What is the ROI of BPM?
Implementing business process management (BPM) for your project or organization is associated with increased return on investment and maximizing the utilization of all resources. But, understanding the differences between types of ROI for your project can help you maximize your investments.
This includes learning how to recognize the difference in benefit types. ROI types may range from actual costs of implementation or long-term cost savings for your operation. In fact, knowing more about how direct and indirect ROI of BPM affects your organization can be key to the success of your short-term and long-term projects.
Direct Versus Indirect ROI From BPM
Direct and indirect ROI both describe the overall return on different parts of a project. Direct ROI revolves around BPM costs that can be quantified easily.
For example, the actual cost of a software platform is considered in calculating direct ROI.
Think of direct ROI as hard, tangible costs that can be leveraged to identify ways to increase your ROI. The simplest way to define indirect ROI is to think of long-term costs. This includes costs associated with adherence to environmental regulations, meeting quality standards, and mitigating risk. Each indirect cost reflects how well your company will do in the future. Employee training would be an example of a value that has an indirect benefit to your company, which you can learn more about by downloading this guide. Of course, indirect ROI may also have benefits for short-term savings as well.
Direct ROI of BPM
The direct ROI of BPM goes back to knowing how to manage specific, finite costs within your project. This includes the immediate costs of implementing a new BPM platform, such as purchasing new computer terminals, maximizing your investment. Process management naturally leads to lower costs and better overall visibility. But, the direct ROI from effective process management continues to benefit your project in the following ways:
- Improved Efficiency – Process management enables your organization to determine what areas of a project appear to be lacking. This results in better identification of weak areas and how to improve them.
- Minimized Risk For Error – Decreased risk for error derives from ensuring the goals, including those of smaller activity-groups, are met.
- Clearly Defined Roles and Responsibilities For Employees – When employees understand their responsibilities and roles in your project, you can help keep them on track and budget.
Direct ROI helps you plan for the immediate future of your organization. And, it can help you maximize your investments in Oracle Primavera, risk management programs or other resources.
Indirect ROI of BPM
Indirect ROI reflects costs that warrant the subjective evaluation, which are integral in devising a strategic direction for your company, reports BMPInstitute.org. A strategic direction also includes the use of training and any resources that affect the success of your company, as explained in a previous blog post. For example, completing training to use BPM tools might be key in unlocking higher ROI.
Reduced future costs in acquiring new clients reflect indirect ROI as well. Since you can approximate value, it does have an influence on your ROI calculation. Yet, you can reduce its impact by using existing BPM data sources to create more-accurate evaluations. Calculating indirect ROI results in the following benefits:
- Standardized Process and Procedures Across the Organization – Standardization gives workers the tools and resources needed to ensure adherence to budget and scheduling issues. For example, an indirect ROI impact on standard procedures may include the creation of enhanced policy guidelines.
- Better Collaboration – Since more employees understand what to do, including how to respond in unusual circumstances and manage scope creep, as explained by Upside Research, indirect ROI of process management results in better collaboration. This helps to ensure future success as well.
Calculating the ROI of BPM
How to Calculate Direct ROI
Like any ROI calculation, you need to know what you have before you can take full advantage of your investments, such as the investment discussed in this ebook. To calculate direct ROI, you need a list of the actual expenses incurred from implementing BPM in your project. Calculate direct cost savings for each expense. For example, assume BPM implementation results in a 20-percent cost savings of project management platform costs overall. Next, add the cost savings to your original expected profit. Divide the sum by the total costs of process management implementation.
Direct ROI = (Total “Hard” Cost Savings & Benefits / Total Expenses of Implementation) * 100
2. How to Calculate Indirect ROI
Indirect ROI calculations are more complex. This is because the initial values needed to perform the calculation are more difficult to obtain, such as reduced costs of growing your client base.
Determine the costs associated with maintaining your project without process management, such as regulatory, quality, new client acquisition or risk costs. This is your control value.
Define the projected cost savings of maintaining your project after BPM implementation in relation to compliance, quality, client acquisition, and risk. This is the projected net benefit on indirect factors.
Indirect ROI = (Projected Net Indirect Benefit / Control Value) * 100
Depending on who describes the calculations, terminology for values may vary from source to source. However, the base formula remains the same. Both results for the general formula must be multiplied by 100 to determine an ROI percentage.
Note: In some cases, the parenthetical calculation in ROI may result in decimal, integer or another number. For example, $29,000 in Project Benefits divided by $20,000 as the Control Value results in 1.45. Multiplying this value by 100 results in a 145-percent indirect ROI.
A Formula for Calculating ROI
Automation and standardization have 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 the cost associated with BPM/Dependent projects and ROI. Benefits are multi-dimensional compared to a 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 in BPM due to unknown ROI.
- There is an initial upfront 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 of operating structure/efficiency due to BPM
- Reduction in day to day breaks, failures, rework compared to the previous year
- Optimized staffing model consists 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 company’s 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
- The 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 new clients and developing new strategies to accommodate the need of clients.
- Centralized Business analysis & Project Management efforts with more control.
- Expansion of BPM model to other departments 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
|End -2 End Documentation||10%||0.2||16000|
|Efficiency on GAP Remediation||15%||0.3||24000|
|Smooth Handovers (Reduced rework)||10%||0.2||16000|
|Work Flow Events Automation||20%||0.4||32000|
|2. In-Direct Financial Impact (Gain/Loss) – After BPM|
|Saving on Activities due to …||Approximate Saving (+/- 20% ROE)|
|%/Month 1||Equiv of
|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|
|Reduction in External BPM SME||30%||0.4||32000|
Next 5 Year analysis
|Approx Exp. ($)||Direct Impact
|Net Benefits (Excl. indirect Benefit) $|
|Licenses||FTE (Consult)5||(4K + FTE*85K)|
|Total Investment||296000||Total Saving||784000|
ROI Calculation :
Total Investment = 296000 (Over 5 years)
Total Saving (Excluding in-direct savings) = 784000
IRR (Companies rate of return) = 6% (Usually between 6 % – 8%)
Gain or Loss on Investment ($) = 488,000 Term =5
ROI (%) = 164.9% S
Simple Annualized ROI (%) = 33%
- The above example presents a comprehensive view of the 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 “indirect benefits”.
- The overall approval for any company/ department can be quantified/justified based on the above calculation by plugging in their numbers.
- The vast majority of BPM implementations do not allow a completely reliable estimate of the profitability that the organization will obtain.
- But using best practices and the explained methodology an estimation can be made to assist the managers in the making of concrete decisions in this topic.