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Business Process Management

Business Process Management: A Formula for Calculating ROI

Contributor: Vinod Jain
Posted: 09/29/2011
Business Process Management: A Formula for Calculating ROI
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Automation and standardization has benefit, but vague references to the possible value of Business Process Management (BPM) isn’t enough for your management team. You need hard figures. So how do you get them?

Consider some of these facts:

  • There is no clear formula or mathematical model available for exact mapping of cost associated with BPM/Dependent projects and ROI. Benefits are multi dimensional compare to single direction.
  • ROI is a critical factor for any larger corporation/ senior management to know before approving any BPM related investment as it is not in the critical path of company success.
  • Major corporations/companies understand the needs/benefits of optimal strategies for operating models to save cost. But don’t want to invest on BPM due to unknown ROI.
  • There are initial up front cost associated with BPM installation and adopting this model.

To determine the Return on Investment & Net Present Value for BPM you need to track both the direct benefits - in terms of cost saving for short term (1 year) and long term (5 years) period – and the In-direct Benefits in terms of cost saving.

Examples of Direct Benefits:

  • Improvement to operating structure/efficiency due to BPM
  • Reduction in day to day breaks, failures, rework compared to previous year
  • Optimized staffing model consist of reallocation of roles and responsibilities (globally or low cost area) as Business Process Modeling exercise
  • Reduction in risk exposure with more control points determined with help of BPM
  • Standard and enhanced End – 2 – End detailed process maps to reflect companies’ policies and procedural (Direct saving on External/internal audits & Time spend on audits with reduced exceptions)

Examples of In-direct Benefits

  • Ease of change management of future enhancements due to more standardized documentation and process mapping
  • Centralized location of Policies & Procedures with details end-to-end mapping for cross reference
  • Direct contact and interaction with IT and business staff due to seamless integration.
  • Ease of onboarding news clients and developing new strategies to accommodate need of clients.
  • Centralized Business analysis & Project Management efforts with more control.
  • Expansion of BPM model to other department with minimal efforts and reduced external expertise.
  • Regulatory and compliance benefits and support to compliance certifications.

Sample ROI Model calculation

  1. Direct Financial Impact (Gain/Loss) - After BPM

Saving on Activities due to…

Approximate Saving (+/- 20% ROE)

%/Month 1

Equiv of
Staff/Yrs
2

$ Approx3

End -2 End Documentation

10%

0.2

16000

Efficiency on GAP Remediation

15%

0.3

24000

Process Automation

20%

0.4

32000

Smooth Handovers (Reduced rework)

10%

0.2

16000

Reporting Automation

10%

0.2

16000

Billing Automation

15%

0.3

24000

Work Flow Events Automation

20%

0.4

32000

Regulatory Fines/Expenses

15%

0.3

24000

Project Management

20%

0.4

32000

Overall Improvement

135%

2.7

216000

  1. In-Direct Financial Impact (Gain/Loss) – After BPM

Saving on Activities due to ...

Approximate Saving (+/- 20% ROE)

%/Month 1

Equiv of
Staff/Yrs
2

$ Approx3

Standardized Approach & Procedures

10%

0.2

16000

Standard error codes

5%

0.1

8000

Streamline Alerts & Notifications

10%

0.2

16000

Ease of Change management

15%

0.3

24000

IT Interaction and Modification

15%

0.3

24000

SLA & Audit support

10%

0.2

16000

Employee Satisfaction

10%

0.2

16000

Reduction in External BPM SME

30%

0.4

32000

Overall Improvement

105%

1.9

152000

Next 5 Year analysis

Years

BPM
Investment($)
4

Approx Exp. ($)

Direct Impact
Savings

Net Benefits (Excl. indirect Benefit) $

Licenses

FTE (Consult)5

(4K + FTE*85K)

1

4000

2

164000

216000

52000

2

4000

0.75

64000

216000

152000

3

4000

0.5

44000

216000

172000

4

4000

0.1

12000

216000

204000

5

4000

0.1

12000

216000

204000

Total Investment

296000

Total Saving

784000

ROI Calculation :

Total Investment = 296000 (Over 5 years)

Total Saving (Excluding in-direct savings) = 784000

IRR (Companies rate of return) = 6% (Usually between 6 % - 8%)

Gain or Loss on Investment ($) = 488,000 Term =5

ROI (%) = 164.9% Simple Annualized ROI (%) = 33%

The above example presents a comprehensive view of rate of return on investment by incorporating BPM with business and operation. Here it clearly shows that "Direct Impact" or savings are greater in both time and strategy when you incorporate BPM in addition to "in – direct benefits". The overall approval for any company/ department can be quantified / justified based on above calculation by plugging in their numbers.

Adoption and Best Practices

Once you’ve calculated the ROI of BPM, what’s the best way of adopting it? Incrementally, is the answer.

The biggest obstacles to BPM adoption are culture, resources and funding because in large organizations, multiple divisions need to coordinate on the initial roll-out. So, it’s always advisable to incorporate BPM technology by taking an "incremental approach" at enterprise level. This has been the approach taken by many financial organizations, for instance, when adopting BPM strategies. Financial businesses are complex and distributed, and if you start small it is much easier to see and measure the impact.

Additionally, BPM modeling can provides a very quick and direct visual perspective of any gaps and issues that may be a reflecting of problems within larger financial processes. This helps managing business planning, reporting , integration and activities associated through closed loop.

Sample Business Architecture Model

Once you’ve calculated the ROI of BPM, and identified the areas where you will adopt it, here’s an example of what a business architecture model could look like:

References & Assumptions

* ROE: Rate of Error

* 1 – % saving in terms of HRS converted to approximate per month distribution.

* 2 – Saved Time per Year approximate resource saving (Considering standard 40 -50 Hrs/week)

* 3 – 1 FTE – Approx salary nearly 80K /Year

* 4 - BPM Licenses( Multiple) approx 4 K (Enterprise level could be cheaper)

* 5 – BPM FTE Cost from vendor for installation and training (Approx 30 -40 Hrs/Week)

* IRR - Normally its 6 % - 8 %

* Used google.com – Web Search for secondary information

* Article reference http://www.bpminstitute.org/articles/article/article/future-with-bpm-cost-vs-benefits-strategies.html


Thank you, for your interest in Business Process Management: A Formula for Calculating ROI.
Vinod Jain
Contributor: Vinod Jain