September 2006

Calculating the Expected ROI of BPM

Calculating expected return on investment (ROI) is a
difficult exercise, as where and how ROI is generated
differs from company to company and situation to
situation. In the case of business process managment
(BPM), this difficulty is further compounded by the many
intangibles and difficulties in quantifying benefits, as
demonstrated by results from a survey by Intercai
Mondiale that appears elsewhere in this newsletter.
That said, there’s no question that coming up with at least a ballpark figure for expected returns is
important. The first step toward calculating expected ROI is to identify potential places where ROI would
be likely to be generated.

Here are a few ideas:

Situations where a large number of false positives are being generated. If you are turning
down 50% of credit card applicants because they are showing up as fraudulent, it is likely that
introducing a more refined and accurate way of scoring applicants may help you reduce that
number to a more reasonable one, thereby increasing the number of potential customers.
Situations where throughput is limiting production and ability to satisfy demand. This
could be caused by inefficient processes, where a lack of a certain resource is causing a
bottleneck. It might also be caused by a sub-optimal process that could be improved with
some optimization.
Situations where tasks can be automated to increase productivity. This will help you
decrease the number of employees needed or allow your organization to scale up and
increase production.
Situations where frequent costly errors are made. These are parts of a process that
generally involve some sort of calculation or decision. If the errors are caused by calculation
errors, automating those aspects of the process can result in a tremendous savings. This is
usually done by incorporating some type of business rule engine into your business process. If
the errors result from lack of information, BPM can be of significant value by providing the right
information to the right person at the right time.

Generally, the ROI associated with a BPM project is generated from a number of sources, both
quantifiable and not. The first step towards getting a plausible ROI number for the tangible benefits of a
BPM project is to identify your metrics. Once you have identified metrics that are likely to generate ROI
for your organization, it’s really just a question of “plug and chug.”
The following example -- based on the case of false positives mentioned above -- shows how to
calculate potential ROI by making inferences from available data:
 Identify the number of customers being turned down based on the likelihood that their
application is fraudulent. In this case: 50%. Call this number fraudcurrent

Using available information, identify what the likely actual fraud rate is. In this
case: 3%. Call this number fraudactual

Find out the average revenue generated from a customer for this type of product. In this case:
$1000. Call that number revenuecust

Identify, based on historical data, the number of applicants for this product over a given period.
In this case: 100,000 over the past year. Call this customersyear

Perform the calculation:

ROI in dollars/year =
(customers * (1 - fraudactual )) * revenuecust ) – (customers year* (1 - fraudcurrent )) *
year
revenuecust ) = (100,000 cust/year * (1 - .03)) * 1000 dollars/cust) – (100,000 cust/year *
(1 - .5)) * 1000 dollars/cust = 47,000,000 dollars/year = ROI in dollars/year

This is just one example of how to calculate one type of ROI. The validity of the calculation is obviously
dependent on the accuracy of the numbers used and the surrounding business conditions and
objectives. For example, even though the actual number of fraudulent applications is 3%, you still may
not be able to fine-tune your system to reach this level; you may still have 7% false positives in addition
to the 3% of real positive identifications. For this reason, it is important to understand that any ROI
projection is only a ballpark number. On the other hand this type of mathematical calculation of ROI will
also exclude the many intangible benefits that come from implementing BPM software.