While predicting the benefits of a data warehouse may be more challenging than predicting the benefits of other IT systems, it is an exercise that must be done. ROI calculations force a company to analyze the investment for the actual sources of its value and define its expected benefits.
Two myths surround data warehouse ROI calculation. First, warehouse ROI can't be calculated, and second, the warehouse itself produces returns.
Myth No. 1: Data warehouse ROI can't be predicted. As pure reporting systems, warehouses are a relatively new concept. Early warehouse builders frequently worked from a philosophy of “build it and they will come.” In other words, if they provided users with clean, integrated data from across the organization, users would find great ways to use it.
Great in theory, however, all too often, users didn't come. Most employees are responsible for producing a certain result and have tools for accomplishing that result. Give those employees a new tool for doing that same job and you haven't improved the organization, you've just spent a lot of money to do the same things with a new tool.
Myth No. 2: Data warehouses produce returns. Many companies attempt to calculate the return on their warehouse investments. Warehouse tool vendors frequently tout returns on warehousing investments in the hundreds of percent. But, in actuality, warehouses themselves provide no financial returns.
Technology investments have no inherent return. The return on technology investments is, instead, derived from the processes that the technologies enable. Thus, the source of warehousing ROI actually flows from the new or modified business processes that are possible only with the warehouse, not the warehouse itself.
The source of ROI. It is inaccurate to talk about calculating the return on a warehouse investment. It is accurate to calculate the return on an investment in a new business process that is enabled by a data warehouse.
Predicting the value of a warehouse-supported process. Many of warehousing's benefits stem from its ability to reduce the amount of time needed to get information. Viewing the warehouse as a time compression device, we can develop a framework for interviewing key executives to identify the sources of business value. The framework
includes the following:
* Identify and document the business goals of the executive.
* Document the metrics by which attainment of those goals will be measured.
* Document the strategies that will be used to attain the goals.
* Document the levers' that the manager can work with. A lever is a tool that the manager has at his or her disposal
* Determine where time compression (via a warehouse-enabled process) will give management the ability to adjust levers sooner and improve performance.
Calculating ROI. An ROI can be calculated for each year that money is allocated to an investment. The basic ROI formula is as follows:
* Net cash flow from an investment divided by value of the investment equals ROI.
There are a number of variations on the ROI concept. Common ones include net present value and payback period calculations. Each of these is intended to measure the profitability, or expected profitability, of an investment. Companies have scarce resources for investment. In a perfect world, they would compare the expected ROIs of various projects and allocate those resources to the ones with the greatest expected ROIs.
Calculating an expected return on investment requires two key figures: the amount of the investment and the expected cash flow of that investment.
Benjamin Taub is founder/CEO of Dataspace Inc. His e-mail address is [email protected]