Why is it important to calculate ROI on MDM?
Though there is not a fixed model for calculating the Return On Investment (ROI) on MDM projects, it is imperative to get the monetized benefits, cost of investment and return before commencing on a project.
The key benefits of calculating ROI on MDM are:
- Helps the client organization to foresee the financial returns of their investment
- Helps the implementation service provider to build a strong business case for MDM
- Helps in showcasing the clear need for MDM, problems in the current master data and business benefits from MDM implementation
- Brings forward the intangible benefits like improved customer satisfaction and business process alignment
Why is it difficult to calculate ROI on MDM? Having said the importance of finding the ROI before commencing on the MDM project, it is not an easy task. Some of the reasons why it is difficult to calculate ROI are:
- MDM is huge. It involves multiple systems of an organization spread across the globe. Assessing the master data status in each of these systems accurately is difficult.
- You are playing with the master data! While implementing master data you touch the sensitive data of a company and hence organizations might be hesitant to reveal all the issues making harder to accurately calculate the ROI.
- What’s the difference between ERP, MDM and custom database solution? Organizations fail to clearly distinguish between a MDM solution and a custom solution built around database for solving their master data issues and hence fail to recognize the importance of a separate MDM solution.
- Show me the dollar value! Many of the benefits from MDM are soft and intangible.(Example: Increased customer satisfaction, higher visibility in planning, accurate and structured reports etc). Hence it becomes all the more difficult to monetize them and arrive at a dollar value of benefits derived form MDM.
How to calculate ROI on MDM?
ROI Defined:
(Gain from MDM Investment – Cost of MDM)
ROI = ----------------------------------------------------------------
Cost of MDM
This blog tries to understand the various factors that must be considered while calculating the ROI of MDM project. The basic steps are:
- Calculate cost of MDM project
- Calculate monetized benefits of MDM
- Calculate NPV, discounted costs and benefits
- Calculate ROI and payback period
1. Calculating costs involved
MDM projects are comparatively of shorter duration if taken one master record at a time. Hence it becomes all the more important to calculate the exact investment that an organization will have to make.
Following are few of the factors that may be noted while calculating the Total Cost of Ownership (TCO).
· Hardware costs (servers, networks etc)
· Software costs (MDM license, Operating System, Database)
· Employee cost (Consultants, developers, administrators, data stewards etc)
· Training cost (Internal stakeholders)
· Annual Maintenance cost
· Other costs (travel, communication etc)
· Integration cost (Cost of integrating existing and new systems with MDM)
· Service Provider (If outsourced)
Though this is not an exhaustive list, cost factors can be added or deleted depending on the scenario.
Each of these costs must be calculated over a period of time using Phase-In YoY factor.
2. Monetized benefits
MDM helps in achieving both monetary as well non-monetary benefits over a period of time.
Monetary Benefits
The direct monetary benefits include reduction in shipment errors, faster customer complaint resolution, accurate reporting and analysis, accurate forecasting, compliance adherance etc.
Intangible Benefits
The non-monetary benefits include business process standardization, adherence to regulatory compliance, improved customer loyalty and service etc. All these factors must be converted to dollar value. One way of achieving this is by weighting them on a scale and then multiplying it by a appropriate dollar value.
All the factors; both cost and benefits; must be calculated over a period of time by considering the Phase-In benefit.
Steps 3 and 4 are common for any financial evaluation and the ROI can be calculated accordingly.
A clear cost benefit analysis before start of an MDM project helps in the long run to continously track the benefits that are reaped as a result of MDM. And hence an accurate calculation encorporating all the various costs and the difeerent business processes that would get benfited must be accounted for during calculation.
