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Calculating Return on
Investment for Business
Process Management
A BUSI NESS PROCESS MANAGEMENT WHI TE PAPER OCTOBER 2011
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Calculating Return on Investment for Business Process Management t 2
Author
As Director of Perficients national Business Process Management (BPM)
practice, Kevin Feldhus provides leadership in developing and
implementing Perficients BPM strategies with integrated enablement plans
for sales and delivery. Kevin is a business-focused, tool-agnostic BPM
professional with years of senior-level executive consulting experience. He
has been focused nearly 15 years on using BPM as a method to bridge the
communication gap between business and IT by leveraging a background
in finance and IT consulting to create customized business-focused BPM
solutions. He has led multiple strategic BPM engagements, including
strategy and roadmap, assessment and implementation projects and led all phases of the BPM
practice including marketing, alliances, training, recruiting and communications
Calculating Return on Investment for Business Process Management t 3
Introduction
Return on Investment (ROI) is a performance measurement tool used to evaluate the efficiency of
an investment. Each individual project or a project within a program should have the ROI
calculated to provide the basis for the value of the investment and the worth of that endeavor to
the organization. A key part of any business case is to understand not only why an organization
should undertake an initiative, but the value of that endeavor (i.e. the ROI). The ROI is also a key
critical metric in determining which projects are funded from a pool of competing potential
projects.
Business Process Management (BPM) is defined as a disciplined approach that focuses on effectively
and efficiently aligning all aspects of an organization, with the vision of constant process
improvement, technological integration and increasing customer value. Since a key objective is
increasing customer value and subsequently shareholder value, any improvement in a business
process (increase revenue/reduce cost) should have the ROI calculated. BPM projects tend to be
intangible (the results you cannot touch, but experience), so it is sometimes difficult to see the
results of a BPM project or program and subsequently the value to the organization. As a result,
calculating the ROI for a BPM engagement may be a difficult task, but not impossible.
This paper provides guidance on calculating ROI for a BPM engagement. As is typical in most
college text books, the formula is the simple part; determining and gathering the inputs is the real
challenge.
Calculating ROI
Two ROI calculations are recommended for a complete BPM ROI analysis, a target ROI and the
actual ROI.
The target ROI is the initial ROI calculation completed when the BPM project is in the planning
phase. The basic calculation is the estimated dollar cost of the project subtracted from the
anticipated dollar gain from the project multiplied by 100. The result is typically expressed as a
percentage. The equation to calculate ROI is:
ROI % = (Anticipated $ improvement Estimated project cost) / Estimated project cost * 100)
ROI Calculation Steps
1. Determine the dollar amount of the anticipated improvement, (the dollar amount of the
estimated return on the investment). Some examples to consider include:
Process Reduction %: Current estimated cost of the process * improvement % (i.e.
$1,000,000 * 10% improvement = $100,000)
Revenue Increase: $ amount or % of the revenue increase
Cost Reduction: $ amount or % of the cost decrease
Headcount: The fully loaded cost savings (number of employees * salary + benefits). This
is a type of cost reduction that captures a lot of BPM interest
Regulatory: Cost of not implementing the regulation, expressed as the potential impact of
non-compliance (i.e. fines or cost of not doing business)
2. Determine the estimated dollar project costs, ensure to include:
Consultant costs (hourly rates plus associated expenses)
Other vendor costs (hourly rates plus associated expenses)
Organizational subject matter expert (SME) costs (include associated expenses)
Hardware costs
Software costs
3. Subtract the estimated project costs from the $ amount of the anticipated improvement
4. Divide the result from step 3 by the $ project costs
5. Multiply the result of step 4 by 100 in order to represent as a %
Example ROI Calculation:
XYZ Company invested $100,000 in an internet advertising campaign to promote a new product.
The results realized by the company were new project sales of $500,000 directly attributable to the
internet advertising campaign. In order to calculate the ROI, subtract the cost of the investment
($100,000) from the sales results attributable to the campaign ($500,000). Take the $400,000 result
and divide it by the amount of the investment ($100,000). The result is 4, which multiply by 100
to get the ROI as a percent. The result is a 400% ROI.
Calculating Return on Investment for Business Process Management t 4
Calculating Return on Investment for Business Process Management t 5
BPM Simple Example:
1. Target ROI Calculation: For a BPM process improvement project, project costs are estimated
at $500,000. The goal of the project is a 10% increase in process efficiency. Current process
costs are estimated by the business to be $10,000,000. The ROI calculation $10,000,000 *
10% is an initial process efficiency target ROI of $1,000,000. The initial target ROI minus the
project estimated costs of $500,000 is $500,000. This result divided by the project estimated
cost of $500,000 is 1, which when multiplied by 100 is a 100% ROI.
2. Actual ROI: For the BPM process improvement project, actual project costs are $600,000 and
the actual increase in the process efficiency is 9%, not the targeted 10%. The result is an actual
ROI of 50%. The difference is a 50% decrease in the targeted ROI, due to project cost overruns
of $100,000 and actual improvement in efficiency was $100,000 less than anticipated.
BPM Not-So-Simple Example:
It becomes more challenging when the ability to calculate the anticipated improvement in a dollar
amount is not relevantly apparent. For example, a project to Manage a Portfolio of Projects with
the stated management project goal to increase visibility into the projects within the portfolio.
Here is how to calculate the ROI in this example.
Estimated project costs are $3,000,000 including process design, build and rollout. The project
portfolio contains $10,000,000,000 in projects. After discussions with the Project Sponsor and the
Project Manager, the tangible goal agreed to was to be able to align the portfolio to the corporate
goal of a 5% annual return on assets. The initial portfolio was estimated to be returning a 4.8%
return. So, the goal of the project was to increase the return on the project portfolio by .2% (5.0%
- 4.8%) or $20,000,000. (The increase would be the result of management having visibility into the
portfolio to improve the return by optimizing the projects within the portfolio). The ROI calculation
is $20,000,000 ($10,000,000,000 * .002) less the estimated project costs of $3,000,000. The result
of $17,000,000 is then divided by the project cost of $3,000,000 for a factor of 5.67, which when
multiplied by 100 is 567%. Not a bad ROI for a project that was kicked off with no ROI calculation
and funded based on managements frustration that they could not see the status of the work within
a project portfolio.
Calculating Return on Investment for Business Process Management t 6
Conclusion
BPM combines people, process and technology to improve organizational performance and
customer value.
The basic challenge is not the calculation itself, rather quantifying the ROI. This is especially
challenging for BPM projects, where the goals and objectives of the project may be expressed in
non-tangible terms. The goal however, is to determine two ROIs for each project, a targeted ROI
calculated during the planning phase of the project and an actual ROI, calculated after the solution
has been implemented. The analysis of the variance between the two ROIs is beneficial in
analyzing the projects successes and opportunities for improvement.
Perficients BPM Solutions and Services
BPM combines people, process and technology to improve organizational performance and
customer value
Strategy & Roadmap - Develop a prioritized roadmap of BPM projects
Assessment - Understand and quantify the potential of a BPM program
Implementation - Realize the benefits of the BPM program
Training - Identify and implement process efficiencies across the organization
Why Perficient?
Experience delivering a variety of successful BPM projects
Proven systemic BPM delivery approach to understand and define business processes based
on best practices
Expert facilitated session(s) to generate a solution with demonstrable return on investment
Leverage Perficients technical expertise to solve the technology requirements of a business
process
Utilize Perficients business partners BPM tool suites
For information on Perficients leading BPM solutions and services please contact BPM@Perficient.com