The Total Economic Impact™ Of IBM Case Managerlab.pix-agency.com/thib/PIXELIXIR-News-ECM_May2016/The Total...IBM Case Manager is a case management suite that brings together documents,

A Forrester Total Economic

Impact™ Study

Commissioned By

IBM

Project Director:

Reggie Lau

December 2014

The Total Economic

Impact™ Of

IBM Case Manager

Table Of Contents

Executive Summary .................................................................................... 3

Disclosures .................................................................................................. 5

TEI Framework And Methodology ............................................................ 6

Analysis ........................................................................................................ 7

Financial Summary ................................................................................... 15

IBM Case Manager: Overview .................................................................. 16

Appendix A: Interviewed Customer Description .................................. 17

Appendix B: Total Economic Impact™ Overview ................................. 18

Appendix C: Glossary ............................................................................... 19

Appendix D: Endnotes .............................................................................. 20

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3

Executive Summary

In December 2014, IBM commissioned Forrester Consulting

to conduct a Total Economic Impact™ (TEI) study and

examine the potential return on investment (ROI)

enterprises may realize by deploying IBM Case Manager.

The purpose of this study is to provide readers with a

framework to evaluate the potential financial impact of IBM

Case Manager on their organizations.

IBM Case Manager is a case management suite that brings

together documents, business information, flexible workflow,

real time analytics and reporting – all with a rapid solution

development environment. It also provides a case

container (folder) where all the business critical case

artifacts and decisions are maintained over time,

automatically creating an audit trail, as well as a time

stamped case record. To better understand the benefits,

costs, and risks associated with IBM Case Manager,

Forrester interviewed an existing customer with two years of

experience using IBM Case Manager.

Prior to its use of IBM Case Manager, the interviewed

customer was dependent on accessing multiple systems for each case. This required knowledge workers to log in and

gather data from multiple systems, which could take 3 to 4 hours per case. The customer chose IBM out of four vendors for

its out-of-the box flexibility and strength in integrating content, BPM, and case management engines.

IBM CASE MANAGER IMPROVES KNOWLEDGE WORKER EFFICIENCY, CREATES OPPORTUNITIES WITH

ANALYTICS INTEGRATION, AND PROVIDES AUDITABLE CONSISTENCY

Our interview with one existing customer and subsequent financial analysis found that the customer experienced the risk-

adjusted ROI, benefits, and costs shown in Figure 1.1 See Appendix A for a description of the interviewed customer.

The analysis points to benefits of $19,040,360 per year versus costs of $5,626,865, adding up to a net present value (NPV)

of $13,413,496.

FIGURE 1

Financial Summary Showing Three-Year Risk-Adjusted Results

ROI: 238%

NPV: $13,413,496

Payback period: <1 month

Source: Forrester Research, Inc.

“With a strong foundation in BPM,

the case management tool allows us

to validate information prior to

creating a work item so users don't

have to log in to 10 systems and

spend 3 hours gathering data.

Instead, they can spend 3 minutes

looking at gathered data in one

system.”

~ Lead development manager, large US financial

institution

4

› Benefits. The customer experienced the following risk-adjusted benefits:

• Knowledge worker efficiency. This benefit is focused on the efficiency gains experienced by knowledge workers

validating data and processing cases.

• Analytics impact. This benefit centers on the opportunities that the customer has found in cross-selling and

retaining funds based on the ability to link different systems and teams.

• Auditable consistency. This benefit conceptualizes the cost savings and avoidances due to reduced regulatory

fines and auditing costs.

› Costs. The customer experienced the following risk-adjusted costs:

• IBM Case Manager cost. This is the annual fee for IBM Case Manager's licensing and maintenance.

• Internal labor and implementation cost. This is the cost of the customer's resources for both initial and ongoing

development and support for IBM Case Manager and new case designs.

5

Disclosures

The reader should be aware of the following:

› The study is commissioned by IBM and delivered by Forrester Consulting. It is not meant to be used as a competitive

analysis.

› Forrester makes no assumptions as to the potential return on investment that other organizations will receive. Forrester

strongly advises that readers use their own estimates within the framework provided in the report to determine the

appropriateness of an investment in IBM Case Manager.

› IBM reviewed and provided feedback to Forrester, but Forrester maintains editorial control over the study and its findings

and does not accept changes to the study that contradict Forrester's findings or obscure the meaning of the study.

› The customer names for the interviews were provided by IBM. IBM did not participate in customer interviews.

6

TEI Framework And Methodology

INTRODUCTION

From the information provided in the interviews, Forrester has constructed a Total Economic Impact (TEI) framework for

those organizations considering deploying IBM Case Manager. The objective of the framework is to identify the cost, benefit,

flexibility, and risk factors that affect the investment decision.

APPROACH AND METHODOLOGY

Forrester took a multistep approach to evaluate the impact that IBM Case Manager can have on an organization (see Figure

3). Specifically, we:

› Interviewed IBM Case Manager marketing, sales, and/or consulting personnel, along with Forrester analysts, to gather

data relative to IBM Case Manager and the marketplace for IBM Case Manager.

› Interviewed one organization currently using IBM Case Manager to obtain data with respect to costs, benefits, and risks.

› Constructed a financial model representative of the interviews using the TEI methodology. The financial model is

populated with the cost and benefit data obtained from the customer interview and IBM.

› Risk-adjusted the financial model based on issues and concerns the interviewed organization highlighted in interviews.

Risk adjustment is a key part of the TEI methodology. While the interviewed organization provided cost and benefit

estimates, some categories included a broad range of possibilities or had a number of outside forces that might have

raised or lowered the benefit and cost values. For that reason, some cost and benefit totals have been risk-adjusted and

are detailed in each relevant section.

Forrester employed four fundamental elements of TEI in modeling the value of using IBM Case Manager: benefits, costs,

flexibility, and risks.

Given the increasing sophistication that enterprises have regarding ROI analyses related to IT investments, Forrester’s TEI

methodology serves to provide a complete picture of the total economic impact of purchase decisions. Please see Appendix

B for additional information on the TEI methodology.

FIGURE 3

TEI Approach


Perform duediligence

Conductcustomerinterviews

Constructfinancial

model usingTEI framework

Write casestudy

7

Analysis

INTERVIEWED CUSTOMER

For this study, we conducted one interview with an existing customer that has deployed IBM Case Manager. The interviewed

customer is a large US financial institution with the following high-level characteristics:

› Has annual revenue of approximately $30 billion and over $400 billion in managed assets.

› Has approximately 11,000 operational users divided among the front, middle, and back office.

› Provides multiple financial products including retirement plans, investment, insurance, retail, and institutional.

The customer processes 6,000 to 7,000 cases each day. The majority of cases are transaction-based (e.g., withdrawals,

deposits, rollovers, etc.). During processing, each case may be handled by front-, middle-, and back-office operations staff.

Front-office staff are typically client-facing, such as those who operate the contact center. Middle-office staff are the majority

of the knowledge workers who need to validate data and perform due diligence before committing to transactions. Lastly,

back-office staff are typically those at the start or end of a workflow

and either send or receive documentation.

Prior to deploying IBM Case Manager, the customer relied on

middle-office knowledge workers to gather data from multiple

systems. Most cases could take 1 to 1.5 hours, while some

onboarding cases would require more due diligence and take up to

3 to 4 hours. More importantly, there was not an intelligent and

automated method of checking for errors.

To lay the groundwork, the customer implemented IBM master data

management (MDM) in the years preceding IBM Case Manager.

Several years later, the customer tackled the BPM and case

management concerns. They compared four vendors and selected

IBM for its balanced strengths in out-of-the box flexibility and

integration of content, BPM, and case management engines. The

customer launched IBM Case Manager with the following high-level

goals:

› Consolidate multiple systems and automate data gathering and

processes to reduce due diligence effort and errors for

knowledge workers.

› Provide an agnostic, 360-degree view of each case, allowing for

truly omnichannel customer engagement.

› Improve cross-sell and upsell opportunities.

› Improve customer experience.

“We are able to accurately

target customers for specific

investment products based on

their withdrawal frequency

and trends. This allows us to

retain instead of lose. . . .

cross-sell opportunities have

ranges from $25 million to

$50 million each year.”

~ Lead development manager, large US financial

institution

8

INTERVIEW HIGHLIGHTS

The interview revealed the following themes:

› Improvement in knowledge worker efficiency is primarily based on data consolidation and data gathering

automation. Of the 6,000 to 7,000 cases that the customer processes each day, 2.5% to 3% are onboarding cases that

pertain to onboarding an end user to a new financial product. Before the onboarding, a knowledge worker must perform

due diligence and validate all data before the next step in the workflow. The information that needs to be validated would

previously be pulled from three or four systems, which would require the knowledge worker to log in to three to four

systems and gather the proper information. This process took 3 to 4 hours in the past and now takes approximately 3

minutes, representing an approximately 98% efficiency gain. Even the majority of cases that are transaction-related (e.g.,

withdrawals, deposits, rollovers, etc.) have seen 1 to 1.5 hours of data gathering reduce down to 3 minutes. The customer

has since been able to enact larger operational efficiency programs, such as reducing outsourced and offshored work.

› The ability to see each case linked to a single account record from a 360-degree view improves cross-sell, upsell,

and customer experience activities. Linking a single account and programming intelligence to create work items for

adjacent or relevant product teams based on a user's actions and tendencies is a major benefit the customer highlighted.

The customer mentioned two main examples that describe how it has retained over $25 million that would have been

otherwise withdrawn by end users. The first example is related to suggesting different investment products that may

provide a better return than withdrawing cash. The customer would focus on the frequency, amount, and other trends to

determine what investment products might be best suited to or interest the end user. The second example focuses on

providing a solution when an end user meets an error like overdrawing from a pension account. In this case, the system

should automatically generate a work item for the personal loans team to follow up with the end user at the right time.

› Achieving auditable consistency and efficiency is not always quantified but remains an important metric. The

interviewed customer did not experience any regulatory fines or penalties related to poor case management before

implementing IBM Case Manager but mentioned that having all data in one single source has assuredly made it easier for

external auditors to perform due diligence. The customer described how auditing projects that took three to five days will

now take one day. Readers who have experienced fines or penalties may find it helpful to quantify those amounts as a

potential saving and avoidance that IBM Case Manager could achieve. Furthermore, while the customer described

auditing as an external expense from regulatory bodies, organizations that pay for an external auditing company or internal

auditors could also include the cost of these resources as a potential cost reduction as a result of implementing IBM Case

Manager.

9

BENEFITS

This case study had three benefits, two of which the customer experienced and provided feedback and data to quantify:

› Knowledge worker efficiency.

› Analytics impact.

› Auditable consistency.

Knowledge Worker Efficiency

The customer processes 6,000 cases each day. For effort designation purposes, cases are split between 150 onboarding

cases and 5,850 transaction-related cases. Knowledge workers took 3 hours to process an onboarding case and 1 hour to

process a transaction-related case prior to the customer implementing IBM Case Manager. Both types of cases now take 3

minutes to process due to automated data gathering and a single account record for each user. The model accounts for a

30% productivity conversion on efficiency gains.

Assuming a $19.50 loaded hourly rate, the customer is able to save approximately $7 million each year after adjusting for

risk, as shown in Table 1. Although the savings may seem high, readers are reminded that the interviewed customer is a $30

billion organization and works with high volumes of transactions. Moreover, the customer highlighted that these efficiencies

have allowed for a reduction in outsourced and offshored activities, as internal, local staff gain more capacity.

TABLE 1

Knowledge Worker Efficiency

Ref. Metric Calculation Year 1 Year 2 Year 3

A1 Onboarding cases Customer provided (150*240) 36,000 36,000 36,000

A2 Pre-IBM Case Manager validation

time per onboarding case (minutes) Customer provided 180 180 180

A3 Post-IBM Case Manager validation

time per onboarding case (minutes) Customer provided 3 3 3

A4 Case processing resource cost per

hour Assumption $19.50 $20.09 $20.69

A5 Onboarding case efficiency savings

and avoidances

(((A1*A2)/60)*A4)-

(((A1*A3)/60)*A4) $2,070,900 $2,133,027 $2,197,018

A6 Transaction cases Customer provided

(5,850*240) 1,404,000 1,404,000 1,404,000

A7 Pre-IBM Case Manager validation

time per transaction case (minutes) Customer provided 60 60 60

A8 Post-IBM Case Manager validation

time per transaction case (minutes) Customer provided 3 3 3

A9 Onboarding case efficiency savings

and avoidances

(((A6*A7)/60)*A4)-

(((A6*A8)/60)*A4) $26,009,100 $26,789,373 $27,593,054

A10 Productivity conversion Assumption 30% 30% 30%

At Knowledge worker efficiency A5+A9*A10 $8,424,000 $8,676,720 $8,937,022

Risk adjustment 13%

Atr Knowledge worker efficiency

(risk-adjusted) $7,328,880 $7,548,746 $7,775,209


10

Analytics Impact

The customer was able to leverage linked systems and a single record for each end user to cross-sell, upsell, and retain

approximately 2% of funds that would have been otherwise lost or withdrawn by end users. In other words, for every $100

withdrawal, the customer was able to retain $2 of it by suggesting a financial product that the end user might be interested in

pursuing. The model then assumes a 5% return on the retained funds that are re-invested and a 0.5% management fee or

fund expense ratio. Readers should apply this type of impact to their own organization’s potential use case for either

incremental or retained revenue.

After adjusting for risk, the customer experienced a benefit value of $359,976 over three years, as shown in Table 2.

TABLE 2

Analytics Impact


B1 Total withdrawals Customer provided $1,200,000,000 $1,236,000,000 $1,273,080,000

B2 Funds retained Customer provided $25,000,000 $26,250,000 $27,562,500

B3 Funds retention rate B2/B1 2.08% 2.12% 2.17%

B4 Rate of return Assumption 5% 5% 5%

B5 Management fees Assumption 0.50% 0.50% 0.50%

Bt Analytics impact B2*(1+B4)*B5 $131,250 $137,813 $144,703

Risk adjustment 13%

Btr Analytics impact

(risk-adjusted) $114,188 $119,897 $125,892


11

Auditable Consistency

Although the customer was not able to quantify this benefit, there was an agreement that the conceptual model in Table 3

below is a fair way to quantify this benefit if the customer had relevant data. Readers should check with their legal

departments for any past fines or penalties that could have been avoided with better case management. Auditing

requirements and regulations differ by industry; readers should again check with their legal departments regarding their

organization's auditing expenses.

TABLE 3

Auditable Consistency


C1 Fines and penalties avoided

C2 Pre-IBM Case Manager auditing hours

C3 Post-IBM Case Manager auditing hours

C4 Auditing resource cost per hour

C5 Auditing savings and avoidances (C2*C4)-(C3*C4)

Ct Auditable consistency C1+C5

Risk adjustment 6%

Ctr Auditable consistency (risk-adjusted)


Total Benefits

Table 4 shows the total of all benefits across the three areas listed above, as well as present values (PVs) discounted at

10%. Over three years, the customer expects risk-adjusted total benefits to be a present value of approximately $19 million.

TABLE 4

Total Benefits (Risk-Adjusted)

Benefit Initial Year 1 Year 2 Year 3 Total Present Value

Knowledge worker efficiency $0 $7,328,880 $7,548,746 $7,775,209 $22,652,835 $18,742,881

Analytics impact $0 $114,188 $119,897 $125,892 $359,976 $297,479

Auditable consistency $0 $0 $0 $0 $0 $0

Total benefits $0 $7,443,068 $7,668,643 $7,901,101 $23,012,811 $19,040,360


12

COSTS

The customer experienced two main costs associated with IBM Case Manager:

› IBM Case Manager licensing and maintenance.

› Internal labor and implementation.

Total Costs

The majority of the solution cost is a three-year enterprise licensing and maintenance contract with IBM. The contract is $4.5

million over three years and does not include upgrades or any additional professional services that may be needed. The

customer mentioned that professional services may typically be needed for this type of implementation, but it was able to

source all talent internally and did not need any additional professional services.

The customer also spent six months planning and developing for the first release. The development lead brings four IT

resources together with two business resources to work on building the case view, rules, parameters, and fields together.

Once requirements are gathered, IT will then develop all the back-end connections. These resources typically collaborate on

four releases each year, and while IT resources spend 80% of their time on IBM Case Manager development, business

resources spend 50% of their time collaborating to design a new case.

Over three years, after adjusting for risk, the customer experienced a cost of $6.7 million. Discounted at 10%, the PV was

$5.6 million, as shown in Table 5.

TABLE 5

Total Costs (Risk-Adjusted)

Cost Initial Year 1 Year 2 Year 3 Total Present Value

IBM Case Manager

licensing and

maintenance

$0 $1,620,000 $1,620,000 $1,620,000 $4,860,000 $4,028,700

Internal labor and

implementation $261,360 $522,720 $538,402 $554,554 $1,877,035 $1,598,164

Total costs $261,360 $2,142,720 $2,158,402 $2,174,554 $6,737,035 $5,626,865


13

FLEXIBILITY

Flexibility, as defined by TEI, represents an investment in additional capacity or capability that could be turned into business

benefit for some future additional investment. This provides an organization with the “right” or the ability to engage in future

initiatives but not the obligation to do so. There are multiple scenarios in which a customer might choose to implement IBM

Case Manager and later realize additional uses and business opportunities. Flexibility would also be quantified when

evaluated as part of a specific project (described in more detail in Appendix B).

In the near future, the customer plans to upgrade to the next version of IBM Case Manager. The customer noted that while

the organization is rapidly adopting the tool, the next upgrade will bring an improvement to the user interface.

Furthermore, the customer looks forward to an eventual capability to link social media with its end users' accounts. The

customer envisions the ability to provide the appropriate amount of information about 529 college savings plans after an end

user posts or tweets about having a newborn child. The ability to monitor and link social media would result in upsell

opportunities and make sure current end users are retained and know about the organization’s full product line. The

customer could also improve the customer experience by reviewing the accounts and cases of end users who are posting

negative comments. This would potentially allow the customer to turn a negative situation into a positive experience.

RISKS

Forrester defines two types of risk associated with this analysis: “implementation risk” and “impact risk.” Implementation risk

is the risk that a proposed investment in IBM Case Manager may deviate from the original or expected requirements,

resulting in higher costs than anticipated. Impact risk refers to the risk that the business or technology needs of the

organization may not be met by the investment in IBM Case Manager, resulting in lower overall total benefits. The greater

the uncertainty, the wider the potential range of outcomes for cost and benefit estimates.

TABLE 6

Benefit And Cost Risk Adjustments

Benefits Adjustment

Knowledge worker efficiency 13%

Analytics impact 13%

Auditable consistency 6%

Costs Adjustment

IBM Case Manager licensing and maintenance 8%

Internal labor and implementation 8%


Quantitatively capturing implementation risk and impact risk by directly adjusting the financial estimates results provides

more meaningful and accurate estimates and a more accurate projection of the ROI. In general, risks affect costs by raising

the original estimates, and they affect benefits by reducing the original estimates. The risk-adjusted numbers should be taken

as “realistic” expectations since they represent the expected values considering risk.

The following impact risks that affect benefits are identified as part of the analysis:

› Reduced volume of cases and transactions.

14

› A consolidated foundation prior to IBM Case Manager, leading to marginal improvements in efficiency.

› Low adoption rate.

› Implementation without the business' input on design.

› Not leveraging analytics to cross-sell or upsell.

The following implementation risks that affect costs are identified as part of this analysis:

› Increased pricing from the vendor.

› Urgent need for rapid deployment, causing increased resourcing costs.

Table 6 shows the values used to adjust for risk and uncertainty in the cost and benefit estimates. Readers are urged to

apply their own risk ranges based on their own degree of confidence in the cost and benefit estimates.

15

Financial Summary

The financial results calculated in the Benefits and Costs sections can be used to determine the ROI, NPV, and payback

period for the organization’s investment in IBM Case Manager.

Table 7 below shows the risk-adjusted ROI, NPV, and payback period values. These values are determined by applying the

risk-adjustment values from Table 6 in the Risks section to the unadjusted results in each relevant cost and benefit section.

FIGURE 4

Cash Flow Chart (Risk-Adjusted)


TABLE 7

Cash Flow (Risk-Adjusted)

Initial Year 1 Year 2 Year 3 Total Present Value

Costs ($261,360) ($2,142,720) ($2,158,402) ($2,174,554) ($6,737,035) ($5,626,865)

Benefits $0 $7,443,068 $7,668,643 $7,901,101 $23,012,811 $19,040,360

Net benefits ($261,360) $5,300,348 $5,510,242 $5,726,547 $16,275,776 $13,413,496

ROI 238%

Payback period <1 month


($5,000,000)

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

Initial Year 1 Year 2 Year 3

Cas

h F

low

s

Financial Analysis (risk-adjusted)

Total Costs Total Benefits Cumulative Total

16

IBM Case Manager: Overview

The following information is provided by IBM. Forrester has not validated any claims and does not endorse IBM or its

offerings.

IBM Case Manager can optimize case outcomes and increase customer satisfaction by empowering knowledge workers. It

provides case workers access to structured and unstructured information from various types of applications or storage

systems. IBM Case Manager provides flexible process controls, access to powerful analytics and dashboards, and an array

of industry-specific business partner solutions to enable rapid time-to-value.

Suite components include:

› IBM Case Builder allows nonprogrammers to quickly and easily design and try out new case solutions.

› IBM Case Client is the knowledge worker user experience that displays the solutions created by Case Builder.

› IBM Case Foundation provides the powerful content and process platform that Case Manager is built on.

› IBM Content Analytics with Enterprise Search analyzes and visually explores large volumes of unstructured content to

unlock new business insights.

› IBM Sametime delivers unified communications and collaboration software for voice, data, and video.

› IBM Content Navigator provides a collaborative and mobile content experience that delivers better intelligence and control

throughout the organization. It is a component that can be used with various IBM products for mobile-enabled social

business.

› IBM Daeja ViewONE Professional delivers modular, extensible, and powerful document and image viewing.

17

Appendix A: Interviewed Customer Description

For this study, we conducted one interview with an existing customer that has deployed IBM Case Manager. The interviewed

customer is a large US financial institution with the following high-level characteristics:

› Has annual revenue of approximately $30 billion and over $400 billion in managed assets.

› Has approximately 11,000 operational users divided among the front, middle, and back office.

› Provides multiple financial products including retirement plans, investment, insurance, retail, and institutional.

The customer processes 6,000 to 7,000 cases each day. The majority of cases are transaction-based (e.g., withdrawals,

deposits, rollovers, etc.). During processing, each case may be handled by front-, middle-, and back-office operations staff.

Front-office staff are typically client-facing, such as those who operate the contact center. Middle-office staff are the majority

of the knowledge workers who need to validate data and perform due diligence before committing to transactions. Lastly,

back-office staff are typically those at the start or end of a workflow and either send or receive documentation.

Prior to deploying IBM Case Manager, the customer relied on middle-office knowledge workers to gather data from multiple

systems. Most cases could take 1 to 1.5 hours, while some onboarding cases would require more due diligence and take up

to 3 to 4 hours. More importantly, there was not an intelligent and automated method of checking for errors.

To lay the groundwork, the customer implemented IBM master data management in the years preceding IBM Case

Manager. Several years later, the customer tackled the BPM and case management concerns. They compared four vendors

and selected IBM for its balanced strengths in out-of-the-box flexibility and integration of content, BPM, and case

management engines. The customer launched IBM Case Manager with the following high-level goals:

› Consolidate multiple systems and automate data gathering and processes to reduce due diligence effort and errors for

knowledge workers.

› Provide an agnostic, 360-degree view of each case, allowing for truly omnichannel customer engagement.

› Improve cross-sell and upsell opportunities.

› Improve customer experience.

FRAMEWORK ASSUMPTIONS

Table 8 provides the model assumptions that Forrester used

in this analysis.

The discount rate used in the PV and NPV calculations is

10%, and the time horizon used for the financial modeling is

three years. Organizations typically use discount rates

between 8% and 16% based on their current environment.

Readers are urged to consult with their respective

company’s finance department to determine the most

appropriate discount rate to use within their own

organizations.

TABLE 8

Model Assumptions

Ref. Metric Value

X1 Hours per week 40

X2 Weeks per year 52

X3 Hours per year (M-F, 9-5) 2,080

X4 Hours per year (24x7) 8,760

X5 Working days 240

X6 Annual organization growth 3%

PY Prior year


18

Appendix B: Total Economic Impact™ Overview

Total Economic Impact is a methodology developed by Forrester Research that enhances a company’s technology decision-

making processes and assists vendors in communicating the value proposition of their products and services to clients. The

TEI methodology helps companies demonstrate, justify, and realize the tangible value of IT initiatives to both senior

management and other key business stakeholders.

The TEI methodology consists of four components to evaluate investment value: benefits, costs, flexibility, and risks.

BENEFITS

Benefits represent the value delivered to the user organization — IT and/or business units — by the proposed product or

project. Often, product or project justification exercises focus just on IT cost and cost reduction, leaving little room to analyze

the effect of the technology on the entire organization. The TEI methodology and the resulting financial model place equal

weight on the measure of benefits and the measure of costs, allowing for a full examination of the effect of the technology on

the entire organization. Calculation of benefit estimates involves a clear dialogue with the user organization to understand

the specific value that is created. In addition, Forrester also requires that there be a clear line of accountability established

between the measurement and justification of benefit estimates after the project has been completed. This ensures that

benefit estimates tie back directly to the bottom line.

COSTS

Costs represent the investment necessary to capture the value, or benefits, of the proposed project. IT or the business units

may incur costs in the form of fully burdened labor, subcontractors, or materials. Costs consider all the investments and

expenses necessary to deliver the proposed value. In addition, the cost category within TEI captures any incremental costs

over the existing environment for ongoing costs associated with the solution. All costs must be tied to the benefits that are

created.

FLEXIBILITY

Within the TEI methodology, direct benefits represent one part of the investment value. While direct benefits can typically be

the primary way to justify a project, Forrester believes that organizations should be able to measure the strategic value of an

investment. Flexibility represents the value that can be obtained for some future additional investment building on top of the

initial investment already made. For instance, an investment in an enterprisewide upgrade of an office productivity suite can

potentially increase standardization (to increase efficiency) and reduce licensing costs. However, an embedded collaboration

feature may translate to greater worker productivity if activated. The collaboration can only be used with additional

investment in training at some future point. However, having the ability to capture that benefit has a PV that can be

estimated. The flexibility component of TEI captures that value.

RISKS

Risks measure the uncertainty of benefit and cost estimates contained within the investment. Uncertainty is measured in two

ways: 1) the likelihood that the cost and benefit estimates will meet the original projections and 2) the likelihood that the

estimates will be measured and tracked over time. TEI applies a probability density function known as “triangular distribution”

to the values entered. At a minimum, three values are calculated to estimate the underlying range around each cost and

benefit.

19

Appendix C: Glossary

Discount rate: The interest rate used in cash flow analysis to take into account the time value of money. Companies set

their own discount rate based on their business and investment environment. Forrester assumes a yearly discount rate of

10% for this analysis. Organizations typically use discount rates between 8% and 16% based on their current environment.

Readers are urged to consult their respective organizations to determine the most appropriate discount rate to use in their

own environment.

Net present value (NPV): The present or current value of (discounted) future net cash flows given an interest rate (the

discount rate). A positive project NPV normally indicates that the investment should be made, unless other projects have

higher NPVs.

Present value (PV): The present or current value of (discounted) cost and benefit estimates given at an interest rate (the

discount rate). The PV of costs and benefits feed into the total NPV of cash flows.

Payback period: The breakeven point for an investment. This is the point in time at which net benefits (benefits minus costs)

equal initial investment or cost.

Return on investment (ROI): A measure of a project’s expected return in percentage terms. ROI is calculated by dividing

net benefits (benefits minus costs) by costs.

A NOTE ON CASH FLOW TABLES

The following is a note on the cash flow tables used in this study (see the example table below). The initial investment

column contains costs incurred at “time 0” or at the beginning of Year 1. Those costs are not discounted. All other cash flows

in years 1 through 3 are discounted using the discount rate (shown in the Framework Assumptions section) at the end of the

year. PV calculations are calculated for each total cost and benefit estimate. NPV calculations are not calculated until the

summary tables are the sum of the initial investment and the discounted cash flows in each year.

TABLE [EXAMPLE]

Example Table



20

Appendix D: Endnotes

1 Forrester risk-adjusts the summary financial metrics to take into account the potential uncertainty of the cost and benefit

estimates. For more information, see the section on Risks.

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