Business Case
Most projects go through
a quick cost-benefit analysis to highlight this viability and draw on
a three-year payback. A minority go through a more detailed business case
to forecast a return on investment (ROI) and calculate the risk. Very few
look beyond the project post-implementation (the online operation). You
must give this thorough attention and consider the possibility of the solution
being unavailable. This is a problem because, with the Internet channel,
there are substantial "repercussive effects" that need to be carefully
considered and factored in. For example, customers tend to be less patient
and forgiving with the channel and may make a rapid switch to a competitor.
This has been excerpted from On-line, On-time, On-budget: Titanic Lessons for the e-business Executive.
This has been excerpted from On-line, On-time, On-budget: Titanic Lessons for the e-business Executive.
The following section provides some insights into how to calculate the real costs, specifically identifying the hidden costs at the project outset based on the risk factors. This means looking beyond the end of the project into the online operation, something that most projects fail to consider carefully.
How do you calculate the real costs of Internet projects?
Before you commit to an Internet project, you need to make a "go/no-go" decision on whether your "online operation" is viable--i.e., the proposed Internet solution has enough value to pay for and support itself and is not a "risk" to the business. Most projects go through a quick cost-benefit analysis to highlight this viability and draw on a three-year payback. A minority go through a more detailed business case to forecast a return on investment (ROI) and calculate the risk. Very few look beyond the project post-implementation (the online operation). You must give this thorough attention and consider the possibility of the solution being unavailable. This is a problem because, with the Internet channel, there are substantial "repercussive effects" that need to be carefully considered and factored in. For example, customers tend to be less patient and forgiving with the channel and may make a rapid switch to a competitor.
In many projects, there tends to be a very clear distinction between what was created in the project and what is running in production, an "us and them" syndrome. Yet the two are directly related. If you cut corners in the project or don't perform due diligence, this will have a repercussive effect that may not surface right away. In creating a business case for your project, you need to look into the future of the online operation for at least a year and calculate a profitability analysis. So to justify an online operation, the first step is to start with a simple formula:
Revenue > fixed costs + variable costs + solution investment
In putting operations online, on the Internet, you are faced with the challenge of providing a 24-hour, seven-day, year-round operation to your customers. However, it won't always be 100% available. What kind of impact is this going to have, and how much unavailability can your organization tolerate? To get an accurate picture of ROI for your project, you need to factor unavailability and its "real" cost into the above formula:
Revenue > fixed costs + variable costs + solution investment + total unavailability costs
But how do you measure total unavailability cost and make it meaningful? Every minute your online operation is unavailable has an impact on your customers and your organization. In that minute, you are not generating revenue or saving costs, and you can put a value against that minute.
To complete the calculation, you need to measure the number of times this happens for a period (e.g., a year) and the number of outage minutes assuming a 24-by-7 clock. A User Outage Minute (UOM) provides a meaningful measure and baseline to organizations. A UOM is based on the number of minutes one user is affected in an outage. So in the formula below, the UOMs are based on the total number of outages, the duration time of an outage, and the number of users impacted.
Total unavailability costs = Unavailability cost * UOMs
For each UOM, you need to calculate:
Unavailability cost = (average revenue per minute - absence effect value)
However, with online operations, revenue is not evenly generated. More revenue is generated in "peak periods." Knowing the revenue per minute for those peak period minutes is very significant because they are a lot more valuable. For example, with an online stock trading operation, the "end of day trading period" is the most valuable. The "absence effect value" is what it would cost your company if that minute of operation disappeared:
Absence effect value = (average revenue per peak minute + repercussion value)
The "repercussion value" is the ripple effect of the outage minute. For example, for "revenue-generating" online operations, this includes the impact of lost transactions, cost of adjustments and settlements, penalties paid for missing service-level guarantees, loss of customers and goodwill, loss of shareholder confidence, damage to image, brand-name erosion, lawsuits, and losses due to unfortunate timing, like a during peak sale period.
But not all online operations are the same. For example, a "cost-reducing" online operation includes the automation of paper handling, back-end functions, or workflow processes. These have a different set of impacts, such as lost employee productivity, adjustments and settlements, additional support and maintenance expenses, penalties paid for missing service-level guarantees, loss of confidence in service, and losses due to unfortunate timing, like month-end processing.
Working through an example better highlights how the revenue-generating formula works:
Assume for a given month a worst-case scenario in which 5,000 users experience 20 minutes of outage each, or 100,000 UOMs. Half (50%) of these occur in a normal period.
Total unavailability costs = Unavailability cost * UOMs
Or total unavailability costs = Unavailability cost * 50,000
For each UOM, assume the average revenue per minute, generated by one user, is $0.5 and the absence effect value is $0:
Unavailability cost = (average revenue per minute - absence effect value)
Or unavailability cost = ($0.5 - $0)
Therefore, total unavailability costs = $0.5 * 50,000 = $25,000
However, 50% of the UOMs fall in a peak period, or 50,000 UOMs.
Total unavailability costs = Unavailability cost * 50,000 UOMs
For each normal-period UOM, assume the average revenue per minute is still $0.5:
Unavailability cost = ($0.5 - absence effect value)
Absence effect value = (average revenue per peak minute + repercussion value)
But assume the average revenue per peak minute is $2 and repercussion value is $2.
Absence effect value = ($2+$2) = $4
Unavailability cost = ($0.5 - $4) = $3.5
and Total unavailability costs = $3.5 * 50,000 = $175,000
So in a single month for normal and peak periods:
Total unavailability costs = $175,000 + $25,000 = $200,000
Benchmarks exist for unavailability costs across industries; e.g., a financial institution solution is $1,000 per minute, or a Telco solution is $2,000 per minute. (Source: Standish Group Research, 1998.)
And over a year:
Total unavailability costs = $200,000 * 12 = $2.4 million
This overall number is a worst-case scenario that is then fed back into the business case.