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ROI calculation methodology
In order to get the full benefit of SOA, a holistic approach should be taken. Such an approach takes business benefits, development costs, and infrastructure costs into account. In this approach, you divide the overall transformation into multiple projects and you estimate the ROI based on the costs and benefits of each project. By considering the costs and benefits in total, you achieve a more balanced view than if you consider each project’s costs in isolation.
Many factors go into calculating ROI for SOA. The cost factors are similar to those for other IT projects, and include development costs, hardware costs, software costs, and deployment costs. The benefits are many and include quantifiable advantages such as revenue increases and cost savings, as well as advantages that are more difficult to quantify, such as flexibility and responsiveness to change.
Development costs include costs of project managers, consultants, and technical resources such as architects and programmers. Software costs include costs of development tools, middleware, such as application servers, message-oriented middleware, LDAP and RDBMS systems, and software for monitoring and managing deployed systems. Hardware costs include costs for servers, storage, and networking equipment. Some of these costs can be deferred or reduced by using hosting services and hosted applications. Deployment costs include costs for administrators, operators, and support personnel. Some of the people costs could increase at the beginning of an SOA conversion, but are expected to decrease as the benefits of SOA, such as reusability, are factored in the equation. Another factor that will decrease costs over time is improved technology and tooling, which will improve the productivity of less skilled developers and even allow business analysts to do tasks that currently require programmers.
The benefits of SOA are varying. They depend on the individual projects. Some projects have easily quantified benefits, such as savings on materials or supplies. Others have benefits that are more difficult to quantify. If SOA allows you to get to the market faster, because you are able to reuse existing software instead of creating software from scratch, it will increase your sales and take market share from a competitor. Therefore, the benefits are increased revenue and profitability. If SOA allows you to serve more devices, such as cell phones, PDAs, Web browsers, and so forth, by increasing customer satisfaction, it could increase your sales or decrease your customer support costs, with measurable benefits on the bottom line. If SOA allows you to reach more customers by integrating with a leading e-commerce site such as eBay or Amazon, it could increase your sales. If you are in a supply chain and have to integrate business partners into your network, using SOA makes integration easier. This decreases the cost of integration. If you provide data to customers or suppliers using Web pages, providing the data via SOA eliminates manual touches, decreases error rates, and increases customer and supplier satisfaction. If you provide data to customers, suppliers, or other applications using data files, such as bulk data transfer, providing the data via SOA eliminates latency, which can have an impact on the bottom line. Providing data via SOA and Web services may also result in a more valuable service for your customers, resulting in higher revenue.
Most businesses have issues, problems, or pain points that, if solved, would have significant impacts on important measures such as revenue, profit, time to market, or ability to respond to new challenges and opportunities. These pain points can be found though a variety of methods, including component based modeling. The methods generally focus on the company’s strategic direction, its business processes, and its IT environment. The methods analyze the current state, industry trends, and technology trends as well as corporate strategy. The result consists of corporate drivers, business objectives, and a set of business initiatives that will transform the business to achieve its goals, such as revenue and profit. In most cases, these business initiatives provide opportunities for IT. These opportunities support the initiatives and ultimately help the company reach its goals. The opportunities can be categorized based on whether they are:
- Foundation opportunities — Opportunities that should be initiated prior to other opportunities to enable the development and ease of future system integration
- Enhancement opportunities — Opportunities that will improve or expedite current processes
- Quick-win opportunities — Opportunities that can be implemented quickly and whose benefits can be realized in the near term
- Transformation opportunities — Opportunities that will change the current operating model and directly impact the businesses revenue stream or profitability
By examining the opportunities, estimating the costs and benefits of each opportunity, a dependency graph of opportunities can be created. A dependency graph of opportunities is a graph that shows which opportunities are prerequisites for others. You can create a roadmap for a transition to SOA and determine the ROI for a group of opportunities, thereby justifying the initial outlay for a conversion to SOA.
Customer and analyst evaluations of SOA ROI
Here are what some of the analysts, consultants, and customers have to say about ROI for SOA and Web services.
Don Buskard, Senior VP and CTO of AXA Financial states:
"The benefits of easier integration and increased agility lead to greater ROI." Buskard says he’s achieved a 200 percent return on his SOA investment. One of AXA Financial’s most popular SOA-based services is Get Client, in which any front-end app can issue a command and, after probing around the legacy systems, come back with a complete picture of a customer’s investments. Buskard says that Get Client is one example of how AXA achieves its ROI — developers design services to be generic enough that they can work with an array of front-facing systems, reducing development time and freeing developers to spend more time on business solutions. In addition, IT workers can easily incorporate new technologies into the SOA, reducing risk and expense while speeding development of new applications
("What you need to know about service-oriented architecture." CIO magazine, Jan 15, 2004.)
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"How much effort could you save by reusing something rather than writing it yourself? Typical answers span a wide range (usually from 50% to 100% savings) and depend on factors related to your environment and existing applications.
"With this in mind (and based on a lot of hard data), we estimate that a reasonable savings due to reuse is approximately 80% of the cost needed to develop the same software development asset (SDA) for one-time use. At an industry-average cost to develop new software of around $100 per line, this means that every 1,000 lines of reused code yields a development cost avoidance of $80,000!....
"A service-oriented architecture requires developers to design services that have the proper granularity and generality for reuse."
("The business case for software reuse," Jeffrey Poulin and Brent Carlson, Computerworld, February 2, 2004.)
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"A review of early case studies indicates that organizations that use a service-oriented architecture (SOA) can reduce integration project development and maintenance costs by 30% or more. These savings are made possible by the increased effectiveness of component reuse that SOA enables."
("Integration in a Service-Oriented World," Ken Vollmer and Mike Galpin, Forrester, July 6, 2004)
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Financial return
IDC conducted a study in 2002 with in-depth interviews of seven IBM customers implementing Web services. The overall results of the analysis were:
"On average, major benefits projected over three years include a reduction in costs of $39.7 million on an investment of $1.8 million, 22% faster time to deployment of key new applications, and an increase of 47% in developer efficiency."
For most, time to market was the key driver. The ability to deliver services online to employees, customers, partners, and suppliers quickly and easily, using simple interfaces across disparate systems, holds universal appeal. In addition, the ability of external parties to manage their own account information via a self-service model was also valued.
The IDC study also found:
- On average, developers became 47% more efficient and companies were able to save $2.2 million annually through reallocation of developer assets or meeting increased demand for applications without hiring additional developers. In addition, companies with call centers were able to increase the efficiency of their operations by 15%. Because Web services are standards-based, it also protected prior investments in technology. Companies were not locked into specific service or platform providers.
- Investment estimates from each organization interviewed found that companies spent, on average, $6.76 per user for their Web services projects. Costs ranged from $0.17 to $17.50 per user. Users were defined as anyone in contact with the applications launched via Web services and included employees, partners, distributors, consortia members, customers, and regulated companies.
The following are some data collected from IBM customers showing the financial returns of Web services:
- One large financial services company was able to save three weeks of time (2,700 hours) and $170,000 in costs by introducing new applications via Web services.
- An online retailer reduced the time required to set up the extranet relationships critical to getting its business functional from six months to two months. This time savings allowed the company to gain four additional months of revenue. For this online retailer, the competitive advantage came from being first to market.
- A medical service replaced a paper-based forms process where medical forms were sent in for verification. In automating this business process, its partner companies were able to reduce the time required to process claims by 50% through the elimination of paper handling. Many members were able to raise productive time by approximately 2,400 hours annually, resulting in collective savings of $1.1 million. The increase in productivity had other significant benefits as well that could not be measured directly. For example, many clerical errors were eliminated, and lost documents due to misfiling and misrouting were reduced. Employees had more time to review forms and implement quality-control measures, which resulted in more accurate work, faster turnaround, and higher customer satisfaction.
- An online retailer estimates that its revenue increased by 2% due to its distributors being able to create better business-to-consumer applications. The customer has only 10 retail stores, and it generates about 80% of its business from online sales. Web services technology lets the company get its distributors online faster by using simple interfaces, accelerating time to market. Setup time for initiating extranet relationships has been reduced by 33%, going from one year to eight months. Since Web services can be deployed using industry standards, an added benefit has been that the technical staff among its distributors is more eager to build applications than in the recent past.
- A government agency used a Web-enabled e-commerce system to standardize and automate the reporting format and data requirements for the companies that it regulates. In turn, the automation increased the efficiency of the government agency and the companies being regulated by 20–30%. Today, only 10–25% of the companies are involved, and the government agency estimates that by the time all companies are part of the system, it will have avoided hiring 10–12 people to monitor regulatory compliance.
- An online retailer now has more of its distributors using online systems and estimates that a significant portion of its call center operation, about 100 people, are approximately 25% more efficient. The ability to reuse software through a Web services architecture makes feature exposure easier across company organizational lines for this company's 200 developers. As a direct result, 50 developers will become 30% more productive over the near term.
Documented examples from public sources
The following are some real numbers from public sources on the financial returns of implementing SOA and Web services:
AXA Financial:
- Industry: $7.5 billion (U.S.) insurance and financial services company
- Application: Services-based IT infrastructure
- "Sticking to a vision has its rewards. For AXA Financial Services LLc, those rewards add up to about $55 million, which is what IT executives figure they’ve saved by adhering to a blueprint for the services-based computing architecture the company first laid out in 1990….The bottom line is that AXA has saved a lot of money," says CIO Bill Levine.
"We spent about $35 million on our architecture, and we estimate it would have cost us about $90 million to do the same thing had we not had an architecture in place," Levine says.
("Building an IT architecture for the long term," Computerworld, February 09, 2004.)
Providence Health System:
- Industry: 606,000-member system of hospitals, clinics, and assisted-living complexes in the Northwest.
- Application: Providence is using Web services to create:
". . . a network of reusable components that likely will save it more than $1 million per year, lead to better patient care, and potentially save lives…The project will make medical and other records, which are spread across disparate systems, accessible to patients and physicians through portal-based applications."
"pulls together in no more than 3 seconds all the electronic medical records a patient’s primary care physician has stored…The system aggregates data from 27 physician offices."
- "This is more of a business-based ROI based on what this new technology will allow physicians to do,"
says Mike Reagin, director of research and development.
"It's significant to say that potentially making this technology available to physicians can save us $700,000 per year. That is in addition to savings Providence gets with its Profile Manager Web service introduced two years ago."
- "As its Web services effort has evolved, Providence has created its version of a service-oriented architecture (SOA) built on component collection that provides simple and reusable interfaces for incorporating patient data into an application."
("Web services project protects healthcare provider," Network World, March 15, 2004.)
Bekins Company: Industry: Moving company
- Application: Logistics management
- Tonnage Broadcast Exchange (TBE) focused on solving a long-standing problem of how to tender shipping jobs to Bekins agents. In the past, jobs had to be tendered by phone or fax, often causing delays and sometimes a feeling of unfairness on the part of the agents. TBE automates this process by offering the opportunity to all qualified agents at the same time and enabling an agent to instantly claim the job, making it no longer available to anyone else.
- Reduced operating costs resulted in improving profitability by $1M. TBE enables Bekins to pass on lower-margin freight more efficiently to its business partners, reducing its carrying costs up to 2% while maintaining high levels of customer service.
- Reduced cycle time by 25% and improved customer satisfaction and loyalty. Through the use of advanced Web services tools and technologies from IBM, which provided extensive sample code, Bekins shaved two-thirds off the development cycle. This saved an estimated $100,000 compared to building the solution from scratch.
Nintendo Australia:
- Industry: PC and video game creator
- Application: Software maintenance
- "Odyssey has the potential to save Nintendo around one million Australian dollars over the course of four to five years,"
Stroud [information technology (IT) Manager at Nintendo Australia] predicts. This year, Nintendo Australia stands to save about AUS$20,000 in maintenance costs alone on ancillary software packages that it no longer needs. For example, the distributor can generate all of its documents electronically, in PDF format, eliminating the need for paper processing, sending, archiving and storage facilities.
A reasonable and justifiable estimate of reduced integration project development and maintenance costs due to SOA is 30%.
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