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Take, for example, the organization seeking to purchase
service managementprocess-automation software. The
organization has an 8% discount rate. The useful life of the software is set to five years. A prior NPV analysis of the tangible costs and benefits shows an NPV of -£139,755. If the intangible benefits are large enough, the NPV could go from negative to positive. To compute the benefit required (inflow), first find the Present Value Factor in Appendix A. A look in Column 8%, Row 5-period, reveals a factor of 3.993. Now perform the following calculation:
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The result serves as a subjective guideline for estimation. If the intangible benefits are at least £35,000, then the NPV is acceptable. The process automation should be performed. If in the judgement of senior managers, the intangible benefits are not worth £35,000, then the process automation should not be performed.
5.2.2.2 Preference decisions (IRR)
There are often many opportunities that pass the screening decision process. The bad news is not all can be acted on. Financial or resource constraints may preclude investing in every opportunity. Preference decisions, sometimes called rationing or ranking decisions, must be made. The competing alternatives are ranked.
The NPV of one project cannot be directly compared to another unless the investments are equal. As a result, the IRR is widely used for preference decisions. The higher the Internal rate of return, the more desirable the initiative.
The IRR, sometimes called the yield, is the rate of return over the life of an initiative. IRR is computed by finding the discount rate that equates the present value of a project’s cash outflows with the present value of its inflows. That is, the IRR is the discount rate resulting in an NPV of zero.
Take, for example, Case example 11. To compute the IRR, first find the discount rate that will result in a net present value of zero. The simplest approach is to divide the investment in the project by the expected net annual cash flow. This will yield a factor from which the IRR can be found.
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The IRR factor, 3.0303 in this case, is then located in the present value table in Appendix A to determine the rate of return it represents. Use the 5-period line since the programme has a five-year window. A scan on the 5-period line reveals that an IRR factor of 3.03 represents a rate of return between 19% and 20%.
Once the IRR is computed, compare against required rate of return. In this case, the required rate of return is 20%. Since the IRR is slightly less, it would likely be rejected during a screening decision. A summary is given in Table 5.7.
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The IRR for successful candidates can be directly compared to other successful candidates. Viable projects can then be ranked by their respective IRR. The projects with the highest rank are those with the highest IRR percentages.
5.2.3 Post-programme ROI
Many companies successfully justify service management implementations through qualitative arguments, without a business case or plan, often ranking cost savings as a low business driver. But without clearly defined financial objectives, companies cannot measure the added value brought about by service management, thereby introducing future risk in the form of strong opposition from business leaders. Having experienced a history of shortfalls in past frameworks, stakeholders may question the resultant value of a service management programme. Without proof of value, executives may cease further investments. Therefore, if a service management initiative is initiated without prior ROI analysis, it is recommended that an analysis be conducted at an appropriate time after. The calculation of a service management ROI is illustrated in the basic model shown in Figure 5.9.
Figure 5.9 Post-programme ROI approach
5.2.3.1 Programme objectives
Objectives should be clear, as they serve to guide the depth and scope of the ROI analysis. Objectives can range from simple terminology to the adoption of industry practices:
Deliver consistent and repeatable service
Lower the overall total cost of ownership
Improve quality of service
Implement industry-wide best practices
Provide an overall structure and process
Facilitate the use of common concepts and terminology.
5.2.3.2 Data collection
The collection of data is vital for a valid and quantifiable ROI result. There are two periods in which to collect data: pre- and post-implementation. Programme objectives should guide the source and nature of data points. For example:
Metrics for quality of service
Costs for service transactions
Questionnaires for customer satisfaction.
Note that the data collection for process transactions will differ from data collection for a function.
5.2.3.3 Isolate the effects of the programme
By this stage, the results of the service management programme are becoming evident. By isolating the effects, there should be little doubt that the results should be attributed to the programme. There are many techniques available:
Forecast analysis: a trend line analysis or another forecasting model is used to project data points had the programme not taken place. An example is given in Figure 5.10.
Figure 5.10 Trend line analysis
Impact estimates: when a forecasting approach is not feasible, either due to lack of data or inconsistencies in measurements, an alternative approach in the form of estimations is performed. Simply put, customers and stakeholders estimate the level of improvements. Input is sought from organizational managers, independent experts and external assessments.
Control group: in this technique, a pilot implementation takes place in a subset of the enterprise. That subset may be based on geography, delivery centre or organizational branch. The resultant performance is compared with a similar but unaffected subset.
5.2.3.4 Data to monetary conversion
To calculate ROI, it is essential to convert the impact data to monetary values. Only then can those values be compared to programme costs. The challenge is in assigning a value to each unit of data. The technique applied will vary and will often depend on the nature of the data:
A quality measure, such as a complaint or violation, is assigned or calculated, and reported as a standard value
Staff reductions or efficiency improvements, in the form of loaded costs, are reported as a standard value
Improvements in business performance, in the form of lessened impacts, are reported as a standard value
Internal or external experts are used to establish the value of a measure.
5.2.3.5 Determine programme costs
This requires tracking all the related costs of the ITIL programme. It can include:
The planning, design and implementation costs. These are pro-rated over the expected life of the programme
The technology acquisition costs
The education expenses.
5.2.3.6 Calculate ROI
NPV and IRR techniques are detailed in the previous sections.
5.2.3.7 Identify qualitative benefits
Qualitative benefits begin with those detailed in the business case, as described in a previous section. A second look at service management qualitative benefits is found in the Continual Service Improvement volume.
5.3 Service Portfolio Management
A Service portfolio describes a provider’s services in terms of business value. It articulates business needs and the provider’s response to those needs. By definition, business value terms correspond to marketing terms, providing a means for comparing service competitiveness across alternative providers. By acting as the basis of a decision framework, a Service Portfolio either clarifies or helps to clarify the following strategic questions:
Why should a customer buy these services?
Why should they buy these services from us?