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How to Calculate Precisely the ROI of Your Enterprise Architecture Practice?

Calculating the ROI of Your Enterprise Architecture Practice - an Example.png

by Daniel Lambert (book a 30-minute meeting)

There are still some EA practices that do not get evaluated and do not need to justify their existence in their organization, but it’s becoming less frequent. Calculating the Return on Investment (ROI) of an Enterprise Architecture (EA) practice can be challenging due to the complexity and indirect benefits it provides. However, a structured approach can help you quantify the ROI effectively. Here are the seven steps to calculate the ROI of your EA practice over a year: 1- define the scope and objectives of your practice, 2- identify and quantify the benefits for each one of your interventions, 3- collect the relevant data, 4- calculate the benefits generated due to your practice, 5- calculate the costs of your practice, 6- calculate the ROI of your practice (or other financial ratios used by your organization), and 7- communicate your results to the relevant internal stakeholders within your organization.

1. Define the Scope and Objectives

Clearly define the scope of your EA practice. This includes identifying the specific objectives of your practice, such as improving the IT efficiency of your organization, reducing costs, contributing and enhancing the agility within your firm, increasing revenue by being more client-driven and adopting a product architecture approach, supporting strategic initiatives, or improving decision-making with more precise information.

2. Identify and Quantify Benefits for Each one of your Interventions

Identify the tangible and intangible benefits your EA practice has brought to your organization over the last year. Tangible benefits are easier to quantify and can include:

  • Cost Savings: Reduction in IT costs, such as decreased hardware and software expenses, lower maintenance costs, and reduced operational expenses.

  • Increased Revenue: Enhanced business processes leading to increased revenue or market share.

  • Improved Efficiency: Time saved in project execution, better resource utilization, and streamlined operations.

 

Intangible benefits, although harder to quantify, are also very important:

  • Better Decision-Making: Improved alignment between business and IT, leading to more informed and strategic decisions.

  • Risk Mitigation: Enhanced security, compliance, and reduced risk of IT failures.

  • Business Agility: Faster response to market changes and business needs.

3. Collect Financial Data for Each One of Your Interventions

Ideally, with the assistance of a financial analyst, gather data to measure the tangible benefits identified for each intervention by your EA practice. This can include:

  • Financial records showing cost reductions or revenue increases.

  • Performance metrics indicating improved efficiency or productivity.

  • Surveys or feedback from stakeholders about improved decision-making and alignment.

4. Calculate the Benefits Due to Your EA Practice

Once a year, you need to calculate at minimum the gains due to your EA Practice for all your completed interventions within your organization. Having precise dollar numbers will prove difficult for some of your interventions. In these cases, you will need to fix the minimal and maximum gain caused by your EA practice intervention.

The tangible benefits of each one of your interventions need to be calculated as precisely as possible. The range between the minimum and maximum tangible benefit of each one of your interventions should be low. As for the intangible benefit of your interventions, the difference between the minimum and maximum benefit can be much higher. Even for intangible benefits, your numbers need to be justified. Avoid guessing.

5. Calculate the Costs of your Practice

Enterprise architects are expensive. Determine the total annual costs of implementing and maintaining your EA practice. This includes:

  • Initial Investment: Costs related to setting up the EA practice, such as software, tools, and training.

  • Operational Costs: Ongoing expenses, including salaries of EA team members, consultancy fees, and maintenance of EA tools.

  • Indirect Costs: Potential disruptions during the implementation phase and the time spent by employees on EA-related activities.

6. Calculate the ROI of your Practice

Use the following formula to calculate ROI:

  • ROI = Net Benefits / Total Costs X 100

  • where: Net Benefits = Total Benefits (Step 4) − Total Costs (Step 5)

Your organizations probably use other financial ratios. Find out what they are and use them on top of the common ROI ratio. Net Present Value and Internal Rate of Return are also two very common financial ratios.

 

Example Calculation

Suppose your EA practice resulted in the following:

Benefits and Costs

  • Tangible Benefits: between $900,000 and $1,000,000 in cost savings and between $700,000 and $800,000 in increased revenue.

  • Intangible Benefits: Estimated at between $100,000 and $500,000 in improved decision-making and business agility.

  • Total Costs of your Practice: between $800,000 (including initial and ongoing costs).

The calculation would be:

Minimum ROI

  • Total Benefits = $900,000 in cost savings + $700,000 in increased revenue + $100,000 in intangible benefits  $1,700,000

  • Net Benefits = $1,700,000 in total benefits - $800,000 in total costs of your practice = $900,000

  • ROI = $900,000 / $800,000 x 100 = 112.50%

Maximum ROI

  • Total Benefits = $1,000,000 in cost savings + $800,000 in increased revenue + $500,000 in intangible benefits = $2,300,000

  • Net Benefits = $2,300,000 in total benefits - $800,000 in total costs of your practice = $1,500,000

  • ROI = $1,500,000 / $800,000 x 100 = 187.50%

7. Communicate the Results

Once you have completed the ROI calculation of EA practice, make sure to communicate the results to the relevant internal business and IT stakeholders within your organization, highlighting both the quantitative and qualitative benefits. Use clear and concise metrics and provide context to help stakeholders understand the value of your EA practice.

In the event that your EA practice has generated a low ROI (below 20% usually), your practice may be in jeopardy or probation for the next. You’ll need to put your act together and make changes to your practice. Non-performing EA practices are usually the results of selecting the wrong interventions, not prioritizing initiatives and projects based on ROI, and a lack of communication with business stakeholders. Correction measures will be required, and you may want to inspire yourself from this article entitled “Your First 90 Days as Director of Enterprise Architecture”.

Calculating the ROI of your EA practice is crucial to providing value to your organization, setting the foundation for your long-term success, and for your EA practice to become indispensable. By focusing on understanding the organization, building relationships, indicating a clear vision, developing a reliable team, and demonstrating early wins using the ROI or other financial metrics, you can establish credibility and create a strong platform for driving strategic architectural initiatives. Remember, the key to success lies in aligning your efforts with business goals, fostering collaboration, and maintaining a relentless focus on delivering value, including profits.

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