Today, technology has to pay its way. No longer is it enough for an IT staff to hold out vague promises of gold at the end of the rainbow when budgeting for new projects.
These days, many CFOs and other budget officers are looking to see return on investment (ROI) projections before they'll approve a project. This is just as true for service-oriented architecture and Web services as it is for any other technology. This leads to a conundrum, though. As anyone who has worked with SOA and Web services can attest, it can be tough to know ahead of time what ROI a project can return.
I'm here to help. In this column and the next, we'll look at Web services,
The Voice of a Pro
The best place to turn for figuring out ROI on Web services and SOA projects is to someone who's been through the calculations many times before and is considered an expert. Maja Tibbling is an enterprise architect with Con-Way Transportation Services Inc., a $2.6 billion transportation and logistics company operating in the U.S., Canada and Mexico. Tibbling recently participated in a panel at the Gartner Application Integration & Web Services Summit, titled "Costs/Benefits of SOA and Web Services." She presented a case study that profiled Con-Way's successful deployment of SOA and event-driven architectures using Tibco Software Inc. tools.
There are two primary ways that Web services or SOA can deliver ROI — IT ROI and a qualitative, or business value, ROI. In an IT ROI, the IT departments saves money, for example by decreasing the amount of work needed to launch a new project or maintain existing ones. For a qualitative ROI, the return comes from being able to launch new products and services more quickly, gaining additional revenue or improving productivity so that fewer staff are needed to perform the work.
Tibbling warns that when planning a project you should take into account that initially there will probably be no IT ROI. In fact, she says, you will most likely end up spending more money than you do currently on IT costs and so the initial ROI would be negative. That's because developers will be using new techniques, new tools need to be bought and there can be a long ramp-up and learning curve.
"You can't quantify ROI on a single project," she says. "To cost-justify itself, an SOA has to become systematic and has to be used for a number of different projects."
But once the SOA or Web services are used for multiple projects, the IT savings can be substantial. That's because each service or module you create can be reused in new projects, significantly cutting the development time and cost for each subsequent project. There's a multiplier effect as well. Over time, as more and more modules become available, less and less time is required for new projects because more modules are available for reuse. This is where the IT ROI really kicks in — it takes far fewer people to launch new projects because of all the reusable modules available.
Tibbling speaks from personal experience. She says that because Con-Way has built up such a large number of modules — what she calls "artifacts" — the savings have gotten to be substantial. She cites a recent project having to do with customer warranties that she was able to deliver in weeks because she was able to use existing artifacts. Without these reusable modules, it would have taken six months for launch rather than weeks, she says.
Because of this, the ROI of SOA increases with time, sometimes exponentially.
"Let's say that as part of a project, I need to get customer information," she says. "When I code that as a service, it might take me a day. So the first time I code it, there may not be much of an ROI. But the next time I need to get customer information, I've already coded it and so all I need to do is call a service. So I've just saved myself eight hours."
Business Value ROI
Many companies can expect a higher ROI from business value than from IT savings because the business impact of a project can be tremendous and have a much greater financial benefit than greater IT productivity. For example, launching a new revenue-generating service six months earlier than you normally would means six months extra of revenue. Increased business efficiencies bring in savings across an entire enterprise rather than just from a single department, as do IT savings.
Tibbling cites a classic example of a Web services project that reaped a tremendous ROI from a business point of view. Con-Way ships a great deal of freight between the United States and Canada and its trucks frequently need to cross the border. Because of constantly changing and complex regulations, a great deal of paperwork needs to accompany each truck. Each truck would have to spend from two to three hours at the border waiting to pass through customs.
Con-Way wrote a service that automatically routed all the properly filled-out forms to customs electronically so that the trucks were pre-cleared. As a result, they are now able to cross the border in less than a minute. The savings are tremendous — more trucks can cross the border in a day because drivers no longer are tied up in bureaucracy.
Tibbling's bottom-line: When calculating ROI look mostly to the business benefits. To do that, make sure that your IT staff is aligned with the business staff and that there is constant communication between the two. Look for IT ROI as well, but in many cases business benefits will outweigh those. And recognize over time, your ROI should increase.
All this is well and good, but what if you need to sell a CFO on a project before you launch and he or she is looking for the potential ROI? You'll get advice on how to handle that in my next column.
This was first published in January 2006