Realizing Data Warehouse ROI
By Lisa Slutter, Teradata Warehouse Marketing Specialist, Teradata, a division of NCR
Data Warehouse ROI MeasurementNo Longer a “Nice to Have”
If IT is expected to meet the same standards of risk andreward as other enterprise expenditures, you’d better manage ITprojects like an investment portfolio. That means being as adept atprojecting and assessing ROI as using your OLAP tool. Organizationstypically avoid projects or investment where internal rate of return isless than cost of capital or desired return rate.
Some organizations have reaped data warehousing benefitslike improved customer service and retention, increased effectivenessof marketing programs, more accurate demand forecastingleading to reduced inventory costs, and overall cost savings fromincreased operational efficiency. But success isn’t achieved until it ismeasured in a demonstrable way. What is the best way to do that?There are no standard methodologies or recommended practices.And the number of practitioners is still low. A June 2003Computerworld article reported that according to a Hackett Groupsurvey of 2,000 Fortune 1000 companies, fewer than half validate anIT project’s business value after completion. Polls at data-warehousing-focused events like The Data Warehouse Institute (TDWI) conferencesshow the number is well below that.
Nevertheless, a growing number of organizations developedeffective and consistent approaches to measuring data warehouseimpact in quantitative terms, for the purpose of evaluating investmentopportunities and post-implementation assessment.
Total Cost of Ownership (TCO) vs. ROI
IT projects can be viewed from a TCO or an ROI perspective.
TCO: When considering the system for Sarbanes-Oxley reportingand compliance, use TCO. If it’s something to do to be in business,forget the ROI and compare the TCO of alternative solutions.
ROI: ROI is the ratio of how much one gains or saves (projectbenefits) vs. invests (project costs). When evaluating two differentdiscretionary projects, ROI is often more illuminating than TCO(which is the denominator in the ROI calculation). Which is a betterinvestment?
- A $2 million data warehouse saving $1 million in campaign costsand generating $2 million in additional revenue due to increasedacceptance, OR
- A $1 million data warehouse generating historical reportssooner, but with no measurable value
The TCO criterion used alone indicates that the $1 million datawarehouse is the better investment. Comparing the two optionsbased on TCO may be easier to justify, but hardly provides basis forbuilding a world-class data warehouse, or doing what’s best for thebusiness—not to mention meeting IT’s top priorities.
According to the 400 business-technology executives surveyedfor InformationWeek’s annual Outlook study, the top four businesspriorities for IT in 2004 are:
- Optimize business processes (91%)
- Boost worker productivity (90%)
- Improve customer service (88%)
- Gain better return on IT capital investments (83%)
Accomplishing the first two are challenging enough. How comfortableare you in assuring that the data warehouse implementationyou’re recommending can achieve those objectives, while improvingcustomer service (a seemingly opposing goal,) based on a lowestTCO assessment?
Measuring the numerator (benefits) of the ROI equation is moredifficult. But you need to do pre-implementation projections andpost-implementation assessments to:
- Get project funding
- Properly set expectations
- Ensure you’re doing what’s right for the business
- Improve processes as you go
There are three major categories of benefits:
- Cost savings
- Revenue enhancement
- Business process and productivity improvements
Cost Savings vs. Revenue Enhancement
Several Teradata clients have seen a wide range of cost savingsincluding reduced taxes, reduced shipping fines due to incorrectaddresses, reduced inventory based on improved forecasting,and reduction in various types of fraud.
Cost savings are easier to identify and quantify than businessimprovements, and hold more credibility with CFOs. Reduced cost falls directly to the bottom line. There’s cost in generating additionalrevenue, which must be subtracted, allowing only the profit to fall tothe bottom line. However, the upside opportunity for revenueenhancement from a data warehouse is far greater. Some organizationsuse projected cost savings to justify the investment, show earlycost savings demonstrating value, then further leveraging the warehousefor business enhancement.
Measuring the Value of Improved Productivity
Bank of America stated, after implementing the first phase oftheir data warehouse with its aggressive self-service capabilities,it reduced the cost of support people over a half because usersused the system themselves. Improved productivity is a commonoutcome, but you can quantify the benefit if you keep people onstaff by decreasing backlog and speeding up implementation ofsubsequent projects.
Based on a single piece of data about a taxpayer, the State ofIowa was performing audits, a slow, costly, labor-intensive manualprocess, more often than necessary. By integrating data from manysystems into their Teradata data warehouse, the Department ofRevenue and Finance was able to perform analysis and more accuratelypredict tax compliance problems. The increased productivitygenerates an additional $10 million in tax revenue per year. The TaxGap Compliance Project funds the data warehouse and won theState of Iowa a TDWI Best Practices Award in 2003 in the governmentor non-profit category.
Measuring Value of Improved Business Processes
Data warehouses themselves provide no financial return. Unlikean investment in bonds, there is no inherent return. Return on a technologyinvestment is derived from new or modified businessprocesses the technology enables.
At Harrah’s Entertainment, the Total Rewards™ Program enabled by their Teradata data warehouse, has fundamentally changed theway Harrah’s interacts with its 100,000 most important customers.Quantifiable benefits of the program divided by the cost, whichincludes the data warehouse, equals the project ROI. A well-designeddata warehouse like Harrah’s supports multiple applications,leveraging the same data model, ETL processes, and transformeddata elements. The slot placement system leverages thesame investment made for Total Rewards.
Airlines Reporting Corporation (ARC), providing ticket processingand financial settlement services for 133 global airlines and25,000 ticket agency locations, implemented the world’s most extensiverepository of air travel data in existence. The 25+ terabyteTeradata data warehouse includes 39 months of ARC ticketing historyserving over 15,000 users. Initially, the focus was on productivity,and the impact was huge. Internal auditors summarized the activityof any airline or agent in 5 minutes vs. 24 hours previously.
Key benefits of integrating and centralizing all that data are inbusiness process changes such as fraud detection and management.ARC reduced fraud to the level of insignificance. Additionally,three-second access to 500 million tickets enables customers tomanage their own tickets at airlines where that wouldn’t be possible,helping them to compete. As users manage their subscriptions, ARCcan sell services to a wider range of users, including airports andconvention centers. Typically in successful implementations, PhaseII focuses on revenue generation, providing over 40 revenue-generatingreporting products to the global travel industry. Since the datawarehouse has been established, revenue generation is the primarythrust of the overall initiative, successfully covering expansions tothe technology infrastructure.
The Big Payoff
When adding the second, third, then nth application, leveragingthe same data warehouse drives up ROI dramatically. In terms ofinvestment payoff, this is a very effective course vs. the hit-and-rundata-mart-per-application approach of the 1990s. Since the data isthere, ARC can continue to expand their line of subscription servicesgrowing into new markets. The cost of each new application is relativelysmall, resulting in a situation where the sum of many benefitsis spread over a single investment.
Moreover, because the time to deliver is reduced, benefits fromnew applications accrue sooner, further adding to the benefits.
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