During the past four years the Internet channel has seen the migration from an exploratory revolution of new functionality to creating a viable profitable business. It is no longer feasible to place additional technological enhancements on the web without considering the payback model in which returns and/or cost savings can be generated.
This young Internet economy has already seen too many examples of huge expenditures spiraling out of control resulting in the extinction of mismanaged companies. Costly infrastructures that become outdated in less than one year, and advertising/marketing expenditures that exceed revenues are just two examples of such fiascoes that have resulted in the death of many a dot-com.
- Return: Any measurable method for recovering the expenditures associated with developing the functionality on the web. Examples include subscription fees collected, additional accounts, and cost-savings resulting from migration from off-line to on-line channels.
- Return on Investment: Present value of returns divided by present value of cost over a maximum of a three-year period.
- Business Case: A written proposal for a new business or new direction in a previously established business. It includes a description of the initiative and the value proposition, a budget, a market analysis, marketing strategy, and projected profits and losses.
- Cost: The present value of internal and external expenses associated with the project development. This would include hardware and software expense and consulting fees. Additionally cost will include on-going production expense such as license fees, depreciation, marketing and production support charge-backs.
- Performance Measurements: Pre-determined goals that measure business processes and practices. They should provide timely, relevant and concise information to help assess progress toward goals.
- Tangible Benefits/Cost: Any return or expense that can be directly quantified through association with the Internet initiative. Examples include fee income from an Internet service or licensing expense of a specific application.
- Intangible Benefits/Cost: Any return or expense that can be implied/imputed from an Internet initiative. The intangible benefits/cost are not realizable, rather are used as a gauge to compare Internet activities with off-line channels. Examples include applying the cost per call for a service ($9 per call) to the Internet transaction (2,000 transactions) to receive an intangible benefit ($18,000).
I. Develop Business Case with Return on Investment
The purpose of this step is not instructional for creating a business case, but rather serves as a guide for consideration when producing the business case. In order to ensure that proper return on investment considerations have been made the following components should be included in your business case:
- Contingency Planning: This exercise determines when it is the point to withdraw from the initiative. Outline the minimum expected outcome that would make it useful to continue (i.e., minimum product sale, subscribers, etc.). Consider in this plan, any language in third-party deals that will allow you to legally exit the contract. Customer impact should always be a consideration in the contingency plan.
- Scenario Planning: Best, Most-Likely, and Worst Case scenarios are highlighted with best estimates of probability calculated. Those that evaluate the initiative will better understand any risk associated with it with a scenario plan. Always include any assumptions that have been made in order to help others understand your thought process.
- Measuring Benefits: Benefits are measured from at least three different perspectives.
- Increasing revenue: Acquisition of new customers through the Internet channel. This would also include any fee revenue to enhanced services.
- Cost Reduction: Online is typically a less expensive channel to manage than off-line. Therefore any migration of transactions from the off-line to online channel will have cost-savings results. An example would include online password changes that migrate the call center transaction to self-service via the Internet.
- Accelerate Gains: A more difficult measure of return, but one that is easily over-looked. Online offers the ability for recognition of revenue streams (i.e., fees collected) in a more timely manner than through traditional channels (mail).
- Accountability: Ultimately accountability resides with the product/business owner. There is a shared responsibility between the owner and the respective supporting functions. Assumptions are based on marketing and financial commitments. Without such commitments it is unlikely that the initiative will be successful.
II. Determination of Performance Measures
The second step in monitoring return on investment will occur during the planning phase of the Internet project life cycle. The determination of performance measures occurs when developing the business requirements. At this stage it is determined which are the true business drivers for measuring success. The first consideration is to establish the objective of the new function/enhancement. Examples are:
- Acquire new customers through product sales
- Retain existing customers by adding new enhancements to existing products
- Add service fees
- Migrate servicing call volume to the web
- Determine offline cost per transaction
- Determine transaction per FTE for the offline channels
- Compare the volume projections on the Internet to the offline channel, therefore resulting in cost savings through slower headcount growth/ postponing new hiring (if the Internet channel was not in place)
The second consideration is to develop the measurements that will monitor those objectives. Examples are:
- Number of new customers sold
- Decrease in attrition rate
- Service fee income
- Number of self-service transactions and number of calls for that service
Continue to monitor the impact from offline channels (i.e., has telephone volume decreased as a percentage of customers subsequent to the post-implementation of the Internet process). The next consideration is the frequency of reporting. Reports are traditionally reported to the financial department on a monthly basis. Product /business owners will likely want more timely reporting either on a weekly or even daily basis. Additionally, the level of detail for these individuals may be more granular (i.e., customer segmentation, regional breakdowns, etc.) than the monthly information that is provided to finance.
III. Tracking Cost
Tracking of cost occurs throughout the entire Internet project life cycle and is repeatedly monitored throughout post-production. Specific expenditures are usually monitored for projects while in development. Once in production, finance and the business owner should continually monitor the on-going expense.
IV. Tracking Performance
There are two methods for tracking the return of a specific Internet initiative. Return is measured either by examining actual revenue generation (i.e., product sales, fees collected, etc.) and cost-savings through tangible benefits. The second method is estimating indirect cost-savings through migration of off-line activities to the web through Intangible benefits.
Revenue Generation: Any returns that are quantifiably measured should be specifically dedicated to the initiative. Examples of returns include:
- Membership service fees
The units that are directly impacted by measuring returns are:
- Financial Department: is usually responsible for reporting the returns on a monthly basis on individual initiatives and for the entire Internet channel.
- Business/Product Owner: is responsible for ensuring that the strategic plans are in place that meet the specific targets outlined in the business case.
Cost-Savings: Off-line activities traditionally incur greater cost than those conducted online. Servicing transactions that migrate to the Internet channel have the ability to result in an expense decrease. There would need to be actual decreases to headcount or reductions of more manual technologies in order to recognize a direct reduction to expenses. A potential compromise is for business units and call center support areas to reduce the level of projected staff additions through use of Internet technologies. Any headcount transaction and cost analysis must be received and signed-off by the business unit or supporting off-line channel that is impacted.
The following steps can achieve the indirect cost-savings associated with Internet initiatives:
- Determine the servicing transaction that is conducted off-line which can now be accomplished without human intervention.
- Determine the # of transactions that an FTE can perform for a given period of time. (i.e., processor can process 500 transactions per month)
- Determine the cost per transaction (i.e., $2 per transaction)
- Determine the number of transactions processed via the Internet (i.e., 20,000 per month)
- Equate the Internet figure to headcount and cost-savings (i.e., 40 FTEs or $40,000 per month).
It is more critical than ever to ensure that web-based initiatives have proper payback models in place given all the challenges facing the new Internet Economy. The discipline of measuring return must be adhered from the feasibility during business case creation throughout post-implementation to ensure that the assumptions are reasonable. Web based initiatives need to stand up to the same financial justification and business scrutiny as any other competitive project. This will allow management to properly prioritize initiatives based on a common denominator – the bottom line.