APPROACH: Financial Metrics Defined (con't)
Financial Metrics - Defining the Business Impact (con’t):
- Net Benefit (same as Net Value) is the benefit delivered to the organization for the investment made in the project. Net Benefit is calculated by taking the total benefit minus the project costs (capital and ongoing expenses).
- Internal Rate of Return (IRR) is the implied rate of return of an investment assuming complete reinvestment of cash flows. IRR is calculated as the discount rate necessary to drive the NPV to zero. In other words, it is the percentage rate by which you have to discount the benefits until the point that they equal all the costs.
Like ROI, IRR gives a good indication of the percentage of business impact of a project especially for large multi-year investments, but provides no indication of the size or timing of benefits. IRR is considered a hurdle rate used to compare many different types of projects (IT and non-IT), where the hurdle rate represents the minimum return required for a particular class of project.
- Key Performance Indicators (KPIs) is a quantifiable measurements that reflect the critical success factors of an organization. They must reflect the organization's goals, they must be key to its success, and they must be quantifiable (measurable). For this analysis, it represents the forecasted health of what the project will deliver to the business over time.
- Total Cost of Ownership (TCO), shown in our analysis as project costs, is the sum of the one time and ongoing costs during the useful life of an investment. It includes all relevant hardware, software, services, implementation, staff and costs.
TCO provides a good metric for budgeting the actual project costs over time, but cannot be used to evaluate the bottom-line business impact because it focuses only on costs, not benefits