Cost-Benefit Analysis

A common complaint is that BI projects are hard to cost-justify. That can be true if there is no obvious business problem to solve. One of the most difficult aspects in building a business case for a BI application is to show an adequate ROI. Despite the difficulty, you must demonstrate how, by analyzing and mining the information in the BI decision-support environment, the organization can more effectively maneuver and adapt to an increasingly changing marketplace .

Benefits are usually harder to quantify than costs, and it will take many high-valued benefits to offset the costs. A very effective method for justifying the expenditure of a BI application is to tie it directly to a business problem of measurable proportion. For example, let us assume an organization is losing $5 million each year because it cannot curb insurance fraud due to insufficient and unreliable data about its underwriting practices. If the proposed BI application can resolve that specific business problem, it will be relatively easy to justify. Therefore, be as detailed as possible when identifying the benefits, even if it is difficult to quantify a precise ROI. This way you can gain the confidence of business executives and win approval for the BI project.

Note that not all business problems need a BI solution. For example, the types of problems that do not require a BI application because they can be solved in more economical and less complicated ways are:

• Provide easier online access to a flat file

• Archive operational data

• Merge two operational files for operational processing

• Separate the operational reporting function from the operational update function

Sometimes all you need to do to solve an operational problem is to buy a better reporting tool or move the data into a relational database; neither should be interpreted as a need for a BI solution. However, if the business problem hinges on an inability to analyze integrated cross-functional data or to extract from the operational systems hidden intelligence needed to make strategic business decisions, then a BI decision-support initiative is probably the right solution.

The results of the cost-benefit analysis should succinctly state how the BI application would solve a business problem or enable a business opportunity. It should also state what type of information will be available, how that information can be used to make better business decisions, and when and how the information will be presented to the business community (e.g., monthly reports , ad hoc access through online analytical processing [OLAP] tools). Once you have clearly stated the business need and outlined the benefits, the next step is to estimate and compare the detailed costs and benefits so you can produce the projected ROI, which provides the justification for the BI project.

All BI decision-support initiatives should fulfill at least one of the five benefit categories listed below (Figure 1.3).

1. Revenue increase, possibly in the form of:

   • Identification of new markets and niches

   • More effective suggestive selling

   • Faster opportunity recognition

   • Faster time to market

2. Profit increase, including possibilities for:

   • Better targeted promotional mailings

   • Early warning of declining markets

   • Identification of under-performing product lines or products

   • Identification of internal inefficiencies

   • More efficient merchandise management

3. Customer satisfaction improvement through:

   • Improved understanding of customer preferences

   • Improved customer-to-product matching

   • Up-selling to customers

   • Increased repeat business

   • Faster resolution of customer complaints

4. Savings increase through:

   • Reduction in wasted or out-of-date merchandise

   • Reduction in requests for customized reporting

5. Market share gain through:

   • Increased numbers of customers who defect from the competition

   • Much higher customer retention rate as compared with previous years and with the competition

Figure 1.3. Benefit Categories

In addition to determining ROI, a business case assessment must include an appraisal of risk. Any project is bound to involve some risks and, given the high costs of BI projects, performing a risk assessment is a high priority.