Break Even Analysis

ROI and Break-Even Analysis Techniques

Return on investment (ROI) and break-even analysis are used by businesses to determine the value of a proposed investment or make decisions about where their money is best spent.

Conduct a comparative research of ROI and break-even analysis techniques using the module readings and the Argosy University online library resources.

Respond to the following:

To what extent should all or some of these techniques be used to establish a business case?
How should each technique be used to assess specific financial performance benchmarks? Use a specific example to help demonstrate your points.

Give reasons to support your responses.

Write your initial response in approximately 300 words. Apply APA standards to citation of sources.

By Saturday, July 13, 2013, post your response to the appropriate Discussion Area. Through Wednesday, July 17, 2013, review and comment on at least two peers’ responses. Consider the following:

Are there any alternatives to consider? What are these alternatives?

This module is designed to teach you how to develop and justify a business case for information technology using various techniques such as break-even analysis, net present value (NPV), and return on investment (ROI). You will also complete the first of the two Learning Assessment System Assignments (LASAs) by developing a proposal that examines all the issues associated with demonstrating an IT project’s value to an organization. Particular emphasis is placed on the balanced scorecard approach. You will research and apply this approach to this assignment and to the second LASA in Module 6.

What is the single most important information system to an organization? Is it e-mail, supply chain management, customer relationship management, business intelligence, or perhaps a secure Web server? You might be surprised to learn that the most important information system to an organization is the human element.

An information system is the combination of all the activities of employees and information technology that helps support organizational business operations, decision making, and management. One tends to forget that the major benefit of information systems is in leveraging the capabilities of the people. People are the best information system.

A standalone information system can be used to automate processes and decrease the need for human resources. However, as soon as you automate or decrease the utilization of human resources, your competitors can analyze and learn from you to leverage the same benefits to their advantage.

If you use a customer relationship management (CRM) system to help increase customer satisfaction and it increases your market share, your competitors will be forced to implement their own CRM system, or else they will lose their market share to your competitive advantage.

The implementation of information systems should start with the analysis of how it leverages capabilities of the human resources. Instead of focusing on how information systems can decrease the number of human resources, the strategy should be to analyze what can be done to leverage the increased capabilities of your most important assets—the people.

The use of information systems can provide a competitive advantage to an organization if the IT strategy is aligned with both the business strategy and the leveraging of human resources linked with the technical solution.

Should you purchase the newest enterprise resource planning (ERP) system for your organization, or invest in a CRM system?

To answer this question, you must first consider how an ERP or a CRM benefits your business strategy, and then think about how the individuals in your organization can improve their capabilities using these new tools.

If the business strategy is to provide the best customer retail experience, increase customer satisfaction, and provide the best customer value, an ERP system would assist in this vision as it will enable employees to streamline the supply chain or to provide just-in-time inventory. A CRM system might provide the same benefit in streamlining customer transactions.

Selection of either the ERP or the CRM should come down to which feature-set best matches the goals and objectives of the business strategy. The selection should focus on providing maximum value in improvements to efficiency and effectiveness of the human element.

How do you know which system would provide the maximum benefit to your organization? This is one of the most complex questions in IT management because there is no easy answer. In a perfect world, a manager would run a simple ROI, balanced scorecard, or payback analysis and the results would always provide management with the best solution to the problem.

The most important factor in selecting the right technology for an organization is understanding the business strategy and business process. Methods such as ROI, balanced scorecard, and payback analysis benefit this decision-making process. A financial analysis of an investment in IT will only provide value to a manager if he or she understands how that technology solves a business need, improves an existing business process, or expands business capabilities.

Understanding the strategy and strategic execution associated with an organization is the critical first step in planning and justifying IT projects. The ROI analysis might provide the same results for an ERP and a CRM; both might increase capabilities and save resources for the organization.

If the business strategy is to increase customer satisfaction during each customer interaction, the organization should invest in a CRM. If the strategy is to streamline internal and external processes to provide greater organization efficiencies, the organization should invest in an ERP. If the strategy requires greater efficiency and customer satisfaction on all levels of the organization, the solution might be to implement both an ERP and a CRM.

The first step in the planning and justification of any information system should be the alignment of the selection with the business strategy and process. The selection of any IT system should be a product of a robust business strategy. After an IT system is identified as part of the business strategy, the project should use various techniques such as break-even analysis, NPV, and ROI to select the best system that fits the business needs.

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Managerial Application of Technology

Application of IT—VoIP at Energiedienst Holding AG

The cost of an IT system should always be less than the savings the system provides the organization. An
investment in an IT system should increase productivity or decrease the cost of maintaining existing
processes or systems.

The Challenge

Energiedienst Holding AG was looking to update their phone systems to provide their users with greater
services and to decrease costs. They decided on a Voice over Internet Protocol (VoIP) phone system
because it could provide greater flexibility at lower administrative costs.

Before any investment in IT resources, a financial analysis has to be conducted to show the cost and
benefit to the organization.

A Solution

A financial analysis showed that investment in the VoIP technology would reduce the yearly costs of, for
example, maintenance, support, and monthly phone bills. The maintenance cost for the system was
projected to decrease by as much as 20% per year and a potential 7% decrease in monthly phone bills.
The analysis also showed that the VoIP system would pay for itself in less than 4 years and provide
improved features such as Microsoft Outlook integration, voicemail transcription, and integration with other
systems such as the CRM.

Energiedienst was able to use VoIP to decrease costs in setup, equipment, and monthly fees. One of the
largest savings for the company was the introduction of video conferencing services that decreased travel
costs. Often cost savings are in areas that are not related to the systems and, therefore, cannot be included
in the cost justification for the project.

References

Kaufman, C. (2008). The benefits of business VoIP. Vendor Guru. Retrieved from
http://www.teledata.com/PDF_Resources/Resources/Not%20ShoreTel%20-
%20Why%20VOIP%20makes%20Business%20Sense

VoIP a natural choice. (2011). [Video file]. Retrieved from http://www.youtube.com/watch?v=Oh5rMBEpaLY

VoIP meets hydro power. Avaya. (2011). Retrieved from http://www.avaya.com/uk/case-for-
avaya/customer-stories/energiedienst

http://www.teledata.com/PDF_Resources/Resources/Not%20ShoreTel%20-%20Why%20VOIP%20makes%20Business%20Sense

http://www.youtube.com/watch?v=Oh5rMBEpaLY

http://www.avaya.com/uk/case-for-avaya/customer-stories/energiedienst

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