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Roi Estimation - Presentation Transcript
Anand Paropkari Estimating ROI For Process Improvements
Agenda
ROI & its significance
Elements of ROI
Calculating ROI
Challenges
Time – the missing dimension
Summary
What is ROI? “ Return on Investment (ROI) is a measure of
investment potential by comparing the expected benefits to
the total investment.”
Significance of ROI Money is the language of business and
quality efforts must be communicated to management in their
language. - Juran
Benefits of ROI
Determine potential of the improvement
Justify value to the management
Prioritize improvements
Track and monitor improvements
Validate improvements
Elements of ROI
Elements of ROI ROI = (Total benefits – Total Cost) / Total
Cost Benefits : Estimated benefits measured in dollars
Cost : Estimated cost measured in dollars
Key Factors Affecting Cost
Infrastructure cost-
Software tools and technology
Hardware
Support and maintenance of infrastructure
Improvement methodology-
Standard or model (e.g. ISO, 9000, ITIL etc.)
Off the shelf methodolgy / roadmap
Process definition & documentation
Human Resources-
Time & Efforts
Training
Hiring people with specialised skills
Rewards and recognition
Vendor-
Consultancy
Training
Assessment
Certification
Estimating Benefits Intangible benefits may not be
traceable to software engineering processes alone. Benefits
Tangible benefits Intangible benefits
Increased productivity
Reduce waste
Redduced defects
Reduced rework
Reduced cost of operation
Increased customer satisfaction
Increased employee motivation
Increased market share
Growth in revenue
Calculating ROI
ROI Example ROI = (235,000-210,000)/210,000 = 11.90% Net
benefit = $25,000 235,000 Total 210,000 Total 100,000 Work
Effort 95,000 Improved cycle time 25,000 Training 35,000
Vendor 140,000 Reduced defect and rework 50,000
Infrastructure Amount in $ Category Amount in $ Category
Benefits Cost
Challenges
Challenges of Estimation
Inadequate past data
Scope of process improvement
Impact to the organization
Size and duration of the effort
Organization's inertia to change
Validity of assumptions
Effect of project risks on estimation
Good understanding of the organization is required to
overcome these challenges
Benchmarks
Use industry benchmarks with caution
Most Benchmarks are organization specific
Examples:
Cycle time : Depends on how process is designed and
supported by automation
Rework : Depends on way of execution, but percent value may
be used as benchmark
Productivity : FP or KLOC value may be used as benchmark
TIME.. The Missing Dimension
Time Value of Money
In 1624 the Native Americans sold Manhattan island for $24
If they had invested $24 at 6% annual interest they would
have had $70 billion in year 1999
$1 received 1999 years ago, invested at 6% could now be
used to purchase all the wealth in the world
Example taken from the book Foundations of Financial
Management by Block and Hirt.
Fundamentals of Finance
Let's understand some basic financial concepts:
Time Value of Money
Present Value (PV)
Future Value (FV)
Net Present Value (NPV)
Opportunity Cost
Future & Present Value At 10% interest per annum, Value of
$1000 after 5 years will be $1611, OR $1000 is present
value of $1611 earned in 5th year from now.
Future & Present Value
FV = PV(1 + i) n
PV = FV/(1 + i) n
FV : Future value
PV : Present value
i : Rate of interest per annum
n : Number of periods
Functions to calculate FV and PV are available in MS Excel.
Net Present Value (NPV)
The difference between the present value of the benefits
and the present value of the expenditures is Net Present
Value
NPV is essentially a profit and loss statement
A positive NPV means that the improvement generates more
benefits than it took to fund it and vice versa.
ROI alone doesn't give complete picture, flavor of NPV
makes it perfect
ROI Example Net benefit = $20,163
Opportunity Cost
Opportunity cost is the potential loss incurred by not
utilizing an opportunity to get benefit.
It's the cost of 'status quo'
Example:
If avg. budget overrun of projects is 35%, as compared to
industry avg. of 5-10%, then the opportunity cost is 25-30%
of project budget.
Summary
ROI is a measure management can understand
Cost and benefits are basic elements of ROI
Accuracy of estimation depends on understanding of the
organization
NPV along with ROI gives complete picture of benefits

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