building a business case for eda - oracle · event driven architecture (eda) is a key technology...

An Oracle White Paper June 2011

IT Strategies from Oracle Building a Business Case for EDA

IT Strategies from Oracle – Business Case for EDA

Table of Contents Introduction ....................................................................................... 2 Process for building the business case for EDA ................................ 3

Business Context ........................................................................... 4

Revenue Growth Drivers ........................................................................ 4

Cost Reduction Drivers........................................................................... 5

Agility and TTM drivers ........................................................................... 5

Technology Drivers ................................................................................. 5

Business Benefits Identification .............................................................. 6

Tangible and Intangible Benefits ............................................................ 6 Benefits ......................................................................................... 8

Identify sources of cost savings ............................................................. 9

Estimate cost savings ........................................................................... 10

Identify additional revenue streams ...................................................... 11

Estimate additional revenue ................................................................. 11

Estimate the other benefits ................................................................... 12 Investments ................................................................................. 13 ROI .............................................................................................. 14 Business Case ............................................................................ 16

Oracle EDA ROI Tool ...................................................................... 17 Structure and Organization .......................................................... 17 Usage Flow ................................................................................. 18

Conclusion ...................................................................................... 19


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Introduction

Businesses are always looking for ways of gaining competitive advantage over their peers to survive and thrive in their sector. One of the ways of achieving this is by doing business better and faster than their competitors. A nimble business can respond to market changes faster and cut down time-to-market significantly. Internal and market conditions must be quickly detected and responded to in real-time thereby supporting timely business decisions. The business transforms to a Real-Time Enterprise (RTE), when the right information gets to the right people at the right time.

Event Driven Architecture (EDA) is a key technology enabler of Real-Time Enterprises (RTE). EDA complements existing enterprise technologies by providing the infrastructure needed to support the event-driven solutions that analyze complex relationships between business events to identify business opportunities, threats, and anomalies. Business users need timely information about significant business activities to improve the quality of the decisions they make and to close the insight-to-action gap.

As IT systems continue to proliferate, the volume of events to be processed also grows exponentially. These events possess complex inter-relationships that are not easily deciphered by human examination. The challenge for many organizations is identifying or deriving the notable events that are important to the business. EDA solves this challenge of handling high volume of events that possess complex inter-relationships.

The maturity and adoption levels of EDA differ from one organization to the other. Some organizations have been using EDA in some form or the other for long, while other organizations may not have heard of EDA at all. Investing in an EDA initiative, whether beginning a new one, or re-architecting an existing one, would require sufficient justification for management approval and funding.

Oracle has created a ROI Tool for creating the business justification for an EDA initiative. This tool is based on industry best practices and has built-in default parameters and complex logic to calculate ROI metrics. The tool also presents the results in an executive-friendly format.

The goal of this whitepaper is to outline the process for building a business case for EDA, and elaborate the use of the EDA ROI Tool to support the business case.


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Process for building the business case for EDA

Figure 1 illustrates the process for building a business case for EDA. Each of the phases of this process is described in detail in the following sections along with the usage of the Oracle EDA ROI tool pertinent to that section.

Figure 1 - Building the business case for EDA - the process


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It is divided into five major groups of activities listed below:

• Understanding the Business Context • Identify and Estimate the Benefits • Identify and Estimates the Investments • Calculate the ROI • Build the Business Case and Communicate to the Stakeholders

Each of these categories is described in detail below:

Business Context

A business case must clearly demonstrate how the investment will benefit the core goals and objectives of the organization. All investments must align with and support the corporate goals. So, the first and foremost activity in building a business case is to understand the business context by reviewing the goals and objectives of the organization.

A number of drivers affect how an EDA roadmap is defined and executed. The ultimate goal of the EDA roadmap is to provide a strategic path to achieve the goals of the business and to provide incremental value to gain competitive advantage. Although EDA can be perceived as an integration technology, a number of other technologies already exist to efficiently perform enterprise integration. The value of EDA is really in enabling businesses to gain competitive advantage through real-time insight and response. This leads to the fact that most of the EDA drivers are business-oriented. There are also technology drivers that impact how the EDA roadmap is shaped. The EDA roadmap should ensure that the drivers listed below are fulfilled by the EDA implementation.

Revenue Growth Drivers

Real-Time Enterprise (RTE) strategies are efficiently used to drive the top-line growth. This is achieved in multiple ways. Businesses with RTE capabilities gain competitive advantage over their peers and can provide value added services to their customers that generate additional revenue. RTE shortens the sales and delivery cycles, improving inventory turnover ratio and cash flow.

EDA also plays a key role in enhancing customer experience through faster response, value-added services, and real-time insight into order processing and fulfillment. This not only improves customer loyalty but also enables valuable up-sell and cross-sell opportunities. EDA


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technologies such as Complex Event Processing (CEP) can identify patterns in customer interaction and identify up-sell and cross-sell opportunities based on the current and historical data.

Cost Reduction Drivers

EDA can also contribute to improving the bottom-line by reducing and containing cost. Real-time processing means fewer manual interactions and faster order processing and fulfillment. This directly affects the bottom-line and boosts the profitability. EDA supports the lean approach, eliminates waste by cutting down the process steps and enables straight through processing. Just-In-Time (JIT) inventory is another example of where EDA can help implement a “push supply chain” instead of a traditional “pull supply chain”. A push supply chain requires up-to-the-minute inventory information to be captured and shared with the suppliers using event-driven technologies.

Agility and TTM drivers

EDA improves Business Agility and Time-To-Market (TTM). Agile businesses respond faster to changes in market conditions. This requires continuous monitoring of market conditions, sensing when market change occurs, and determining if any actions are required. CEP is one of the best technologies available to achieve this. Combined with BAM, it can offer attractive solutions to detect and respond to changes in the market.

TTM is improved by designing and rolling out products and services to customers faster. This requires flexible technology that can support efficient product design, development, and rollout. EDA provides loosely coupled architecture that allows faster solution implementation.

Technology Drivers

The technology drivers for EDA are listed below.

• Loosely Coupled Architecture • Ease of Integration • High volume, low latency processing • Business Process and Service interaction • Partner integration • Real-time monitoring • Pattern Matching and Analysis


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Business Benefits Identification

The next step in building the business case is the identification of the benefits of using EDA. Figure 2 shows how the specific organizational benefits are derived from the organization’s goals and objectives. The benefits should be prioritized based on the objectives of the organization. This in turn, guides the EDA roadmap to achieve the high priority benefits sooner.

Figure 2 - EDA Prioritized Benefits

Tangible and Intangible Benefits

The identified benefits may be tangible or intangible. Tangible benefits can be measured by defining appropriate metrics whereas intangible benefits are qualitative, and hence more challenging to measure.


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The list below summarizes some of the intangible benefits.

• Improved Customer Satisfaction • Improved customer experience and faster response lead to improved

customer satisfaction and customer loyalty • Improved Employee Morale

• Works on latest technology -> helps career development • Tools remove mundane task and help focus on value added work • Rapid solution development provides variety and fulfillment

• Improved Quality • Use of standards-based products and tools improve the quality of the solutions

• Improved Brand Status • Enhanced customer experience and superiority over competitors improve the

brand

Tangible benefits are further broken down into quantitative benefits and appropriate KPI metrics are defined to measure them. The enterprise EDA initiative realizes these benefits (Figure 2) and the consequent EDA infrastructure should provide ways of measuring these metrics.

One of the important steps of building the business case is to identify stakeholders and classify them based on their interest and power. The business case must ensure that it addresses the concerns of the key stakeholders. It may not be possible to address the concerns of some stakeholders but they should be kept informed even if their concerns are not satisfied. The stakeholders identified must be kept informed during and at the end of the business case development process.

Based on the business requirements and stakeholder concerns gathered, the suitability of EDA and RTE can be assessed for the overall initiative and for specific projects. You may determine that EDA is applicable only to a certain percentage of the projects. The ROI calculation should account for such considerations.

Given the KPI metrics to measure the benefits of EDA, the input parameters needed to calculate the metrics must be defined and captured. Figure 3 illustrates a sample set of input parameters captured in the Oracle EDA ROI Tool. Some of the input parameters are pre-filled with default values that can be modified and some are unchangeable.


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Figure 3 - Sample Input Parameters

Benefits

There are many different benefits that an organization can realize by successfully adopting EDA. However, not all benefits can be realized in parallel. When creating an EDA business case, emphasis should be placed on the benefits that are highest priority and leave the lower priority benefits for later phases.

The business benefits were identified in the first phase. In this phase, the benefits are quantified and estimated for a multi-year period, typically five years. Typically the quantitative benefits come in the form of cost savings or additional revenue. Figure 4 classifies the benefits of EDA under three categories, Cost Reduction, Revenue Growth, and Agility/Time-To-Market.


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Figure 4 - EDA Sample Benefits

The key tasks in this phase are:

• Identify sources of cost savings • Estimate cost savings • Identify additional revenue streams • Estimate additional revenue • Estimate the other benefits

Identify sources of cost savings

Typical sources of cost savings for EDA are

• Decreased System Integration Costs: EDA provides a loosely coupled architecture style for event-based integration. This eliminates tightly coupled point-to-point integration and promotes standards-based, bus or hub-and-spoke architecture consequently reducing the number of interfaces required for integration.

• Decreased Integration Maintenance Costs: Event Driven Architecture and the existence of pre-built adapters to most popular applications helps to reduce the number of tightly coupled integration points (interfaces) by approximately half of loosely coupled, standards based interfaces per application. It is assumed that EDA can reduce maintenance costs by an estimated 50-75% by providing packaged


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adapters for upgrades and isolating maintenance requirements to the changing application.

• Decreased Development Costs: EDA promotes reuse of information assets (Event structure, Event entities, Domain entities etc.), business logic (Event Processing components, CQL/EQL, Event Processing Networks etc.), infrastructure components (Event Bus, adapters, channel definitions etc.). These building blocks enable the development of business and technology capabilities through event consumption rather than green-field development. The percentage of reuse and consumption is assumed between 10% and 20%.

• Operational Savings: EDA provides operational savings through Just-In-Time (JIT) inventory, Real-time monitoring, faster deployment, and transparent supply chain. This metric quantifies these benefits (savings/cost avoidance) as a percentage of Cost of Goods Sold (COGS), which includes inventory and operational costs.

Estimate cost savings

Once the sources of cost savings are identified, they can be estimated based on the criteria specific to the source. Figure 5 shows how the reduction in the system integration costs may be estimated for the first and second years using number of applications and number of interfaces per application.

Figure 5 - Estimating the reduction in integration costs

Figure 6 illustrates how the maintenance savings may be estimated. In this example a 67% reduction in maintenance costs is assumed, primarily attributed to the pre-built, standards-based adapters used in the COTS products (e.g. Oracle CEP and Oracle Service Bus).

Figure 6 - Decreased Integrations Maintenance Costs


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For estimating the reduction in development costs, a five year 10% reduction in development budget is assumed in the calculation shown in Figure 7.

Figure 7 - Decreased Development Costs

Identify additional revenue streams

EDA and Real-Time Enterprise (RTE) initiatives may have a positive impact on the revenue side as well. This is achieved either through increase in revenue or the creation of additional revenue streams.

Application of EDA to build real-time business capabilities to enhance customer experience would ultimately result in fewer customers being lost. EDA also influences new customer acquisition through customer experience enhancements and real-time sales capabilities added. Marketing researches show that satisfied customers increase their spending with the company every year.

EDA enables real-time BI and predictive analytics that will help promote additional products and up-sell the current products. This is a vital capability for internet commerce companies.

EDA offers real-time business insight and provides capabilities to react to critical business events, hence closing the insight-to-action gap. This boosts employee productivity, improves customer satisfaction and makes sure that opportunities are quickly converted to revenue.

To build a business case for EDA, all additional revenue streams specific to the organization must be identified and quantified. The exact nature and size of the revenue increase would vary between organizations.

Estimate additional revenue

To estimate the revenue impact of customer satisfaction resulting from the enhanced customer experience, we need to understand Customer Lifetime Value (CLV). Customer acquisition is a very expensive process for many organizations. It is economically better to retain the existing


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customers than trying to replace them with new ones. Figure 8 shows CLV in terms of Net Present Value (NPV) calculated over a five year period.

Figure 8 - Customer Lifetime Value (CLV)

Figure 9 shows the parameters considered for the quantification of the improvement in customer retention and customer acquisition. It is assumed that the improvement in customer retention is 20%, customer spending growth is 20%, and new customer acquisition is 0.5%. These numbers may vary between organizations and should be tuned on a case by case basis.

Figure 9 – Parameters for estimating Customer Retention

The additional revenue due to the retained customers is calculated based on the estimated parameters. Similarly revenue impact due to up-sell/cross-sell opportunities and business insight enhancement can be calculated as a percentage of divisional top-line revenue. An example is shown in Figure 10.

Figure 10 - Revenue Growth Estimation

Estimate the other benefits

Any benefits that are not covered by cost savings or revenue growth should be covered in this step. For example, Agility and Time-To-Market benefits may include faster deployment, quicker


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delivery of business capabilities, and shorter response times. Although these benefits may eventually lead to cost savings or revenue growth, it may be hard to associate them to the right bucket initially.

The EDA ROI Tool quantifies the Agility and TTM benefits by examining the direct and indirect impact on revenue. Revenue Generating projects have a direct impact due to increased Agility and TTM and Non-Revenue Generating projects have an indirect impact. Figure 11 illustrates how the tool quantifies these two kinds of projects.

Figure 11 - Business Agility and Time-To-Market

Investments

EDA, like any other technology, will require initial, one-time, and recurring investments. Initial investments may include hardware and software for the infrastructure. One-time investments may include hardware expansion and performance enhancements. Recurring investments include product maintenance and technology consulting expenses. In order to calculate the ROI metrics accurately, it is important to estimate the timing of the investment as well. For example, whether an investment is paid up-front or in installments will affect the Payback Period significantly. A traditional deployment of the EDA solution results in more Capital Expenses (CapEx) but a Cloud deployment shifts the investment to Operational Expenses (OpEx).


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ROI

To measure financial returns of any project, some financial indicators can be calculated to show the quantitative value of the project. The Oracle EDA ROI Tool considers the financial indicators Return on Investment (ROI), Internal Rate of Return (IRR), Net Present Value (NPV) and Payback Period. Figure 12 shows the description of each one of these indicators.

Figure 12 - Financial Indicators

Most organizations use one or more of the metrics listed in Figure 12 for valuation and prioritization of projects. These metrics allow organizations to compare the opportunity costs of alternative projects and choose the one that is appropriate for the goals of their organization.

The key steps in calculating these metrics are:

• Calculate annualized cost savings based on the sources of cost savings determined in the Benefits phase.

• Calculate the annualized revenue growth numbers for the revenue streams identified in the Benefits phase.

• Based on the annualized benefits and investments, calculate the discounted cash flow (DCF). Use the organization’s specific Discount Rate (Cost of Capital), if available. If not, use the industry standard Discount Rate.

• Calculate the ROI metrics including NPV, IRR, ROI, and Payback Period. • Identify and capture the intangible benefits that are not covered by any of the

calculated metrics. (e.g. Employee Morale)


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Figure 13 shows a sample output of the Oracle EDA ROI Tool that calculates the ROI, IRR, Payback Period, and NPV.

Figure 13 - Oracle EDA ROI Tool Financial Analysis


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Business Case

The final phase of the process is to build an executive level presentation and deliver it to the right audience. The key steps in this phase are:

• Visualize the ROI results to make them suitable for executive level audience. The visualization should include a variety of graphs to demonstrate various views of the business benefits and implications. Figure 14 shows an example of graphs generated by the Oracle EDA ROI Tool to illustrate the key facts of the business case.

• Communicate to the key stakeholders and review the business case with the sponsor. You may need to identify the coach or champion among the stakeholders and review the business case with them as well. The feedback from the review sessions should be incorporated into the business case presentation.

• Deliver the business case presentation to the executive audience. Make sure that the audience includes decision makers and influencers.

• Address any issues or concerns promptly and secure acceptance.

Figure 14 - Visualization of key facts


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Oracle EDA ROI Tool

This section describes the Oracle EDA ROI Tool.

Structure and Organization

Figure 15 illustrates the structure of the Oracle EDA ROI Tool. The tool is organized into customer specific section and general section.

Figure 15 - Organization of the Oracle EDA ROI Tool

The general section includes the following components.

• Instructions: Describes various components of the tool and the usage of the tool. • Notes: Provides explanations to parameters used in the questionnaire and the logic

used for calculations. It also describes the rationale for the default values used for key data.

• Data: Presents the base data and assumptions used for ROI calculations.

The customer specific section includes the following components.


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• Questionnaire: Captures the input information required for ROI calculations. Defaults are provided for assistance but most of the parameters can be overridden with organization specific numbers.

• Investments: Captures the investments required for the EDA initiative. Investments include initial, one-time, and recurring expenses.

• Benefits: Quantifies the benefits over a multi-year period. • ROI: Calculates a number of metrics including NPV, IRR, ROI, and Payback Period. • Complementary Analysis: Performs additional analysis to format the data to present

to executive audience. • Charts: Visualizes the analysis results.

Usage Flow

Figure 16 outlines the usage flow of the Oracle EDA ROI Tool. Most parts of the tool are interactive, as indicated in the “User Interaction” section. There are parts of the tool that are used for background analysis. The information derived in the Analysis section is used in the User Interaction section for calculation and presentation of the metrics.

Figure 16 - Usage Flow of the Oracle EDA ROI Tool


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The usage of the tool is fairly simple and is described by the following steps:

• Review the instructions. • Complete the Questionnaire with values specific for your organization. Update the

defaults or assumptions with appropriate values as needed. • EDA Benefits are calculated based on the input entered in the Questionnaire. • Enter the information about the investments along with specific timelines on when the

investments will be made. • EDA ROI metrics are calculated based on the information entered. • Complementary analysis is performed to format the data. • Charts are automatically updated to reflect the organization specific data. • PowerPoint presentations may be generated using the “Generate PowerPoint” buttons

in the ROI section.

Conclusion

EDA is a key strategy for real-time enablement of modern enterprises. The competitive nature of business environment has required businesses to be agile and establish differentiation using a combination of value and customer experience.

An essential part of EDA journey is convincing the key stakeholders of the business benefits of the technology. Justification of EDA requires a systematic approach to building a business case specific to the organization. This document outlined a process for building a business case for EDA. Oracle has created an EDA ROI Tool to assist with the development and delivery of the EDA business case.

Building a Business Case for EDA June 2011 Author: Anbu Krishnaswamy Anbarasu

Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores, CA 94065 U.S.A.

Worldwide Inquiries: Phone: +1.650.506.7000 Fax: +1.650.506.7200

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