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Building the Financial Analysis for Your Project An Orientation

Robin H Foster Practice Leader for ROI and TCO Analysis Presented May 1, 2007

2005 Avaya Inc. All rights reserved.

The Agenda
Background of ROI-TCO Practices in Avaya Whats a TCO? Whats an ROI 10 tips for success Looking at results

2005 Avaya Inc. All rights reserved.

The Avaya ROI TCO Practice

Established in 2001 as part of the contact center sales community; expanded in 2002 to incorporate telephony Sets the standards and methodologies for ROI and TCO within the sales community Now supports financial analyses for inbound call center, multi-media contact center, predictive dialer, enterprise convergence, and messaging customers Designs, develops and produces training and training collateral on five main ROI TCO tools Tools are available for use by the Avaya sales force and Avayas BusinessPartners
2005 Avaya Inc. All rights reserved.

The basics of TCO and ROI cases


A TCO Case Total Cost of Ownership An ROI Case Return on Investment

Requested by those focused primarily on operating budget who want to save money Generally limits you to a strict hard dollar view if it wont show up in the expenses lines, it wont be in the case Tougher for applications like mobility for sales force productivity, for example

Requested by those aligned with business strategy, marketing, lines of business who want to justify an investment to enhance the business Opens up the possibility for productivity and revenue benefits Often the focus in contact center sales

The majority of the effort is identical for both types of analysis. The more that the investment delivers productivity and revenue benefits, the more likely the focus will need to be on ROI.
2005 Avaya Inc. All rights reserved.

Classic TCO illustration

Spend some now

Save over time

Ultimately it is the dollar reduction in TCO that is of greatest interest, not the absolute value Fundamentally at TCO answers: can I save more over time than I must invest?
2005 Avaya Inc. All rights reserved.

Classic ROI Illustrations

Some initial negative cash flow as project begins, turning to positive cash flow Net Present Value, Internal Rate of Return and Months to Payback are key results Fundamentally an ROI answers: is this a worthwhile thing to do with my investment dollars, or could I do better with a different investment?

2005 Avaya Inc. All rights reserved.

10 tips for success in building a financial case

1. Determine the likely areas of benefits 2. Look for reasonable information, not right information 3. Consider sampling when full data is not available 4. Be very careful with Benchmarks 5. Validate the results; iterate as needed 6. Separate hard dollar savings from soft dollar benefits 7. Deal with uncertainty; deal realistically with project roll-out 8. Include all costs 9. Anticipate questions that reviewers will ask 10. Ask for help
2005 Avaya Inc. All rights reserved.

1) Become familiar with the kinds of benefits to look for Discovery phase of your case Reduced Expenses
Network, Maintenance and Support, Conferencing, Centrex removal, Operator Consolidation

Increased Productivity
Reduced agent payroll, streamlined administration and support efforts, employee communication advantages

Increased Revenue
From up sell/cross sell in the call center, increased contacts per agent, outbound campaigns, increased access to sales people, improved communications for revenue generation activities
2005 Avaya Inc. All rights reserved.

2) Look for Reasonable, not Right information The good news is, you never need to be right Reasonable data describes the situation without over precision or worrying about exactness Reasonable data often is a little rounder than exact
50 agents is reasonable; 52 to 55 is more exact $4000 spent on conferencing each month is reasonable; $3955 to $4308 might be the actual range of spending $65,000 loaded annual cost for system administrator is reasonable; actual loaded salary is $65,245

2005 Avaya Inc. All rights reserved.

3) Consider sampling when complete data will take too much time and effort to collect Remember the principle of declining return Example: 20 office locations 5 were sampled and found to have
Average 22.8 MACs/month Average Expense of $1220/month for fee-based MAC services

For planning purposes


Assume 22 MACs/month per office location Assume average expense of $1200/month for MAC services

20 locations are today spending $24,000/month for MAC services for 440 MACs/month

2005 Avaya Inc. All rights reserved.

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Magnitude and Relevance of Benefits

Major

ROI Magnitude

Medium

Cover the space of benefits as broadly as you can, building out from the areas of major, hard dollar benefits toward the more difficult to quantify and minor benefits

Minor

Soft Dollars

Situational Dollars

Hard Dollars

ROI Relevance
2005 Avaya Inc. All rights reserved.

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4) Stay away from dangerous benchmarks Understand the difference between unit cost benchmarks and impact benchmarks
Unit Cost benchmarks Tells how much something costs Examples:
7 cents/minute for conferencing services; 3 cents/minute for PSTN; $30,000 annual loaded salary per agent

Impact Benchmarks Tell how much something will change Examples:


IP-telephony reduces network expense by 24% CTI applications increase agent effectiveness by 10% to 15% Sales effectiveness increases by 8% with predictive dialing

Using these are not threatening to anyone, because the number is readily understood and simply changed when more accurate information is found

Impact benchmarks require you to prove your starting conditions and how you will apply the technology are the same as the clients in the study Benchmark studies cite averages with just enough detail attract attention to possibilities
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2005 Avaya Inc. All rights reserved.

5) Validate the results; iterate as needed Shampoo, Rinse, Repeat People do not remember the numbers theyve provided
Make good notes: Who, What, When, How calculated

People often do not recognize the numbers theyve provided if youve changed the units on the numbers
$1200 cost/mo per location
All the same information

$14,400 cost/year per location $288,000 cost/annually across the enterprise (20 locations)

Place holder numbers must all eventually be replaced with real numbers choose place holders that are conservative and reasonable
2005 Avaya Inc. All rights reserved.

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6) Separate hard dollar savings from soft dollar benefits Prepare a case with only hard dollars and one with hard + soft dollars
Hard dollar benefits Show up today on someones budget Can be readily validated Examples include reduced maintenance cost, network savings, reduced call center agent payroll Are usually the only kind of benefit permitted in a TCO analysis May be the only benefits permitted in an ROI Soft dollar benefits Are generally productivity and revenue increases, or the impacts of increased customer satisfaction, higher customer retention, higher employee retention Soft benefits do not or are tough to identify from changes to someones budget Are usually only included in an ROI analysis Soft benefits that are difficult to quantify are often simply talking points
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2005 Avaya Inc. All rights reserved.

7) Be realistic about uncertainty and roll-out You can (and must) navigate these successfully
Two question could keep you from moving forward with your case:

1. How do I know all these numbers are right?


The truth is that we cannot say all these numbers are right What we can do is ask do you think the projection is within +/10% of actual? or +/- 20% of actual?
Probe for certainty for every savings or benefit Take only 90% or 80% (etc.) of the calculated savings or benefit depending on certainty Remember that some items, like a bill that is completely eliminated (eg, maintenance on obsolete systems) are highly certain

2. Do all these benefits show up on Day One?


Usually we need to say NO To be realistic, estimate what percentage of the full run-rate of benefits can be achieved in the first year Generally these estimates do not need to be too scientific
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2005 Avaya Inc. All rights reserved.

8) Include all relevant costs Be conservative but realistic Initial Cost from Cross Telecom / Avaya for the solution Professional services for design and integration Recurring costs for maintenance, services Other vendor costs (for example, servers) Internal Project Management costs Recurring cost of additional staff for admin, support, etc. Future costs earmarked for periodic training updates, performance tune-ups, upgrades Some clients include a 5% contingency cost to cover unanticipated expenses
2005 Avaya Inc. All rights reserved.

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9) Anticipate questions that reviewers will ask The Scout motto is Be Prepared How did you get these numbers? How do we know all these numbers are right? Who have you tested these numbers on? Do you expect all the benefits on Day One? Did you include the cost of X, Y, or Z? Are there any soft dollars in here?
If so, how much of the case depends on soft dollars? What do the results look like without the soft dollars?

2005 Avaya Inc. All rights reserved.

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10) Ask for help Theres no need to go it alone There are lots of skills needed to complete a thorough and successful case
Discovery skills to identify benefits and the data needed to quantify the benefits Validation and explanation of how benefits are calculated Organization of benefits and costs into a workable format for financial calculations Interpretation of financial results

Cross Telecom and Avaya welcome your requests for support in developing the cost justification you need

2005 Avaya Inc. All rights reserved.

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How we in Avaya are prepared to help you

We can work with your project team in


Understanding the important areas of impact you expect Defining the data needed to quantify the benefit Depicting the certainty of the nominal calculations to produce a conservative and reasonable case Explaining the calculations used in the case Depicting carefully the roll-out or ramp-up of the projects costs and benefits Assist in presenting your financial case to your decision makers

2005 Avaya Inc. All rights reserved.

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EXAMPLE

ROI Case for Travel Agency


Rick Cohen Avaya ATAC racohen@avaya.com

2005 Avaya Inc. All rights reserved.

EXAMPLE Summary of Problem Areas


Customer looking to lower costs and improve efficiency Looking to improve Agent Retention, reduce recruiting costs Staff of 4 makes call allocation changes all day

Summary of Solution
4 separate Avaya call center sites, to be consolidated into a single call center with 360 total agents Voice Mail to be consolidated resulting in lower costs Business Advocate and NICE call recording to be included
2005 Avaya Inc. All rights reserved.

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EXAMPLE Summary of Costs that go away


4 full time operations staff (call allocation changes) at $200,000/year 6% fewer call center agents due to consolidation (Erlang model suggests more). Equates to 21 agent savings, $840,000/year Elimination of 2 upgrades in 2007: 2 in Bluffs and Tempe at $290,000 Less hiring and recruiting costs of agents due to better mobility options with IP agent, saving $18,000 per year 1st year savings set at 80% (this is due to a ramp-up period)

Summary of Solution Costs


Cost to consolidate and upgrade 3 sites, add Business Advocate- $669,000 Cost for Services/Project Management- $155,625 NICE Systems Call Recording all 3 sites- $265,000 NICE systems annual post warranty maintenance - $39,000; first 3 months free

2005 Avaya Inc. All rights reserved.

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EXAMPLE Benefits

Reduce Overall Staff (call center and administrative) Improve Call Center Agent retention rates Consolidate 4 sites into single entity Gain new capabilities with Business Advocate and call recording

2005 Avaya Inc. All rights reserved.

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EXAMPLE ROI over 5 years


Return on Investment Analysis on Purchase
Beginning Y1

Costs depicted are for Customer owned and managed solution Year 2
$ $ $ 1,244,536 39,000 759,488 $ $ $

Year 1
$ 744,966 39,000 705,966 $ $

Year 3
978,564 39,000 591,925 $ $ $

Year 4
1,003,313 39,000 607,517 $ $ $

Year 5
1,028,804 648,146

Total Benefits
Solution Costs $ -$ 1,268,875 1,268,875

Net Cash Flow ROI for Purchase, All Benefits Cumulative NPV by Year @ 20% RRR Internal Rate of Return by Year Payback Period (months)

Beginning Y1 -$ 1,268,875 -$

Year 1
680,570 -$ -44% 21

Year 2
153,148 10% $

Year 3
189,402 30% $

Year 4
482,379 40% $

Year 5
742,854 46%

Payback Period
$7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $Beginning Year 1 Y1 Year 2 Year 3 Year 4 Year 5

Savings in TCO by Year with Avaya Proposal


$1,500,000 $1,000,000 $500,000 $-$500,000 -$1,000,000 Invest +Y 1 Y 2 ear Y 3 ear Y 4 ear Y 5 ear

Purchase

Cumulative Benefits

Cumulative Purchase Costs

21 month payback period

5-year IRR of 46% Average Savings of $17,146 per month over 5 years

2005 Avaya Inc. All rights reserved.

Depreciation and taxes not included in analysis

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EXAMPLE Benefits

Greater Agent Efficiency with consolidation Identification of calling reasons Elimination of tasks to manage call allocations Technology refresh New tools for agent monitoring and incentive programs ROI timeframe of 21 months beats the 24 month goal Unquantified benefits: Impact of Nice Call Recording

2005 Avaya Inc. All rights reserved.

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