Definition of ROI

We all know the great impact the Internet has had on our work and personal lives. E-mail, Instant Messaging, and web surfing are now entrenched daily activities of millions of people. Increasingly, many workers are looking to their intranets to create order in a world of increasing information and interaction.

Web professionals are presented with a vast selection of functionalities for their intranet. This could range from simple document management, to sophisticated CRM (Customer Relationship Management) administration. Unfortunately we can't have everything and choices have to be made. The question becomes, how do we measure the value of the individual functionalities and make those choices? The answer is simple: Return on Investment.

Intranet ROI is an estimate of organization's total costs to build, maintain, and develop an intranet, and the organization's subsequent benefits. There are two main components to ROI: the costs and the benefits.

"There are two main components to ROI: the costs and the benefits."

As a simple example, if you spend $120,000 to build an intranet and it generated $240,000 in cost-savings in one year - the ROI is $120,000.

$240,000	(Total savings)
-$120.000	(Total costs)
$120,000	Total ROI

The calculation is simple. But the real work is determining the figures that are entered into the formula.

What's the Value of Intranet ROI?

At this point you may be thinking: "I'm a web professional - not an accountant. I shouldn't have to do this ROI stuff!" Wrong. ROI has some very clear benefits for web professionals:

• Good ROI will sell your intranet project to managers.

• ROI aligns intranet with business strategy

• ROI improves decision-making

• ROI improves execution

Good ROI Will Sell Your Intranet Project to Managers.

I am sure you've all had those meetings where you're explaining your intranet and all its great new functionalities you've planned. At some point you start to notice the 'glazed' looks from your managers. It all becomes too technical and everyone, apart from you, was lost somewhere between Cascading Style Sheets and the SQL server.

The meeting would start much better if you said "We've found a way to save 8% of our annual printing costs - which is a total saving of $34,000". This should keep the attention of most managers. If you can show your project will save money, then you will have a much easier job selling the idea.

ROI Aligns Intranet with Business Strategy

A good intranet ROI will require that you understand the company's goals, and also allows for some measurement of success or failure based on a goal. During the ROI process members of management and different business units will participate and provide valuable insight into the goals of the business and how it plans to get there. At this point the opportunities for the intranet will start to become apparent. Therefore, it becomes logical to pursue functionalities that fit within the company's goals, rather than pursue the building of your own intranet kingdom.

Having the intranet aligned to broader objectives makes good sense. This alignment boosts the chance the intranet will be approved, and its development supported, as well as increasing the chances of its subsequent success.

ROI Improves Decision-Making

Understanding the economics of your intranet gives you great clarity when it's crunch time. In fact, it can remove a great deal of tension that appears during decision-making times. How? When you have a fair measurement system the final numbers become indisputable. If you're forced to choose between two valuable functionalities in an intranet - just consult the ROI and choose the most effective functionality.

ROI Improves Execution

We all enjoy the visualization of our intranet after a tedious planning stage. However, it often seems our visual designs start to swim in a sea of buttons and icons. But when we understand the financial impact of functionality we can avoid critical areas of the intranet being neglected or plainly being left out.

Furthermore, intranet ROI requires an understanding of the typical worker's needs and daily tasks. As you guide your intranet project you ensure the user-interface will encourage and facilitate the execution of the tasks that bring the greatest ROI.

The Current Climate of ROI

ROI and technology is a hot topic in many companies right now. According to a study conducted by Forrester Research in 2002, ROI is the leading factor in prioritizing new IT projects. There are six areas that we need to consider in the current climate:

• Show me the money

• We need results today

• Who actually manages our intranet?

• I forgot about that cost

• We'll save millions

• Where's the ROI calculator?

Let's explore these trends and determine how we might respond to them in the context of an intranet project.

Show Me the Money

The measuring of the financial impact of an intranet is not such a bad thing for web professionals. Even if we don't enjoy spreadsheets and formulas, the result of a solid intranet ROI can provide insight for the development process. For example, during the planning process of the intranet you may be forced to make the choice between two different functionalities for the next release. Choosing between an employee directory and an expenses submission tool is not easy. Both are valuable for the employees and the organization - the intranet directory will have up-to-date contact information and the expense tool will make life easy for the accounts department. But looking at the ROI for both options can make the choice more obvious.

If an intranet employee directory can reduce the printing of the 'hard copy' directory from six times a year down to one and access to up-to-date contact information represents a significant productivity improvement, the cost-saving on the printing could be measured at $75,000 and the time saved by employees can total an extra $50,000. But the expenses tool, despite being valuable, only represents a $12,000 saving on the current cost of handling employee expenses. The choice is easy.

"Even if we don't enjoy spreadsheets and formulas, the result of a solid intranet ROI can provide insight for the development process."

In turn, the ROI will allow a project manager to brief technical and design teams far more effectively. It can be made clear to a developer that the update function is critical to the employee directory. We know this already because in the ROI analysis we saw access to recent and updated information represented a cost-saving of $50,000. Furthermore, when the designer creates a mock-up of the employee directory page it must clearly and easily allow the updating of contact information. This avoids the button or icon being hidden within the page and therefore not used by the employees.

We Need Results Today

Organizations are often looking more to the short term than they ever did during the nineties. Many companies are evaluating their activities based on what results it will produce in the next six to twelve months. And the only measurement is cash. If an intranet is not forecast to produce real cost-savings and productivity enhancements within 12 months, chances are it won't happen.

The 'quick-win' mentality of some companies can be a challenge to many intranet developers. Decision-makers are often reluctant to look beyond the next 12 months, and this can affect their attitudes towards intranets.

In response we must present intranets not only from an ROI perspective, but in a quick-win format as well. However, consider the long-term implications and risks of this approach. Without long-term planning your intranet runs the risk of being the sum of random quick-wins with no long-term cohesion. Issues such as scalability, flexibility, and integration are often the victims of short term planning.

Examples of intranet quick-wins:

• Employee Directory

• Expenses Declaration Forms

• Daily Lunch Menu

• Product and Service Information

• Company Document Templates (such as Fax, Proposals, Memo's, Project Management, etc)

If you're focusing on quick-wins also ask the following long-term ROI questions:

• What is the company's long-term strategy? How will this effect its technology needs?

• What is our vision for the intranet in 3–5 years? What will it look like and how will it function?

• What will our intranet needs be in terms of scalability, flexibility, and integration? What databases will talk to each other? Where do ERP (Enterprise Resource Planning) and CRM (Customer Relationship Management) meet?

Who Actually Manages Our Intranet?

Many intranets started as a side project for IT departments. As the intranet becomes more important, the responsibility of managing intranets has spread across several different areas of an organization such as Marketing, Human Resources, and Administration. Just who exactly is responsible for the ROI is often not clear.

Regardless of where the responsibility for your intranet sits, key representatives of the different parts of your company must play a role in determining the ROI of your next intranet project. As a web professional your insight into the company and its issues can be greatly increased by forecasting ROI for your colleagues. In their day-to-day activities your colleagues will see many different activities that can be improved with functionalities on the intranet.

At this point you need to make use of a business steering group and user steering group. Created for the intranet project, they bring together those with a stake in the intranet's design. The Business group should consist of a senior member of HR, Operations, Management, and Finance. This group is charged with establishing the main business goals and strategy - their participation creates a natural link between the intranet and business. The User group should consist of everyday users of the intranet. These people should represent the main categories of users within the organization (somebody from the accounts department, a sales person, and a receptionist). This group is charged with ensuring the intranet functionalities are relevant, easy to use, and effective.

Let's say your company has the goal of cutting costs by 10% over the next two years. The business steering group will be able to provide insight into the key areas of the business relevant to cost cutting. The areas may be purchasing, personnel, and time to market. Your chief financial officer may indicate to you that purchasing is a high-cost and inefficient process.

You can have a workshop with your user steering group the best improvements to make within purchasing tasks and process. You may determine that different business units buy their stationery separately. However, if they could combine their purchasing power they could negotiate a 12% discount with the supplier. In turn, your intranet could be a central interface of all purchasing with an application that facilitated group purchasing. When it's time to justify your intranet all you need to do is show the cost-saving on purchasing.

I Forgot About that Cost

Intranet costs are always a sum of more than the immediate cost of the server license and the billable hours of a developer. The success of an intranet is dependent on everyday workers using the intranet. These users need to be trained and supported. Also there are several operational activities that need to be covered and they all cost. In fact, personnel are usually the largest single cost of an intranet over time. Companies cannot afford to miss any of these costs; otherwise the intranet's chance of success becomes far lower. Web professionals often only attribute the direct infrastructure cost, yet it is sometimes the lowest of all costs. Many managers do not calculate the full costs of creating and managing content and the people required to do so. We'll discuss costs further in the ROI breakdown later in the chapter.

The following research provides some insight into the real costs of an intranet: http://www.darwinmag.com/read/110101/intranet_cost_content.html.

We'll Save Millions

Did you forecast a 40% percent decrease in costs? Have you benchmarked this against other intranet case studies? Has your company ever made a cost-saving of similar proportions over the same period of time? It's better to always be on the safe side - don't set expectations too high. Clear and grounded assumptions on costs and returns need to be examined and approved before the champagne is opened. You can find a paper I wrote on specific cases of ROI at http://evolt.org/article/Optimising_Return_On_Investment_with_Intranets/25/35700. I also recommend http://www.cio.com/research/intranet/ and http://www.intranetjournal.com/.

In the previous paragraph we considered the real costs of an intranet. The logical next step in the process is to consider the real returns. However, when people discover the potential for some significant returns, they all too often jump the gun and tell the world without undergoing the proper checks and balances.

Let's set some general rules regarding over promising intranet ROI. Remember these are guidelines and you may find your company requires a special approach.

• Always take a hard line in your cost estimates. If your cost could be between $5,000 and $10,000 enter it as the higher.

• Always take a soft line with returns. For example if you think you could save $5 on the cost of handling a holiday request form, enter the saving at $4.50 or have a low and high ROI column.

• Any improvement over 50% is very high. Go back and triple-check all the numbers. Make sure you have significant evidence to support your forecast.

In very general terms (and these will differ from organization to organization):

• Any improvement over 25% is high.

• Any improvement between 10–25% sounds reasonable

• Any improvement between 0–10% is modest.

An important thing to remember is that the higher the forecast improvements, the more evidence you will need to prove them.

Where's the ROI Calculator?

Unfortunately there is no magic calculator where you can enter some data and out 'pops' a magic ROI number for your intranet. Every organization has its own unique problems, costs, and solutions. The challenge in creating an intranet ROI calculator is the very nature of intranets - internal. It's all done behind closed doors and companies are reluctant to share standards, performance benchmarks, and results. Furthermore, every company is different and finds its technology needs are unique in a particular way. But there are some things we can do to make our life easier:

• Setting benchmarks for intranet usage is very important. We want to know how regularly users visit the site, for how long, and what they do. Based on a detailed understanding of the user we can begin to see opportunities for improvement. Any further additions to the intranet can have a sound ROI based on past experiences. So make sure you use, and keep, your site stats.

• Work closely with your financial and operational people. These peers will give you insight into the business issues and by becoming familiar with those you'll start to gather insight into the relationship between business and intranet technology. Over time your thinking towards ROI will become more holistic and more insightful towards metrics and formulas.

"Every organization has its own unique problems, costs, and solutions."

The Different Types of ROI

Let's look at what we've covered up to this point before we jump into the types of ROI. We have a working definition of ROI and we've established its relevance to web professionals and their intranet projects. Remember, intranet ROI is an estimate of an organization's total costs to build, maintain, and develop an intranet, and the organization's subsequent benefits. There are two main components: the costs and the benefits.

So now you're dying to put ROI to work on your next intranet project. There are many different forms of ROI, however there are three popular types of ROI you may hear of within IT:

• The Cost Benefit Approach - This is a traditional method based on financial paradigms such as costs and returns. Types include Economic Value Added, Total Cost of Ownership, Total Economic Impact, and Rapid Economic Justification.

• The Vendor Selection Approach - Largely used as a risk-management tool helping managers choose between vendors and technology. Types include Balanced Scorecard, Information Economics, Portfolio Management, and IT Scorecard.

• The Risk Management Approach - A measure of probability that suits very large IT projects. Types include Real Options Valuation, Applied Information Economics.

The method you apply depends on what question you're looking to answer. For our intranet ROI we will be looking to measure the real benefits for the company. Risk and vendor selection will not be directly addressed in the following material. The model we will apply is the Cost Benefit Approach. I have selected this model as it keeps things simple and is easy for first-time users to implement and use. Before we look at implementing ROI let's be aware of some the problems organizations regularly have with the process.

I cannot stress enough how important simplicity is when approaching ROI. Complexity usually increases as you go through the process and touch on forecasting returns. The attributing of value to enhanced productivity can be complex as it's an estimate of future behavior not a measure of past behavior. Later in our intranet process I'll provide a framework for conducting ROI and we'll focus on keeping it simple and avoiding mistakes.

Rapid Economic Justification As an Advanced Model for Intranet ROI

REJ is very powerful because it incorporates an extensive approach to total costs and also seeks to align IT and business goals. The process begins with a quick scan of the organization and looks to uncover who the stakeholders are and their true expectations. Furthermore, it works on a roadmap basis to get the project to completion. This makes the model a great intermediary for business and IT executives.

Later in this chapter I will provide a basic framework for ROI that will get you started and avoid the common pitfalls. You may wish to develop your approach and I suggest you take some time to understand REJ to help you develop ROI forecasting.

The model was originally created by Microsoft as a way of understanding the value of technology projects. For more information about Rapid Economic Justification you can visit the Microsoft site or download this white paper:

http://www.microsoft.com/business/whitepapers/value/valuerejwp.asp

http://www.microsoft.com/business/downloads/value/rejwhitepaper.doc

A great discussion of the REJ model can be found at http://knowledge.wharton.upenn.edu/microsoft/070302.html.

You may find REJ too much information. However, REJ provides a proven way to develop a company's approach towards business and technology and can go beyond the intranet.

Avoiding Problems with Intranet ROI

Although the basic principle is straightforward, the devil is in the details. So here are some rules to keep you out of trouble.

Business Impact, Not Cost Allocation

By calculating intranet ROI we're aiming to uncover an intranet's most powerful and profitable functionalities. We must uncover its true cost in order to determine ROI - but our job does not stop there. Equally, we must establish the improvement in company performance due to the intranet.

Remember the critical process in intranet ROI is the alignment of business and the intranet. You must be confident of determining the high-impact functionalities of an intranet. These functionalities must deliver benefits to the company in either a qualitative or financial way.

Poor Numbers in, Poor Numbers Out

If your basic numbers are incorrect or calculated on wildly optimistic formulas then your intranet project is doomed. In these circumstances history suggests everyone from management to sales will be expecting intranet utopia: an unrealistic utopia of cost reduction and productivity increases, none of which are actually forthcoming. It is important that you manage expectations, and don't give a false impression of how the intranet will benefit people. The fact is you must establish realistic numbers related to costs and forecasts in order to create a solid ROI.

"It is important that you manage expectations, and don't give a false impression of how the intranet will benefit people."

It's a Group Thing

One of the most powerful mechanisms in creating intranet ROI is group participation. No single individual can determine intranet ROI by them self. Often the result of a one-man ROI is a rather narrow and unrealistic document. A simple solution is to use the two groups we mentioned earlier, the business steering group and the user steering group. As a result of group involvement, the final intranet ROI has its foundation within the context of the overall business strategy and is connected to the daily lives of the employees.

Of course it may not be within the remit of the intranet developer to create groups like these. However, there may well be a business steering group or similar. If there is, then it is useful to get hold of the reports and documents that arise from their meetings, and make sure that these form a significant part of your decision-making process.

The Time Problem

Finally, as with all projects, time is bound to be an issue. You may not have the time you would like to put together an extensive ROI. One of the things you need to be successful in is research and background information, but it takes time to acquire and consolidate such information. Take care that pressure to get the re-design started and completed quickly doesn't lead to mistakes and oversights.

The ROI Process and Data

The process you're about to read is a framework for delivering a cost-benefit ROI broken down into steps. In many cases a web professional or project manager may be working with someone from management or IT that is conducting an ROI plan. For that reason, the example focuses on true costs and how to determine realistic benefits.

Step 1: Quick-Scan

The first stage is to create a very clear set of business goals and intranet functionalities that will help achieve them.

Create Background Document

• Project History (Activities, People, Status) - For example: Have we done an intranet before? Was it a success? Why? Who managed the project? What's their advice for this project? What does the current intranet look like? How is it performing?

• Parties Involved (Internal, Vendors, Clients) - Who is involved in this project and what are their roles and responsibilities?

• Motivations (Hard and Soft) - Hard motivations: more sales, less costs, etc. Soft motivations: happy staff, better knowledge-sharing, better culture.

• Expectations - What is going to be delivered? How will it be managed? How will it be communicated to the staff?

• Current Intranet Overview (include costs, benefits, and functionalities).

Project Plan

• Aims - A summary should be made of the Motivations and Expectations, with quantified statements.

• Deliverables - A shopping list of what will be created. Should include infrastructure, people, process, plans, and documents.

• Communication - List of all parties that will be communicated to. Then define objectives of communication: What will be communicated? What media will be communicated? How frequently will it be communicated? Who will communicate the information?

• Roles and Responsibilities (Who, What, When).

• Critical Path (A timeline of the project listed by deliverable).

• Budget (initial & ongoing).

Business Steering Group Meeting

Define business and intranet goals (including quick-wins). The meeting of this group must include senior managers from different parts of the company (technology, information, and finance directors, for example). The remaining members should be chosen according the goals of the intranet ROI. The main output of the meeting should be a mutually agreed chart like the one below. This outlines which functionalities have the greatest overall value.

The diagram above demonstrates the business value of different functionalities within an intranet. For example an employee contact directory is usually easy to implement and has a large impact of ROI. However, an expense tool may have similar impact but is harder to implement. Therefore it moves towards the left of bottom axis.

User Steering Group

Define intranet functionalities. Working from the business goals and quick-wins determined by the Business Steering Group, the User Group would translate those into realistic functionalities. All functionalities should clearly connect to a business goal.

Step 2: Assumptions

The assumption step will establish how we arrive at the numbers that we enter into our formula. Make sure your CFO (Chief Financial Officer) is highly involved in this process. Your CFO will have a lot of input in this stage so I will cover some fundamentals of intranet ROI and you should add specific items related to the way your company works. Here's a list of assumptions that should be covered:

• Define cost allocation between departments and corporation. - In larger-sized organizations this can be a huge issue. Make sure you're clear if a business unit or head office pays a cost. For example, a server could be covered by head office but a special software package for an individual business unit is likely to be charged to the business unit.

• Define interest charges and depreciation. - Publicly traded companies especially will have policies on how these charges are handled. For example the cost of a server and its depreciated value may be spread over three years by the finance department. Your ROI should do likewise.

• Define calculation of employee time usage. - Later in the process you will estimate time-savings and their worth. Here we need to be clear on how we measured current time usage. I suggest using a logbook with a small sample group over a one or two week period. That way you can safely outline the average tasks and time allocations of an employee (as with all user questioning, avoid influencing the results).

Step 3: Costs

The next step is to work out the costs. Make sure you consider all of the items below when calculating the true costs of your project:

Infrastructure:

• Servers - You should include operating system, web server software, and security.

• Routers - Make sure you have enough routing capacity for the 'forecast' traffic.

• Load balancing - Ensure you network administrator has the required load balance capacity across servers at peak times (usually the morning on an intranet).

• Databases - You have both proprietary and open source solutions in this space. Make sure you cover licenses and support.

• Storage - Especially for backup purposes, make sure you can handle the extra data created.

• Bandwidth - Forecast bandwidth when you link externally and provide video content.

Central Staff:

• Consultants - Usually external people for strategy and tactics.

• Project managers - These can be internal and external.

• Management team - Ensure you allocate staff time costs as determined by HR policy.

• Designers - These can be internal and external.

• Developers - These can be internal and external.

• System administrators - These can be internal and external.

Content / Service Production and Maintenance:

• Editor and Content Management System operator - Who will enter content, publish material, and plan content needs.

• HTML tools - Do you need Dreamweaver or Frontpage? Or do you have a custom-made CMS?

• Multimedia Tools - Tools such as Real Producer and Final Cut Pro.

• Application tools - Tools that build your application environment such as JRUN, Delphi, etc.

Users' Wasted Time:

Name conventions - How much will it cost if the name of buttons and sections do not relate to the users?

User interface - How much will it cost if the layout of the intranet does not improve activities?

Search Engine - The more data on an intranet, the more people will use Search. How much will it cost if users cannot find information quickly and easily?

Other Items

Training - This includes manuals and live sessions.

Promotion - What means will be used to promote the intranet, such as Posters, Newsletters, Parties, etc.

Support - How will users be serviced when they have a problem with the intranet?

Log analyzer software - Software used to understand user behavior on a site.

Step 4: Benefits

There are two main categories of benefits - tangible and non-tangible. Tangible benefits consist of cost-savings and productivity increases. The non-tangibles include staff morale, openness, flexibility, etc. For some organizations the non-tangibles will be more important than others.

Example of Costs Reduced - Employee Directory Annual Intranet ROI

Using an no-hard-copy delivery, printable version available for download:

$213,000	(Total cost-saving - Printed 6 times per year + shipping)
- $ 34,000	(Cost of development and maintenance)
$179,000	Total ROI per year.
520%	ROI within one year

Please note: Employee Directory via the intranet is always a great return. Don't expect this ROI on every function within an intranet.

Example of Productivity Increases - Intranet Sales Kit

Many sales executives complain about not having enough information to do their job. An intranet can be very effective in delivering information directly to the sales executive. Furthermore, access to templates and materials for sales can improve the time spent on a proposal and its effectiveness. For example:

• 57% of sales persons' activities are directly related to sales

• 43% of their time on is spent on no sales activities (see log books for more information)

• By providing rapid delivery of sales information, access to order status and sales templates via our intranet we can save 10% of their time.

• Assuming this extra time is spent on sales

$17,520.00	Weekly revenue per sales person from 57% of their time
$ 3,073.69 +	10% increase in time allocated to sales-related activities
$20,593.69	Total revenue per sales person
$ 3,073.69	Revenue increase per sales person
200 x Number of sales persons
$614,738.00	Total increase in sales
$614,738.00	(Total increased revenue)
$140,300.00	(Cost of development and maintenance)
$474,438.00	Total ROI within one year 338% ROI within one year

These examples provide you with the format for estimating tangible benefits. However, never forget to list the intangibles as well. Here's a list of benefits that may be relevant to your intranet projects:

• Becoming a knowledge and innovation company - Sharing knowledge between employees has two major benefits. The first, employees learn from each other and avoid duplicating mistakes, thus making activities cost less. The second benefit of knowledge-sharing is innovation. Knowledge-sharing can stimulate employees and help them see opportunities both inside and out.

• Better quality information for decision-making - Some companies are starting to create digital dashboards on their intranets. GE and Cisco already have the ability to get daily data regarding many aspects of the company performance via their digital dashboards. The benefit is that the business information is centralized in the intranet. Executives can then access and update information on a daily basis. As a result they can immediately identify changes in their customer behavior and respond accordingly.

• More content and empowered staff - Many employee activities can be supported. Activities such as transfers, stock options management, pension, leave and holiday, payroll, overtime, discussions, and feedback can all be supported online. At Cisco, they reduced staff turnover by 50% after the launch of the employee self-services intranet. This not only supports the notion that staff were happier but also has bottom-line benefits given the cost of hiring and training people.

• Breaking down barriers to information - Many companies struggle to share information among departments. This is a culture and structure issue foremost. But intranets can be the underlying infrastructure that facilitates the sharing process. Employees can begin to discover what exists beyond their office.

Finally, before you run through the cafeteria shouting, "The intranet will solve all our problems!" you and your peers should ask yourselves these questions:

• "Am I confident that I am aware of all the possible costs?"

• "Are the benefits and improvements really achievable?"

• "Would I sign this document and present it to the CEO?"