Information technology projects need to pay for themselves in productivity.
Information technology projects need to go beyond keeping firms at the leading edge. They need to pay for themselves in terms of productivity.
Information technology projects are often expensive in terms of the direct finance costs of software, infrastructure, and consulting, not to mention the indirect costs of involving an organization’s key personnel and the effort it takes to institute the change management needed to make these projects successful. It is fair and necessary to ask Was it worth it?
The classic and most obvious way to answer this question is simply to measure the gains produced by the new system compared to the costs of implementing it. The most common formula for this assessment is Gains = Earnings / Cost.
In this ratio, earnings equals the difference between the cost of doing things the old way and the cost of doing things the new way provided by the implemented IT solution. Although there is always some difficulty in capturing the true cost of an IT implementation, the real hurdle is reflecting the real and tangible benefit because there are always intangible gains that manifest themselves in very material ways.
For cost savings projects, the classic approach works well enough to give a worthy answer to Was it worth it? But the design and design-build industry has struggled with measuring the benefit for potential revenue-generating investments such as with building information modeling.
In this case, most design firms try to indicate value in a derivative way, such as by improved profitability brought about by better billing cycles, project quality, increased revenue, and even through heightened client satisfaction achieved by better communication during the earlier and more creative phases of a design project.
Frankly, whatever the cost benefits are in implementing new technology for efficiency gains, businesses really want to see their overall financial indicators improve after the introduction of these solutions. Moreover, even though solution vendors and system integrators can share many experiences about how design firms have an intuitive sense that things are better after a new technology solution is put in place, the measurability of that feeling is very often hard to pin down.
Design and design-build firms can make more concrete determinations of value by using tools to set the proper expectations around what the business benefit should be for investing in information technology solutions and applications. The point is this: When key business metrics improve in relation to a technology investment, given the many business process and behavior changes that accompany the implementation, value is returned to the organization on that investment.
To that end, let’s use the example of a business intelligence application implementation focused on delivering performance management information to the management team of a design and design-build firm as a hypothetical scenario for a practical and meaningful assessment of return on investment.
A design and design-build firm invests in a business intelligence application to deliver performance dashboards and scorecards to its project and resource management teams. The content provided in the application reflects the operational and strategic objectives of the firm (Figure 1):
• Maximize cash on hand to ensure the firm receives the most dollar value from the work it has expended on behalf of its clients by minimizing the amount of time between work done and payment received for that work.
• Minimize project loss, which is a reflection of the realization that many firms unintentionally give work away by not tracking closely the value of the work that has been expended on a project task in relationship to that task’s contribution to the overall project’s fee. This objective simply states that the worth of a task is not just that it delivers on a contract commitment but that it does so in a way that is of financial benefit to the firm.
• Optimize resource investments to ensure two things: Projects are staffed in a way that achieves the maximum return to the firm on its labor investment and professional staff are consistently engaged in billable activity as opposed to activities that do not provide a financial return to the firm.
It is important to note that these are not the only success-indicative objectives of a firm. For example, many design organizations rightly deploy some of their most talented and expensive resources on projects that will certainly have an inverse impact on project margins. However, it is equally important to know when that level of expertise is not returning the value to the firm that it should. And is of great importance to know when resources are being used to do tasks that are more financially suitable to be done by more junior or less creative members of the team.Let’s explore this scenario further.
Maximize cash on hand. Envision a hypothetical design and design-build firm in which the current cash cycle is 120 days. Often referred to as days sales outstanding (or DSO), cash cycle days is the sum of accounts receivable days and work-in-process days, where AR days speaks to the number of days of revenue that are reflected in current AR balances and WIP days reflects the number of days of revenue that are reflected in the current WIP balances.
This firm has targeted a cash cycle of 90 days, desiring, at least initially, to recover a month’s worth of cash value from its billing and collections cycle. This is a worthy goal, and it is important for us to appreciate the value of this measure as it pertains to the objective. Here are some key facts:
• One of the firm’s organizations has project charges in one month that total $500,000. Based on the firm’s current cash cycle of 120 days, those charges will become cash in four months.
• If the firm achieves its objective of reducing its cash cycle to 90 days, all of those charges become cash a month sooner. This will result in, at the very least, a full month’s interest benefit of having that cash on hand. Assuming a 3 percent interest on $500,000, that works out to be $15,000 in interest income (for simply reducing the cash cycle from 120 to 90 days). If the organization continues to improve and eventually sets its sights on a 60-day cash cycle, then the interest income is compounded, totaling $30,450!
Clearly, this example is simplistic in the sense that other items can and will affect the actual income received from interest, such as whether payments come in throughout the 90-day period or mainly toward the end, but the benefit of earlier payment is obvious.
There are several factors that affect billing and collections performance that are outside the project leader’s ability to impact. Some of these are company policy decisions, such as how often project charges are posted and subsequently billed to clients, the billing and payment terms of contracts, and the like. If projects reflect schedule or milestone-based billing, then there will be an inevitable amount of work queued in the billing process. In this case, the only way to improve billing speed is to negotiate terms that allow for a more rapid conversion of work to cash.
Other billing and collections performance factors are within the project leader’s ability to impact and these can be addressed by making project leaders aware of billing and collections problems on their projects or of project risks that might impact the clients’ willingness to pay. In these cases, the business intelligence application previously mentioned would do wonders in automatically alerting the project leader to potential problems that would affect performance.
The new business intelligence application’s ability to identify projects that are approaching their AR and WIP billing targets will prompt a response from project leaders to address these items before they begin to threaten the firm’s ability to meet its targets for the billing and collections cycle. If the project leader responds to these kinds of alerts in a timely manner and deals with project conditions to avoid billing and collections problems, the performance management application’s metrics will reflect this to all application users by showing a trend of decreasing monthly cash cycle values across a project leader’s project portfolio.
Minimize project loss. There are two things that plague a project’s profitability: One is simply working beyond the fee amount set for a project, which is tantamount to giving work away, the other is project revenue write-offs, which is perhaps the bane of financial project management. There is nothing worse than doing work that is deemed valuable by the project team that is subsequently challenged by clients and can result in the financial value of that work being lost. Our hypothetical firm wants to avoid these items with a vengeance.
The newly implemented business intelligence application provides project leaders with an alert to inform them of projects that are already running at a loss or that are projected to end in a loss because of unfavorable performance on a phase or task within the bowels of the project.
This alert makes the project leader aware of projects that are at financial risk relative to the budgetary terms of the project. The assumption here is that a project leader will be in a position to respond to these problems early enough to approach the client about the reasons for this situation and perhaps negotiate an amendment to the project’s scope to accommodate what may become a budgetary overrun. Or the project leader can begin to search for gains later in the project to offset losses in the early phases.
Through the benefit of these kinds of alerts, our hypothetical firm should begin to see two sets of measures improve over time: variances and variance ratios, and write-offs and write-off percentages.
These improvements simply reflect that more financial value is being retained in projects, which is critical since the firm’s costs for these projects don’t decrease when revenue escapes from them through variances or write-offs.
Optimize resource investments. As a financial metric, our hypothetical firm wants to be aware of two key items in relation to effective resource staffing:
• Staffing in a way that ensures the greatest return on labor investment. An ideal measure for this is net labor multiplier, which indicates all revenue earned, less expense costs, in relation to a firm’s labor investment: Net labor multiplier = (Gross revenue – Expense cost) / Labor cost
• Utilizing resources on billable engagements to the fullest capability. A good measure of this is chargeable utilization, which is often simply calculated: Chargeable utilization = Total chargeable hours / All staff hours
There are several ways a business intelligence application can alert resource managers to their organization’s performance in these areas. One is simply projecting project demand in relation to resource capacity so that the gaps can be seen and responded to accordingly. Another is looking back over historical performance of net labor multiplier and chargeable utilization to see if steps the firm has taken to improve them are working.
It is a common practice to factor net labor multiplier and chargeable utilization against each other to arrive at a measure often referred to as revenue factor so that firms can see if their chargeable utilization success is being met with wise staffing level decisions. We can all agree that it’s best not only to have everyone busy but to have them busy in a financially advantageous way. Graphs provided from a business intelligence application showing net multiplier, chargeable utilization, and revenue factor will illustrate to management whether performance is improving or worsening in this area.
If the metrics discussed above improve over time, then the value provided by the business intelligence application and the behavior that it prompts are indicators that the investment in the solution was well made.
Indeed, there are a number of intangible benefits that themselves should not be lost, such as the sense of empowerment that project leaders and resource managers feel at having access to timely and relevant information. But fundamentally, an organization should take objective measures to ensure that clear organizational value is delivered from these kinds of initiatives because the warm feelings of application users don’t usually warrant the cost involved in delivering those feelings.
The above scenario speaks to a model that can be used to assess the business impact of any technology solution since the introduction of such a solution should improve the overall financial health and performance of the business. Combined with the soft results of end-user satisfaction, tangible financial results provide hard evidence that the investment in the new solution was a wise decision producing a significant and measurable return on that investment.
James P. Cramer, Hon. AIA, Hon. IIDA, CAE, is founding editor of DesignIntelligence and co-chair of the Design Futures Council. He is chairman of the Greenway Group, a foresight management consultancy that helps organizations navigate change to add value.
Darryl Williamson heads the business intelligence practice of BST Global.