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F E A T U R E

It's the Information, Stupid

September 30, 2002
By Lori MacVittie

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Down to the Numbers

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	In this article
	Introduction
	Down to the Numbers
	The Whys and Hows
	Executive Summary
	Everybody's Doing It
	Epoll Results

By now we must have convinced you that business-intelligence tools can provide meaningful information on which to base business and IT decisions. But you're probably concerned about the cost (rightly so!) as well as what kind of ROI (return on investment) you can expect.

BI solutions are expensive--maybe not ERP expensive, but definitely as costly as an Oracle database. With IT budgets still tighter than Britney Spears' jeans, it's almost a sure bet that someone in your organization will need to justify the purchase with an ROI study. The good news for IT folks is that the businesspeople will most likely do that study. Generally speaking, the business analysts push the paper to acquire this type of tool. However, in the event that you need to deal with this hefty project, here's the skinny on how to perform it.

The short answer on how to calculate the ROI on business intelligence tools is that you can't. Even the vendors whose products we tested shrugged and admitted that calculating ROI on such tools is nearly impossible because of all the factors involved. "ROI is too nebulous," says Rob Novick, a vice president with The North Highland Co., who has been involved in the deployment of BI tools for years. The problem, he says, is that there are "no tangible dollars necessarily associated with these reports unless they can be pushed out to a customer."

But, in fact, there are a few tangible numbers that can be used to calculate ROI, such as the savings associated with avoiding churn, or the loss of an existing customer. Retention is less costly than acquiring new customers, so it behooves an organization to determine why customers are leaving and what can be done to prevent the loss, saving hard dollars on a regular basis. A BI solution can find the characteristics shared by customers that leave, and help you put a plan into place to either avoid those customers during acquisition or provide those customers with an incentive to stay.

Because you can characterize the customers who have left, you can also determine how many additional customers share those characteristics, and therefore, which might leave (see graphic "Avoiding Churn"). For every month that the customers in that "churn set" do not leave, the cost of acquiring a new customer (paperwork, sales, time to set up accounts and so on) can be applied to the ROI of your BI tools, assuming that the tools were used to identify the set in the first place.

Another potential candidate for an ROI calculation is increased revenue from a marketing campaign targeted at a specific set of customers identified. Any revenue received from that campaign can be tied to the BI solution.

Avoiding Churn

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Unfortunately, both of these hypothetical examples have problems. Perhaps the customer would have stayed anyway or purchased without the marketing campaign. For this reason, some experts suggest running a controlled set of experiments to determine whether business intelligence tools will effect a sufficient ROI. Fortunately, many vendors are prepared for such an audition: They bill customers on a per-user basis, so the customers can start small to determine if the product is helping the bottom line. By targeting a simple campaign at customers identified by the tools as "likely to purchase X" based on past purchasing history, the revenue can be more tightly tied back to the BI solution. It's critical to ensure that customers receive no additional marketing influences during the campaign's run. Even in this case, however, the cause and effect can't be completely associated.

You may have noticed that the ROI calculations we describe are based on having a BI solution in place. That's for a very good reason: It's nearly impossible to project the ROI of a BI solution before it has been used, which makes using ROI as a justification method almost as valid as "it ships in a pretty box."

However, there is another acceptable prepurchase method of determining whether to consider a BI solution. Calculate ROI as a measure of efficiency in information distribution. This is also the easiest of all ROI justifications to compute. Consider the example in the graphic "Automated Reporting".