Return On Investment ROI Return On Investment ROI

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Return On Investment (ROI)

Return On Investment (ROI)

Return On Investment (ROI) ROI is a concept for quantifying the value of an

Return On Investment (ROI) ROI is a concept for quantifying the value of an investment. Its use and meaning are not always precise. When dealing with financial offers, ROI most likely means Return on Invested Capital (ROIC), a measure of business performance. This is not the case with service management; ROI is used as a measure of the ability to use assets to generate additional value.

Keep it simple In the simplest sense, it is the net profile of an

Keep it simple In the simplest sense, it is the net profile of an investment divided by the net worth of the assets invested. The resulting % is applied to either additional top-line revenue or the elimination of bottom-line cost.

Tactical Benefits While a service can be directly linked and justified through specific business

Tactical Benefits While a service can be directly linked and justified through specific business imperatives, few companies can readily identify the financial return for the specific aspects of service management. It is often an investment that companies must make in advance of any return.

Terms Business Case Pre-Program ROI Post-Program ROI

Terms Business Case Pre-Program ROI Post-Program ROI

Business Case A decision support and planning tool that projects the likely consequences of

Business Case A decision support and planning tool that projects the likely consequences of a business action. The consequences can take on qualitative and quantitative dimensions. A financial analysis, for example, is frequently central to a good business case.

Business Objectives The structure of a Business Case varies from organization to organization. What

Business Objectives The structure of a Business Case varies from organization to organization. What they all have in common is a detailed set of business impact or benefits. Business impact is in turn linked to business objectives. A business objective is the reason for considering a service management initiative in the first place.

Business Impact While most of the Business Case argument relies on cost analysis, there

Business Impact While most of the Business Case argument relies on cost analysis, there is much more a service management initiative than financials. The scope of possible non-financial business impacts is summarized as: A business impact has no value unless it is linked to a business objective. There does not have to be a one-to-one relationship between business impact and business objective.

Pre-program ROI The term “capital budgeting” is used to describe how managers plan significant

Pre-program ROI The term “capital budgeting” is used to describe how managers plan significant outlays on projects that have long-term implications. A service management initiative may sometimes require capital budgeting.

Capital budgeting Capital Budgeting is the commitment of funds now in order to receive

Capital budgeting Capital Budgeting is the commitment of funds now in order to receive a return in the future in the form of additional cash inflows or reduced cost outflows. Capital budgeting decisions fall into two broad categories: § Screening Decisions § Preference Decisions.

Screening Decisions (NPV) An investment typically occurs early while returns do not occur until

Screening Decisions (NPV) An investment typically occurs early while returns do not occur until some time later. Therefore, the time value of money, or discounted cash flows, should be accounted for. There are two approaches to making capital budgeting decisions using discounted cash flows: § Net Present Value (NPV) § Internal Rate of Return (IRR)

What is an organization’s discount rate? A companies cost of capital is typically considered

What is an organization’s discount rate? A companies cost of capital is typically considered the minimum required rate of return. This is the average rate of return the company must pay to its long-term shareholders or creditors for use of their funds. Therefore, the cost of capital serves as a minimum screening device.

Other methods There are other methods for making capital budgeting decisions, e. g. §

Other methods There are other methods for making capital budgeting decisions, e. g. § Pay-back § Simple Rate of Return. However, Pay-back is not a true measure of the profitability of an investment and Simple Rate of Return does not consider the time value of money.

Intangible benefits Process improvement and automation are common examples of difficult-to-estimate cash flows. The

Intangible benefits Process improvement and automation are common examples of difficult-to-estimate cash flows. The up-front tangible costs are easy to estimate. The intangible benefits, such as lessened risk, greater reliability, quality and speed are much more difficult to estimate. They are very real in impact but still challenging in cash flows.

Preference Decisions (IRR) There are often many opportunities that pass the screening process. The

Preference Decisions (IRR) There are often many opportunities that pass the screening process. The bad news is not all can be acted on. Financial or resource constraints may preclude investing in every opportunity. Preference decisions, sometimes called rationing or ranking decisions, must be made. The competing alternatives are ranked.

Post-program ROI Without proof of value, executives may cease further investment. Therefore, if a

Post-program ROI Without proof of value, executives may cease further investment. Therefore, if a service management initiative is initiated with prior ROI analysis, it is recommended that analysis be conducted at an appropriate time after. Program objectives should be clear as they serve to guide the depth and scope of the ROI analysis.

Data Collection The collection of data is vital for valid and quantifiable ROI results.

Data Collection The collection of data is vital for valid and quantifiable ROI results. There are two periods in which to collect data: Pre-Implementation and Post-Implementation. Program objectives should guide the source and nature of data points, e. g. § Metrics for quality of service § Costs for service transactions § Questionnaire for customer satisfaction.

Isolate the effects By this stage, the results of the service management program are

Isolate the effects By this stage, the results of the service management program are becoming evident. By isolating the effects, there should be little doubt that the results should be attributed to the program. There are many techniques available, e. g. : § Forecast Analysis. § Impact estimates. § Control group.

Data to monetary conversion To calculate ROI, it is essential to convert the impact

Data to monetary conversion To calculate ROI, it is essential to convert the impact data to monetary values. Only then can those values be compared to program costs. The challenge is in assigning a value to each unit of data. The technique applied will vary and will often depend on the nature of the data: A quality measure is assigned or calculated and reported as a standard value. Staff reductions or efficiency improvements are reported as a standard value. Improvements in business performance are reported as a standard value. Internal and external experts are used to established the value of a measure.

Determine program costs This requires tracking all the related costs of the ITIL program.

Determine program costs This requires tracking all the related costs of the ITIL program. It can include: § § § The planning, design, and implementation costs. These are pro-rated over the expected life of the program. The technology acquisition costs The education expenses.