1.5 The ROI of Enterprise Integration
Companies that have invested in an integrated IT environment have seen dramatic results in business performance. Case Study 1.4 is a compilation of the impact that can result when an organization is able to harness the power of an integrated information system. However, many decision makers require even more data before they agree to pursue a project.
Even if we grant the fact that real-time business requires comprehensive integration, often managers allocating budgets need more tangible paybacks before they will fund an integration project. In fact, there are clearly definable areas where integration projects have been shown to deliver an ROI. Enterprise integration reduces personnel, IT, and business costs and increases revenues. Two other important benefits that companies gain from integration are increasing customer satisfaction and improving overall quality and efficiency through optimizing business processes. An ROI can be calculated in any of these areas to justify a project.
1.5.1 Reducing Costs
Personnel costs can be reduced through automating business processes and reducing head count; providing self-service interfaces for customers, thereby reducing customer support costs; and making information easily and readily available, thereby reducing training costs. For example, through enterprise integration a logistics service company was able to triple its size in five years, going from $80 million to $250 million in revenue, without adding additional head count. It standardized on its product offering, which enabled it to implement new solutions faster, with fewer and less-skilled employees. While saving money, it also increased customer satisfaction and reduced risk.
Through process automation, a Canadian transportation company eliminated 70,000 to 80,000 hand-processed transactions, reducing cost per order from $25 to $5, saving $1.6 million per year. A high-tech parts supplier saved over $166,000 annually by replacing transactions that have gone through Value-Added Networks (VANs) with RosettaNet transactions. It reduced the cost of setting up new partners by 50%. Less-specialized personnel can now perform setups previously done by senior-level system engineers. Employees no longer have to learn some of their partners' proprietary applications to conduct business. Lastly, it reduced the time and costs related to checking inventory from five minutes over the phone to six seconds electronically.
Sidebar 1.4. Achieving Dramatic Business Result
Does mastering business integration have a meaningful effect on an organization? Will an investment in an organizational approach to business integration pay off? A survey of 162 North American information technology executives conducted by NerveWire found that the most highly integrated companies had generated the following results through their integration initiatives (Surmacz 2002):
40% increase in revenue
30% decrease in cost
35% increase in customer retention
We continually see three attributes in successful organizations that benefit from business integration.
Organizational. Integration is not an administrative or technology task, but one where business interactions are more effectively managed.
Architecture. Significant emphasis is placed on the architectural aspects of the technology and its application and not on the selection of a specific vendor, product, or approach. In addition, technology coupling is as loose as possible. Tight coupling or proprietary approaches provide only short-term benefits.
Expertise. Organizations that commit to developing business integration as a core competency achieve more dramatic results than those that outsource their integration. One claim is that 3:1 productivity measures are seen between those that are able to master business integration and those that cannot.
Improving the ability to integrate can no longer be pushed aside as a technology issue; it must be addressed as core to the business strategy.
IT costs can be reduced by reducing error rates and the cost of fixing errors, eliminating rekeying of information, and reducing system support costs through integration. For example, a high-tech manufacturer using RosettaNet reported an 85% reduction in error rates and achieved a 100% ROI in the first year. Reducing errors cropped up frequently in ROI studies, for good reason: The cost of processing disputed transactions is orders of magnitude higher than nondisputed transactions.
Enterprise integration can reduce business costs by reducing the cost of implementing change and optimizing business processes. Integration provides the infrastructure that enables companies to rapidly implement new business solutions or change existing ones to meet new requirements. Rather than having to hand code connectivity to applications and information for each new business solution, the underlying integration architecture provides the necessary connectivity, translation and transformation, intelligent routing, and process management. With a fully integrated infrastructure and process, management business analysts can implement many business process changes without IT intervention, enabling them to implement change at the speed of business.
1.5.2 Increasing Revenue
Enterprise integration can increase revenue by increasing market share and creating new market opportunities. Increased market share is the result of retaining and increasing revenue from existing customers by increasing customer satisfaction and attracting new customers by bringing new products and services to market rapidly in response to emerging opportunities.
New opportunities are created by integrating with partners and suppliers, bringing products and services to market more quickly, and creating new sales or distribution channels through on-line capabilities. For example, a high-tech electronics supplier achieved a 40% increase in sales through implementing real-time order capabilities. In 1999, 81% of Cisco's orders were placed online, representing $11.7 billion annually, with 98% to 99% accuracy. Because of an integrated supply chain, Dell was able to deliver customized PCs in days rather than weeks, propelling the company to market leadership.
1.5.3 Customer Satisfaction
Customer satisfaction is increasingly becoming an important area of focus and spending for many organizations, so we will address it separately here. A major insurance company reported that 1% of retention can equate to nearly $25 million to the bottom line. According to a study by the Insight Technology Group (Dickie 1999), improving knowledge of the customer and customer relationship management has the following benefits:
20% increase in customer satisfaction ratings
42% increase in revenue
35% decrease in sales costs
25% decrease in sales cycles
The potential ROI for increasing customer satisfaction is tremendous. Enterprise integration can increase customer satisfaction by making information easily available and responding to customer requests and complaints more quickly. For example, online customer self-service systems enable customers to view their account balances on demand, track orders, and change information. The customer is more satisfied because needs are met immediately, and the company saves money on personnel costs. Integrating customer information from disparate back-end systems enables improving customer interactions at every stage of a transaction, through every channel used for a customer interaction. Companies investing in Customer Relationship Management (CRM) systems are finding that integration is a large part of the implementation process.
1.5.4 Business Process Improvement
Business process optimization holds the greatest potential for ROI. Through process optimization companies can do things better, faster, and cheaper. For example, a large apparel manufacturer reduced inventory costs by 10%, saving millions of dollars through the ability to plan plant capacity better and optimize the manufacturing process. A logistics service company reported that its customers have been able to shrink inventory floor space by 50%, yielding significant savings in inventory carrying costs through enhanced visibility into its logistics supply chain. A high-tech manufacturer projects a 230% ROI over five years through improved business processes provided by implementing RosettaNet Process Interchange Protocols (specifications for automated B2B transactions in the high-tech industry). Business process optimization reduces the latency in business and improves efficiency, quality, and bottom-line profitability.