Measuring business benefit

How can you justify any investment in e-business projects? Are there any methodologies for calculating return on investments, or...

How can you justify any investment in e-business projects? Are there any methodologies for calculating return on investments, or should it be treated as more of a qualitative issue?

Normal business rules apply

Roland Hanbury

Rubus

The Internet stock bubble has led some people to think that the normal rules of business have been suspended. Maybe they have, but only temporarily.

Anyone planning a significant e-business investment now would be well advised to apply standard project evaluation techniques. That requires creativity as well as rigorous analysis.

On the financial side it is important to blend tangible and quantifiable figures, such as cost savings in postage, with the larger but harder to estimate figures such as additional sales.

Nowadays we would also suggest including a section on opportunity costs - what are the consequences if you are the last in your industry to develop this capability?

The art of the believable business case is in the validation of the assumptions: how many different ways can you sensibly cross-check estimates?

Whether the final figure is converted into a return on investment, payback, shareholder value - or whatever - is largely irrelevant. If it is a good idea it will look good on all of them!

In summary, use normal investment criteria but add in a creative twist to account for the uncertainty of the Internet.

Follow your hunch

Nick Maxwell

Quidnunc

Whole books are written on this subject, so it is tricky to distil this into one paragraph.

But what the heck! The justification on any business venture will come down to three things. The costs involved in setting up and running the venture; the revenues realised through running it; and the value on any intangibles created.

The intangibles are, well, intangible and so difficult to put any precise value on until someone is prepared to put a price on them. Compared with this, the costs are relatively easy - you must consider what is involved in setting up and maintaining the venture.

Stacked against all of the costs should be a revenue plan that takes into account your perception of how the market will respond to the online offering. And here lies the real difficulty. Any forward revenue projection for any new business is always going to be based on a view of market behaviour and demand.

Hiding underneath all the hard facts and figures is a hunch. So take your hunch, do the research you need to convince your colleagues and investors that this is the right journey to embark on and remember: nothing ventured, nothing gained.

Roi is not enough

Martin Butler

MD Butler group

Return on investment is proving to be a stumbling block for many businesses looking to exploit e-business technologies. Where ROI can be predicted, it tends to be quite small.

Indeed ROI calculations only tend to apply to supply-side activities where cost savings can be accurately calculated. On the demand side, ROI is wholly inadequate as a device for making investment decisions.

Where decisions about using e-business technologies to enter new markets or provide new interfaces to existing markets are concerned the issues are much more qualitative and, dare I say, speculative. It is here however that the really big returns can be realised.

Model for maturity

Peter de Groot

Andersen Consulting

Any e-business project should be supported by a business case, but the numbers can be subject to considerable qualitative judgement.

A common method for calculating the value of a project is to calculate the present value of future cash flows resulting from that project.

For e-business projects that are primarily about streamlining existing business processes this is relatively straightforward. Things get trickier when starting up a new e-business operation or standalone e-business. The challenge comes in estimating the many imponderables that exist in a start-up.

E-economics favour scale disproportionately and so drive e-businesses to achieve market dominance quickly. This requires substantial up-front marketing and customer acquisition costs and so the cash flow of a first year start-up gives little or no clue to future success.

What you have to do is to model the economics of the business when it has achieved a position of dominance in its sector.

This is why analysts use proxy measures such as site visits and customer numbers as an indication of future dominance and resulting cash flows.

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Each month E-Business Review prints a problem submitted by readers. Our panel of experts draws on their specialist knowledge to explain how best to solve it.

E-mail your questions or your own personal solutions to this or next week's problem.

Our panel of experts

This month's replies were drawn from:

  • Roland Hanbury, of e-business consultancy Rubus

  • Martin Butler of analysts Butler Group

  • Andrew Rigby from law firm Tarlo Lyons

  • Ken Olisa, venture marketing forum, Interregnum

  • Roger Till, e-business user group, eCentre UK

  • Nick Maxwell, from e-business consultancy Quidnunc

  • David Grimshaw, Cranfield School of Management

  • Peter De Groot, Andersen Consulting

  • Neil Barrett, from IT security consultancy IRM

  • Read more on E-commerce technology

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