How To Calculate ROI for Your BPM Project

	Bookmark This Page Email This Page Format for Printing Submit an Article Read More Articles
	Related Tools & Articles Combining Business Process Management and IT Business Process Management (BPM) Best Practices 9 Steps for Implementing Business Process Management
	Discussion Forum "...It sounds like there are more failures than successes nowadays. I have heard story after story from companies that have implemented SAP and had a hard uphill battle achieving their ROI." Contribute to this Discussion

By N.Y. Chow

With the need for higher productivity and ultimately greater profitability, many organizations have begun to adopt business process management (BPM) initiatives to continuously improve their processes. This is particularly prominent when new products and services are introduced into the organization, thus resulting in the need for current business processes to be changed or new processes to be put in place.

While many firms recognize the need for BPM functions, executives are more comfortable with the decision to pursue that route if the return on investment can be proven for the costs incurred in implementing BPM. Costs include hefty investments to purchase BPM software as well as the expense of hiring consultants and staff to deploy these initiatives. Yet, because BPM cuts across functions and divisions, relating those expenses to revenue from a specific new product or service can be tricky to derive. BPM investments are applicable across a significant time period and frequently may be used for long-term business process improvements.

The ROI Formula

The general approach for calculating ROI is to accumulate the total benefits acquired from the BPM initiative, taking into consideration discounts for net present value, and dividing these quantifiable benefits with the total cost of implementation incurred. For example, if a BPM initiative is expected to be utilized for a period of three years, then the ROI calculation will look like this:

Cost of BPM Initiative

(Benefit for Year 1) + (Benefit for Year 2) + (Benefit for Year 3) (Discount rate + 1) (Discount rate + 1) (Discount rate + 1)

Cost of BPM Initiative

For instance, if your benefit for Year 1 is $500,000, for Year 2 is $300,000 and for Year 3 is $150,000, with a cost of BPM initiative of $1 million, the ROI calculation would look like this:

The formula above is rather elementary in nature and, in fact, is the general formula you'd use for any form of asset or capital purchase. However, the challenge of determining the ROI for BPM doesn't lie in the calculation process, but rather in what constitutes the benefits that have been acquired as a result of the initiative. How can a company determine that an increase of revenue or profits is the result of the BPM work? For instance, within a certain year, better human resource procedures could have resulted in the hiring of employees with better skills and therefore greater productivity; this might lower operating costs. Similarly, the sales and customer services teams could have been trained to improve their interactions with customers, thereby resulting in higher sales volume, as well as greater brand value.

Tangible Benefits

We can only quantify direct tangible benefits of BPM when tabulating our ROI. These tangible benefits will be direct results of a change in business process. To accomplish this, we need to analyze an entire process, pin down the relationship between the processes and direct outcome, and finally measure and quantify the outcome as compared to previous results.

For example, improvements in processes that directly result in a decrease in headcount within a department can be quantified by the cost savings in salaries. Cost savings of a decrease in the amount of paperwork that needs to be sent out by a finance department could be acquired by tabulating the amount of paper, time (in terms of staff hours), printing, and mailing costs that are saved as a result of BPM implementation.

How does this play out in real life? Lockheed Martin implemented a BPM initiative to consolidate data and streamline the collection of data, which was dispersed across the organization. Data from various systems, departments and entities in the company were collected and the processes were automated. In the end, this resulted in faster turnaround in the acquisition and processing of information, and also reduced reliance on people to perform manual tasks. The reduction in headcount totaled 1,000, which amounted to a total annual savings of $40 million, assuming an average annual employee cost of $40,000.

In general, there are two aspects we can analyze in the process of realizing the tangible benefits of BPM.

Decreased Costs

This can occur through improvement of workflow, increased productivity, elimination of manual processes or task automation and shorter processing time. Also, this can be viewed from the aspect of improved speed of business, tabulated, simply enough, by measuring the amount of time a process takes to be completed.

With BPM, increased productivity and added efficiency will shorten processing time. This can be further detailed to improved task time (time taken to complete a task) and decreased lag time (time where documents are idle or in queue). For example, when analyzing the process of bank loan processing, task time is the time taken for each person to complete his or task within the process, while lag time is the time where loan documents are sitting in a tray waiting to be evaluated by the next person involved in the process.

Increased Revenue

When BPM initiatives are implemented, we typically expect increased product output, a reduction in cycle time and -- we hope -- improved customer service. In a manufacturing environment, concepts such as straight-through processing helps to increase output speed, while better service through shorter turnaround time for order fulfillment helps to increase customer satisfaction levels. Ultimately these improvements produce a direct impact of increased revenue.

The Intangibles

Although there are numerous tangible benefits from a BPM initiative, a number of other benefits are in intangible. These would include the increase in an organization's agility, particularly in increased response speeds within a competitive business environment, as well as a greater brand value through better operational performance. Most importantly, these intangible benefits may take a longer time to be realized. They're definitely a challenge to quantify but can inherently grow into greater value as compared to the tangible and quantifiable benefits of BPM.

What's BPM Cost?

In terms of the costs of a BPM initiative, these would include areas such as hardware and software purchase, training, maintenance contracts, customization and development of applications, support and administration costs and finally, implementation costs.

In conclusion, the ROI of a BPM implementation shouldn't be restricted to what can be counted in the short term. Your thinking needs to incorporate other intangible benefits applicable over the longer term. In the end your actual ROI may extend far beyond what you're able to see, value and tabulate.

About the Author: