The Need for Smart Enough Systems (Part 6): The ROI for Enterprise Decision Management
Last time we learned some techniques for finding operational decisions and we saw how applying enterprise decision management could deliver smart enough systems. Now, finally, we will see when to use (and not use) enterprise decision management, when we take a look at the Return On Investment (ROI) for Enterprise Decision Management. The following definitions give a brief primer on calculating ROI and Total Cost of Ownership (TCO):
- Return On Investment. The ROI for an information system is the ratio of value gained compared to the total cost of ownership. ROI is usually given as a percentage, rather than a value, and is stated for a period or as an annual rate. The value gained must be assessed in terms of the present value of the benefits gained during the period. ROI is often calculated for a three-year period.
- Total Cost of Ownership. TCO assesses the direct and indirect costs of an information system. It should reflect purchase costs and all use and maintenance costs over a defined period. Costs might include training, support, personnel, downtime or other outage costs, delays, building space and electricity, development costs, and more. TCO gives a true sense of a system's cost over a specified period.
Given these definitions, an EDM approach can show a positive ROI by reducing costs in acquiring, building, operating, or maintaining your information systems and by increasing the value you get from the systems.
Enterprise decision management can help you make better use of existing investments in technology and offers new opportunities for you to use the data you have about associates more effectively across more systems. If "Information is data that changes you," enterprise decision management helps turn more of your data into information.
To realize benefits, you need a clear vision for any kind of EDM project before you embark on it. To decide whether enterprise decision management is going to offer the kind of returns that make it attractive, you need to consider whether your organization is the right kind to benefit, who will benefit, and how to put a value on the benefits.
Any organization making many dynamic, high-impact operational decisions can benefit from enterprise decision management. In general, however, the more decision-focused organizations are, the more they benefit from enterprise decision management. If the key to their core transactions' profitability or effectiveness is a business decision, they are likely to benefit a great deal.
In general, organizations adopting an EDM approach see layers of benefits, as shown in Figure 1. At the lowest level are operational cost reductions. For instance, processing a loan application is less expensive when you automate the origination decision; the same number of employees can underwrite more auto policies, and fewer decisions are referred to supervisors or other experts. IT costs can also be lowered, because fewer programmers are needed to maintain and modify a system or add new product lines, customers, or countries. In regulated industries, costs of fines can be reduced or eliminated, because automated decisions ensure compliance with regulations.
Figure 1. Three layers of benefit from enterprise decision management
An EDM approach can often result in revenue growth, too. Increased precision in decision making can result in more value from every interaction with associates. You can also improve associate relationships and retention through more targeted offers, faster responses to service requests, and more consistent treatment. This improvement also tends to result in revenue growth. You can minimize losses by using analytics to make more accurate and consistent risk assessments and do a better job of fraud detection. Revenue growth also comes from enabling front-line workers and systems to make business decisions. Enterprise decision management often enables once-and-done or straight-through processing transactions, and customers often agree to prices, deals, and offers during their first interaction instead of shopping around (which they might have done if you had said you would get back to them with a price).
The final layer of benefit, one that's hard to measure but often the most important, is strategic control. Enterprise decision management allows your operations to change to reflect new business strategies quickly and effectively. You can gain a competitive advantage by being more nimble than your competition; you can get new strategic initiatives, products, campaigns, and pricing to market faster and with better precision and consistency. You control how your organization and all its systems make a decision, enabling you to change your business approach quickly to take advantage of even the most narrow window of opportunity and minimizing the opportunity a competitor gets by doing something first.
This combination of strategic control, revenue growth, and cost reduction allows profitable growth. Not only can your organization grow, but it can also decouple its expense growth from its revenue growth. It can add business, respond to opportunities, manage threats more cost-effectively, and use the resources it saves from day-to-day operations to invest and grow. Each layer -- cost reduction, revenue growth, and strategic control -- can contribute value to your ROI calculation in several different ways, as will be explained next time.
|Acknowledgement: This material is from the book, Smart (Enough) Systems, by James Taylor and Neil Raden, published by Prentice Hall (June 2007). ISBN: 0132347962.|
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