ROI analysis of license management projects

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1 25 years Innovation Quality Sustainability ROI analysis of license management projects IT projects have a dubious reputation. Only about 35% of all completed projects are considered successful (Standish Group, 2009). Therefore it is not surprising that in most cases a cost-benefit analysis is required by the project sponsor before the project starts. That analysis concentrates on ROI - the return on investment (ROI) describes the profitability of an investment. The method proceeds from the assumption that both the costs and the returns of the investment can clearly be assigned. The costs are comprehensible, but returns are often the result of many external and internal factors and not directly quantifiable. Inevitably, this results in a somewhat ambiguous and subjective impact when calculating the return. Another criticism of the focus on this purely monetary measurement comes from the Gartner Group. For the evaluation of IT projects Gartner recommends an assessment in five dimensions (Murphy, 2002): Strategic Alignment Business Process Impact Architecture Direct Payback Risk An explanation of the five dimensions is given in the appendix. A return on investment calculation considers the dimension of direct payback. Obviously, especially the dimension of risk management in projects is an important factor which must be considered in an overall assessment of needs. The other three dimensions have also important criteria for the analysis of management projects. Wolfgang Stratenwerth has been operating for over 20 years as an IT consultant in executive functions. Since 2009 he has been working as Business Development Manager at Spider LCM GmbH, a Hamburg-based software house. Inhalt Analysten zum monetären Nutzen von Lizenzmanagementprojekten 2 Kosten eines Lizenzmanagementprojekts 3 Nutzenkategorien in einem Lizenzmanagementprojekt 4 Beispielrechnung monetäre Nutzen 6 Schlussbemerkungen 9 Anhang 1: Gartners fünf Nutzen-Dimensionen für IT-Projekte 10 Anhang 2: Microsoft SOM - Kompetenzfelder 11 Literaturverzeichnis 12

2 Even if the ROI is just one of the five dimensions which can also be inaccurate, it remains for most projects the decisive criterion for decision making. All the more amazing it seems that there is no unified approach in the scientific literature or in company practice to calculate the ROI of license management projects. This essay focuses on the identification of ways by which a standardized, yet flexible, ROI calculation of license management projects becomes possible. The project s success will be based on forecasts and can be reviewed by key figures. The following chapter begins with the statements of IT analysts about cost effectiveness, before the cost and benefit categories for an ROI calculation will be described. Finally, benefit categories and metrics calculation rules are proposed in order to permit a manageable, understandable and flexible ROI calculation. The return on investment is just one of the five dimensions by which a project should be assessed. In practice, however, it is a very significant factor. Despite a uniform approach for determining the direct payback of license management projects is lacking. Analysts talk about the monetary benefits from license management projects Almost all known IT analysts have also published statements about the profitability of license management projects. All statements show that substantial savings are possible with the implementation of a license management project. The potential savings and benchmarks vary depending on the author: The Aberdeen Group expects savings of up to 35% of the total IT budget (Aberdeen Group, 2002) Analysts expect for the Experton Group savings of 15% of software budgets (Experton Group, 2010) The Gartner Group estimates that 30% of IT asset costs can be saved (Gartner Group, 2007) KPMG has quantified various savings so that 50% of PC support costs can be saved (KPMG, 2008). KPMG distinguishes the total cost for software the first year in which 30% savings can be expected and the following years where the total cost for software can be reduced by at least another 5-10% can be reduced (Stefán, 2007). It must be taken into account that all these potential savings won t show a direct cash effect. All analysts consider overall productivity gains and avoidance of costs for software audits in their calculations. The license manager of an engineering company told me: «It was not easy to explain to the management why our SAM project was supposed to save 15-30% when the software budget increased to EUR for necessary additional licenses in the first year.» The initial situation of the company is critical for the saving potential. In a company where the IT purchasing is already standardized and centralized, the savings will be much lower than in a company where the department purchases on demand. The term for this situation is maturity of a SAM organization of a company. 2

3 Microsoft differentiates with the help of the SAM Optimization Model (SOM) the maturity levels Basic, Standardized, Rationalized and Dynamic. The rating is based on 10 competency areas, which are shown in appendix 2. The defined areas of expertise allow a sufficiently accurate location and also facilitate the definition of the objectives of a license management project. Experience shows that the greatest potential for savings can be realized from the second into the third stage of development (from Standardized to Rationalized SAM). The move from Basic to Standardized SAM has the most affect to the Risk dimension, while the last step for Dynamic SAM has a greater impact on Business Process Impact and Strategic Alignment. In order to do a return on investment calculation you have to analyse your current situation and define what you want to achieve with your license management project. The four levels of maturity of the Microsoft SAM Optimization Model is a classification which can be helpful for your analysis together with the list of criteria. Cost of a license management project The costs must be determined in order to calculate the ROI. These include direct investment (procurement and installation of SAM software, possibly with hardware) and the current internal and external costs to operate the software (the software maintenance and administration costs as well as legal costs). Since the payback period of IT projects should rarely exceed three years, a discount of loans for future payments is not necessary. Year 1 Year 2 n Tool costs Software purchase price incl. installation Additional licenses where necessary Software maintenance Software maintenance Services (external and internal) Tool training Tool administration Tool adjustments Ongoing management and optimization of existing processes Development and implementation of processes 3

4 Benefit categories in a license management project The following list illustrates the versatile dimensions of a SAM project. In addition to the monetary value of a ROI, additional criteria for evaluating projects and objectives of SAM should be considered. Selected monetary criteria are evaluated in the example calculation of chapter 5. Strategic Alignment Financial security SAM leads to standardization and increased transparency. This will improve the budget planning. The precise knowledge of the used software allows the correct depreciation. The exact consumption information enables an equitable distribution of the software costs and lead to more efficient use of the software used. Successful Corporate Governance SAM helps to identify risks associated with software management. Proven processes optimize the use of these software assets within the whole organization. Therefore an effective corporate governance is established which identifies the risks in time. Improved market position With SAM competitive advantages are achieved by keeping licenses up to date and by managing complete license documents centrally. Even with mergers and acquisitions information about licenses is an important data source. Business Process Impact Increased employee satisfaction Effective SAM processes ensure that all employees have the tools at their workplace they need to do their jobs. In addition, SAM ensures that the software operates largely without problems and support issues are resolved quickly. Architecture Higher flexibility of IT resources SAM can increase the speed with which the company can adapt to changing conditions. With SAM processes, the company uses its IT resources efficiently and can respond quickly to market conditions and sales opportunities. SAM makes better information for decision making available. Therefore a higher level of operational excellence is achieved. 4

5 Direct Payback Quantity discounts SAM provides accurate knowledge of the purchased license types and installations throughout the organization. Starting from that knowledge it can be defined which software is used to what extent. Less unnecessary redundancies Redundant, obsolete and non-integrated software generates higher operating expenses. SAM provides the information to unify the software inventory and eliminate unused software. Flexibility for the future SAM shows exactly what software is in use and allows estimating future developments. Unnecessary updates are avoided. Risk Better adhesion control SAM prevents the violation of license conditions and thus protects against high fines and court costs. Therefore brand damage through negative reporting can be prevented. Smooth workflow and business continuity SAM provides automated and standardized processes and helps to reduce the complexity. This allows IT to focus on its business objectives. The certainty of legally acquired software guarantees that no unexpected interruptions of the IT systems and thus the general business are expected. 5

6 Example calculation monetary benefit In this example, a company is considered which manages a growing number of computers with software. There were seven main benefit monetarily evaluated. The savings consider the maturity level of the initial situation and the desired goal. Initial situation Costs Year 1 Year 2 Year 3 Sum Number of PCs License purchase Maintenance Training and implementation Process introduction SAM Administration and management Total Expected benefits Inventory tracking and auditing Manual software inventory audits are cumbersome and time consuming. In addition, results must be reviewed. SAM applications automate all the activities for inventory tracking and auditing. Saved labour time (minutes) 15 Number of realizsation 2 Billable hours IT staff 60,00 Faster processing of support cases Thanks to the accurate information from the software asset system the support staff can solve the problems of the affected PC. They don t need any help finding the right information. Average number of software support tickets per year, and PC 5 Cost per ticket 50,00 Savings 15% 6

7 Avoidance of audits and reduction of the complexity of audits Thanks to consistent and transparent licensing audits can be avoided. The performance of audits is limited to control samples and can be performed tool-supported. Number of audits per year without SAM 2 Cost of the audit execution per audit (internal / external) ,00 Cost reduction by SAM 70% Loss of working time by using unauthorized software If unauthorized software is used the productivity of employees declines. Programs providing chat, games, etc. can automatically be removed from the clients. Thus, users are not tempted to use those. Number of hours per year which is not used efficiently (5%) 70 Proportion of affected employees 3% Average hourly rate per employee 20,00 Usage of free licenses instead of purchasing new ones and preventing further updates With SAM unused licenses can be identified and redistributed and they don t have to be updated or extended. Average number of unused licenses for each PC 0,5 Average value of a license 300,00 Percentage of licenses that can be reused 30% Strengthening of the negotiating position By identifying the needs and efficient planning of future needs the bargaining position with the software vendors will be improved. Procurement volume per year Savings through better negotiation results 10% Used software is not authorized or has incorrect licenses Incorrectly licensed software is recognized and additional costs for relicensing of audits can be avoided. Average proportion of non-licensed or incorrect license per PC 15% Average value of all license per PC 780,00 Proportion of avoidable costs for relicensing 50% 7

8 Continued from Example calculation monetary benefit The scenario, which was defined in the cost analysis, results in the following benefits each year (for the first year where the project is implemented we calculate 50 % annual savings): Benefit Year 1 Year 2 Year 3 Sum Saving Inventory tracking and auditing Faster processing of support cases Avoidance of audits and reduction of the complexity of audits Loss of working time by use of unauthorized software Usage of free licenses instead of purchasing new ones and preventing further updates Strengthening of the negotiating position Used software is not authorized or has incorrect licenses Total In this case the ROI is due in under a year. 8

9 Conclusion Through successful license management projects, a company can achieve monetary and non-monetary benefits. The height of both categories depends on the maturity of the license management before and after the implementation of a project. The condition for a successful calculation is therefore an analysis of the current situation and the definition of the target. Experiences from projects have shown that the greatest benefit gain is realized in the transition of the maturity level two to three (Standardized to Rationalized SAM). We therefore recommend within the first stage of the project to aim at least for level three and to limit the scope of the considered software products. The monetary ROI analysis should consider this and adapt the calculation factors for the potential saving to the specific starting point of the company. It should be taken into account that the monetary benefit of a SAM project is usually the avoidance of additional costs. Therefore a significantly improved outcome compared with the past cannot be expected. Consequently, a SAM project is always a defense against charges in the future. 9

10 Annex 1 Gartner s five benefit dimensions for IT projects (Gartner Group, 2006) Diagnostic Pillar Strategic Alignment Business Process Impact Architecture Direct Payback Risk Assessment Description This perspective refers to the importance the organization attaches to the medium-term or longterm alignment of IT facilities to organizational goals. Typical issues to consider include: Does the organization plan to alter its structure, change the manner in which it delivers its services, or have to rapidly respond to changing customer requirements? Does the organization intend to modify its culture, for example by empowering staff and reducing direct control? Is there an intention to outsource key activities? If so, strategic alignment between computer systems and corporate objectives is likely to be important. Another point to remember is that if business plans or prospects are unclear or are likely to change significantly in the short to medium term, this weighting factor would have to be reduced because achieving strategic alignment in such circumstances would be more difficult. Does the organization require the capacity to rapidly and radically change business processes in line with changing business conditions? A business process is defined as any series of tasks leading to a stated objective. This issue is likely to be more important in industries such as IT and telecommunications but less so in discrete manufacturing, for example. If process transformation is important, a higher weight should be assigned to this factor because IT is a key enabler of process transformation. When this factor is especially important, many existing processes usually show signs of malfunction. Typical symptoms are capture of data more than once, inflexibility, long turnaround times, too much checking and non-value-adding controls. If this applies to the organization, particularly if it operates in a changing environment, assign a high weight to Business Process Impact. In the Five Pillars approach, IT architecture is represented by computer hardware, software, databases, and telecommunications facilities. Management often finds it hard to assign a weighting factor to this perspective, but it can be very important. A badly integrated architecture would mean that various systems fail to communicate, resulting in unproductive work and an inability to fully capitalize on information resources. For instance, if a closed architecture exists, there may not be effective links between departments or with trading partners, an increasingly important consideration. Some architectures can adapt well to change, others do not. Other architectures may be headed for a technological limbo, while others may be well positioned to accommodate and capitalize on new technological developments. If these factors are important to the organization, assign a high weighting to Architecture. Direct Payback relates to direct benefits such as cost savings of any kind: cost avoidance, revenue enhancement, better or faster information, and other forms of immediate, direct benefits. If these factors are important to the organization, assign a high weight to Direct Payback. All IT projects involve organizational and technical risk to some degree. Some organizations have a risk-adverse culture, while others are more adventurous. Banks for instance always assign a very high weighting to Risk, because IT is essential to their very survival. Risk is not so important for organizations in which a system failure will not result in the shutdown of key services. To weight this perspective properly, ask the question, What are the consequences for our organization if an investment in systems proves troublesome to install and to manage or which may suffer breakdowns or interruptions from time to time? If the nature of the organization s business indicates that any level of disruption would have serious long-term ramifications, then weight this perspective highly. If a high weighting factor is assigned to Risk, the likelihood that the safe, predictable alternative is selected (rather than the innovative one) will increase. 10

11 Annex 2 Microsoft SOM - Practice Areas (Microsoft Corporation, 2010) Key Competency Basic Standardized Rationalized Dynamic SAM Throughout Organization SAM Improvement Plan Hardware and Software Inventory Accuracy of Inventory License Entitlement Records Periodic Evaluation Operations Management Interfaces Acquisition Process Deployment Process Retirement Process Project Manager assigned but SAM roles & responsibilities not defined. No SAM development or communication plan. No centralized inventory or < 68% assets in central inventory. Manual inventory no discovery tools. Procurement manages contracts; not accessed by IT managers. IT operations managed on ad-hoc basis. SAM not considered part of M&A risk plan and company integration. Assets purchased on a per project basis; without a review of current availability. Assets deployed by endusers in distributed locations; no centralized IT. Software is retired with hardware, and is not harvested or reassigned. Direct SAM responsibility is identified throughout organization. SAM plan is defined and approved. Between 68% and 95% of assets in inventory. Inventory sources reconciled annually. Complete entitlement records exist across organization. Annual sign-off on SAM reports. Operations manages separate asset inventories. Software purchases use approved vendors. Only approved software is deployed. Unused Software is harvested (where the license allows) and tracked within a centrally controlled inventory. Each functional group actively manages SAM. SAM improvement is demonstrated. Between 96% and 99% of assets in inventory. lnventory sources reconciled quarterly. Entitlement records reconciled with vendor records. Quarterly sign-off on SAM reports. Operations manages associated asset inventory. Software purchases based on deployment entitlement reconciliation. Software deployment reports are accessible to stakeholders. Centrally controlled inventory of harvested licenses is maintained and available for reuse. Deployment and license records are updated. SAM responsibilities defined in job descriptions across organization. SAM goals part of executive scorecard reviewed regulary. > 99% of assets in inventory. Dynamic discovery tools provide near real-time deployment details. SAM entitlement system interfaces with vendor entitlement to track usage. System reconciliations and ITAM report available on demand. All business units follow the same strategy, process. & technology for SAM. All purchases are made using a pre-defined asset catalog based on metered usage. Software is dynamically available to users on demand. Automated process with centralized control and tracking of all installed software, harvest options, internal reassignment and disposal. 11

12 Bibliography Aberdeen Group Discovering IT Asset Value Yields Savings Dividends; An Executive White Paper Experton Group Pressemeldung vom [Online]. - October 12, Gartner Group Express IT Project Value in Business Terms Using Gartner s Total Value of Opportunity Methodology. - January KPMG Software Asset Management - A Key to Infrastructure Optimization Microsoft Corporation // The SAM Optimization Model Murphy Tony Achieving Business Value from Technology [Book]. - New Jersey : John Wiley & Sons, Inc.,, Standish Group Chaos Summary 2009 Report Stefán Tibor Die Bedeutung von Software Asset Management am Beispiel einer IBM Lösung [Article] // e-journal of Practical Business Research. - December Gartner Group The Business Case for Software Asset Management [Article]. - September Headquarter Brainware Solutions AG Sumpfstrasse 15 CH-6300 Zug Tel sales.ch@brainwaregroup.com Germany Spider LCM GmbH Paul-Dessau-Strasse 8 DE Hamburg Tel sales.de@brainwaregroup.com United Kingdom Brainware Technologies Ltd. 7 Warnham Court, Grand Avenue Hove, East Sussex, Berkshire BN3 2NJ, United Kingdom Tel sales.uk@brainwaregroup.com Asia Brainware Japan Inc. Anzen Building Residence Motoakasaka Minato-ku, Tokyo , Japan Tel sales.jp@brainwaregroup.com Africa Columbus Technologies (PTY) Ltd. Corporate Corner, Block 8 5 Marco Polo street, Highveld 0169, Centurion, South Africa Tel sales.sa@brainwaregroup.com brainwaregroup All rights reserved