being set.

The benefits register could be developed as an Excel spreadsheet - this is just as effective as any fancy tool. The key thing is to ensure it is actively managed and kept straightforward. For the project I am on now we are piloting Sharepoint as the tool to use for the benefits register.

The key items I think you should include in the benefits register are:

- Description of Benefit : The description should be written after completing the other fields described below and should reflect the baseline and target metrics. eg. Improve customer response time from 3 minutes to 1 minute, thereby allowing servicing of more customers. This is equivalent to additional revenue of $10,000 per month
- Link to Objectives : How does the benefit to be delivered link to or deliver on the business objectives
- Accountability : Who is accountable for realizing the benefit. Should always select the executive responsible for the project to deliver the benefit (most likely the business sponsor on IT projects). The project manager is accountable for delivering the project, not the benefit. While the benefit will not be delivered until the project is successfully delivered, the benefit will only be realized if the business adopts the change (eg delivering a new system is the project objective, using the system is where the business will get the benefits
- Stakeholders/Beneficiaries: These are the groups responsible who have an input into defining/realizing the benefit or the beneficiaries from the benefit value to be delivered
- Baseline : What is the current state of measure of the benefit metric (eg the current process takes 3 minutes). Supporting details can be referenced but should not be included in the benefits register
- Target : What is the target state for the benefit to be achieved (response time to 1 minute). If the target is to be achieved over multiple periods, then divide the targets up by the periods.
- Approach and method : How will be benefit be realized (eg implement CRM system) and what method will be used to determine if the benefit has been achieved (measure response time 3 months after project implementation).

For tracking the project, have a couple more columns to check the status and what issues/action plans are in place to resolve issues. More on this later.

See the links on the right pane for some additional references on the benefit realization process.

NPV Definition and Sample Spreadsheets

On my current engagement, where I am developing the business case process and benefits realization process, I am now trying to develop the Net Present Value (NPV) spreadsheet. Excel has a good NPV calculator, thought I was not able to find many free NPV templates/spreadsheets online (most are $50 or greater). So I am going to customize one of the one I used for a past project and will upload it soon. Here is one I found that may help for now : Straight NPV & IRR and graphs

Per Wikepedia, NPV is defined as standard method for the financial appraisal of long-term projects. It measures the excess or shortfall of cash flows, in present value (PV) terms, once financing charges are met. As a formula this can be expressed as :

Where
t - the time of the cash flow
n - the total time of the project
r - the discount rate
Ct - the net cash flow (the amount of cash) at time t.
C0 - the capital outlay at the beginning of the investment time ( t = 0 )

Generally speaking, a project with a positive NPV is accepted, whereas negative NPV projects should not be accepted on a financial basis - however there may be other reasons for doing the project, eg regulatory.

For IT Projects, the Net Cash flow is generally the difference between the cost of implementing the solution (initial and ongoing) and the financial benefits

verification

Why developing good business cases and capturing real benefits is getting more important

Worldwide information technology spending will surpass $3 trillion this year, according to market researcher Gartner Inc. IT spending in 2007 will reach $3.1 trillion, an 8 percent increase from last year. Spending for 2008 is forecast to grow 5.5 percent to reach $3.3 trillion.

"On a worldwide basis, IT spending continues to grow at a rapid pace in developing countries," said Peter Sondergaard, senior vice president and global head of research at Gartner, in a statement.

"In fact, one-third of IT spending now occurs outside of North America, Western Europe, and Japan. This development will create new innovation in IT, new competitors, new usage patterns, and continued cost improvement benefits for users," he added.

This makes it especially important for organizations to develop good business cases and understand the value they are getting from their investment. IT spend is now a core and growing expenditure for most companies - so like any investment they need to know what they are getting for it. The business case is where this should be defined and understood.

Business cases and value realization survey

Saw an interesting survey by Forrester research available on the web. It is in line with my experiences to date, though I always question firms that use ROI and NPV as their primary justification - because NPV numbers and underlying assumptions can always be adjusted to reach a "suitable" figure. NPV is a great quantifiable metric, but it should be evaluated in context of other metrics and the underlying figures/assumptions should always be validated by an independent party.

Some more decent and FREE business case templates

Here are some more templates I found on-line. These links have been added to the links on the right hand pane as well. Surprisingly a lot of these were local or state government IT organizations. A number of these have content or sections specific to the organization that created them, so you need t o filter out what you need for your organization's purposes.

Texas Government IT Business case and Instructions

New York State Office of the CIO

Office of Government Commerce (OGC) Detailed and Summary business cases

WA Government IT

JISC

Alberta Government - Infrastructure and transportation business case

NSW Department of Commerce Detailed business case with instructions

If you have any more good ones let me know.

Business Case Templates

Started on a new activity in my current project - putting together a business case template. I have done a few of these in the past so have a good idea of what needs to be done. The key sections are Executive Summary, Background/Case for Change, Cost/Benefit Analysis, Approach and alternative solution analysis. Off course each client will have unique requirements and constraints for which you must tailor the business case.

I also thought that I would check out the web to see what is out there and I ended up finding some useful templates. For example I found one by the CIO office of the South Carolina Local Government. It is quite detailed (more than I needed) - but has some good explanations of each of the sections.

Going forward for the blog, I have created a Free Business Case Templates list on the right pane, within which I will put the links to good (and free) business case templates I find on the web. One day I hope to post the templates I have developed, but client confidentiality agreements prevent me from doing this right now.

If you see any good business cases or benefit register templates let me know and I will post it and credit you for it!

VAL IT Methodology - a useful reference framework

A colleague of mine pointed me to a very useful site today which has some great information on benefits and business cases from an IT Governance perspective. The site is the ISACA website and the section you want is a methodology called VAL IT . I have added this under the Benefits Management resources on the right page and will be discussing some of the articles from it in the next few posts. It has some paid and free content so if your organization is embarking on a IT governance effort it is worth a look at this value/governance driven methodology – which is tied into the COBIT framework.

Critical success factors vs benefits

One thing I have noticed at the organization I am currently consulting at (see previous post), is that a lot of stakeholders use Critical Success Factors (CSF) or Key Performance Indicators (KPI's) as viable alternative to benefits. I don't agree with this.

Here is the difference as I see it:

A benefit is used to justify why an investment makes sense. Eg implement this new system as it will reduce support costs by $X through retirement of legacy systems and reduction in FTE's.

A CSF or KPI is for measuring the performance of an initiative (project, change etc) once it has been justified via building the business case where you state the financial/non-financial benefits and determine the NPV, ROI etc. A CSF/KPI is used to measure how the initiative is tracking in terms of meeting the stated benefits and objectives. Off course it is based on the benefits to be realized - but should not take their place. When a benefit is clearly measurable, then the CSF/KPI will be very similar to the benefit target. A CSF/KPI is very useful for intangible benefits, where it can be used as a good proxy to provide a measure for determining if the benefit has been achieved (eg Train 1000 users by MM/YY date).

Any thoughts?