How to Build a Great Cloud/SaaS Business Case Analysis for Technology Investment
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The document discusses the significance of Business Case Analysis (BCA) for technology investments, highlighting that many IT projects face severe cost and schedule overruns, contributing to substantial financial losses. It outlines the components of effective BCA, key financial metrics, and the benefits of cloud vs. on-premise solutions, emphasizing accuracy, transparency, and scenario planning in decision-making. Ultimately, it underscores the need for thorough evaluation and strategic planning to maximize investment outcomes.
![Comprehensive BCA Inclusions
9
• 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](https://image.slidesharecdn.com/gotransversebusinesscaseanalysisfortechinvestments-151109213948-lva1-app6891/85/How-to-Build-a-Great-Cloud-SaaS-Business-Case-Analysis-for-Technology-Investment-9-320.jpg)
![Meaningful Financial Metrics
10
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
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negaNve
to
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• CriNcal
if
expediNous
return
of
capital
is
needed!
Internal
Rate
of
Return
(IRR)
• Discount
rate
where
NPV
=
0](https://image.slidesharecdn.com/gotransversebusinesscaseanalysisfortechinvestments-151109213948-lva1-app6891/85/How-to-Build-a-Great-Cloud-SaaS-Business-Case-Analysis-for-Technology-Investment-10-320.jpg)
How to Build a Great Cloud/SaaS Business Case Analysis for Technology Investment
- 1. Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals How to Build a Great Cloud/SaaS Business Case Analysis for Technology Investment Drew Wright, co-founder, Technology Finance Partners Mike Murphy, CBO, goTransverse
- 2. 2 Benefits of Business Case Analysis for Tech Investments
- 3. Budgets Are Meant To Be Broken 3 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-‐$150B/yr due to failed IT projects. (Source: Gallup Business Review) Fewer than a third of all projects were successfully completed on Nme and on budget over the past year. (Source: Standish Group)
- 4. Why Produce a BCA? 4 • Helps prioriNze projects in resource-‐ constrained orgs • Ensures resources expended are commensurate with opportunity • Must be accurate, transparent & conservaNve Business Case Analysis (BCA)
- 5. Analytical Expectations 5 • Analytical vs. gut • Tie proof to support: – Corporate goals – Specific objectives • Financial executives require numbers, supporting evidence Photo credit: Jared Tarbell 2009
- 6. Minimize Bias Risk 6 Key financial metrics from a business case analysis allow dispassionate, rational, comparison of investment opportunities.
- 9. Comprehensive BCA Inclusions 9 • Increased labor producNvity • Reduce costs • Increased revenue (and associated margin) Forecast benefits • Upfront costs • Recurring costs Project costs • Ramp up • [Benefits – Costs = Annual Net Benefits] Map benefit and cost projecNons Calculate key financial metrics
- 10. Meaningful Financial Metrics 10 Return on Investment (ROI) • [Total Net Benefits – Total Costs] / [Total Costs] • Does not take into account Nme value of money Net Present Value (NPV) • Uses cost of capital to discount to “current” dollars • NPV < 0 is by definiNon a poor investment Payback Period • Net benefit crosses from negaNve to posiNve • CriNcal if expediNous return of capital is needed! Internal Rate of Return (IRR) • Discount rate where NPV = 0
- 11. Business Case Metrics: ROI Benefits – Costs Costs ROI =
- 12. Business Case Metrics: Payback -‐ 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 Thousands Month Cumula/ve Benefits vs. Cumula/ve Costs ($ USD) Benefits Range Likely Benefits Costs In ProducNon Payback
- 13. Business Case Metrics: NPV C = Cash flow T = Time r = rate
- 14. Business Case Metrics: IRR Set NPV = 0 Solve for r
- 15. Key Financial Metrics 5 Year Net Benefit $1,847,914 5 Year Net Present Value (NPV) @ a Hurdle Rate of 10% $1,311,119 5 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 $2,947,914 Solution 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 $1,100,000 Net Benefit Year 1 Year 2 Year 3 Year 4 Year 5 Total Net benefit ($30,742) $414,889 $474,704 $487,837 $501,227 $1,847,914 Cumulative net benefit ($30,742) $384,147 $858,850 $1,346,688 $1,847,914 Business Case Analysis Summary
- 16. Evaluating a Technology Investment 16 $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
- 17. Polling Question
- 19. Detail Assumptions and Projections 19 • 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
- 20. Use Scenarios 20 • 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
- 21. Scenarios: Payback 21 $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
- 22. Use Scenarios to Set Expectations 22 Present “Low” version to Board for investment Hold employees accountable to “High” for performance
- 23. 23 Key Components of Cloud Economics
- 24. Economics of the Cloud 24 Cloud Billing System Labor Power / AC Upgrade Mgmt HW / SW FaciliNes DR PCI
- 25. Why Cloud? 25 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)
- 26. On-Premise vs. Cloud – Costs 26 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
- 27. On Premise Costs Example 27 $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
- 28. Cloud Costs Example 28 $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
- 29. Cumulative Costs 29 $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
- 30. 30 • Accelerate time to innovation • Drive value to your customers by focusing on your core competence
- 31. 31 • Peak costs determine on- premise cost – Must match highest demand • In cloud, can buy as needed – Agility to scale
- 32. Agility, Scalability, TCO 32 • 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
- 33. Thank You