how to build a great cloud/saas business case analysis for technology investment
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How to Build a Great Cloud/SaaS Business Case Analysis for Technology Investment Drew Wright, co-founder, Technology Finance Partners Mike Murphy, CBO, goTransverse
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Benefits of Business Case Analysis for Tech Investments
Budgets Are Meant To Be Broken
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1 in 6 IT projects have an average cost overrun of 200% and a schedule overrun of 70%. (Source: Harvard Business Review)
US economy loses $50B-‐$150B/yr due to failed IT projects. (Source: Gallup Business Review)
Fewer than a third of all projects were successfully completed on Nme and on budget over the past year. (Source: Standish Group)
Why Produce a BCA?
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• Helps prioriNze projects in resource-‐constrained orgs
• Ensures resources expended are commensurate with opportunity
• Must be accurate, transparent & conservaNve
Business Case Analysis (BCA)
Analytical Expectations
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• Analytical vs. gut • Tie proof to support:
– Corporate goals – Specific objectives
• Financial executives require numbers, supporting evidence
Photo credit: Jared Tarbell 2009
Minimize Bias Risk
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Key financial metrics from a business case analysis allow dispassionate, rational, comparison
of investment opportunities.
Polling Question
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Quantify Financial Benefits
Comprehensive BCA Inclusions
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• Increased labor producNvity • Reduce costs • Increased revenue (and associated margin)
Forecast benefits
• Upfront costs • Recurring costs
Project costs
• Ramp up • [Benefits – Costs = Annual Net Benefits]
Map benefit and cost projecNons
Calculate key financial metrics
Meaningful Financial Metrics
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Return on Investment (ROI) • [Total Net Benefits – Total Costs] / [Total Costs]
• Does not take into account Nme value of money
Net Present Value (NPV) • Uses cost of capital to discount to “current” dollars
• NPV < 0 is by definiNon a poor investment
Payback Period • Net benefit crosses from negaNve to posiNve • CriNcal if expediNous return of capital is needed!
Internal Rate of Return (IRR) • Discount rate where NPV = 0
Business Case Metrics: ROI
Benefits – Costs Costs ROI =
Business Case Metrics: Payback
-‐
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
Thou
sand
s
Month
Cumula/ve Benefits vs. Cumula/ve Costs ($ USD)
Benefits Range Likely Benefits Costs In ProducNon Payback
Business Case Metrics: NPV
C = Cash flow
T = Time
r = rate
Business Case Metrics: IRR
Set NPV = 0
Solve for r
Key Financial Metrics5 Year Net Benefit $1,847,9145 Year Net Present Value (NPV) @ a Hurdle Rate of 10% $1,311,1195 Year Return on Investment 168%Payback in Months 18
Benefits Year 1 Year 2 Year 3 Year 4 Year 5 Total
Total annual benefits $269,258 $614,889 $674,704 $687,837 $701,227 $2,947,914Solution Costs Year 1 Year 2 Year 3 Year 4 Year 5 Total
Total solution costs $300,000 $200,000 $200,000 $200,000 $200,000 $1,100,000Net Benefit Year 1 Year 2 Year 3 Year 4 Year 5 Total
Net benefit ($30,742) $414,889 $474,704 $487,837 $501,227 $1,847,914Cumulative net benefit ($30,742) $384,147 $858,850 $1,346,688 $1,847,914
Business Case Analysis Summary
Evaluating a Technology Investment
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$4,900
$1,100
$3,800
$2,300
$7,200
0
2
4
6
8
10
$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000
Risk (low
=10, high=
1)
Profit: 5 Year NPV (000s)
Comparison of Contemplated Technology Investments
(size of bubble represents 5 year cost in 000s)
Priority Dark Blue
Red
Green
Yellow
Light Blue
Polling Question
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Transparency & Accuracy
Detail Assumptions and Projections
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• Make assumptions and calculations TRANSPARENT • Best Practice Example: include complete detail of
assumptions and projections
Ex Benefit #1: Labor Savings
Daily savings per employee $26.25 Calculated as 15% of emp’s day X rate $175/day
Annual savings per employee $5,119 Assumes 195 days worked/year
Total pre-‐tax savings $255,938 Assumes 50 affected employees
Total aqer-‐tax savings $166,359 Assumes 35% blended tax rate
Use Scenarios
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• Create scenarios to evaluate ranges in projections • Example: Benefit projections
Total
Total Benefits $204,500
Total Costs $195,250
Net Benefits $9,250
Total
Total Benefits $214,500
Total Costs $195,250
Net Benefits $19,250
Total
Total Benefits $224,500
Total Costs $195,250
Net Benefits $29,250 Low
Medium
High
Scenarios: Payback
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$0
$1
$2
$3
$4
$5
$6
Project Init Year 1 Year 2 Year 3 Year 4 Year 5
Millions
Benefit Range Across Scenarios vs. Es/mated Costs
Benefit Range
EsNmated Cost
Use Scenarios to Set Expectations
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Present “Low” version to Board for investment
Hold employees
accountable to “High” for performance
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Key Components of Cloud Economics
Economics of the Cloud
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Cloud Billing System
Labor
Power / AC
Upgrade Mgmt HW /
SW
FaciliNes
DR
PCI
Why Cloud?
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P & L Impact • Usage-‐based pricing tracks predictable expenditures more closely to demand
• Move from large CAPEX to consumpNon-‐based OPEX enables operaNon agility (and reduces shelf-‐ware)
Strategic Opportuni/es • Take advantage of the latest technologies and features • Core competency focus – move non-‐core IT acNviNes to the cloud • Shiq risk from enterprise to cloud vendor • Improve business agility and Nme to value with web services • Future proof; Increased innovaNon (IoT, ecosystem connected)
On-Premise vs. Cloud – Costs
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Cost Item On-‐Premises Cloud
CC Soqware Upfront SubscripNon – Usage
CC Hardware Upfront Included
Annual Vendor Support Annual Included
Servers Upfront & refresh Included
Server Support Annual Included
Professional Services Upfront & periodic Upfront & oqen lower
FaciliNes, Power, AC Ongoing Included
Bandwidth WAN/LAN Internet
Support Staff Ongoing Minimal
Infrastructure, Staff RetenNon, Training Periodic Included
Vendor Management Higher cost Part of support staff
Disaster Recovery (DownNme) Higher cost Included
On Premise Costs Example
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$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
Year 1 Year 2 Year 3 Year 4 Year 5
On-‐Premises
DownNme
Support staff
Bandwidth
FaciliNes, power, AC
Professional services
Server support
Annual vendor support
Servers
Soqware
Cloud Costs Example
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$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
Year 1 Year 2 Year 3 Year 4 Year 5
Cloud
DownNme
Support staff
Bandwidth
Professional services
Cloud subscripNon
Cumulative Costs
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$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
Year 1 Year 2 Year 3 Year 4 Year 5
Cumula/ve Costs
On-‐Premises Cloud
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• Accelerate time to innovation
• Drive value to your customers by focusing on your core competence
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• Peak costs determine on-premise cost – Must match highest
demand • In cloud, can buy as
needed – Agility to scale
Agility, Scalability, TCO
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• Want to know more? Whitepaper: Calculating ROI for Technology Investments – Overcoming objections to
BCA creation
– How to leverage financial metrics in evaluating options
– Tips for best practices, iterations, and post-implementation
Thank You