Peter Stewart, MBA, CICE Electronic Commerce Institute – Montreal

1. Your Web Project. What’s the Payback?ROI E-Business SeminarHalifax – November 24th, 2003Nova Scotia Community College Peter Stewart, MBA, CICE Electronic Commerce Institute – Montreal Stephen Parsons, M.IT.Ed, MCPNova Scotia Community College In collaboration with:

2. Objective • Help businesses make critical investment decisions regarding the Web, e-business and IT. • Relevant to Management, Operations, Project Directors, Professionals, Accountants.

3. Agenda • Welcome – Introductions – 10 minutes • Section 1 – Context – 60 minutes • Section 2 – Overview of ROI Theory – 20 minutes • Break – 15 minutes • Section 3 – ROI Calculation Tool – 30 minutes • Section 4 – Case Study – 40 minutes • Wrap-up – 5 minutes • TOTAL: 3 hours. Finish time: Noon

4. Section 1CONTEXT ACHIEVING CORPORATE OBJECTIVES

5. Context Hi Peter, After losing over $1.3 Mil on Internet investments gone bad since 1993, I don't need a calculator to tell me what the ROI from an Internet investment will be. Good Luck with your seminar. I hope it helps others before they take the hype plunge. Best Regards, Tony (Moncton, NB, Oct. 8, 2003)

6. Context Reality • 1001 reasons e-Business projects are failing. • Some environments littered with blood. • Companies got caught up in the hype. • Lots of consultants or so-called experts simply improvised. • 80% of businesses surveyed have not defined programs to measure the value or benefits of theire-business projects – Giga Information Group, 2001 IT Value Poll • Assessment: One of the most difficult tasks in a business

7. Context E-Business is simply about doing business in a world where the right business models, the right software, the right hardware, the Internet and the right communications equipment can help improve productivity, sales and growth. Just need to get back to basics!

8. Context Gartner’s Technology Hype Cycle

9. Context Reality From Another Perspective: • Fantastic E-Business models working for many. • Models core to business. • Companies where every business decision sparks a web, e-business or IT decision • 100’s of success stories across all industries at www.cebi.ca, strategis.ic.gc.ca/ebizenable, and other sites.

10. Context Anecdotes (of Efficient e-Business Models) • Air Canada • Never loses a reservation • Dollar Rental Car • Efficient model well established • Couldn’t do business without it. • Business Development Bank of Canada (1995-2002) • Complex solution involving web, e-business, IT to improve client satisfaction and loan turnaround time to 16 days and less.

11. Context Reality => There are WINNERS AND LOSERS, as there have always been in business And the one basic question remains the same: Am I doing the right thing? What’s my payback? Asking specifically today about: • Website / Intranet / Extranet • B2C transactional sites • B2B Solutions • Customer Relationship Management Solutions (CRM) • Enterprise Resource Planning Solutions (ERP) • E-Content Management Solutions • And more

12. Context Management wants to know about: • ROI / Payback period • How to reduce risk / ensure success • Impact on different parts of the company, including relationships • Governance / process / methodology • Skills requirements • Benchmarks (performance vs. objectives) We always take one step back and ask: • How does your project contribute to corporate objectives?

13. Context Are you on the right track? What’s the payback? • 1000 employees or more? => web-based recruiting software • Lots of clients, lots of points of contacts? => CRM • Continuous service to clients? => Extranet • Big printing bills? => Internet, Intranet, Extranet sites • Flash vs. forms online? => Decide. What’s more core? • Three people keying in same data? => ERP • Shopping cart? => Outsource • Platform for employee of month photo? => Forget about it! And how do you decide what to do?

14. Context What is your Context?

15. How about Competing Viewpoints? • Organizational and financial value • How do we keep our shareholders happy? • Internal operations • What processes do we need to do to continue growing, creating value and achieving long term financial objectives? • User services / client satisfaction • How do we set ourselves apart from our closest competitors? What must we do to increase client satisfaction? • Innovation and learning • How do we improve for the future?

16. How about your employee evaluations? * Here, the Balanced Scorecard is adapted for the profile of a junior position within the company. For a more senior position, the assessment criteria is different.

17. Context Summary In today’s complex environment, you need to demonstrate how your project meets corporate objectives. And sometimes, you need to be very creative and innovative.

18. Section 2OVERVIEW OF ROI THEORY What`s my Payback?

19. Background Achieving Corporate Objectives A large number of concepts and tools are available to assess the performance of a project, service or business TCO Balanced scorecard NPV VOI Value of Investment - Gartner ROI TEI Total Economic Impact - Giga

20. Background • Significant changes in definition and attitudes for measuring returns • Strategic management rather than tactical or operational management of the company - Alignment of profitability analysis with corporate strategy • Working with a variety of measures (TCO, ROI, NPV, etc.) • Consideration of the company’s intangibles.

21. Total Cost of Ownership (TCO) Definition • Total Cost of Ownership (TCO) makes it possible to prepare an overall budget for computer projects, i.e. the total cost for a business to acquire and maintain a system. • The basic approach entails identifying direct and indirect costs related to the solution.

22. TCO Concept • Total Cost of Ownership (TCO) includes • acquisition, • use, • information technology support, • cost of resources, • cost of processes, • cost of technologies related to use of assets, and • cost of ownership and operations: • Office computers • LAN • Servers

23. ROI Concept Definition • Return on investment (ROI): financial ratio that helps determine the profitability of invested capital • Method ROI = (net earnings ÷ invested capital) x 100 where net earnings = quantified benefits – costs

24. ROI Concept • For example, if a project earns 10 times more than it cost for the initial investment, the return on investment is 900%. • Returns rarely appear rapidly; we should not expect immediate returns.

25. NPV Concept Definition • Net present value (NPV) of an investment is the present (discounted) value of future cash inflows minus the present value of the investment and any associated future cash flows. -- ComputerWorld, Feb 17, 2003 • What does it mean? It’s the net result of a multiyear investment expressed in today’s dollars. • To calculate NPV, compare the TCO and the present value of expected earnings over the life of the investment. NPV = capitalized net earnings - TCO

26. NPV Concept • In the most simplistic terms, $1 today would be worth $1.03 next year if it was invested in a risk-free Government of Canada bond. So, if you can turn $1 today into $1.20 next year, it might be a good investment. • If, on the other hand, you need to borrow money at 7%, you aren’t likely to invest that capital for a 5% return.

27. Payback Period Definition • Payback Period is the time required to recoup your original investment (i.e. the point in time where benefits cover costs). $ Accumulated Benefits costs Payback time

28. ROI Theory Summary • Several models available • Often need to be used together • Challenge are the assumptions: • indirect benefits, • savings in the medium and long terms, • cost of money long term • risks • Major challenge is valuing intangible benefits and assets • Focus must remain on how you are contributing to corporate objectives

29. Section 3ROI E-Business Calculation Tool An aid in justifying your project

30. The ROI e-business calculation tool is not a calculator that makes your decisions for you, but one that helps you make your own decisions.

31. ROI Calculation Tool Objectives of the tool • Calculate the profitability of an e-business project • Assess intangible aspects • Develop a comprehensive list of points to take into consideration • Add credibility and reliability to profitability analyses In a nutshell, • justify your investment.

32. ROI Calculation Tool Who is it for? • Anyone who has to justify a web, e-business or IT project • Management • Project manager / Project champion • Professionals … from small to large enterprises Features • Tool to assist in decision-making • Inclusion of risk-by-activity calculation • Useful tool for assessing multiple projects The user is responsible for calculation assumptions.

33. ROI Calculation Methodology 1. COSTS • Planning • Development • Deployment / Rollout • Monitoring and maintenance 2. BENEFITS • Tangible benefits • Higher revenues • Lower costs • Intangible benefits 3. ASSUMPTIONS • Tax rate and credits • Cashflow discount rate • General risks 4. RESULTS

37. Increase in Revenues

38. Decrease in Costs

39. Intangible Benefits Intangible benefits are benefits that are difficult or virtually impossible to quantify. For example, • better customer relations and/or communications, • greater customer satisfaction and loyalty, and • improved service quality.

40. Cost- benefit ratio Cost of assessment Cost Assessment error Rigorousness of assessment How far do you go in valuing intangible benefits? Inspired by J. Efrim Boritz, School of Accountancy, University of Waterloo, Waterloo, Canada

41. How to measure Benefits? (examples) Customer Relationship Management (CRM)

42. How to Measure Benefits? (examples) Enterprise Resource Planning (ERP)

43. Intangible Benefits

44. 3. Assumptions Before making a decision about an e-business project certain assumptions need to be made, including: • Marginal tax rate • Anticipated tax credits • Discounted cashflow rate • General risks (impact on the capitalization rate)

45. Assumptions

46. 4. Results The results page is living and dynamic. Here, the user will find the results of the data entered into the model and the calculations done automatically by the financial assessment tool: • Summary of costs • Summary of tangible benefits • Assumptions • Calculation results • TCO • NPV • ROI • Payback Period • Summary of intangible benefits

47. Results Within the Tool

48. Results Within the Tool (cont.)

49. Case Study Section 4 CASE STUDY – GRIZZLY CO. Would you go ahead with this project?

50. Case Study Summary of Case Study • Textile mfg. company which designs and markets tents and sleeping bags for amateurs of the outdoors. • Annual revenues of $10M • Strategic objective: Increase volume of sales • Smoother more efficient operations • Penetrate U.S. market • Introduce complementary product lines • Solution: Extranet for retailers • Cost $178,500 over five years