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Calculating data warehousing ROI

While Return on Investment is a simple phrase, the implementation of ROI is complex.

If the number email messages I received from my last column on the analysis of the IDC study is any indication, the topic on calculating the Return on Investment (ROI) is quite high on many organizations' priority list. Thank you so much for all of the emails.

While Return on Investment is a simple phrase, the implementation of ROI is complex. The usual calculation is as follows:

ROI = Present Value of Benefits / Present Value of Costs

The complexity comes from trying to determine what is the present value of the benefits and costs.

Present Value of Benefits

The IDC study broke the benefits into 3 categories:

  1. Keepers - money saved from not doing traditional decision support functions such as ad-hoc reports created by IT staff to produce reports from multiple disparate source systems and then having another member of the IT staff create the same (or closely similar) report again. The benefit might be that if there were 5 people doing this function today, and with the data warehouse you need only 2, then 3 other members can be deployed to do other important backlogged projects. IDC calculates this using the formula

  2. (# of members deployed) X (salary+benefits)

  3. Gatherers - money saved due to automated collection and dissemination of information. This could give managers back, for instance, 10% of their time by not having to gather and compare multiple reports. IDC calculates this using the formula:

    (# of managers) X (salary+benefits) X (%time Saved) X (Productivity Rating)

    where Productivity Rating is for the belief and understanding that all time saved does not necessarily return as additional work.

  4. Users - money saved or gained from decisions made by using the data warehouse.

However, remember that your investment in one thing may have a "trickle down" effect on other things that may not be specifically attributed to the data warehouse. For example the creation of reports for a manager to see 15 days earlier may allow that manager time to analyze the data more completely to find a new business process that will increase productivity of the manufacturing process. Most ROI calculations would be on producing the report faster, but the "trickle down" of more efficient processes may never show up.

Present Value of Costs

Costs of the data warehouse are pointed out in many flavors. They are

  • Hardware (purchase and maintenance)
  • Software (purchase and maintenance)
  • Network Bandwidth (while this is hardware and software, I wanted to point it out specifically)
  • Internal Development
  • Internal Support
  • Training
  • External Consulting

Conclusions

The distribution of ROI in the IDC study show that savings were about 20% for Keepers, 30% for Gatherers, and 50% for users. What can this tell us? Correct! We need to have our users involved during the development of the data warehouse.

The IDC study also points out that these are the tangible benefits. There are intangible benefits as well. Some of the intangible benefits described are:

  • Being able to manage the total customer relationship
  • Being able to add value for your customer
  • Creating supportive roles within your organization instead of stovepipes
  • Being able to manage at the big picture and specific issue

But, after all is said and done, let us remember that data warehousing is not about random, endless query authoring. It is about timely and consistent execution to create opportunistic behavior. The results of which should be better than the obvious observation method.

 

About the Author

Chuck Kelley is president and founder of Excellence In Data, Inc. and an internationally known expert in database technology. He has more than 20 years of experience in designing and implementing operational/production systems and data warehouses. Kelley has worked in some facet of the design and implementation phase of more than 35 data warehouses and data marts. He also teaches seminars, co-authored a book with W. H. Inmon on data warehousing and has been published in many trade magazines on database technology, data warehousing and enterprise data strategies. Please feel free to email him at chuckkelley@usa.net with comments (negative or positive) about this column or ideas for future columns.

 

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