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Eye on ROI:
Measuring the ROI of Increased Productivity

online columnist The Gantry Group     Column published in DMReview.com
June 23, 2004
  By The Gantry Group

One of the promises on the marquee of most IT business automation solutions - whether installed on premises, hosted offsite or completely outsourced - is an increase in employee productivity from improved process efficiencies. This benefit has been the driver for most technology solutions since the advent of the PC. While increased employee productivity is clearly a desireable attribute, it remains in the realm of "difficult to quantify" success metrics. Productivity has always been a rather amorphous metric and, as a result, has lost its potency as a business benefit over time. This is unfortunate since productivity improvement is at the heart of business process automation.

Today, enterprises require demonstrated proof of positive economic impact of a given IT solution on their businesses prior to making the investment decision. The importance of being able to quantify the ROI driven by increased productivity has, therefore, become critical. Tangible ROI, of course, can be driven by many other improvements such as incremental revenue and reduced operating costs. But one of the biggest contributors to the intangible ROI business automation is employee productivity.

How can this be credibly measured for inclusion in a tangible ROI analysis?

It's Easy ... Right?

At first glance it might appear that the quantification of productivity is not so elusive. Afterall, you can just figure out how much time each employee saves by not executing tasks that are now automated on a monthly or yearly basis. Next, multiply the saved time by the average loaded salary and ... presto! You have your total savings. Let's look at an example of a fictional scenario (the company names used are contrived for illustration and do not represent any real company).

An enterprise business process management (BPM) solution from Acme Enterprise Solutions has been deployed at Consolidated ABC, Inc. The software impacts multiple functional areas including finance/accounting, sales, manufacturing and product development. The solution enables 50 of that company's administrative employees to accomplish what used to take them 35 hours per week in about 23 hours. This savings of approximately 12 hours per employee represents their increase in weekly productivity by about 33 percent. If you take the 12 hours per week and multiply by 50 employees, that is a total savings of 600 hours per week or 30,000 hours per year. Assuming an average loaded annual salary of $45,000, this time savings results in a heft savings of $650,000 annually!

But wait ... is Consolidated ABC actually saving this money? In many cases, productivity increases result in reallocation of employees to other (hopefully) more value-added work. Unless this recovered time is appled to work that generates increased sales and revenues, there really isn't a cash return on investment to the enterprise. In other words, the benefit is "soft" or "indirect" since it does not track to the bottom line. In the case of Consolidated ABC, these 50 employees were reassigned to other tasks in their department, so their time savings did not create bottom-line value. In order to quantify the benefit of these employees' time savings, one has to evaluate the business impact of the new business tasks now being performed that would not have been achieved if not for the increased productivity. Hmmm ... as you can see, the productivity analysis just got a bit more complicated!

Following the Money Trail to the Bottom Line

When in doubt, follow the money! This old business axiom holds true for ROI analysis as well. There are situations where productivity improvements can actually be traced directly to the operating profit. These savings are revealed when you examine how productivity enhancements impact the company at the business process level. Specifically, you must examine your business processes and workflows to assess whether, and to what extent, a productivity enhancement has changed them.

Going back to our example at Consolidated ABC, the CFO reviews a report from HR showing the dramatic productivity improvement in 50 of the company's administrative employees. On the basis of this data, a strategic decision is reached: the company plans to execute on a planned acquisition without hiring additional administrative employees.

Before the BPM implementation, Consolidated ABC had intended to increase its employee count in accounts payable by four additional workers per year over a three year period to accommodate the increase in transaction volume. Now the firm can avoid hiring 12 people, saving themselves over $540,000 in the next three years. This is a real cash savings from avoided expenditure and will directly affect operating profits.

There are other ways to measure tangible ROI from productivity enhancements.

Finding the Upside

Productivity ROI can also be measured by the impact such improved efficiencies have on the top line. Here are three primary ways this can occur.

  1. Now suppose Consolidated ABC's sales force has also been impacted by the solution implementation. Prior to installation of the ACME solution, the sales force spent considerable time generating weekly reports to send to the regional sales managers. Additionally, the regional managers were not able to effectively manage sales territories since the reports were usually late, incomplete and prone to error. The ACME solution automated the reporting process and gave the regional managers visibility into their territories so they could make better, timelier decisions about resource allocation. Instead of spending time digging to surface pertinent information, the regional managers now spend more time on strategic issues. The sales force now spends more time with prospects and customers, rather than being hunkered down generating reports. As a result of the increased productivity of both the sales force and the regional sales managers, the solution has a clear impact directly on net sales.
  2. Another way that productivity can impact revenue is when employees in positions relating to product design and development can be made more productive. Prior to implementation of the ACME solution, Consolidated's product development tasks were based on manual processes and segregated disparate data sources. As a result they frequently experienced product development delays caused by miscommunication among the team, lack of timely project data or just plain human error. These delays had a negative impact on time to market which, in turn, created missed market opportunities, unsatisfied customers and loss of market share. The business performance metrics that indicate these problems - new product revenues, lost sales (to competitors) and decreased repeat business (from dissatisfied customers) - highlighted the problem. When the ACME solution was deployed, these metrics changed. By providing visibility into business units, development programs and technology - regardless of geographic location, Consolidated saw decreased errors and fewer product delays. This directly impacted their ability to get to market faster with fewer errors and, hence, resulted in more satisfied customers. Further, development engineers were more productive, resulting in greater annual throughput (e.g., lowered development costs). Consolidated was able to trace increased new product sales and greater repeat business directly to this improved productivity.
  3. Sales are also impacted by productivity enhancements that drive competitive advantage. In our illustrative example, Consolidated ABC was able to lower the manufacturing cost of its main product due to gains in manufacturing efficiency from new and streamlined business processes. As we saw above, they were also able increase throughput per engineer, which lowered their product development costs. The company decided to pass this cost savings along to the customer by reducing their prices. Consolidated's competition can't reduce their prices without losing margin. In this case the competitive advantage from increased productivity translates into increased market share, followed by incremental revenues.

Other ways that productivity can be measured by cost reductions are less obvious. Take for example the case where a financial automation system enables employees in accounts receivable to gain faster access to historical information that was once scattered throughout the company. At Consolidated ABC, this improved access allowed employees to resolve disputed outstanding invoices faster, decreasing the number of days to receipt of payment. Prior to solution implementation, accounts receivable personnel were required to manually search paper files to find supporting documentation for disputed invoices. As a result, the average number of days' sales outstanding (DSO) was often over 60. With the ACME solution in place the accounts payable staff is significantly more efficient and can now resolve disputed receivables in less than 45 days. Here, the tangible measurement of this increased productivity can be found in the additional interest generated from payments that are collected sooner. This additional cash therefore results in a direct and tangible increase in not revenues - but available cash.

Using Cause and Effect

The real point being made here is that there are many ways to track productivity improvements to the top or bottom line. Once you have determined that a productivity increase has occurred, measurement of the tangible ROI from increased productivity requires the following steps:

  1. Identify the department or functional role of employees whose productivity has been enhanced due to the automation solution.
  2. Examine the business processes in which they are involved or to which they connect.
  3. Use a cause and effect approach to explore how this enhanced productivity impacts the enterprise. How have the business processes changed? Have some been eliminated or modified? Are new processes now in place? What impact do these changes have on the enterprise? Remember, the impacts may be experienced in multiple business processes across multiple functional areas.
  4. Try to follow the impacts to the bottom or top line as directly as possible.

Step four can be tricky and is where many companies over estimate the ROI from a solution deployment. As you move out along the financial value chain looking for the impact of increased productivity, care must be taken to only use those improvements where the contribution from the solution can be reasonably assessed. In our example, if Consolidated also launched a major new marketing campaign at the time of deployment, then increases in sales may have also derived from this marketing initiative. In this case, it is difficult to reasonably conclude that 100 percent of the revenue increases were caused by productivity enhancements. The contribution to by each initiative to the bottom-line effect must be assessed and weighted.

In other words, it is important to evaluate all the potential drivers of a net benefit in revenue or cost. If it is not possible to make a distinction between how these drivers contribute to the net result, then it is best to pass on drawing a tangible conclusion. Generally the fewer possible drivers there are to a net benefit, the more likely the results can be reliably and accurately attributed to the real catalyst(s).

If there is no way to know exactly how much a solution is contributing to ROI value drivers, it is sometimes possible to make a reasonable assumption about what percent of the improvement is due to the solution. Err on the conservative side, if you need to make such estimates.


For more information on related topics visit the following related portals...

Dawna Paton and Dale Troppito are managing partners of the Gantry Group. Paton has helped guide the Gantry Group's rigorous ROI best practice models based on a 25-year career as chief executive officer, CFO, sales and marketing executive, and venture capitalist in high technology companies. You can reach her at dpaton@gantrygroup.com. Dale Troppito, company cofounder, believes that the technology leaders of the future will be those that understand the crucial role that a market-validated, value delivery strategy and compelling ROI play in shaping corporate competitiveness and customer satisfaction. You can reach her at dtroppito@gantrygroup.com.

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